Construction and "uncreative destruction" of the Albanian economy

2024-02-11 15:56:00, Ekonomi CNA

"Creative destruction" is a term that began to be used in 1942, when innovation and industrialization increased production and productivity, revolutionizing the economic structure but simultaneously destroying the old one.

Although it can result in immediate problems and job losses, creative destruction has been viewed positively, as it is a constructive driver of long-term economic growth and progress. Innovation is a key factor in economic progress, fueling creative destruction.

In fact, since that time, the world has gone through cycles of growth, decline, crises, but it has always moved forward driven by innovation, innovations, technology and above all, the evolution of human resources.

Today, the global economy is changing at an extraordinary speed, driven by technology and scientific advances, which are bringing about the need for new development models.

The contrast is obvious with the path that the Albanian economy has followed and is following. After the transition from a centralized to a market economy, for three decades, the main competitive advantage of the domestic economy has been the cheap cost of labor, which has encouraged sectors with low added value and minimum wages.

Now, this model is no longer working. Immigration has created a real bottleneck in the labor market.

All sectors report that they are struggling to find employees and are being forced to increase wages, for the most part without improving productivity, affecting the reduction of competitiveness in relation to their neighbors.

This process, being strained, is not accompanied by increased productivity, risking many bankruptcies. The industry is failing to invest in improving technology, losing the advantage of cheap labor costs, without creating another advantage. Albania lags behind in information technology, which is mainly being developed as a service for third parties.

Tourism is the most positive development that has happened to the economy in recent years, but again, as seen from the figures of 2023, it failed to bring added value to the economy. Besides having a seasonal impact, no effort is seen to be made to link other sectors, such as the food processing industry.

Moreover, this sector is quite fragile, both to unexpected developments and to a deterioration of the image, in the conditions of a not very functional infrastructure and a rapid increase in prices in the country that is marketed as one of the cheapest Europe.

Construction has been and continues to be an important engine of the country's progress. Eurostat data, which calculates the nominal construction costs as a percentage of the Gross Domestic Product (GDP), or what the economy produces in a year, in 2022, for Albania was 18.8% of GDP, from 11.3% that is the average of the European Union.

In contrast, investments in machinery and equipment, which are necessary for the progress of enterprises, as they positively affect productivity growth, are the lowest in Europe. And according to Eurostat, in 2022, spending on machinery and equipment was 4.1% of GDP in Albania, the second lowest in Europe.

In Serbia, this indicator is 8.9% of GDP, in Montenegro, 7.9%, in Bosnia and Herzegovina, 9.5%, in North Macedonia, 7.5%.

The need for a new economic model, oriented towards innovation, the use of competitive advantages, increased knowledge and added value, investment in human capital, has been discussed for years.

Practically, in recent years, the greatest orientation of investments is in construction, a temporary sector with no added value in the economy. Construction and real estate activities have been the largest contributors to economic growth in the past three years, often accounting for nearly 50% of it.

Both these sectors were driven by the boom in building permits that were issued in the capital after 2017 and peaked in 2022, falling for the first time in 2023.

That today's model has failed to increase well-being was proven by the latest IMF figure for poverty, which had risen to 25% in 2022, from 22% the previous year. Destruction is remaining non-creative due to the delay in innovation, but also the low level of knowledge - the result of non-creative destruction in education.

This is the most important point that will hold the development hostage, if there is no revolution so that some knowledgeable Albanians return, or some knowledgeable immigrants come!

Demographic developments, emigration and labor shortages are turning into a systemic problem of the economy, which requires an immediate solution.

Only a stable economic model, centered on human capital, innovation, the use of competitive advantages and the increase of added value could bring the economy back on track, before it is too late./ Monitor.al