A Rising Tide Lifts Empty Boats
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Interpreting an Improved Economy in the Face of Depopulation
Mark Crawford
In 2024 Albania faces a paradox of statistics. After a couple of years of strong GDP growth, Albania is projected to have a stable, if not solid next couple of years. Tourism in 2023 boomed and investment in real estate remained strong. Based on the initial metrics, the future looks bright in Albania.
When President John F Kennedy borrowed the quote ‘A Rising Tide Lifts all Boats” from the New Economic Council he was referenced as combating the perception of economic favoritism when investing in a dam in Arkansas. Using the example of automotive sales in Arkansas, President Kennedy suggested that by increasing the buying power of Arkansans, due to an interconnected American economy, the investment is having a trickle through impact on other states.
These projects produce wealth, they bring industry, they bring jobs, and the wealth they bring brings wealth to other sections of the United States. This State had about 200,000 cars in 1929. It has a million cars now. They weren't built in this State. They were built in Detroit. As this State's income rises, so does the income of Michigan. As the income of Michigan rises, so does the income of the United States. A rising tide lifts all the boats and as Arkansas becomes more prosperous so does the United States and as this section declines so does the United States. So I regard this as an investment by the people of the United States in the United States.
The logic of Kennedy’s speech makes initial sense. In an interconnected economy, trickle down economics initially sound attractive. It should create an environment that will attract new business activity, creating an environment that would obviously advantage existing Albanian citizens who have the cultural, historic and language ties to the economy. Yet the Albanian population dynamics reflect a paradox.
Albania’s population is declining. Official statistics recently suggest a drop of fourteen percent, pointing to emigration and low birth rates. Critics suggest that the depopulation of Albania is much higher, pointing to UN reports suggesting that as many as 1.7 million Albanians, 37% of the country, have left to seek better options elsewhere.
Why are people jumping ship when a rising tide should be lifting the boat that they are on? If Albania is truly at an economic inflection point and that would benefit local residents possessing cultural and linguistic advantages for doing business there, shouldn’t we be witnessing not only a falling rate of emigration, but also a repatriation of Albanians from abroad seeking to secure seats on this boat in the rising tide?
Of the 3.44% GDP growth reported for Albania in 2023, construction accounted for a whopping 1.19%, just over 1/3 of GDP growth. Government related spending supported 0.92%, and trade, tourism, accommodation and food services account for 0.76%. On the other hand the Central Bank of Albania reports negative tends in GDP contribution from industry and agriculture and a drastic decrease in domestic exports.
Albania faces a delicate situation in which the optics of GDP growth are encouraging on the surface, but upon closer inspection the fundamental economic indicators appear alarming. Capital flows in Albania are going into construction. However, the growth in residential housing is not based upon demand for housing from rising employment or increased immigration. Instead, reports quoting the OECD and Albania’s INSTAT state that over 30% of homes in Albania are now empty. With prices rising, at the same time that supply outstrips demand with a reported 350,000 empty apartments in Albania, normal economics dynamics are not in play.
Economists would characterize investment into non-productive real estate that isn’t support by traditional demand factors as malinvestment. And yet, prices not only are being maintained, but continue to rise. Property prices have reportedly risen by 30 percent over the last year. Therefore, if traditional housing demand is not driving pricing, asymmetric demand is coming from somewhere else. Explanations for the current trend of malinvestment into non-productive residential real estate assets point to the grey economy. Critics cite reports of international criminal activity looking to find a place to park revenue from illicit activity. Tangential data from sources such as Operation Venetic continue to point to Albanian language activity, leading to real estate as a place to launder funds.
The strength of the Albanian Lek has had a negative impact on export sectors, which will eventually impact tourism. While Albania is enjoying the benefit of trendy tourism articles and positive industry reports, an overly strong Albanian Lek is not conducive to sustainable tourism at the level that Albania is currently able to offer. There are already initial reports, suggesting a negative outcome in relation to 2024 tourism expectations.
Critics of trickle-down economics point out that even though the macro-number may be positive, the money flows entering the country, just as a rain falls on the top of a tree and trickles down to the ground, not every branch or leaf or patch of soil receives an equal amount of water. None of the lower branches or soil will ever receive as much water as the branches and leaves at the top. Trickle down economics is, by the nature of the analogy, uneven in outcome. Those looking for equity in outcome will not find it in trickle down economics any more than someone walking around a tree after the rain should expect the water to be spread equally rather than finding puddles in some places and dry ground in others.
If the Albanian GDP is creating puddles of wealth accumulation in non-productive assets, strengthening the Albanian Lek, while pricing out the next generation of Albanians from local real estate, killing the domestic agriculture and industrial export competitiveness, then the natural result would be for average Albanian citizens to jump off the economic boat, even if the tide is rising.
Inflation, defined as too much money chasing too few goods and services, is a monetary phenomenon. Albanian inflation is nominally reported as one of the lowest in the region, on target with Central Bank expectations. And yet prices increase impacting business and life in Albania seems to be different than what the statistics initially suggest. In response to inflation, the Albania Government has increased public sector salaries by up to 40%, a potential wage/price spiral suggesting that inflation is in fact higher than official statistics would state. Such a move may maintain the status quo but is unlikely to attract the labor that is needed in the local market. What then should the Government do?
On September 10, the Heritage Foundation, in conjunction with the Albanian Policy Center, is gathering with several conservative think tanks to explore what is the Conservative Way Forward for Albania. A Conservative path means providing positive incentives for Albanians to remain in Albania. A Conservative path forward means providing positive incentives to encourage the return of the Albanian diaspora to the local economy. As the President of Republicans Overseas Foundation, focused on international tax policy, I will be sharing the findings in this article as well as some practical ideas that that Albania may consider in the face of a rising tide of empty ships.
1. Accurately report the Statistics. A misstatement of statistics may be useful in an election year, but if the real population and related buying power are significantly less than represented, then it will only attract further malinvestment and disappointed long-term investors in Albania. If the true population is lower than reported than the real number should be published. Alternatively, malinvestent will be made up on false premise of buying power that does not exist. Such a scenario will set Albania back in terms of attracting investment from the private sector.
2. Reduce employment tax on Albanian citizens, residents and local employers. Albania should reduce personal income tax drastically. The percentage of personal income tax to total Government revenue is less than 10%. It needs to be reduced in order to be a magnet for Albanians to stay in the economy if not return from the diaspora.
3. Change the taxes on real estate to disincentive unreported cash payments. The current system of using a reference price as a minimum amount paid, provides a strong disincentive for formal real estate purchases to be made via traditional banking institutions in regards to any value paid above the reference price. This perverse tax incentive empowers those who pay the additional value in cash and lends itself toward those in the grey economy looking to launder and park money in tangible assets. Albania should just consider making the additional tax owed for any transaction above the reference price as close to zero as possible, reducing the incentive for formal economy participants to use cash.
4. Implement zero interest Patriot/Diaspora Bonds in order to fund domestic Government investmnet. Coupled with a tax amnesty, offset by a zero percent interest rate, a zero percent Patriot Bond would be a manner to fund major infrastructure projects like railroad improvements while reducing informal cash circulation in the economy.
5. Use the strong Albanian Lek to continue to reduce Albania’s external debt. Albania is doing well in reducing its interest bearing debt to below 60%. It should continue this trend.
Albania needs to come to terms with the elephant in the room if it is going to tackle its paradox of a rising tide of empty boats. It must implement tax policy that attracts individuals and it must remove perverse incentives that are creating grey market pools of wealth in non-productive assets. Dealing with these issues is the Conservative path forward for Albania today.
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Mark Crawford is an American citizen, an enrolled member of the Chickasaw Nation, and an active member of the Sons of the American Revolution. Crawford is the Pro-Bono Global Vice President for Legislative Affairs for Republicans Overseas and has worked in international entrepreneurship for over thirty years.
