Pyramid Investment Schemes Cause Albanian Government to Fall

Date January, 1997

After the fall of communism in Albania, numerous investment companies with little capital backing began to appear in the country. Some of these companies were actually pyramid schemes that took advantage of desperate times. The schemes collapsed, however, leading to riots approaching civil war and the fall of the corrupt government.

Locale Albania

Key Figures

• Sali Berisha (b. 1944), president of Albania, 1992-1997
• Aleksander Meksi (b. 1939), prime minister of Albania, 1992-1997
• Fatos Lubonja (b. 1951), cofounder of the Albanian Forum for Democracy

Summary of Event

When the communist regimes of Eastern Europe began falling between 1989 and 1991, Albania smoothly introduced democratic rule into the country. However, Albania was still the poorest country in Europe. With the economy in dismal shape, Albanians looked for a quick fix. They thought they found it in what ultimately turned into a series of pyramid schemes. The plans, given the low level of the Albanian economy, were unprecedented in their scope and audacity, and their eventual collapse was monumental as well. At its height the nominal value of the investments reached almost half the country’s gross national product. Almost 70 percent of the population had stock in the fraudulent companies.

The schemes were fed by the lack of stable and historic Albanian financial institutions and markets and the failure of the government to regulate the economy, much of which was handled through informal markets. Albania lacked private banks, and the three state banks that existed established strict credit policies after bad loans mounted in their portfolios. Private loans from family members and unregulated lenders filled the gaps. Some of these private lending companies invested depositors’ funds in the pyramids.

A banking act of February, 1996, put the lending institutions under the authority of the Bank of Albania, but the bank was unable to exercise control because the government continued to support the pyramid companies and prevented closure of the rogue banks. Some of the highest government leaders, including prime minister Aleksander Meksi, were closely associated with these banks, which gave large contributions to the ruling Democratic Party.

Some of the companies involved were pure pyramids, attracting investors by promising huge returns from the investments of later depositors. The companies themselves had no intrinsic value nor did they engage in any enterprise to raise profits, except seeking more investors. As more investors became involved, it was impossible to keep up with the promised returns, and when investors wanted to pull their monies, they discovered that the companies were in fact frauds.

Some of the companies fell into a more gray area: investing in enterprises. Three of the largest of these companies—VEFA, Gjallica, and Kamberi—had investments in illegal activities that included smuggling contraband into Bosnia. These companies, too, dissolved into pyramids in 1996, when their liabilities far outstripped their assets.

The road to ruin began in late 1995. United Nations sanctions against Yugoslavia ended the lucrative smuggling activities of the companies, but the corruption continued. At the beginning of 1996, the companies increased their promised interest rates to attract more investors. Taking into account that Albania’s runaway inflation rate was 17 percent at the time—triple what it had been the previous year—the promised annual rate of return amounted to almost 100 percent and, during the year, that rate continued to rise. Two new pyramid companies, Xhafferi and Populii, joined in with even greater promises. One of the pure pyramid companies, Sude, offered rates that were double those of the others.

More investors entered the pyramids. VEFA had the largest number of liabilities, with eighty-five thousand depositors. Xhafferi and Populii attracted two million depositors between them. (Albania had a population of only 3.5 million.) A war of inflated promises began. Kamberi promised 10 percent per month; Populii promised 30 percent. In November, Xhafferi promised a 300 percent increase after a three-month period. Sude countered with a promise of doubling the depositor’s investment in two months. Pyramid liabilities rose to $1.2 billion. Albanians sold their homes and farmers sold their cattle.

The population, initially, paid little attention to the rumors of fraudulent dealings. There was an expectation that the government would take care of things, a feeling perhaps stemming from the decades under communist rule. If the money was the fruit of some shady dealing, the investors did not care. They happily put all their expendable income, and some income they could not afford, into the investments.

Meanwhile, the government remained idle. Only in October did it warn the public against the risky investments, but it attacked only the pure pyramid companies. Albanian president Sali Berisha defended the companies, but the International Monetary Fund (IMF) warned the government of the danger of the schemes. Berisha responded by accusing the IMF of interfering in Albania’s internal affairs. Under external pressure, he established a commission to investigate the companies, but that commission never met.

On November 19, Sude defaulted, and like a house of cards the pyramids began to tumble. Sude’s failure led to a lack of confidence in the rest of the companies. Some tried to restore confidence by offering more reasonable rates on deposits, but the public would reject the attempts. In January, 1997, Sude and Gjallica declared bankruptcy. Soon, the other companies stopped making their payments as well. The government refused to compensate the investors for their losses, which made possible national economic recovery but did not appease the investors.

The government moved against the pure pyramids, freezing the assets of Xhafferi and Populii, but it still took no action against those that had investments, especially the largest ones, even after the parliament enacted a law against pyramids in February. The Bank of Albania, on its own, limited the amount of money that could be withdrawn at any one time to prevent the depletion of resources.

By the spring of 1997 the government lost control of the country. Soldiers and police officers deserted, allowing many people to loot the national armories for rifles. Foreigners were evacuated by their home countries and Albanians fled the country. The government resigned, and a caretaker government faced a hopeless situation. Rioting led to the deaths of two thousand people, and the economy collapsed. Anarchy ruled through most of the nation. The rioters burned customs and tax offices, and state revenues dwindled. Industries closed, trade stopped, and prices rose close to 30 percent in the first six months of the year. The lek (the national currency) fell 40 percent in value. Still, the largest pyramid companies claimed to be solvent and clung to their existing assets.

In Vlora, angry crowds threw stones at police trying to restore order. The mob beat some police and stripped off their uniforms, burning them with their weapons and equipment in bonfires. The police fired in the air and retaliated with stones from rooftops. In Tirana, thirty-five thousand rioters attacked the police and forced them to retreat. The police returned with water cannons and police dogs to quell the mob, but the rioters continued, setting government buildings afire. Berisha called a state of emergency on March 2, and on March 28, thousands of U.N. peacekeeping troops entered the country.

Impact

With international assistance the caretaker government began to restore order. The economic effects of the schemes affected the economy in the short term only. The political and social effects were more damaging, however. Much of the population lost its meager savings, and confidence in the new democracy was severely shaken. Some of the pyramid leaders were tried and convicted.

Fatos Lubonja, cofounder of the Albanian Forum for Democracy, told an American political scientist after the crisis that the government corruption destroyed Albania’s infrastructure and, far worse, destroyed the people’s faith in the new Albania. Lubonja hoped that those who fled would return and rebuild the country.

The development of a new Albanian constitution led to reform in politics and the economy, but although democracy and the rule of law took hold, government corruption persisted. In 2005, Berisha, who had defended the pyramid companies, returned to public office as prime minister of Albania.

Bibliography

Bezemer, Dirk J., ed. On Eagle’s Wings: The Albanian Economy in Transition. New York: Nova Science, 2006. A collection of articles by authors with academic, business, and policy backgrounds. Includes a chapter on the pyramid schemes. Bibliography.

Jarvis, Christopher. “The Rise and Fall of Albania’s Pyramid Schemes.” Finance and Development 37, no. 1 (March, 2000). Jarvis, an economist, examines the Albanian financial and economic crisis in detail. Offers solutions to prevent such economic collapse.

Prifti, Peter R. Unfinished Portrait of a Country. Boulder, Colo.: East European Monographs, 2005. A survey of Albania by a leading expert. Examines the pyramid companies and the aftermath of the scheme. Includes bibliography.

Vaughan-Whitehead, Daniel. Albania in Crisis: The Predictable Fall of the Shining Star. Northampton, Mass.: Edward Elgar, 1999. One of the best studies of the pyramid schemes by an academic expert. Contains a bibliography.

Vickers, Miranda, and James Pettifer. Albania: From Anarchy to a Balkan Identity. Rev. ed. New York: New York University Press, 2000. An excellent study by two specialists focusing on the postcommunist period in Albania. Examines the pyramid schemes but does not include discussion of the rioting and violence.