Policy Documentation Center

Ward, Terry

Lelkes, Orsolya

Sutherland, Holly et al

English

European inequalities: social inclusion and income distribution in the European Union

Denisova, Irina

Mortality in Russia: microanalysis

Giragosian, Richard

The military balance of power in the south Caucasus

Hanke, Steve

28     GlobeAsia  |  A U G U S T  2 0 0 9
Perspective
by Steve Hanke
he new york times columnist and nobel laureate 
Paul Krugman (“Dr. Gloom”) and New York University 
professor Nouriel Roubini (“Dr. Doom”), who gained 
fame as one of the first to detect the U.S. housing bubble, 
have fingered tiny Latvia as the next domino to fall.  They argue that 
Latvia is in the same situation as Argentina was in late 2001.  And 
as a result, Latvia will be forced to devalue its currency and default 
on its debt, as did Argentina in early 2002.  Then, the argument GE
TT
Y
 IM
A
G
ES
Will Dr. Gloom 
and Dr. Doom’s Latvian 
domino fall?
goes, neighboring Estonia and Lithuania will be forced to follow 
suit and a damaging wave of devaluations and defaults will sweep 
through Central and Eastern Europe.  This will be followed by yet 
more international gloom and doom.  
Just what, if anything, does Latvia today have in common 
with Argentina in 2001?  On the surface, it appears that Latvia is 
employing the same type of exchange-rate system as did Argentina. 
Latvia’s currency trades in a narrow band of plus or minus 1% 
Nouriel Roubini (“Dr. Doom”)
A U G U S T  2 0 0 9   |  GlobeAsia     29
quite low by international standards.  Argentina, in contrast, had 
persistent problems with cutting spending and had a much higher 
debt to GDP ratio.  
In the monetary sphere, there is a straightforward way to 
determine whether a monetary authority that links its currency 
to another is in danger of breaking the link: compare it to an 
“automatic” system.  The most automatic system is a currency 
board, which issues money convertible on demand into a foreign 
anchor currency at a fixed rate of exchange.  As reserves, a currency 
board holds foreign assets equal to 100% or slightly more of the 
monetary base (its note, coin, and deposit liabilities).
These characteristics ensure that the quantity of domestic 
currency in circulation is determined solely by market demand 
for domestic currency.  They imply that for a currency board, net 
foreign reserves (foreign assets minus foreign liabilities) should 
be close to 100% of the monetary base. Moreover, “reserve pass-
though” (the change in the monetary base divided by the change 
in net foreign reserves over the period in question) should also be 
close to 100%.
During the three years before Argentina’s currency crisis of 
December 2001-January 2002, Argentina’s monetary system, 
often mistakenly termed a currency board, was not operating 
in “automatic” fashion.  Its reserve pass-through was not even 
close to 100%, and after mid 2001, its net foreign reserves as a 
Table 1.  General government 
deficit (-) and surplus (+) (% of GDP)
2003 2004 2005 2006 2007 2008
Euro area -3.1 -2.9 -2.5 -1.2 -0.6 -1.9
Estonia 1.7 1.7 1.5 2.9 2.7 -3.0
Latvia -1.6 -1.0 -0.4 -0.5 -0.4 -4.0
Lithuania -1.3 -1.5 -0.5 -0.4 -1.0 -3.2
Source: Eurostat      
Table 2.  General government  
consolidated gross debt (% of GDP)
2003 2004 2005 2006 2007 2008
Euro area 69.3 69.7 70.4 68.6 66.2 69.6
Estonia 5.6 5.0 4.5 4.3 3.5 4.8
Latvia 14.6 14.9 12.4 10.7 9.0 19.5
Lithuania 21.1 19.4 18.4 18.0 17.0 15.6
Source: Eurostat
around a peg of 0.7028 lats per euro.  In 2001, the Argentine peso 
was linked to the U.S. dollar at one to one.  But the similarities 
stop there. 
Latvia and its Baltic neighbors have been models of fiscal 
prudence (see Tables 1 and 2).  Before last year, when the recession 
began, all had low budget deficits or even budget surpluses.  They 
have shown willingness to make tough cuts in government 
spending.  They also have ratios of debt to GDP that remain 
Paul Krugman (“Dr. Gloom”)
30     GlobeAsia  |  A U G U S T  2 0 0 9
Perspective
percentage of its monetary base fell well below 100% (see Chart 
1).  By comparison, Latvia’s monetary system—even though not 
legally a currency board system—is operating largely as though it 
were one.  In consequence, Latvia could convert its entire monetary 
base into euros at the current exchange rate.  The same can be said 
of Estonia and Lithuania—two countries that officially adopted 
modified currency board systems in 1992 and 1994, respectively.  
The data speak clearly.  Latvia and its Baltic neighbors are 
not repeats of Argentina.  Their economies have suffered greatly 
from a sudden stop of foreign investment and from recession in 
Western Europe, but they retain ample foreign reserves.  
They would do better to officially adopt the euro, even without 
the blessing of the European Central Bank, than to devalue their 
national currencies.  
Steve H. Hanke is a Professor of Applied Economics at The Johns 
Hopkins University in Baltimore and a Senior Fellow at the Cato 
Institute in Washington, D.C.
-200
-100
100
Pe
rc
en
t
Latvia
200
300
400
0
Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09
-200
-100
100
Pe
rc
en
t
Lithuania
200
300
400
0
Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09
-200
-100
100
Pe
rc
en
t
Argentina
200
300
400
0
Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02
-200
-100
100
Pe
rc
en
t
Estonia
200
300
400
0
Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09
Sources: International Monetary Fund’s 
International Financial Statistics (June 
2009) and author’s calculations
Net Foreign Reserves (% of 
monetary base, monthly)
Reserve Pass- Through  
(% 12-month rolling basis)
Line of Orthodoxy (100%)
Chart 1: Net Foreign Reserves and Reserve Pass-Through
(currency board orthodoxy = close to 100%)


Will Dr. Gloom and Dr. Doom's Latvian domino fall

Karanflova Panovska, Fani

Milovski, Kire

Strategies for Preventing Corruption in the Municipalities of Gjorce Petrov, Bitola and Ohrid.
Curing and Preventing Corruption on Local Level

Markevich, Andrei

Zhuravskaya, Ekaterina

Career Concerns in a Political Hierarchy: A Case of Regional Leaders in Soviet Russia

Mihaljek, Dubravko

The Institute of Public Finance deals with economic research and analysis related to various forms of public finances such as the budget, taxation and 
customs duties. Its orientation is thus to the various economic, legal and institutional topics that are important for the sound long-term economic develop-
ment of the Republic of Croatia. So that the public should be able to have a better insight into certain issues, the Institute of Public Finance is launching 
its Newsletter, in which it will  from time to time publish informed and independent analysis of economic questions. The views expressed in the articles 
published in the Newsletter will reflect the opinions of the authors, which do not necessarily coincide with those of the Institute as institution. Full text of 
Newsletter is also available on Institute’s Web site: http://www.ijf.hr/newsletter.
No. 41 May 2009
1
Inst itute of Publ ic Finance • HR-10000 Zagreb, Smičik lasova 21, Croat ia
Goran Vukšić
Croatian Balance of Payments: Implications of 
Net Errors and Omissions for Economic Policy1
In Croatia, as well as in other tourist countries, a large 
portion of economic activity in tourism takes place in 
the shadow economy, i.e. unofficial economy. This paper 
tries to evaluate the size of unreported income from tour-
ism, or more precisely, from foreign tourists, in a some-
what different way. The conclusions make reference to 
large amounts of unrecorded accumulation of foreign 
cash from foreign tourist spending. It seems likely that 
this accumulation is largely related to shadow economy 
in tourism, i.e. to unreported – and therefore untaxed – 
income from foreign tourists. The government has de-
voted much effort to preparing a successful tourist sea-
son in this economically difficult year. However, exact-
ly the difficult times, i.e. the economic crisis and lower 
government revenues should provide an additional in-
centive to improve tax compliance and revenues from 
tourist spending. This could probably be achieved 
through a broad campaign warning of the overall harm-
fulness of tax avoidance, and through intensifying the 
on-site tax inspection activities.
1  This newsletter is a part of a larger ongoing research project at the Institute of Public Finance. The author is grateful to Tomislav Galac and Davor Galinec 
for their valuable comments.
2  Different studies investigating the issue of the balance of payments data accuracy identified a few items with probably more profound accuracy problems 
(for more details, see e.g. IMF, 1987; 1993). Also, for a detailed discussion about the NEO item interpretation, see e.g. Eggerstedt, Hall and Wijnbergen. 
(1995).
1  What are net errors and omissions  
in the balance of payments?
A country’s balance of payments is a statistical statement 
summarizing economic transactions of an economy with 
the rest of the world over a certain period of time. It most-
ly comprises transactions between residents and non-res-
idents. It consists of two major components: current ac-
count and capital and financial account. The net errors 
and omissions (NEO) is a residual or balancing item. In 
theory, the current account balance should be equal to the 
capital and financial account balance (with the opposite 
sign), so that the overall balance of payments should be 
equal to zero. However, there are operative problems and 
imperfections in the balance of payments data collection 
which lead to sometimes large deviations from this the-
oretical rule.2 These deviations are comprised in the NEO 
item. The size of the NEO is not necessarily an indicator 
of the relative accuracy of data, since it represents a net 
amount, so that the errors and omissions may be offset. 
Croatian Balance of Payments: Implications 
of Net Errors and Omissions for Economic Policy
2
However, there is a reason for concern if the NEO is per-
sistently large and preceded with the same sign (IMF, 
1993; 6-7).
In simple words, if the NEO is positive, it means that the 
sum of current account balance and capital and financial 
account balance is understated. The opposite is true for 
a negative NEO. In Croatia, there has been a persistent-
ly negative current account balance and a positive capi-
tal and financial account balance, with the absolute value 
of the current account deficit being regularly smaller 
than the capital and financial account surplus. This re-
sulted in a negative amount of the NEO item over the pe-
riod between 1999 and 2007 (at the annual level). Table 
1 shows the balances of current account and capital and 
financial account for the period between 1999 and 2007, 
along with the corresponding NEO item. As can be seen, 
the absolute value of the NEO exceeds 800 million euro, 
except for 2001 and 2002. The highest absolute values 
of over a billion euro were recorded in 2004 and 2005.
It is important to stress that a permanently negative 
amount of NEO can be interpreted as a systematic cap-
ital outflow from the economy, either abroad or to unof-
ficial economy. For example, a positive current account 
balance represents the net inflow of funds into the econ-
omy in some period, according to transactions recorded 
in the current account. If, for the same period, the capi-
tal and financial account balance is zero, then we have 
a total net capital inflow into the economy. In this exam-
ple, the NEO would be negative, in order to have bal-
anced balance of payments. This implies that a negative 
NEO item represents the unrecorded use of part of cap-
Table 1 Annual balance of payments data, in million euro
1999 2000 2001 2002 2003 2004 2005 2006 2007
Current account -1,428.8 -568.1 -820.8 -2,098.7 -1,888.8 -1,433.7 -1,975.6 -2,702.1 -3,233.4
Capital and financial 
account 2,311.6 1,406.5 1,005.1 2,538.0 2,716.9 2,560.4 3,013.5 3,687.2 4,123.2
Net errors and omissions -882.8 -838.3 -184.4 -439.3 -828.1 -1,126.7 -1,037.9 -985.1 -889.8
Source: CNB.
Table 2 Balance of payments data for the third quarters, in million euro
III 1999 III 2000 III 2001 III 2002 III 2003 III 2004 III 2005 III 2006 III 2007
Current account 434.4 902.3 1,350.5 911.2 1,811.7 1,930.5 2,190.1 2,077.7 2,072.1
Capital and financial 
account 322.3 119.1 -443.4 19.8 -113.0 -127.0 -471.4 -57.5 115.3
Net errors and omissions -756.7 -1,021.4 -907.0 -931.0 -1,698.7 -1,803.6 -1,718.7 -2,020.2 -2,187.4
Source: CNB.
3  The final data for 2008 is still not available, and according to the preliminary data, the value of the NEO item stood at -1,641.4 million euro in the third 
quarter of 2008.
4  As mentioned in footnote 2, there may be different causes for the NEO item, i.e. for the unbalanced balance of payments. One of them is a possible time 
lag in recording some of the balance of payments transactions. This problem is especially pronounced in the cases of data for shorter periods of time, such 
as quarterly data.
ital inflows, i.e. unrecorded capital outflows, either 
abroad or to unofficial economy.
At this point, a specific feature of the Croatian balance 
of payments should be mentioned. It is usual to present 
changes in the foreign cash holdings of a country’s res-
idents in the financial account item »Currency and de-
posits of other sectors«. Due to data collection problems, 
this item is not shown for Croatia, which certainly af-
fects the amount of NEO (CNB, 2003). If this were the 
only cause for such a NEO in the Croatian balance of 
payments, the negative amount of NEO in Croatia would 
represent unrecorded net accumulation of foreign cash.
2  Relationship between net errors  
and omissions from the balance  
of payments and tourism income
It is known that the overall macroeconomic movements 
in Croatia and, consequently, the balance of payments 
data have a strong seasonal component. Especially in-
teresting in this respect is the influence of the tourist sea-
son, which is mostly reflected in the data for the third 
quarter of a year. Table 2 presents the same data as Table 
1, but only for the third quarters in the period between 
1999 and 2007.
As can be seen from Table 2, the current account bal-
ance was always positive in the third quarters, which is 
due to a high tourism income recorded in this account. 
At the same time, capital and financial account balance 
has been fairly close to zero (with small variations in 
Croatian Balance of Payments: Implications 
of Net Errors and Omissions for Economic Policy
3
Table 3 Net errors and omissions, in million euro
I quarter II quarter III quarter IV quarter Total
1999 -625.9 314.9 -756.7 184.9 -882.8
2000 -132.5 567.1 -1,021.4 -251.6 -838.3
2001 437.3 75.8 -907.0 209.5 -184.4
2002 132.3 12.5 -931.0 346.8 -439.3
2003 145.2 -110.8 -1,698.7 836.2 -828.1
2004 421.2 -249.7 -1,803.6 505.4 -1,126.7
2005 337.0 -64.4 -1,718.7 408.3 -1,037.9
2006 422.3 -134.3 -2,020.2 747.2 -985.1
2007 656.9 -25.5 -2,187.4 666.2 -889.8
Average 199.3 42.9 -1,449.4 405.9 -801.4
Total 1,793.8 385.8 -13,044.7 3,652.8 -7,212.4
Source: CNB.
Graph 1 Tourism income and net errors and omissions in the third quarters, in billion euro
Source: CNB.
net errors and omissions tourism income
1999 2000 2001 2002 2004 2005 2006 20072003
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
some years), so that the NEO value was negative and 
high in absolute terms in this part of the year. The high-
est absolute values of the NEO were recorded in 2006 
and 2007, when they exceeded 2 billion euro.3 Before 
giving a detailed interpretation of these movements, it is 
useful to show, in Table 3, the complete quarterly data 
for the NEO item.4
Unlike in the third quarters, positive average amounts 
of NEO have been recorded in other parts of the year, 
especially in the first and fourth quarters. The average 
value of NEO amounted to 42.9 million euro in the sec-
ond quarter. The cumulative amount of NEO in the third 
quarters of the observed period equalled -13,044.7 mil-
lion euro, and at the annual level it stood at -7,212.4 mil-
lion euro.
The potential importance of tourism income in the third 
quarter has already been mentioned, so that this data is 
shown in Graph 1, together with the data for NEO in the 
third quarters. The NEO amounts are shown in absolute 
terms. The tourism income increased rapidly over the 
observed period. Over the last three years, tourism in-
come from the third quarters amounted to over 4 billion 
euro (on average, almost two thirds of the total annual 
tourism income were earned in the third quarters). It is 
important to mention that the amount of NEO in the third 
quarters averaged 47.8% of the tourism income.
The figure shows a relatively high correlation between 
two variables (the correlation coefficient equals 0.95), 
with an exception for the year 2001 and somewhat weak-
er co-movements observed in 2004 and 2005. Exactly 
this exception for 2001 which saw a fall of the NEO value 
and a significant rise in tourism income provides a basis 
for some conclusions in the interpretation of the NEO 
item in Croatia.
3 Interpretation
As already mentioned, the negative NEO item in the 
third quarter (and also annually) implies an overstated 
sum of the current account balance and capital and fi-
nancial account balance. More precisely, it implies over-
stated income and/or understated spending in the cur-
Croatian Balance of Payments: Implications 
of Net Errors and Omissions for Economic Policy
4
rent account, and/or overstated inflows and/or understat-
ed outflows in the capital and financial account. Espe-
cially in the third quarters, the overstated sum may be 
the result of overstated current account income, i.e. tour-
ism income, and/or understated capital outflows in the 
capital and financial account.
If the reason is only an overstated current account in-
come, i.e. tourism income, the question arises: Why is 
the NEO item positive in other quarters (especially in 
the first and the last)? What would be the reason to over-
state one type of income in one quarter and understate 
it in the others? It seems that the possible overstatement 
of tourism income in the third quarter cannot (complete-
ly) explain the movements of the NEO item.
On the other hand, if the problem arises because of un-
derstated (i.e. partly unrecorded) capital outflows in the 
capital and financial account in the third quarter, it is like-
ly that these outflows represent unrecorded accumula-
tion of foreign cash which flows into Croatia as income 
from foreign tourists.5 An argument for such an interpre-
tation is the high correlation between tourism income and 
the absolute value of NEO in the third quarters, shown 
in Graph 1. This correlation is partly disturbed by the 
mentioned exception for 2001 (the years 2001 and 2002 
are also exceptions at the annual level, with lower record-
ed absolute values of NEO). However, the end of 2001 
was the beginning of the conversion of the national cur-
rencies of the European Monetary Union (EMU) mem-
ber countries to euro. This event was an opportunity for 
the Croatian National Bank to estimate the amounts of 
foreign cash holdings in Croatia (CNB, 2003; 39-40): dur-
ing 2001, the conversion to euro resulted in net foreign 
cash inflows into commercial banks of 2.1 billion euro, 
i.e. 2.3 billion euro of cash in the currencies of EMU 
member countries. The largest portion of these inflows 
ended up as foreign currency deposits of citizens. The 
conversion process was not finished by the end of 2001, 
and although the citizens’ foreign currency deposits did 
not grow at the beginning of 2002, large gross cash flows 
were recorded – further cash inflows in the currencies of 
EMU member countries (mostly German marks) and euro 
cash outflows. As a result of all these movements, the 
total amount of German mark cash holdings before the 
conversion was estimated at slightly more than 3 billion 
euro. A part of these foreign cash holdings was replaced 
by euro cash at the beginning of 2002.
According to the CNB estimate (2003) for the first half 
of 2002, if the item »Cash and deposits of other sectors« 
had been shown separately in the financial account of 
the balance of payments, it would have accounted for 
80% of the NEO item in that period (following the meth-
odology used at the time). Although the first half of 2002 
is not representative due to some special circumstances 
of the euro conversion, and because that period is not 
sufficiently long, this estimate leads to the conclusion 
that NEO would not be so high if the change of foreign 
cash holdings were excluded. It should be noted that the 
bulk of conversion was carried out at the end of 2001 and 
the beginning of 2002. Nevertheless, looking at the 
amounts of the NEO item, it can be assumed that the ef-
fect was felt in the third quarters as well. Overall, one 
can conclude that the correlation between NEO and tour-
ism income in the third quarters would probably be even 
higher if the effect of the conversion of EMU member 
countries’ currencies to euro were excluded. 
Foreign cash accumulated during the third quarters can 
then partly and gradually flow into the official sector of 
the economy during other periods, which would explain 
the (on average) positive sign of the NEO item in the 
other quarters, especially the last and the first quarter. 
During these two quarters, tourism income is the low-
est and possible »new« unrecorded foreign cash accu-
mulation in these periods does not significantly affect 
the amount of NEO.6 On the other hand, the tourist in-
come recorded in the second quarters is usually some-
what larger than that in the first and fourth quarters, so 
that the »new« unrecorded foreign cash accumulation 
may largely offset the inflow of the »old« accumulation 
into the official sector of the economy. Thus, the aver-
age amount of NEO in the second quarters is only slight-
ly above zero.
In addition, the negative amounts of NEO observed at 
the annual level do not necessarily imply that unrecord-
ed foreign cash accumulation from foreign tourist spend-
ing does not completely flow into the official sector dur-
ing the other periods of the year. However, in this case, 
there must be other unrecorded capital outflows, either 
abroad or outside the official sector of the economy, and/
or there must be other reasons for persistently negative 
amounts of NEO at annual level. It is also important to 
state that the part of the unrecorded foreign cash accu-
mulation during the third quarters can already flow into 
the official sector of the economy during the same peri-
5  As already mentioned, due to the data collection problems in the Croatian balance of payments, the financial account item »Cash and deposits of other sec-
tors« is not shown separately, which must influence the amount of the NEO item.
6  At this point, it should be reminded that NEO is a net item, i.e. according to this interpretation, the balance of unrecorded capital inflows and outflows which 
are (partly) offsetting each other.
Croatian Balance of Payments: Implications 
of Net Errors and Omissions for Economic Policy
5
od, which would reduce the NEO in that period. There-
fore, it is possible that the gross amount of unrecorded 
foreign cash accumulation from the foreign tourist spend-
ing is even larger.
4 Conclusion
Taken all together, the data presented above imply a very 
large amount of unrecorded seasonal accumulation of 
foreign cash from foreign tourist spending during the 
third quarters, which may reach over 2 billion euro in 
some years. It seems likely that this accumulation is 
largely related to shadow economy in tourism, i.e. to un-
reported – and therefore untaxed – income from foreign 
tourists. It is worth noting that these amounts are not 
strictly limited to entrepreneurs’ revenues in the hotels 
and restaurants sector, but they probably largely com-
prise the retail sector and some other local services sec-
tors. Although it seems likely that the large part of this 
unrecorded foreign cash accumulation ends up in the of-
ficial sector of the economy, these amounts are proba-
bly mostly not taxed at (the first) consumption. Espe-
cially in this year of the economic crisis in which pub-
lic revenues are decreasing, it would be irresponsible to 
omit this unreported income from the tax base. Tax com-
pliance for this unreported seasonal income could prob-
ably be improved by launching a broad campaign to 
warn the public of the overall harmfulness of tax avoid-
ance, and by intensifying the on-site tax inspection ac-
tivities.
Literature
Eggerstedt, H., Hall, R. B. and Wijnbergen, S. Van, 
1995. Measuring Capital Flight: A Case Study of Mex-
ico. World Development, 23 (2); 211-232.
CNB, 2003. Bulletin, Quarterly Report. Year viii, No. 80. 
Zagreb; Croatian National Bank. 
IMF, 1987. Final Report of the Working Party on the Sta­
tistical Discrepancy in World Current Account Balanc­
es. Washington; International Monetary Fund.
IMF, 1993. Balance of Payments Manual, 5th ed. Wash-
ington; International Monetary Fund.
Institut za javne financije
Smičiklasova 21
Zagreb, Hrvatska
p.p. 320
Institute of Public Finance
Smičiklasova 21
Zagreb, Croatia
PO Box 320
Poštarina plaćena  
u poštanskom uredu 
10000 ZAGREB
TISKANICA


Newsletter nr. 41, May 2009. Croatian balance of payments implications of net errors and omissions for economic policy

Wierzbowska-Miazga, Agata

Klysinski, Klamil

Polish

Changes in the political elite, economy and society of Belarus. Appearances and reality

Popa, Ana

Lupu\u219or, Adrian

Oprunenco, Alex

Prohni\u21bchi, Valeriu

Vasilescu, Victoria

MEGA - Moldova Economic Growth Analysis, no.2, 2009

  
 
1 
 
The International Institute for Middle-East and Balkan Studies (IFIMES) in 
Ljubljana, Slovenia, regularly analyses events in the Middle East and the Balkans. 
IFIMES has prepared an analysis of the current political situation in Albania which 
has entered the final part of the campaign for the forthcoming parliamentary 
elections scheduled for 28 June 2009. The most relevant and interesting 
sections from the comprehensive analysis entitled “Election campaign with the 
taste of blood” are given below. 
 
ALBANIA AND 2009 PARLIAMENTARY ELECTIONS: 
 
 
ELECTION CAMPAIGN WITH THE TASTE OF BLOOD 
 
 
POLITICAL RADICALISATION  
  
Unlike the beginning of the election campaign when different signals were sent, the 
final part of the campaign has become r aggressive. The two main protagonists, Sali 
Berisha (Democratic Party - PD) and Edi Rama (Socialist Party - PS), reduced their 
duels to the level of personal insults. The tensions led to the assassination of a 
Democratic Party activist in a village near Kavaja, but the situation was soon put 
under control in order to avoid further clashes between the two political parties.  
 
Despite the political benefits of the assassination for the Democratic Party the 
reactions were reduced to the level of verbal conflicts which paved the way for 
potential political radicalisation. Severe verbal conflicts and accusations have marked 
all public meetings and television debates in recent days, diverting attention from the 
essential problems present in the Albanian society. 
 
Despite the attempts to appease the situation another political assassination was 
carried out in north Albania where the Albanian Christian Democratic Party leader 
for the Skadar region Aleks Keka was killed in a car explosion. His party, a former 
Berisha’s coalition partner, accused the Democratic Party and the speaker of the 
Albanian parliament Jozefina Topalli of being directly involved in this political 
assassination.  
 
 
TWO STRONGEST PARTIES LACK OPTIMISM FOR THE CAMPAIGN  
 
Both major political parties entered the election campaign with a strong financial and 
media support, incomparable to other parties, which represents an obvious 
advantage. However, they did not use this advantage to bring the spirit of optimism 
  
 
2 
to the citizens and restore their trust by persuading them that they would be able to 
ensure economic development during the next four years. The issue of economy was 
not represented enough in the vocabulary of political representatives and leaders of 
main political parties. Their political vocabulary contains mostly the militant spirit, 
accusations about corruption related to public tenders and building permits and 
unjustified discrediting of political opponents, which creates the possibilities for a 
very tense atmosphere. Television debates where parties are confronted have turned 
into a political arena where unscrupulous insults have exceeded the limits and ethics 
of public communication, sending a very bad message to the public and the voters. 
The two strongest political parties, Democratic Party and Socialist Party, have been 
openly violating democratic rules, which has prevented other political parties to 
present their position and programmes.  
 
 
THE SOCIALISTS ARE SAVING WHAT CAN STILL BE SAVED 
 
Three renowned companies – Zogby International, Gani Bobi and IPR Marketing – 
in cooperation with the major television houses in Albania – Top Channel, Klan and 
ORA News – carried out several surveys which all show that Democratic Party will 
win the elections but will not have enough seats in the Parliament to form the 
government and run Albania for the next four years.  
 
The IFIMES International Institute is closely monitoring Democratic Party’s 
campaign and believes that it will win the elections, while the Socialist Party is trying 
to save what can still be saved in the final part of the election campaign. 
 
Most Albanian analysis think that Democratic Party’s strategy and campaign differ 
quite a lot from what was expected. Nevertheless, a detailed analysis of Democratic 
Party’s campaign will have to be carried out after the elections. The fact is that during 
more than one year of campaigning the Socialist Party has worn out its political 
vocabulary and is experiencing fatigue the end of the campaign, lacking the 
inventiveness in attracting potential voters. 
 
Socialist Party’s pre-election slogan “New politics and old politics” is focused on the 
personality of PS president Edi Rama and does not guarantee best election results. 
Moreover, confrontation with other left-wing political parties has turned out to be to 
the detriment of the Socialist Party.   
 
 
LSI AND PSV91 ARE UNDOUBTEDLY THE KEY TO FORMING THE NEW 
GOVERNMENT 
 
All surveys have confirmed that the Socialist Movement for Integration (LSI) and 
PSV91 are the key to forming the new government coalition. Although the Democratic 
  
 
3 
Party is ranking highest, as was described in our last analysis (read more at 
http://www.ifimes.org/default.cfm?Jezik=En&Kat=10&ID=467), the block of left 
parties will have the power to form the new government, whereby the parties united 
in the Socialist Alliance for Integration will play an important role. This situation has 
created tensions in the Socialist Party whose intention at the beginning of the election 
campaign was to dominate and to eliminate other political parties in the left-wing 
block. On this basis the Socialist Party’s campaign strategy was built, but it did not 
bring the desired effects. The left voters, having recognised Socialist Party’s strategy, 
are now more attentive to a balanced power and control among individual political 
parties.  
 
Both major political parties are openly calling to the citizens not to give their votes 
outside these two coalitions nor outside their respective party, thus openly violating 
pre-election rules. For example, speaker of the Albanian parliament Jozefina Topalli 
called the voters to vote only for the Democratic Party and not for its loyal ally in the 
government, the Republican Party, whose president and former minister of defence 
Fatmir Mediu resigned as minister after the “Grdec” case. Moreover, Topalli made 
some very serious accusations against the Republican Party members, calling them 
spies and mercenaries. President of the Socialist Party Edi Rama reacted in a similar 
way, which shows that this political practice will seriously threaten future democratic 
development of Albania. . 
 
 
THE US SHOW NO SYMPATHY WITH BERISHA AND RAMA 
 
The election campaign in Albania has shown that the two main political parties lack 
new motives and inspirations. In 2005 elections fight against corruption was the 
main pillar of the Democratic Party. Today, fight against corruption seems to be a 
very distant issue for both political parties. Both PD and PS have no special motive 
for fighting corruption. The public no longer believes that they were fighting a true 
and determined fight against corruption. Although some serious accusations were 
made, there is no clear and efficient platform for fighting corruption and organised 
crime which are very dangerous for the Albanian society.  Even Sali Berisha, who was 
regarded in 2005 as a politician determined to regulate this area, has lost his 
credibility after his own children were accused of being involved in corruption and 
criminal activities. However, his political opponent Edi Rama did no better, as he was 
accused of abusing his position as Mayor of Tirana when he issued building permits 
without any legal basis.  
 
This is one of the reasons why the US are showing no sympathy with the incumbent 
political establishment of Sali Berisha, but obviously they are not showing any 
sympathy with the opposition Socialist Party either. It seems that Edi Rama does not 
like to bee seen in western states capitals and neither does Berisha who is still trying 
to find support for his political abuse of Albania’s integration processes.  
  
 
4 
 
WHY IS FATOS NANO IMPORTANT FOR THE LEFT-WING? 
 
Former prime minister and former leader of the Socialist Party Fatos Nano is one of 
the key actors in Albanian political pluralism. Although he might seem unconcerned, 
he is closely following political developments and during the election campaign he 
very carefully and diplomatically expressed dissatisfaction with the current role of the 
Socialist Party’s leaders, showing open support to his former political opponent Ilir 
Meta (LSI) and to non-conformist Petro Koci. Rama’s attempt to eliminate Fatos 
Nano not only from the list of candidates but also from the political arena has 
damaged badly the reputation of the Socialist Party which is obviously experiencing a 
leadership crisis. Edi Rama has contributed to this crisis by openly confronting once 
most reputable members of the Socialist Party, such as Fatos  Nano, Ilir Meta, Petro 
Koci, Brokajt Sabit, Ylli Bufi, Servet Pellumbi and others who symbolised or still 
symbolise the Socialist Party. 
 
The IFIMES International Institute is of the opinion that regardless of the results of 
the parliamentary elections in Albania it will be interesting to observe the 
denouement of the situation in the Albanian political left-wing where Fatos Nano 
might play a decisive role in the upcoming events. 
                                                                                          
                                                         
Ljubljana, 24 June 2009                            International Institute for Middle-East  
                                                                         and  Balkan Studies (IFIMES) - Ljubljana 
                              
                                                                         Directors: 
                   Bakhtyar Aljaf                                                                
        Zijad Bećirović, M.Sc. 
 
 
                                                    
 
 
 


Election campaign with the taste of blood