We need to attract productive investments
Interview with Mr. Olindo Shehu
Interview with Mr. Olindo Shehu Partner Deloitte Albania & Kosovo published on the Monitor Magazine
Foreign direct investments can have a greater impact in the socio-economical development of the country, once they can help further in the growth of the nation's productivity. The high level of unemployment and low wage labor are some of the most competitive advantages in Albania, that are enough to attract those foreign investments, (such as call centers, inward processing, etc. ), which have a limited impact on socio- economical development as well as productivity growth. We must compete with professional and/or technological and our know-how services.
How do you assess the performance of foreign investments in Albania and the importance they have on the economic development?
Foreign investments have a great impact in small economies and their development, in terms to their contribution in production, employment, and increase in the standard of living. They are a key incentive in economic growth. Foreign direct investments flows in Albania have had a significant increase in the past 8 years. The value of these flows in the year of 2013 signed a historic achievement with a sum of approx. 923 million euros, making up 10.5% of the GDP. From this amount, approximately 25 % consisting of crude oil extraction industry and minerals.
The service sectors, in which call centres are classified, make up approximately 45% of the total foreign investments in Albania. Whereas foreign investments in the legal fields, economic consultancy, professional technological/informative services, which require advanced skills, are completely missing and do not currently provide any contribution to the economic development of the country.
Albanian governments, one after another, keep reporting a continued economic growth in the country, year after year, something that without any doubt is very positive given the economic situation in the region. Nevertheless, I do not think Albanians feel any less poor from year to year despite the economic growth reported in recent years. The definition of the term “poor” is relative but in economic and social terms, Albania continues to remain a poor country in comparison to the socio-economical development we hope to achieve. In a poor country like Albania, a growth of 2-3% is not only not enough to feel an impact in our daily life, but also negligible in relation to the economic development that we should have to move forward towards the European Union.
What has been the role of increase in foreign direct investments in our country, and why do we not feel a stronger impact in our daily life?
The fact that our level of productivity is among the lowest in the region, while the contribution of foreign investment to GDP occupies one of the highest percentages in the region, means that the current foreign investments in Albania are insufficient to increase or incentivize productivity in the country. Even though we generally say that there is a positive correlation between foreign direct investments and productivity, it should be noted that the high level of productivity in a country can bring higher inflow of foreign direct investment, but not vice versa. In other words, foreign direct investments, which would have a higher impact in the socio-economical development of the country, would be the ones that would help in the further growth of productivity in the country. The following types of investments can be attracted only by having previously achieved high productivity and through the increase of foreign capital, to increase productivity and to target access to a larger consumer market in comparison to the domestic. However, the high level of unemployment and low wage labor are some of the most competitive advantages of Albania, that are enough to attract those foreign investments (such as call centers, inward processing, etc. ) that have a limited impact on socio-economical development as well as productivity growth.
So you believe that in order to attract foreign direct investments we must increase productivity in the country and not vice versa?
Absolutely yes, an increase in domestic production in any industry or economic sector will attract these foreign investments, which are interested in local production and are willing to invest further capital and more specialized know-how, and thus give to the Albanian production access to larger markets. In other terms, a successful Albanian farmer who produces a particular product (e.g. olive oil), is more attractive to a foreign investor that with financial strength and expertise can help to have a greater output, greater quality, and greater marketability in European markets. Such an investment multiplies domestic production, and develops the economy as a whole, as together with the farmer in question is a whole chain of suppliers that will benefit of this production increase. However, when your investment is focused on the exploitation of the cheap labor force in Albania but benefits from this exploitation outside the territory of Albania, it helps us because it creates job opportunities, but the impact on economic and social development of the country remains limited and insufficient.
How do you assess the business environment focused on foreign investments primarily?
According to the index of Economic Freedom 2015, Albania has dropped from last year and this decline is related to the weakening of fiscal freedom. Nonetheless, lower ratings continue to be in terms of corruption and property rights. According to "Doing Business in Albania, 2015 “, businesses in Albania perform 50 payments per year in relation to tax, and spend 357 hours per year to prepare files or serious foreign investment to help domestic companies to further develop.
With the increase of fiscal burden over the past two years, does Albania risk losing a regional competition in FDI?
Even though the tax increase does not help to attract foreign direct investors to invest in Albania, I do not believe it penalizes us in relation to those foreign investments that we would like to attract, because even with the fiscal regime we are many times lower than the fiscal regimes of the countries of origin of these foreign investments. It is the implementation of the tax legislation, the quality of state institutions, fiscal policies and incentives, as well as alleviating procedures of doing business in Albania, which can make us more or less competitive in the region in terms of foreign investment.
In your contacts with investors what extra obstacles do they have in the development of investments in our country?
Barriers that foreign investors, but domestic ones as well, encounter in Albania are different and they highly depend on the industry in which they operate. However, typically the quality of government institutions remains particularly important for developing countries like Albania since their low level increases corruption, which leads to higher investment costs and lower profits. Consequently, this increases the uncertainty in foreign investors. The functioning of the judiciary, corruption, property rights, bureaucratic procedures, fiscal system, and the permits of planning and building, are key sectors in the foreign investments that remain problematic in Albania. If the government does not take concrete structural reforms to address these issues, foreign investment in Albania can remain on project basis until the end of the payment process and lead to a tax total of 30.7% of their profit. Such news certainly does not help to attract serious foreign direct investments, or to help local companies to develop more.
Albania is known for its cheap labor, but is it equally competitive in know-how?
Absolutely not, even though we do have every chance to be competitive in relation to professional services and / or technology or our know-how, yet we initially need to develop such expertise. The geographic position of Albania enables access to the Western European market, which represents a competitive advantage in the region for export of the Albanian products (agriculture, light industry, professional services and technological services, etc.), for the development of nautical and mountainous tourism, as well as the "importation " of knowledge, experience and know -how that we are lacking in most of the industries that we want to develop.
One of the best examples of the use of professional services and technology comes from Estonia, a small country with very similar characteristics to Albania which now acts as a "player" in an important market for the provision of specialized services and products in the technological field. Fundamentals were laid in 1992 when Mart Laar, the Estonian prime minister took a series of incentive reforms, fiscal policy easing, and privatizations, fitting for a concrete strategy in regards to the economic and social development of the country. Part of this strategy was the education of generations to come, and focus on the development of the technological sector. In 1998, the Estonian government launched a nationwide project to enable equip classes with a computer as well as connecting all schools online. Last year, in public and private cooperation, a program was launched with the purpose of teaching 5 year-olds the basics of software coding. These are initiatives that may seem hard for Albania, but the biggest struggle lies in the confusion that young Albanians have in relation to their education, and/or their professional future. As a result of this confusion and lack of a concrete stimulus from part of the Albanian government towards specific sectors, who can contribute to the development of the country, most of the youth in Albania continue their higher education without having any clear idea about their professional future. This is evident as the student participation is greater in the Faculty of Law and Faculty of Economics, even though these two areas do not have any particular development, or guarantee jobs and professional development for recent graduates. As many people probably know, Skype was developed in Estonia, and only from the sale of Skype to eBay in 2005 for the value of 2.6 billion dollars, a new class of investors in Estonia was created, who made tens of millions of Euros through their shares and put their experience and their incomes in well-use to further develop this industry. This industry developed in Estonia, certainly doesn’t only serve the Estonian market but international one as well, starting from developed neighboring countries. If young Albanians would be directed towards specific fields, which with the respective development could also be offered to the market of Western Europe, Albania could start resembling Estonian terms of socio-economical development, and not only in population or geographical area.
Do you have any proposals to the government of what needs to alternate from the fiscal part as well as the business environment?
By making the reforms needed to address the current problems that we have in regard to the procedures and the quality of state institutions, education and legal system; and having a concrete strategy with regard to attracting foreign investment of this kind, Albania has all the potential to have an economic growth in higher levels, significant in our daily lives, and that will help the economic and social development of our country.
Almost all of the facts and arguments mentioned above are not unheard, and much less created by me. Estonia's example is not the only one. Policies or reforms that need to be implemented to increase foreign investment in the country are not new, and policy makers in Albania do not need to create something new. I believe it is time to start taking concrete actions towards a more developed Albania by having a clear long-term vision and significant objectives. From the fiscal point of view we have made many proposals, but what I believe will make a revolution in regards to fiscal legislation is the certification of declarations by auditing companies licensed to complete these certifications. Realization of certification of tax can serve as one of the key factors in the growth of tax revenues, the improvement in the application of fiscal laws in Albania, increase in the reliability for foreign and local businesses associated with investments in Albania, and a very good preventive measure of passive and active corruption. Tax audit, conducted in view of the certification of tax declaration by third parties licensed by the Ministry of Finance and subject to amendments to the criteria set by the Ministry, would enable a significant increase in the control over private entities without adding any cost for Tax Administration as well as not consuming any of the current resources of the Tax Administration. This would ensure risk reduction in regard to tax avoidance by these entities as well as automatically have an impact in reduction in the level of informality in Albanian economy.
All of this process will have an impact on the reduction of informal economy, in the decrease in the level of corruption, and financial stability, unified applicability of tax legislation nationwide would increase our countries reputation to the EU as well as states that are interested in investing in our country. Therefore, the increase of direct fiscal credibility would affect directly the increase of foreign investments in our country.