Albania: Growing Out of Poverty

The absence of nationwide, comprehensive household data render poverty analysis difficult, and estimates that can be made from partial data sets must be interpreted with the greatest of caution. The best estimates that can be derived from available information suggest that between 25 and 30 percent of the rural population (of nationwide total of 1.9 million), and around 15 percent of the urban population (of an urban total of 1.3 million)¹ are in poverty relative to the rest of the country's rural and urban populations. These figures should be taken as broad minimum estimates of poverty. With the exception of Tirana where poverty is apparently quite shallow, much of the urban and rural poverty may be deep - where incomes fall far short of a minimally acceptable standard. People are struggling to meet basic needs (food, clothing and heating). Many others are vulnerable to poverty, if not in an immediate income insufficiency context, they are threatened by poor public services and out-of-reach social services.

The main correlates of rural poverty are farm size and livestock holding, and off-farm income from wage employment and remittance. About one quarter of the rural population lives on a farm that is too small to provide a modest level of subsistence. The majority of these families live in the upland areas and the mountains, and have farms of less than half a hectare. The poorest decile of people live on an agricultural income of less than 6,568 lek (equivalent to US$70) per annum, and are unable to meet even their staple food requirements year round. They are dependent on the provision of subsidized wheat/flour through the winter months, and on cash transfers (pension and social assistance).

Non-farm income, critical for many farming households, represents around one fifth of total rural income. Though the most widespread sources are pensions and social assistance, the value of these are small. The most important to recipient families are remittances, followed by wage employment, non-farming business income and unemployment benefit.

Regardless of the poverty line used, urban poverty has some distinct characteristics. i) Poorest of all, both in terms of incidence and depth are households with an unemployed head, typically male, in his early 40s, and with little or no formal education. ii) Next are the three generational households headed by a pensioner, often a widow. While pensioners are not among the poorest, the presence of unemployed grown-up children and dependent grandchildren in their households makes them poor. iii) Households headed by a low wage earning male constitute the third largest group in poverty. These household heads are about 50 years of age, have little or no education and are employed or self-employed in a low paying job. iv) Families with three and more children are especially vulnerable to poverty. v) Households that have no regular source of market income and rely on social cash transfers are typically very poor. The social assistance program plays a key role as a social safety net, but the program seems to suffer from targeting errors and very low payment levels.

Private transfers, especially remittances from abroad, are a critical source of income for urban households. Households benefiting from remittances are more likely to be non-poor, if not affluent.

Incentive and Regulatory Framework

Albania has made tremendous progress in the past three years, recording annual economic growth rates close to 10 percent. This reflects major progress in stabilization and structural adjustment, especially the privatization of much of the country's productive resources (land and enterprises), and liberalization of prices, trade and foreign exchange. Growth -- albeit starting from a low base -- has emanated primarily from the private sector, especially agriculture, construction and services. Unlike many former centrally planned countries, the role of the state has reduced rapidly in Albania. Agriculture, accounting for 56 percent of GDP is almost entirely in the hands of the private sector. Construction, transport, trade and services, heavily financed by remittances from abroad are also largely within the domain of the private sector. Even industry is increasingly dominated by emerging small private sector companies.

Public Expenditures

Although there are substantial demands on the public budget, the tax base of the country is unlikely to improve markedly in the next few years. For this reason as well as other growth promoting objectives, the government will have to be selective in the areas it finances, including the use of donor financing. Policies that encourage private investment are important. Investments that promote labor-intensive growth should be given particular priority given the huge labor pool that exists in Albania.

From the perspective of poverty alleviation, there are a number of areas that call out for investment: health, education and training, urban infrastructure and services (water and sanitation, solid waste), roads and agricultural support services in the high potential agricultural areas, and small business services and credit programs. It is not clear that the 1996-98 public investment program (PIP) adequately reflects these priorities, especially with regard to education. The PIP accords high priority to transport, infrastructure (water and sewerage), energy and agriculture, adding up to two-thirds of all investments (compared to around half in the past two years). In comparison, planned investment in education is 6 percent of the investment budget, compared to 10 percent in 1994 and 1995, and health drops to 7 percent from 9 percent. In terms of transfers, pensions, unemployment benefit and social assistance all remain central to poverty prevention and alleviation, but caution needs to be exercised to ensure that the appropriate incentive systems remain intact, that a dependency on the state does not develop, and that employment is not over-taxed to fund these transfers.

Social Services

Good health and education are widely recognized as playing a key role in raising individual living standards and, in particular, being an essential element of a poverty reduction strategy. Typical of communist regimes, in the past Albanians enjoyed wide access to public services (free of charge). As a result of this policy, and despite rapid population growth, Albania entered the transition with generally good education and health indicators across the board for its per capita income level. In the post-1990 period there has been some deterioration in the education and health status of the Albanian population. Rates of school enrollment have fallen, whereas those of infant mortality and adult morbidity due to infectious diseases have increased. Data on the incidence of these deteriorations is not available, but in all likelihood low income families in both rural and urban areas are suffering disproportionately. Although in large part a reflection of the general economic environment, some of the deterioration can be traced to declining coverage and quality of public services, which is more amenable to direct intervention. This, in turn, can be related to falling public expenditure on health and education. These negative trends need urgent attention, with measures taken to ensure their reversal, especially as they impact on low income families.

Safety Net

Since its inception in 1993, Ndhime Ekonomike (social assistance), has played an important role in supplementing the incomes of many Albanian families, especially those who have little arable land and are long-term unemployed. At its peak, about 20 percent of families were receiving social assistance. In parts of rural Albania, benefit incidence is as high as 50 percent. General rural indicators, such as average farm size, show considerable success with program targeting, but other indicators, such as long-term unemployment, show less success.

This report reveals that some households above the poverty line are receiving social assistance, while some households under the poverty line are not receiving support. This is a particular problem in the urban areas where income can be "hidden" and eligibility is more difficult to assess. Perfect targeting is rarely achieved with such programs, but improvements can be made. Measures adopted over the past year or so (abolition of the minimum payment, part-retention of program savings by local authorities, an assessment of living conditions, and establishing an inspectorate) should reduce inclusion and exclusion errors. In the long run, household surveys should permit closer monitoring of the recipients of Ndhime as well as the identification of household characteristics associated with poverty, thus further fine-tuning the program.²

Poverty Strategy

Because of the pervasiveness of low incomes and continuing population growth, sustained economic growth is the key to poverty reduction in Albania. Since most of the poor (and non-poor) depend on income from labor -- from work on their own land, from wages, or from self-employment -- the optimal growth pattern is one that promotes broadly based rural development and urban employment and self-employment. This, together with emigration for work, is not dissimilar from the growth path that Albania has followed in the past three years. Rapid growth, especially in agriculture, construction, services and small businesses, was fueled by investments stemming from remittances (private capital flows from abroad) and concessional aid -- capital sources that cannot be depended on for the future. While every effort should be made to promote the continuation of these sources, new sources of capital will be needed to underpin a dependable and sustainable growth path for the future. Recent improvements in private and public domestic savings augur well in this regard.

Rural Development.Agricultural growth will continue to be the driving force behind rural development, but increasingly off-farm income-earning opportunities will be key. Although the coastal lowlands and the eastern plateau are particularly fertile and water abundant, Albania has limited arable land. Consolidation of parcels needs to take place to facilitate more efficient use of land and time, and for farmers to have greater security over crops and livestock. To facilitate this, greater administrative effort is needed to finalize the titling of land in order for land sales to occur.

In order to improve the performance of the rural sector, both as a source of growth and a vehicle for reducing poverty, it is necessary to: (a) encourage private investment for support services, especially marketing, in geographic areas with the greatest growth potential, i.e. the coastal plain; (b) provide farmers with credit beyond what the ADF can do through the agricultural bank, or another financial intermediary;³ (c) remove regulatory impediments to the growth of labor intensive businesses affecting on-farm and off-farm employment linked to agriculture; (d) support public investments in agricultural infrastructure, mainly in high growth potential areas to foster private investment in this sector; and (e) increase public investment in education and training for rural households, especially in remote areas. Social transfers will be critical for certain groups of the population: the elderly, the sick, and those with a labor constraint.

Urban Development.Rural-urban migration has already swelled the ranks of the urban population. To respond to the needs of those who have migrated to the cities and have no secure land tenure, the government should adopt: (a) a relatively low-cost and rapid means for clarifying land ownership and registering properties; and (b) temporary registration to help migrant households in receiving adequate health care, registering their children in public schools, and applying for state jobs. It is important to highlight the need to establish or build on ongoing efforts with the private sector, and in multiplying initiatives that support small business development that affect urban households.

Urban environmental problems, which will increase with greater population pressure, are threatening Albania's cities. Poor sanitation and waste management will undoubtedly get worse unless urban services are upgraded. While major investments in water supply and sanitation are already under consideration in Elbasan, Fier, and Lezha, investments should also be made on urban services such as solid waste management and drainage. In designing these improvements and services, the focus should be to: (a) maximize opportunities for local employment; (b) involve households in improving neighborhood services to reduce costs; (c) monitor health conditions; and (d) provide environmental education. To make urban services and utilities accessible to poor households, pricing policy should be sensitive to low urban incomes.

Statistical System

The absence of nationwide, comprehensive household data render poverty analysis difficult, and will continue to hamper the ability to develop an effective poverty reduction strategy for Albania. Moreover, the situation is very fluid, with populations moving from rural to urban locations, in- and out-of country, and businesses springing up one day and failing the next. One of the key recommendations of this report is that Albania launch a nationwide survey of household incomes and expenditures to help better quantify the extent of poverty, characterize the poor, understand better the importance of new sources of income, and aid public policy and program design.