Post-strongSocialiststrong Financial Fragility the Case of Albania.pdfVIP

* Post-Socialist Financial Fragility: the Case of Albania Dirk J. Bezemer Tinbergen Institute and University of Amsterdam Roetersstraat 11 1018 WB Amsterdam The 1997 collapse of the Albanian economy caused by the collapse of economy-wide Ponzi schemes contrasts sharply to its success status as a post-socialist transition country in the years 1992-1996. In this paper, an attempt is made to explain this ‘Albanian Paradox’. The specific Albanian conditions for the growth of Ponzi schemes are identified. Theoretically, the Albanian Paradox can be interpreted as one version of the Financial Instability Hypothesis suggested by Minsky. Investigation of the underlying factors that render financial markets fragile suggests that the Albanian case is extreme but not rare in the region. In the post-socialist setting, expectations of the population and other potential investors based on a lack of reliable information on returns may lead to excessive capital inflow. This trend is reinforced if governments are weak, and if transition policies rely largely on liberal financial market development, rapid privatisation and external capital inflows, facilitating the tendency to instability. Identification of this trend is hindered if policy makers and observers largely rely on macroeconomic indicators in monitoring the economy. JEL classifications: E12, G18, O5, P27, P34 “The transition in Albania is likely to be particularly akin to a laboratory experiment” Anders Åslund and Örjan Sjöberg, 1992 For the moment, just assume Albania doesnt exist. Albanian newspaper Koha Jonë journalist, March 20 1997 1. Introduction The aim of this paper is an analysis of economic policies applied in post-socialist Albania. Despite its modest size, the country caught world attention when the Albanian economy and society collapsed early in 1997. This breakdown was remarkable in the light of Al