Albania's fate seems tied to pyramids. Ismail Kadare, the famous Albanian contemporary writer and several-time nominee for the Nobel Prize, wrote a book called Piramida (The Pyramid). The story unfolds in ancient Egypt, where the pharaohs, much like their communist dictator-successors, use a totalitarian mechanism of myth creation. In Albania, after the death of the communist despot, Enver Hoxha, a pyramid-shaped building was built and dedicated to his memory. The people called it "the pyramid." But Albanians also learned about pyramids of the Ponzi-scheme variety (see box), as depositing money with the hope of reaping record interest rates became a national sport.
After the fall of communism, the young, yet vibrant private sector was generating an increasing amount of domestic savings, along with remittances from about 400,000 Albanians working abroad, mainly in Greece and Italy. In 1995 private savings reached almost 15 percent of GDP, or $350 million (up from practically zero two or three years earlier). Those savings, combined with remittances from abroad, totaled more than $600 million in 1995 and more than $700 million in 1996.
The new class of inexperienced account owners became easy targets for swindlers, who promised exorbitant interest rates for those who joined their schemes. At the beginning they kept their promises, paying their obligations from the next wave of investors' money. This is why such schemes are called pyramid schemes: the bottom layers of deposits must grow fast in order to keep the system running. One woman offered investors 20 to 30 percent interest monthly, and was never asked how she could afford it when the annual inflation rate was only 13 percent. Before her arrest, she was able to amass $50 million from naive depositors. She built a "pure" or fund pyramid and didn't bother to invest the money. (Investor pyramids, on the other hand, carried out some real investments. They financed the construction of supermarkets, office complexes, and gas stations.)
Two fund pyramids put their money in commercial bank accounts. At the height of the pyramid fever in the last quarter of 1996, more than $250 million had accumulated in those accounts. Due to the high interest rates, those deposits represented just 40 percent of the pyramids' total liabilities. Luckily, the swindlers didn't try to shift the accumulated funds outside the banking system. One can only guess why. Probably, the banking system was their only option as pyramid money poured in from all corners of the country. In early 1997, as the crisis erupted, the central bank froze all $250 million, in part to protect the depositors but also to protect the banking system. The system could not have survived a sudden withdrawal of those deposits. The government later returned the $250 million to the depositors, without interest.
Owners of liquidated investor pyramids were also reimbursed, on average, at around 50 percent of their investment, in cash or deposit certificates, although the actual value of their assets is unknown. Many may not have been viable businesses and may have served only as bait to capture more depositors. A company in southern Albania invested in a few hotels and gas stations. It collected an estimated $100 million and then collapsed. It went up in smoke, as did its property after the enraged crowds took to the streets.
Another company-the mightiest pyramid scheme-may have received as much as $500 million, which it invested in supermarkets, travel agencies, and real estate, and even in building and operating its own television station. Its assets exceeded $6 billion, at least on the books. Another enterprise collected more than $50 million that was allegedly invested in the mining industry. Nobody was able to find those mines. Nevertheless, reports claim that this company enjoyed the support of high officials at the mining ministry. There were other small companies so mysterious that it was difficult to classify them as either investor or pure pyramids. They definitely have some real investments, however: their owners moved into new, expensive houses.
The total value of deposits that the 16 pyramids received before the crisis exploded in early 1997-excluding the accrued interest at the time of the estimate-reached an astonishing $1.2 billion, or 50 percent of the country's GDP, at least according to some calculations. The links between criminal activities and pyramids are still not clear. Legal activities undertaken by pyramids could hardly have paid the unrealistic interest rates they promised their clients.
Money, unfortunately, does not grow on trees. For the author of this article to predict in October 1996, in a local newspaper, that the pyramids were doomed to collapse, was not that difficult. The World Bank had been alerting the highest authorities about the pyramid danger since mid-1996. Even earlier, Bank staff familiar with this phenomenon warned high government officials of the expected consequences. The central bank governor urged the Cabinet and President Berisha to ban pyramid operations from collecting deposits. This would have been possible legally, since the banking law rules that deposit collection is a monopoly of licensed banks, and the pyramids were not licensed. But by the end of 1996 judges appointed by the president ruled that the money collected by the pyramids constituted "bilateral loans," which were subject to the civil code, not the banking law.
In the last quarter of 1996 interest rates paid for by the pyramid schemes started to spike rapidly-30 percent, then 40 percent, and even 50 percent per month. The annual inflation rate was still below 20 percent. It was clear that collapse was imminent. Finally, in early 1997 all but four of the pyramids admitted insolvency. People blamed the government, and the pyramids' final collapse provoked an antigovernment uprising and widespread civil disorder in February and March. That eventually brought down the president and the government.
Why did people blame the government? The government did not ask or advise the public to invest in the pyramids. But it tolerated, and even legitimized, these activities, according to critics. True, the finance minister issued a formal, timid warning about the risks of investing in the pyramids (in retrospect, it looks as if the warning was aimed more at satisfying the IMF and the World Bank, than at actually stoping the pyramids). But the public could not believe that a scheme involving every other Albanian family would not be guaranteed by the government. Moreover, pyramid managers were seen at official receptions, and they were interviewed daily by the government-controlled television stations. Their association with the Democratic Party of President Berisha was obvious (and later acknowledged). Many protesters even claimed that the pyramids were the creation of the government, or more precisely, of the president. But the pyramids also reached other parties and other interest groups. After all, was their goal to gradually grind up everybody.
The pyramid story is far from over. Four investor pyramids have survived, though they do not receive deposits because nobody dares to invest in them. But they reimburse a few depositors every day and have succeeded in creating the illusion that they are sound and will pay back everybody-one day. The World Bank has drawn up a $6 million program (financed from the Bank's earlier technical assistance project and other donor contributions) to audit, shut down, and dispose of the last of Albania's pyramid schemes. Foreign firms will audit and manage the remaining investment pyramids. Big international accounting firms are expected to bid on this task.
Until all pyramids come under external administration (as established by a recent law passed by the new parliament), the pyramids assets are recovered (where possible), their accounts are audited, their depositors are identified, and the capital is distributed among depositors using some kind of formula, Albania's fate will continue to be tied up in the pyramids.
Albania was doing well until the crisis exploded-at least it appeared so on the surface. Its GDP was growing fast (albeit not so fast as claimed by the government), inflation had dropped to single digits, and even after surging in 1996 it remained relatively low, at about 17 percent. The currency (the lek) was stable. Relative to the country's size and wealth, foreign investment has started to pick up significantly. But institutions were extremely weak, and they were not improving or gaining strength. Civil society was basically nonexistent, with the exception of some foreign foundations. The private sector was vibrant, but the public sector was unable to deliver what it was supposed to. Since the fate of a society depends, in the end, on the strength of its institutions, its public sector, and its civil society, it should not be surprising that Albania had tremendous problems. The country will continue to have problems if institutions such as the judiciary and the bureaucracy remain weak. It is not true that development is a problem of institutions in the first place-it is a problem of institutions in the first place, the second and the third...!
