INSTITUTIONAL REFORM, NATIONAL STRATEGY FOR ECONOMIC AND SOCIAL DEVELOPMENT AND ITS PROGRAM FOR ECONOMIC GROWTH AND POVERTY REDUCTION

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1 INSTITUTIONAL REFORM, NATIONAL STRATEGY FOR ECONOMIC AND SOCIAL DEVELOPMENT AND ITS PROGRAM FOR ECONOMIC GROWTH AND POVERTY REDUCTION Artan Hoxha Institute of Contemporary Studies Background The National Strategy for Economic and Social Development (NSESD) and its three-year Program of Economic Growth and Poverty Reduction (GPRS) have addressed "good governance" as one of the main questions of their focus, describing it, together with the economic growth, as the pillars of this strategy. The NSESD aims at improving the standard parameters of democratic and legal governance, namely: stability accountability effectiveness and efficiency but it also draws attention to other aspects that need to be improved in order to reduce poverty, that is, to build governance that creates opportunities empowerment and guarantees for all stakeholders, particularly, for the most vulnerable and poor groups/individuals of the society. A priority and convincing approach to "good governance" the achievement of whose objectives is based on the deepening and extension of the institutional reforms is expressed also in its status of a cross cutting issue with all the areas touched upon by the priority sectoral measures proposed by this document: from the fundamental reforms of the state to the decision making on a sector and sub sector level, including also the interinstitutional relations. The essential questions of governing are the following: the reforms that are based on the institutions of justice and the public order that address the need

2 to guarantee public order, fight crime, guarantee property rights, and so on. the reform in the public administration, which aims at strengthening the sustainability of the public administration and at the enhancement of the policymaking capacity and the capability of those who will implement these policies. the improvement of decision-making with respect to generation and use of public funds and the other public assets, and as a result also the consolidation of respective responsible institutions. The three above-mentioned directions, which attempt mainly to increase the governing standards regarding the first set of standards, are complemented with an enhanced involvement of the stakeholders in decision making through decentralization, opening up, transparence, and the fight on corruption. Their plan of measures is expected to yield results both on the first and on the second set of governing standards. The reforms for "good governance," albeit, the institutional and administrative reforms, are a distinct part in every sectoral chapter of the NSESD: from the development of the private sector, infrastructure, education, health, social protection, and assistance, up to integrated rural development and environment. The NSESD matrix also lays down a detailed set of general and sectoral measures. Even though the above-mentioned standards of governing are not new, the NSESD is the first document that treats them in a comprehensive, coherent, harmonious, and measurable manner. The problems and challenges of governance Albanian transition may be described as a process that: i) in its first phase addressed the question of the division of the role between the public and the private sector through the marker reforms (liberalization, privatization) and the institutional reforms (properties rights, private initiatives, and others) while

3 ii) in its second phase, it is giving priority to the distribution of the roles within the public sector (separation of powers and their independence, the sectoral reforms, judiciary reform, public administration & decentralization), as well as to the relations among these three large actors, the state-the private sector, and the civil society. This division in two phases is not longitudinal and does not imply a beginning or end, but only a greater concentration of attention on one or the other direction. Box 1 While liberalization of the internal and external markets has been mostly done in the early transition phase, it continues even today through the privatization programs of some large public companies like (energy, banks, telecommunication, drinking water supply, and others), or through the policies of gradual liberalization of trade relations (membership in WTO, agreements of free trade, and others). Likewise while the major reforms in the separation of powers (legislative, executive, judicial) began as early as the first transition years, they continue to be addressed in order to reduce the harmful reciprocal check and balances and the assertion of every branch of power in its constitutional role, while the other important reforms like that of public administration, decentralization and the reforms within every public sector, including the inter-institutional relations and the relations among various actors, which have their modest beginnings in the early years of transition, constitute the most important part in the governance reform of today. Besides that, the governance reform demonstrates a considerable change in the relative ratio among its determining factors. While in the first phase, the reforms were mainly of a vertical type, namely, top-down, focused on large sets of objectives and based on borrowed models, and the decision making game was concentrated almost entirely on the political class, with the public constituting an almost homogenous group of interests, while sometimes displaying an extreme individualism, in the second phase, however, we note tendencies of bottom-up or horizontal developments, while attention is concentrated more in depth in every field and sector, the decision making game is no longer the absolute monopoly of the political class and the Albanian society has mapped out a

4 structure with groups and strata, although still very dynamic and unstable. From a global point of view, the developments and outcomes seems natural. Nevrtheless, in the Albanian transition experience, passing from one phase to the other was not pace and harmonic and the outcomes are far waya those publicly demanded The relations among the three actors, the state, the private, and the civil society show that the "game of interests" has just started and that it requires a dynamic adjustment of the role of each "actor" vis a vis one another, even though they will remain dialectically divided and distinct at the same time, but also merged and cross-cut with one another. The state and the market Can we say that since the private sector accounts for over two thirds of the GDP (which is a high indicator compared to many other countries in transition), there is no more need for a further withdrawal of the state and an advancement of the private sector role? The noted dominating tendency is that the private sector, which is aggressive and wants to extend not only to the traditional sectors of trade, industry, agriculture, and private services, including the financial and banking services, where it is either predominantly or partially dominant 1, but even in the quasi natural public services like education, health and infrastructure 2, and others. Such a tendency must be supported. The analyses of every sector show that such a process is more likely to use the resources in a more efficient manner, to adjust them better to the demands of the public and the market, and to ensure a longer-term sustainability. 1 The role of the state in trade and agriculture is almost non existent, in industry it continues to remain present in some traditional branches like energy, oil, and minerals. In the banking sector there is only one public bank (under privatisation) as against 13 non public banks. 2 The number of private schools has increased considerably at all levels in the last years, while a more modest tendency is verified at the health sector while it is totally privatised the dentistry service. The first private initiatives in the field of infrastructure like in water supply and drainage system are appearing and the mobile telecommunication is totally private. The bulk of the budgetary fund for operational expenses (non salary) and investments of the government are procured by private sector.

5 The programs of all governments have expressed the need for the continuation of the privatization of the remained public companies in banking/insurance, energy, telecommunication, water supply as well as in mine and oil industry, which obviously shows that there is full consensus about this issue. While the question of the withdrawal of the state is no longer disputed, the debate should be made in terms of: the level of withdrawal 3 of the state in every sector the pace of withdrawal the modification of the role of the state in every sector from which it withdraws. A broad debate is underway today along with an intensive, sometimes open and sometimes not, participation of the stakeholders related to these three issues. The treatment of the three above mentioned issues may be done separately or in a subsequent manner, but it may also be addressed simultaneously and in a combined manner. The approach depends on the targets that one wishes to reach, the perceived risks, and the need to minimize them, as well as on the bargaining power of the interest groups. According to more reliable analyses, one of the main factors of this inefficiency is the weakness of the state to adopt a new role or to put it differently, to play the role of the guarantor and regulator. The high level of the unpredictability of the rule of law and the legal system, the existence of the visible and invisible administrative barriers, the lack of political stability and transparency, the high level of corruption, and the weak capacities of the institutions damage the regulatory and guarantor role of the state. Box 2 In the financial sector, liberalization and privatization were preceded by a structural process of establishing of the the regulator autority(bank of Albania), as a guarantee for the efficient and low risk structuring of the sector. On the other hand, the withdrawal of the state from the traditional 3 The term withdrawal has been used in the sense of non direct provision of the goods and services in the field given by state structures or the state owned companies but it does not imply the withdrawal of the state from the public responsibility for these sectors and services.

6 sectors although has had an obvious impact on the economic growth and the consolidation of the tendency for achieving the markets efficiency, the latest continue to demonstrate weaknesses and are a still long way from being efficient. The distortions in the allocations of funds in some sectors (e.g. the engagement of many new businesses in the same business, the innovative weaknesses of the businesses, and the monopoly tendencies seen in some markets, make one believe that there is still a long way to go before efficiency is achieved. The higly fluctuated prices and their differences in various zones of the country, existing abnormal profit rate, and others are indicators of this inefficiency. The considerable weight of the informal economy and the accumulated conflicts of land ownership are also indicators of the weakness of the role of the state as a guarantor and regulator. In the conditions of having double objectives like the NSESD, namely that of ensuring a sustainable economic growth of 7-8% a year, and that of poverty reduction through providing equal benefits from this growth to all the social groups and strata of the society, the role of the state as a guarantor and regulator should be given proper attention. If we were to take into consideration such sectors like energy, water supply and the sewage system, the public health, and others, which are all linked with the economic growth and the poverty reduction, we might say that in each of them it is necessary to determine the necessary policies and measures to ensure alternative scenarios about the level of the withdrawal of the state, the pace of this withdrawal, and the guarantor and regulatory role of the state, which on the one hand would be likely to produce certain effects regarding the promotion of private initiatives (Albanian and foreign), that is, more investments, greater efficiency, and satisfaction of the market demand but which, on the other hand, would display various risk rates on the side of the offer and the possibility to reduce the access for given social strata, particularly the "poor" ones to these liberalized markets and the provision of relevant privatized services. Box 3 While in the energy sector the situation is such that requires greater discipline, further growth and/or the liberalization of prices, the promotion of investments and statutory interventions, which should precede the privatization of the sector, on the other hand, it is necessary to clearly define the future role of the state in these sectors that have a monopoly tendency and the means to carry it out and to alleviate the implications of this reform on poor strata and/or, which have high access costs (e.g. Rural zones and mainly the mountainous and remote ones). The Albanian Energy Corporation [KESh] strategy, adopted recently by the government, is

7 trying to find a solution to this, but there is still room to go deeper into this analysis and to consider the energy sector also from the aspects of alternative sources, its relation with the environment, the civil security and the expected effects on the markets and the society, and so on. Such trade offs are present in every sector and depending on its nature, they may be more outstanding in the aspect of the guarantor and regulatory role of the state for achieving the efficiency of the market and/or, the alleviation of the social costs for given strata of the society. The energy sector, telecommunication, and the banks require a powerful role of the state to promote the market efficiency, education, public health, and others require greater social attention by the state, meanwhile, such sectors as potable water or protection of the environment require an equal role in both directions. Decision making for such policies in the conditions of the consolidation of the self-organization of the private sector (chamber of commerce, associations, and others) and its growing influence become more complicated and raise the need for a more effective, more acceptable, and more sustainable decision making process. Considering as very positive the involvement of the business community in decision making and its treatment as a partner, greater attention must be devoted to the possible risk of conflict of interests, otherwise it may be easily transformed in a state capture with all the public costs it entails. Key Questions: what are the objectives of every sector and how do they dictate their respective reforms? in what sectors should we aim at achieving a radical withdrawal of the state as against its moderate withdrawal? What would be the appropriate rates of this withdrawal? What would be the new role of the state in every sector and with what institutions and means should it be realized? What would be the most appropriate process to address these issues in a clearer and most reliable manner?

8 How can the interest groups be included in this process by minimizing the conflict of interests? The state and the civil society After a period when extreme individualism and a uniform society have been dominant in terms of interests, we may speak today about the revival of the civil society, which erroneously and in a simplified manner is still perceived mainly in the role of the NGO-s. However this concept is evolving. Apparently the individuals of the society are coming to realize that in some instances, a private aim may be better achieved through a set or public/community/group, non-state actions. The revival, formally or not formally organized interest groups in the society (like those protecting the rights of women, youth, media, business, rural communities, and finally, the urban community) is an expression of this revival and of the growing role of the civil society. The signals of such a revival have become more perceivable today, but we also noted problems that must be treated carefully. The Albanian civil society is not the byproduct of transition, but during the transition phase we note a competition and coexistence of the traditional civil society and the modern one. Despite the fact that a modern civil society, based on the positive values of cooperation, harmony, justice and strong tendencies of opening up is crucial for a successful development over a longer time frame, some traditional aspects, do not have a negative impact on short-mid term. Box 4 The traditional clan, which is "hostile" to the outside world, is a factor of security for its members and assumes a first hand importance for individuals who live in poor rural zones. Along with a growing demand for private services, the Albanian society is manifesting also a growing demand for complete or partial public services, according to interest groups, services that are no longer preferred to be offered only and directly by the state, but also and preferably through new models of delivering them, which imply the use of non-state and non-private mechanisms. These tendencies require a revision and an adjustment of the relations of the state with the civil society, which

9 must be equally competitive, transparent and cooperative in decision-making, while playing also the role of an opposition. There is not and there can be no demarcation line and a clear and static balance in this relationship but also any excess in one or another direction poses risks for that kind of development that is desired by the public at large. The trade offs are present also in those decision-making levels where an answer would seem easy. In essence, we would have a dialectic relation between representative democracy and the direct democracy and the tendency to shift on one or the other side must be a balanced one. The proper administration of the relations of the state with the actors of the civil society requires the adoption of suitable check and balance mechanisms that must be as transparent as possible. Some questions are essential for the key aspects of the operation of the NSESD, like education, health, social protection, the basic services like that of water supply and the role of the communities and the interest groups in the administration of the public goods, or the discussion and the adoption of national, regional, and local policies. Key questions: To what extend is the demand for public service growing and what are they? What are the public services for which the withdrawal of the state is more appropriate and which would be the role of the state in these services? What would be the role of the structures of the civil society in these services? What are the advantages and risks of every potential scenario? Which would be the process for the approximation of the roles? How would we be able to satisfy the demands of the minority given the constant prevalence and or the insensitivity of the majority? To what extent could the conflict of interests and, or, the doubtful legitimacy of the representation of the interests of the civil society be minimized? These are questions that must be resolved by the reform in every sector. For as long as there is no ready made solution in each of them, it is necessary to put forward alternatives and adopt the most appropriate solutions with the view to realize the objectives of the economic

10 growth and the reduction of poverty in a broad context of sustainable development of democracy and market. Box 6 How effective is today the social assistance (economic assistance) scheme to fight poverty, which is distributed in cash by the Ministry of Labor and Social Care, through the municipalities and communes? Does it reach the poors? To what extent it reaches them, does it serve the aim of alleviating poverty? Does it cause permanent dependence on these funds? Would it be more appropriate for part of these funds to be distributed through more active and integrating instruments or are supplementary funds required? If new instruments are needed what are they? Although there are no receipts, there is room for drawing attention to some questions linked directly especially with the poor social groups. The inequality up to poverty, which according to the NSESD, is determined not only by the level of the economic development of the country and the individual and family characteristics of the poor, becomes greater due to a powerful operation of the lack of access or unequal access in the opportunities for development (access in labor market, access to markets and/or to public services like education, health, or social protection). Since the poor are also the most unorganized and weak group of the society, there is a high risk of them becoming even more marginalized by reforms that does not address adequately and in a balance way the market issues vis-avis the social issues. For this purpose, the abovementioned questions in all the sectors linked with poverty must be raised particularly for the poor. Box 7 Since poverty is manifested mainly in the rural, and urban - peripheral zones, the NSESD stresses the need for increasing their access to the opportunities of development but also for empowering their voice and offering them minimal guarantees. Community approach, although with difficulty, is gaining terrain because it is believed that such an approach promises greater efficiency and effectiveness, transparency, stability, and other multiple effects. Nevertheless, it is developed more through programs supported by donors and less so, or not at all, when it is funded directly by the state budget, and, or by the units of local authorities. If we have confidence in this approach, then we must ask about the cultural and traditional barriers it encounters. Is it necessary to focus on the promotion of a cultural process for the consolidation of the community behavior, or would it be more effective to deepen decentralization, which over a longer term might bring about a more powerful community presence? Or would it be better to make a harmonious combination of both aspects?

11 Since the poor are among the less organized people, there is a high risk of making them even more marginalized. For this purpose, the above issues/questions in all the sectors linked with poverty must be discussed especially for the poor. The market and civil society While the relations between the state and the civil society demonstrate a greater dynamics from the point of view of cooperation and/or conflicts and protests, the relations between the market and the civil society are still weak. The Albanian market demonstrates very weak social features. Under a more dominant spirit of individualism, the strata of the population, which are in a better economic state, are almost indifferent to the social problems, including poverty. The main strategy adopted by them is that of individual self-protection when social phenomena entail a cost and, or, an individual risk compared to a need for an active strategy of their commitment to the solution of the social problems. Charity, even though restricted, exists and tends to grow. The lists of debtors in the bakery shops and grocery stores are well known all over the country. Some initiatives to raise funds for assistance in cases of natural calamities have been well received by the public and the businessmen, no matter how modest they may have been up to now. Box. 8 One of the most visible contributions of the communities is the contribution in favor of public schools by the community of parents among which stand out the families with greater income and mainly "businessmen" whose children learn in those schools. 4 This charity and/or civic contribution trend is fostered by the tradition, the religious culture, the humanitarian sentiments and the ambition to demonstrate power. But, in essence, it has a strong assistantialist character and cannot be transformed into a factor of change. Nevertheless, these examples cannot alter the essence of the relations between the market and the civil society. Beginning from the simple forms of civil organizations up 4 The school is a contradictory example. If after a period, many businessmen used to assist the school with funds to make various repairs, this social group is abandoning the public school and is running after private schools in Albania or outside it, making a considerable contribution to the reduction of the contributions of the community for the school.

12 to the powerful NGOs, which are spread all over the territory, the level of financing from private sources is almost inexistent. It often happens that given businessmen distribute the charity funds themselves without using specialized bodies for that purpose, either because they do not trust them or because they want to gain credit for themselves individually. For their part, the organizations of the civil society supported by the donors, do not feel any need to approach the businesses, and on the other, they compete in "charity markets" or the "public interest markets" to play a leading role and to survive as an organization or sometime as a hidden business. Both sides perceive one another as corrupt. Such a gap can be seen also in the relations between the think tanks/academic community and the business community. While both sides have been involved in promoting the pro-business policies, coordinated actions between them are minimal. Given the fact that the tendencies of developments require growing opponence and cooperation in the same time between the market and the civil society and that there are common objectives and a group of individuals and component groups, the possibility to promote this process exists but the ways and means to encourage it are still unclear. Finally, some efforts have been made to create a more suitable legal framework (e.g. the law on the non-profit organizations). The foreign donors are beginning to analyze the possibilities for a gradual process of withdrawal. Likewise some models of social 5 business are being experimented. Anyhow, the analysis of these areas and ideas are still scarce. Some methodical questions may be raised for discussion: Does the Albanian society have any philanthropic potential? Is it possible for the common interests of the market and the civil society to identify common motives/interests of commitment and cooperation? How could the civil society which would like to have a more social market can contribute to a more efficient market? How the business community which may demand for more efficient and fair market can contribute to a more social 5 UNICEF has supported the establishment of a social business, namely, a fast mail service (YAPS). A group of orphans are employed having in the same time ownership right over the company. Some business organizations have embraced t his initiative supporting YAPS in various ways.

13 market? Is this way of crosscutting objectives that may bring the two groups nearer each other? What initiatives should be taken to encourage such a cooperation? What would be the role of the state like in this triangle game? The state vis a vis the state The objectives of the NSESD require not only a redimensioning of the role of the state vis a vis the nonstate, but also a reformed system of its internal relations. While the focus of attention is still being given to the separation of powers (legislative, executive, and the judiciary), attention today is being focused also on the reform within each power aiming at: accountability, effective decision making and inclusion. Such reforms require the adoption of a new system of relations among and within the institutions. One of the most powerful current tendencies is that of decentralization which is based on a national strategy and a framework law. What is expected of this reform is increased abilities to respond better to the needs of the communities, the mobilization of more resources and a more efficient use of such resources, a higher democratization and a broader participation of the citizens in governing and in major issues of interest to them. On the other hand, the reform has its risks coming from the weak capacities, lack of traditions in some zones, and the possibilities of some powerful local groups to capture local state authorities. The strategy and law have rightly addressed such issues and has insured an appropriate model which leads to an accountable local autonomy. The decentralization trade offs, during the its implementation phases, are lawful but sometimes they are being misused and becoming considerable barriers to the further progress of the reform, which has just begun. Now that the reform has entered its real implementation phase, it has come up against a bureaucratic and central resistance of the administration, which is affected by a re-allocation of the authority and powers and also the changing of possibilities to realize non-formal interests. Furthermore as a result of a propaganda, the opinion still exists that decentralization has advanced more rapidly than necessary, creating another group of

14 misinformed which is recently hesitant towards this reform. On the other hand, its slow-down or stopping the implementation of part of it (in most cases implemented with very small portions) is causing problems which though stemming from the slow progress of implementation decentralization, are being controversially interpreted as outcomes of an accelerated decentralization. Apart from the risk of slowing down, the reform faces also the risk of deforming the vision and the check and balance structure of local autonomy towards a clientelist local-central model of this autonomy. Decentralization is a cross cutting reform of most sectors of public services and as such it is complex, long-term, and it implicates many trade offs. On the other hand, its progress is necessary where trade offs are fostered not by a realistic analysis of the public risk but by the centralist bureaucratic traditions or by non-formal interests. With respect to these reforms, it is necessary to constantly bear in mind a broad public dialogue, particularly with respect to the following questions: Do we have reason to change our vision radically, which is now mapped out, of the local autonomy? Which is the process that ensures an analysis, the decision making, the feedback, and more suitable adjustments of the reforms? What must be the pace of the implementation of this reform in each sector? In which sector this process has no reason to be hindered? In what sector must the pace of the progress be revised? What are the risks and how can they be minimized? What would be the best approach to the decentralization of expenditures or of the decentralization of the fiscal authority? What are the advantages and the risks of each sector? At what rate must we proceed? How can decentralization be encouraged to go hand in hand with the enhancement of capacities of local government? How can decentralization contribute maximally to the enhancement of transparency and the inclusion the governing of communities and the poor? Similar questions may be raised in every priority sector of the NSESD, which would address a reform within the structure (ministry and its branches in the districts up to the service delivery unit), the division and the clarification of the responsibilities and the adjustment

15 of the relevant relations between central and local power as two public, autonomous, and legitimate authorities and at the same time of the state in general in relation to the market and the society.