Improving business environment in Albania by transferring Slovak

Improving business environment in Albania by transferring Slovak reform know-how Peter Goliaš INEKO Director, Slovakia Conference: “Improving Business Enviroment in Albania“ June 9 th 2016, Tirana

Content • Key indicators and rankings • How to break the “Iron law of oligarchy“ • Slovak reform experience – Informal pro-reform coalition – Structural reforms – Fiscal stabilization – Fight against corruption – Current challenges

Economic convergence GDP per capita in Visegrad 4 countries and Albania (in purchasing power parity, as % of EU 28 average) 120 100 80 EU (28 countries) Czech Republic Hungary 60 Poland Slovakia 40 Albania 20 0 19951996199719981999200020012002200320042005200620072008200920102011201220132014 Source: INEKO based on data from Eurostat (for V 4 and EU 28) and the World Bank (for Albania)

Shadow economy Size of shadow economy in Albania and V 4 (in % of GDP) Albania 2003 34. 4 2015 32. 9 (2007)* Czech Republic 19. 5 Hungary Poland Slovakia EU 28 25. 0 27. 7 18. 4 22. 6 15. 1 21. 9 23. 3 14. 1 18. 3 Source: Schneider (2015); Boka, Torluccio (2013) * Most recent estimates: 30 -40% of GDP

Economic indicators 2011 2012 2013 2014 2015 e 2016 f GDP real growth (%) 2. 6 1. 4 1. 9 2. 7 3. 4 Unemployment rate (%) 14. 0 13. 4 16. 0 17. 5 17. 3 17. 0 Public debt (% of GDP) 59. 4 62. 0 70. 1 72. 5 73. 3 70. 2 Public deficit (% of GDP) -3. 5 -3. 4 -5. 2 -5. 4 -5. 1 -4. 2 Current account balance (% of GDP) -13. 2 -10. 7 -13. 0 -13. 2 -13. 5 Source: IMF, World Economic Outlook, October 2015 e = Estimate f = Forecast

International rankings Corruption Perception Index, 2015 Doing Business World Shadow 2016 Competitiveness Economy Index, Report, 2015 -16 2000 -07 Albania 88. 97. 93. 73. Greece 58. 60. 81. 49. Slovakia 50. 29. 67. 24. Germany 10. 15. 4. 16. USA 16. 7. 3. 2. Transparency International World Bank World Economic Forum Schneider, Buehn, Montenegro Source:

Barriers to doing business Source: World Economic Forum, Global Competitiveness Report 2015 -16

Barriers to doing business Albania ranking Dealing with construction permits 189. Getting electricity 162. Paying taxes 142. Registering property 107. Enforcing contracts 96. Source: WB Doing Business 2016

Iron law of oligarchy • 1911: German sociologist Robert Michels – The new elite will always acquire power for its own benefit and at the expense of others • 2012: American economists Daron Acemoglu and James Robinson (Why Nations Fail) – To break the Iron law of oligarchy, the country has to have a broad and strong coalition interested in setting up “inclusive” institutions and to distribute political and economic powers in such a way that they cannot be monopolized by narrow elite – Key members of coalition: Free media, businesses independent from Gvt and monopolies

Inclusive institutions • Political: – Democratic political system – Rule of law: Independent justice, regulatory and controlling authorities – Free media, transparency, etc. • Economic: – Market economy – Protection of private property – Effective anti-monopoly policy, etc.

Slovak reform experience • Key success factor: Creating informal coalition of people supporting democracy and reforms – Think-tanks and advocacy NGOs (including INEKO and the Business Alliance of Slovakia) – Free media – Experts from think-tanks and bank analysts engaging in public discourse – Reform-minded politicians and policy makers (e. g. Ivan Mikloš)

Slovak reform experience • Transparent privatization in 1999 -2006 – Establishing independent regulatory authorities – Cleaning-up and full privatization of the banking and insurance sector; energy; telecom; etc. • Tax reform (2004) – Introducing 19% flat tax – Radical simplification of the tax code • Labor market reform (2003) – Introducing more flexible Labor Code

Slovak reform experience • Pension reform (2004 -05) – Linking benefits to contributions – Introducing fully funded second pillar – Prolonging retirement age, automatic indexation, etc. 15% Gross nominal returns of funds in the fully funded second pension pillar (annual weighted averages), Source: INEKO 10% 5% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -5% -10% Bond Mixed Equity Index 2015

Slovak reform experience • Fiscal stabilization – Strengthening analytical capacities at the Ministry of Finance – 2012: Constitutional Act on Budget Responsibility introducing the debt brakes and establishing the Council for Budget Responsibility • • • Public debt at 50% of GDP: Gvt proposes measures Public debt at 53% of GDP: Freezing Gvt salaries Public debt at 55% of GDP: Freezing expenditures Public debt at 57% of GDP: Balanced budget Public debt at 60% of GDP: Confidence voting in Parliament

Slovak reform experience Public finance balance in Slovakia (% GDP) 2008 2009 2010 2011 2012 2013 2014 2015 2016 (f) 2017 (f) 2018 (f) 2019 (f) 1 0 -1 -2 Structurally balanced budget -3 -4 Deficit under 3% GDP - Exit from EDP -5 -6 Two major consolidations: 2011 (Expenditures), 2013 (Revenues) -7 -8 -9 Public finance balance Structural balance (CBR SR) Structural balance (MF SR) Sources: Ministry of Finance (MF SR), Council for Budget Responsibility (CBR SR)

Slovak reform experience Public debt in Slovakia (% GDP) 60 52. 4 55 2. 1 50 45 40 36 0 35 30 40. 8 0 43. 3 0. 2 3. 3 3. 5 48. 6 49. 4 60 52. 9 52. 2 3. 1 3 47. 9 47. 8 47. 7 49. 8 2. 8 45. 7 55 47. 3 50 2. 7 45 43 40 39. 1 35 28. 2 0 30 50. 3 20 53. 9 42. 2 25 15 46. 8 55 36. 0 40. 8 51. 7 50. 4 49. 7 49. 8 49. 2 47. 0 43. 1 44. 6 25 20 15 28. 2 10 10 5 5 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 (f) 2017 (f) 2018 (f) Gross public debt less EFSF, ESM Gross public debt due to EFSF and ESM Net public debt Total gross public debt Source: INEKO based on data from the Ministry of Finance (MF SR) 2019 (f)

Slovak reform experience Long-term sustainability GAP indicator in Slovakia (% GDP) 10 9 Deficit reduction (expenditures) 8 7 6 Reform of the PAYG 5 Deficit reduction (revenues) 4 3 2 1 0 2009 2010 2011 2012 2013 Indicator of long-term sustainability (GAP) Source: Council for Budget Responsibility (CBR SR) 2014 2015

Slovak reform experience • Fight against corruption – 2000: Free Access to Information Act – 2003: Online business registry (user-friendly, searchable) – 2004: Specialized Court and Prosecutor’s Office – 2007: Online Land Registry – 2011: Publishing all property contracts and invoices of public institutions on internet. The contracts are not valid unless they are published. – 2012: Publishing court rulings on internet

Current challenges • Reducing influence of local oligarchs on politics – More independent and efficient judiciary, police and prosecutors, etc. – Anti shell-firms legislation, etc. • “Value for money” project seeking to increase transparency and efficiency of public spending and decision making – Opening public data – Measuring quality and efficiency of public expenditure and regulations • Reducing long-term unemployment, etc.

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