Agricultural production, sectoral imbalances and inflation in Albania: A Kaleckian view

The current remarkable surge in inflation is considered to be a nearly global phenomena (Reinhart and Lucker 2022), affecting both developed and developing nations. While there may be common drivers of inflation, such as factors associated with the Covid-19 pandemic followed by Russia’s invasion of Ukraine, there are considerable variations in the causes of it, especially with reference to developing countries, including Albania. Drawing on Kalecki’s (1976) Essays on Developing Economies, I argue that there are also domestic factors attributed to the increase in inflation that resides in the structural sectoral imbalances of the Albanian economy.  

Rising prices in Albania sparked protests across the country in March 2022. The protests highlighted the rise in food prices which increased by more than 9% compared to March in the previous year; with the price of bread being the main contributor to such increase. With Albanians spending more than 42% of their total budget on food, rising prices of ‘necessities’ adds more pressure to the poor households to make ends meet. Nearly a quarter of Albanians, 640,000 people, already live in poverty (Kote 2022) and soaring prices in the economy could push people further into poverty. But what is pushing food prices to soar in a country where agricultural land accounts for 24% of overall land, a good Mediterranean climate, and water resources, all of which are crucial for agricultural development? Despite these favourable conditions, the productive capacity of Albania’s agriculture sector to meet domestic demand for food and feed meets is only one third (World Bank, 2022a).  

The agricultural sector has always been important for the Albanian economy, in terms of both value added and employability. Even though the country has undergone major economic transformation since the fall of communism three decades ago, the agricultural sector continues to be one of the main contributors to the country’s economy. The agricultural sector accounts for more than 19% of GDP, as of 2020. However, this is a substantial decline since the mid-1990s, in which the share of the sector in the economy was more than 36%.   

At the same time, it appears the country has bolstered industrial capacity, with the industry increasing steadily since late 1990s with construction being the most important component of the sector. The industry sector has also become the main economic sector in terms of employability growth. As of the end of 2021, the annual growth rate in the industry sector increased by 7.5%, followed by the services sector with the number of employed increasing by 7.2%. In contrary, the annual growth rate of employability in the agriculture sector decreased by 5.3% at the end of 2021. According to the Labour Force Survey (2009), the share of employability for the agriculture sector in 2007 was 47% of total employability of people aged between 15-64 years old. However, the importance of the sector in terms of employability has steadily declined over the last two decades, accounting for around 41% in 2020.

There is a large literature emphasising the vital role the agriculture sector plays in the process of economic growth in developing countries (see for example Johnson and Mellor, 1961; Gollin et al 2002; Storm 1995). However, as well as being central in promoting economic growth, of equal importance is the sector’s role in maintaining non-inflationary growth. Kalecki (1976) writings on issues of financing economic growth, highlight the importance of the sector in dissuading domestically produced inflationary tendencies. He recognised that a crucial challenge for developing countries is that of increasing the productive capacity in the economy, and whilst he argued that this (expand productive capacity) can be achieved through increasing investment, the latter could potentially induce inflationary pressures. Kalecki’s short and to the point articles on issues related to development economics argue that then when employment in industry increases, it generates higher levels of income, leading to a higher demand of necessities (which are basic needs goods). On the other hand, if the capacity of the agriculture sector is unable to meet the increased demand, this leads to higher prices for necessities goods. This way, Kalecki is able to illustrate through a simple model, how increased investment could result in bottlenecks in the supply of necessities. It is through this analysis that he explains how the structural characteristics of the economy could potentially lead to inflation being produced domestically.  

Therefore, investment in infrastructure should be accompanied with measures to expand agricultural production with the aim to increase the supply of necessities, in an attempt to avoid inflationary pressures. The alternative of course, is to rely on imports to meet the rise in demand for necessities. Indeed, Albania’s reliance on imports for food has increased by more than 21% in the period between 2017-2011, with imports reaching ALL130 billion ($1.08billion). Such reliance and exposure to foreign markets and the recent global supply chain disruptions, has inevitably led to higher food prices in Albania – increasing to 14% more than in the previous year, latest data in September 2020 shows.

The productivity of the Albanian agriculture sector has declined in recent years significantly. In mid-2021 the sector increased only by 0.11%, with construction dominating with a 25% increase. The World Bank (2022b) reports that access to finance and land fragmentation are of great concerns and significantly prevent the agriculture sector expanding production. In early 2022, Albanian farmers addressed the severe difficulties the country’s agricultural sector is facing, and took to the streets to rally against soaring prices of agricultural inputs, calling for more government support. According to the Food and Agriculture Organisation of the United Nations (FAO) report, Albanian farmers receive the lowest government support in the region, receiving only € 3 million per year in subsidies. The sector also receives the lowest government support relative to the other sectors in the economy. Indeed, agriculture spending accounted for 1.9% of total government spending for the period between 2010-2017. This is considerably lower than what education, healthcare and house building are receiving 10.9%, 9.4% and 6.7% of total government support, respectively.

To sum up, development issues require a multisectoral analysis. The argument provided here is that indeed sectorial imbalances could bring about inflation. In particular, in developing economies, a demand induced by a rise in investment in infrastructure and industry should be associated with a rise in the capacity of production of the agricultural sector. The rise in the production capacity may be achieved by measures such as the provision of cheap bank credit and other forms of assistance such as government subsidies. In light of recent developments, with Albania’s agricultural productivity at it lowest, increased exposure to foreign goods markets and the global supply chain disruption, it is important for the country to focus on achieving and maintaining agriculture development.

References

Gollin, D. Parente, S. and Rogerson, R. 2002. The role of agriculture in development, American Economic Association, 92(2), pp. 160-164.

Johnston, F.B. and Melor, W. J. 1961. The role of agriculture in economic development, American Economic  Association, 51(4), pp.566-593.

Kalecki,M.(1976) Essays on Developing Economies, “The Problem of Financing Economic Development’  and  `Problems of Financing Economic Development in a Mixed Economy’ Hassocks, Harvester Press

Kote, Kristo., (2022), Basic products’ price jumped 14%-24% in April, Albanian Daily News, 10 May 2022, Accessed on 24 May 2022. Available on: https://albaniandailynews.com/news/basic-products-prices-for-albanians-jumped-14–24-in-april-1.

Reinhart, Carmen and Clemens Graf Von Lucker, (2022), The return of global inflation, World Bank Blogs, 14 February 2022, accessed on 25 May 2022, available on: https://blogs.worldbank.org/voices/return-global-inflation.

Storm, S. 1995. On the role of agriculture in India’s longer-term development strategy, Cambridge Journal of Economics, 19(6), pp. 761-788.

World Bank (2022a), The future of water in agriculture in Albania- A broad sector rethinking, World Bank Group. 

World Bank (2022b), Creating markets in Albania: Taking advantage of new trade and investment opportunities for a more robust private sector- Country Private Sector Diagnostic, World Bank Group, June 2022.

Mimoza Shabani is Senior Lecturer in Financial Economics at the Royal Docks School of Business and Law, University of East London.

Photo by Hannah Mishin.

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