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Foreign direct investment in Albania: rule of law as a social requisite for the development of a fair and not predatory market economy

Avenir Peka


Introduction - 1. Elements of the Rule of Law - 2. Issues and problems associated with RoL - 3. Investment Climate in Albania - 4. Business Climate Improvement - 5. Conclusion


Foreign Direct Investment (FDI) plays an important and growing role in global business. For the host country, it can provide a source of new technologies, capital, processes, products, and management skills, thus providing it with a strong impetus for economic development. In its classical definition, Foreign Direct Investment is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. Proponents of foreign investment point out that the exchange of investment flows benefits both the home country and the host country. Opponents of foreign direct investments stress that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much of local competition. Of extreme importance in deciding to invest in a foreign country, is the new market access. Any decision in investing is thus a combination of a number of key factors, including: – Assessment of internal resources; – Competitiveness; – Market analysis; – Market expectations Two categories addressed by World Bank’s ‘Doing Business’ in ranking economies on ease of doing business are ‘protecting investors’ and ‘contract enforcement’. The concept of Rule of Law and its presence in a business [continua ..]

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1. Elements of the Rule of Law

In his book The Morality of Law (first published in 1969 by Yale University Press) American legal scholar Lon Fuller identified eight elements of law which have been recognized as necessary for a society aspiring to institute the rule of law. Fuller stated the following: i. Laws must exist and those laws should be obeyed by all, including government officials. ii. Laws must be published. iii. Laws must be prospective in nature so that the effect of the law may only take place after the law has been passed. For example, the court cannot convict a person of a crime committed before a criminal statute prohibiting the conduct was passed. iv. Laws should be written with reasonable clarity to avoid unfair enforcement. v. Law must avoid contradictions. vi. Law must not command the impossible. vii. Law must stay constant through time to allow the formalization of rules; however, law also must allow for timely revision when the underlying social and political circumstances have changed. viii. Official action should be consistent with the declared rule. Standing alone, these eight elements may seem clear and understandable. But they are actually difficult to implement in the real world because governments are often compelled to prioritize one goal over another to resolve conflicts in a way that reflects society’s political choices. For example, making too many laws that are too detailed and specific may make the legal system too rigid. Inflexibility could [continua ..]

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2. Issues and problems associated with RoL

In Albania, as in most of former communist countries, who transformed from centrally controlled, into free market economies, there were several hurdles along the way of reform. Legislative Reform. Reform of commercial legislation proved to be for Albania, a tedious process characterized by a continuous and seemingly unending series of small, incremental changes. The Role of Inexperienced Legislators. Very few legislators and drafters of commercial legislation have had the necessary understanding of how business transactions were carried out in well-established market economies. Often parliamentary drafting committees or governmental agencies were staffed with civil servants or academics with a limited theoretical understanding of how a market economy functions, but with little practical business experience or understanding as to how private actors would respond to poorly drafted or enforced legislation. Laws Lag Behind Actual Transactions. The legal system is generally several steps behind what is occurring in real world business transactions. This is not surprising: it is a rare legislator or government that is capable of foreseeing future trends in the marketplace. As a result, legislation dealing with cutting-edge legal issues in the commercial context almost always follows actual transactions taking place in the market. Inadequate Consultation with Foreign Investors and Other Affected Parties. Although many changes in legislation were [continua ..]

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3. Investment Climate in Albania

With its developing market economy, Albania offers many opportunities for investors – property and labour costs are low, the young and educated population is ready to work, and tariffs and other legal restrictions are low in many cases and being eliminated in others. Albania’s location offers a notable trade potential, especially with EU markets – it shares a border with Greece and is just across the Adriatic Sea from Italy. Albania has also entered into free trade agreements with all Balkan countries creating the opportunity for trade throughout the region. The Albanian economy in recent years has experienced an economic increase in real terms of approximately 5-6%. Inflation had been kept under control at 2-3% with an average inflation rate of about 2.4% in 2007. Unemployment for in 2006 decreased by approximately 0.3% compared to 2005 when unemployment was 4.3%. The national income per capita estimate for 2006 is US$2.903 per capita. The Albanian economy is now an open economy with fully liberalized trade and a completely privatized banking sector. Some of the best known international banks currently operating in the market include Raiffeisen International, Société Générale, and San Paolo. Their presence and the strength of the banking sector have boosted financing in the economy. Albania offers a considerable amount of natural resources including oil, gas, coal, iron, [continua ..]

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4. Business Climate Improvement

Taxes and fiscal burden The Albanian government has applied a set of liberal fiscal policies during the last few years, drastically reducing fiscal burden, social security, and health contributions. These policy measures consist of: – Reduction of corporate and personal income taxes, implementing a “Flat tax” of 10% by the end of 2007. – Unification of the simplified profit tax and the tax on small business as defined in the new Law no. 9632, “On local taxes in the Republic of Albania”, dated 30.10.2006. According to this law, local authorities are now responsible for the collection of the new tax. – Reduction of the fiscal burden of social security paid by employers from 29% to 20%. – A 30% reduction of electricity rates for businesses. – A tax exemption of dividends designated for investments. Business registering procedures – In the framework of Regulatory Reform, busi­nesses in Albania are only required to register once with the country’s tax authorities. – A new Law on business registration reform was enacted by the Parliament on May 3, 2007. Law no. 9723 “On the National Registration Center” establishes the National Registration Center (NRC) as a new central public institu­tion. – The National Registration Center has opened in September, 2007 and all business activity can be registered in one day with a cost of [continua ..]

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5. Conclusion

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