Natural Beauty Held Back by Poor Rule of Law
Originally published on Mises Canada (September 17, 2014)
Albania is a beautiful country. It made it in The Guardian’s list of 20 best bargain beach holidays in 2013 and Land Rover chose its rough and rugged Accursed Mountains to display the prowess of their new Discovery model. Some of its southern sand and shingle beaches are even reminiscent of Caribbean blue seas. In 2014 New York Times ranked Albania fourth among 52 destinations to be visited. But despite boasting one of nature’s most beautiful places in Europe for summer tourism, the country still lags behind other European destinations with its undeveloped infrastructure.
Tourists are greeted with old and decaying public roads and with nascent but very modest hotels, hostels, restaurants, bars, and nightclubs. World Economic Forum’s Travel & Tourism Competitiveness Index 2013 ranks Albania only the 38th in Europe, behind even land-locked countries like Macedonia, with the lowest score precisely in the “Business environment and infrastructure” category. The inflow of tourists in the recent years, thanks to the construction of the Albania-Kosovo highway, has led entrepreneurs to improve housing, beaches, entertainment, and food. But when I visited the country for the umpteenth time in June and September this year, I often found myself thinking how little its potentials have been realized and how much more remains to be done.
What is behind this slow and sometimes stagnating process of development?
Poor rule of law. Albania is known for it, but nowhere is it perhaps more evident than in summer tourism. Both current and prospective entrepreneurs are reluctant to invest in the coastline due to insecurity stemming from poor rule of law. In a country which doesn’t protect its investors, there are very few of them.
Rule of law—a classical liberal concept—is essentially composed of three principles. First, rule of law entails that every individual is subject to the same set of laws and that no one is “above the law” (universality principle). This means that politicians or their kin can’t use the state for personal gain by expropriating other people’s property.
Secondly, rule of law requires the enforcement of contracts. When an investor enters into a contract, there should be a reasonably credible judicial mechanism to ensure that the parties to it will respect it. Furthermore, this mechanism should provide recourse to the law, for example by awarding damages, in case a party breaches the agreement. Such a properly-functioning judiciary would deter individuals from violating contracts in the future.
Lastly and very importantly, property rights should be protected. Nowhere in the history of the world can one find a success story of economic development where property rights weren’t protected. Threats by the state or threats by private individuals that the state fails to address can too create a climate of uncertainty which investors constantly seek to avoid.
How does Albania stack up against these rule-of-law principles? For starters, Albania is perceived to be the 116th most corrupt country in the world. Using state-granted construction permits and zoning laws, politicians control who is allowed to build on the coastline and thus exercise undue influence on the sector. That’s why World Bank’s Doing Business report ranks Albania the absolute last in the world on construction permits, along with Syria, Eritrea and Libya. As a result, political entrepreneurship brews as businessmen seek to attain political favors rather than create value.
Contract enforcement is likewise bad due to an inefficient, bloated, and biased judiciary which serves individuals with political clout rather than all parties without prejudice. Property rights are infamously not respected either, as both petty theft and racketeering can be a serious problem. This too is reflected in the International Property Rights 2013 index which ranks Albania 19th out of 24 regional countries and 119th out of 130 countries worldwide. Numerous claims to property in land, which the government has failed to settle due to fears of unrest, impede the transfer of property titles. An investor who buys land can never be sure that he has actually received legitimate ownership over it and will be afforded little protection from the government if someone shows up claiming to be the “genuine” owner.
Business in tourism can’t thrive under these difficult circumstances and the infrastructure necessary to make Albania’s summer tourism more enjoyable can’t be developed. There have been calls for the government to introduce subsidies for investors, but they are misguided for two reasons. First, they ignore the failure of government to ensure effective rule of law. If the government is the source of the problem, more government spending can’t be the solution. Second, these proposals deflect the focus away from the obstacles which discourage investment in the first place. The profit motive is a great incentive and no other extra-market incentives are necessary. Instead, improving rule of law will do far more to unlock the entrepreneurship that is being held hostage.