Post-socialist financial fragility: the case of Albania

Abstract

The 1997 collapse of the Albanian economy caused by the collapse of economy-wide Ponzi schemes contrasts sharply to its success status as a post-Socialist transition country in the years 1992-1996. In this paper, an attempt is made to explain this 'Albanian Paradox'. The specific Albanian conditions for the growth of Ponzi schemes are identified. Theoretically, the Albanian Paradox can be interpreted as one version of the 'Financial Instability Hypothesis' suggested by Minsky. Investigation of the underlying factors that render financial markets fragile suggest that the Albanian case is extreme but not unique in the region. It is emphasised that sustainable growth is predicted on the quality of government, on proper financial-sector regulation, on actual microeconomic restructuring and on the development of market institutions through which adequate market information is disseminated.

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