Albanian Civil War (1997)

In late 1996 and early 1997, several failed get-rich-quick schemes robbed hundreds of thousands of Albanians of their life savings. Investors poured an estimated $1 billion into various pyramid schemes -- a staggering 43% of the country's GDP.( When protestors demonstrated in the streets demanding restitution, riot police attacked them. The lack of an acceptable government solution to this problem exacerbated the situation, and the riots spread across the country. These riots, and the state of anarchy which they caused, are known as the Albanian civil war of 1997. When the schemes collapsed, there was uncontained rioting, the government fell, and the country descended into anarchy and a near civil war in which some 2,000 people were killed. At the end of the conflict, power had transferred from the Democratic Party to the Socialist Party.

Although the Albanian civil war was a dramatic event which garnered international attention, it was but one piece of that country's long and difficult transition from an isolationist Communist state to a parliamentary democracy, which began in 1992. The pyramid scheme phenomenon in Albania is important because its scale relative to the size of the economy was unprecedented, and because the political and social consequences of the collapse of the pyramid schemes were profound. At their peak, the nominal value of the pyramid schemes' liabilities amounted to almost half of the country's GDP. Many Albanians — about two-thirds of the population — invested in them.

The wide appeal of Albania's schemes can be attributed to several factors, including Albanians' unfamiliarity with financial markets; the deficiencies of the country's formal financial system, which encouraged the development of an informal market and, within this market, of the pyramid schemes; and failures of governance. Although Albania's transition to a market economy was rapid and quite successful, financial sector reform was very limited. Albania's formal financial system was rudimentary.

With the banks unable to satisfy private sector demand for credit, an informal credit market based on family ties and financed by remittances grew. The informal lending companies were initially regarded as benign and even as making an important economic contribution. Operating alongside them, however, were deposit-taking companies that invested on their own account instead of making loans. These companies were the ones that turned into pyramid schemes.

In a typical pyramid scheme, a fund or company attracts investors by offering them very high returns; these returns are paid to the first investors out of the funds received from those who invest later. The scheme is insolvent—liabilities exceed assets—from the day it opens for business. However, it flourishes initially, as news about the high returns spreads and more investors are drawn in. The closest analogy to such schemes is an asset bubble, whose economic impact is due to changes in perceived wealth. As a bubble expands, people believe themselves to be better off than they actually are. After the bubble bursts, perceived wealth falls dramatically.

Some of the Albanian companies meet this definition exactly: they were pure pyramid schemes, with no real assets. Other cases are more ambiguous. Some of the largest of the companies — in particular VEFA, Gjallica, and Kamberi—had substantial real investments. They were also widely believed to be engaged in criminal activities. At the end of 1995, United Nations sanctions against the Federal Republic of Yugoslavia were suspended, eliminating an important source of income (smuggling) for the companies.

There were also governance problems, both in the financial sector and more generally. The regulatory framework was inadequate, and it was not clear who had responsibility for supervising the informal market. Even after the approval of a banking act in February 1996 that appeared to give the Bank of Albania the power to close illegal deposit-taking institutions, the central bank could not obtain the government's support. Indeed, the government was supportive of the companies: senior government officials frequently appeared at company functions, and, in November 1996, even as the pyramid schemes began to crumble, the prime minister and the speaker of the parliament accepted medals in honor of the anniversary of one of the companies. During the 1996 elections, several of the companies made campaign contributions to the ruling Democratic Party.

On 19 November 1996, Sude [a scheme that had no real investments] defaulted on its payments, and the collapse began. The political crisis began in December of 1996, when protestors in the capital city of Tirana demonstrated against the government, which they held responsible for the collapse of several investment funds. The problem was worsened when $1.2 billion of Albanians' savings were wiped out by pyramid schemes on January 24, and thousands of Albanians took to the streets in the southern city of Lushnje. During the ensuing riots, protestors stole over 500,000 rifles and other arms from government depots. On January 25, Foreign Minister Shehu is attacked by demonstrators. The next day, thousands of protestors convene at in Tirana and clash with riot police. The civil war had now expanded throughout the country, as governments buildings are set on fire across Albania.

The riots had now expanded from protests over lost money to a general protest against the government. On 01 March 1997, the Prime Minister, Aleksander Meksi, resigned, and the next day the government declared a national state of emergency. Many in the army and police force deserted, and 1 million weapons were looted from the armories. As the government and military establishments scattered to the wind and anarchy swept across the country, the southern half of Albania fell under the control of rebels and criminal gangs. In addition, over 10,000 Albanians flee to Italy, which created resentment and a refugee crisis there. At this point, the insurgents solidified their control of the country by seizing the last government stronghold of Gjirokaster.

President Berisha agreed to hold new parliamentary elections before the end of June 1997, and an interim coalition government was appointed. On 11 March 1997, the members of the Socialist Party won a major victory when their Bashkim Fino was appointed prime minister. However, the transfer of power did not stop the unrest, as protests spread to northern Albania. By March 13, all major population centers were engulfed in demonstrations, and foreign countries began to evacuate their citizens from Albania. In the three months of protests, the Albanian economy suffered a heavy blow as unemployment and inflation sharply rose, while the gross domestic product and the value of the currency fell. Large parts of the country were no longer within the government's control. Government revenues collapsed as customs posts and tax offices were burned. By the end of June, the lek had depreciated against the dollar by 40 percent; prices increased by 28 percent in the first half of 1997. Many industries temporarily ceased production, and trade was interrupted.

In late March, the UN Security Council approved dispatching a multinational military force to Albania to oversee the distribution of international humanitarian aid and maintain order. The multinational force, known as "Operation Alba", was authorized by the Council on 28 March 1997 to facilitate the safe and prompt delivery of humanitarian assistance and to help create a secure environment for international organizations in Albania. On April 15, the 7,000 troops participating in "Operation Alba" began deploying to help restore rule of law to the country. The force had contingents from 11 countries -- Austria, Belgium, Denmark, France, Greece, Italy, Portugal, Romania, Slovenia, Spain and Turkey.

The force's immediate deployment prevented further aggravation of the situation in his country and created a positive atmosphere of confidence and safety for Albanians and for the observer missions for the parliamentary elections. It was an excellent example in the history of the operations authorized by the Council to protect international peace and security. In close cooperation with the Government, it fulfilled its mission in a neutral way by fully respecting the mandate defined in the relevant Council resolutions. It began operations on 15 April 1997 and completed its withdrawal from Albanian soil on 11 August 1997.

The UN force provided security for representatives of international organizations in the delivery of humanitarian assistance. It also helped the Albanian people, in cooperation with the OSCE, to hold elections in a relatively short time. The humanitarian situation in Albania improved significantly, and the parliamentary elections represented a very important step towards restoring the political, economic and social order.