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Effects of Albania’s Pyramid Scheme on Local Economy

1.  Introduction

Albania had a largely agricultural economy in the 1940s and relied on a classic Stalinist economic model dominated by central planning and bureaucratic processes of decision-making (Kindleberger 54). This model continued until the early 1990s, when the government introduced economic reforms that promoted private ownership (Davies 78). The private sector contributes about two-thirds of GDP, and Albanians working Greece and Italy’s raising remittances are increasing the disposable income. The improved economic climate increased consumer imports and investments in the emerging pyramid schemes. The lack of adequate financial institution and stock markets prompted Albanians to seek alternative investment opportunities such as the pyramid schemes. This paper examines the effects of the pyramid scheme on the local economy.

2.  Background

As suggested by Dirk pyramid schemes operate on a simple principle according to which money is paid by the later Investors allow earlier investors to pay excessively high returns (78). At first, high returns to woo potential investors are promised to early investors. As the word spreads, more individuals are drawn into the scheme to take advantage of the massive capital gains. As Jarvis observes during the early phases, the whole process seems to work, but with time the interest and principal owed to the old investors exceed the money that the scheme has (5). As a result, creditors are forced to cut payments short, and investors begin to panic.

Some of the players that were involved in the pyramid scheme include VEFA which was formed in 1992 by Vehbi Alimuca, and took in at least $700 million in deposits. The institution started as a trading company and is accused of promising customers unsupportable rates. The second major player is Xhafferi, founded by Rrapush Xhafferi, who took $250 in deposits at the time of its collapse. Another key player in the pyramid scheme was Gjallica that was formed in 1991 and took in deposits valued at $850 million. On the other hand, Sude provided lottery services but started taking deposits from the customers afterwards. At the time of its collapse, the company had $90 million in liabilities and no assets. Just like Sude, after three months, Populli offered to pay its customers twice the principal invested. The company worked closely with the Albanian opposition parties, and at the time of its collapse its liabilities were over $150 million.

Effects of Albania’s Pyramid Scheme on Local Economy

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