Pyramid scheme robs Albanians

By Santo Koesoebjono

TIRANA, Albania (JP): The collapse of an "investment" pyramid scheme in the capital city Tirana in January was the first domino to fall. It prompted riots and protests against President Sali Berisha's regime and his ruling Democratic Party.

The pyramid scheme owing US$13 million to depositors could not live up to the promise of gratifying a gullible interest of 50 percent a month. The detention of the main conjurer was not enough to calm down and disperse the protesters since their prime aim is to get their savings back.

The only thing the government did was forbid other schemes from returning the money and promising itself to reimburse the poorest of the participants. This is certainly not enough since it covers only a tiny part of the smallest investment pyramid. Instead of soothing the problems, the government is worsening the situation by making contradictory promises and sending the riot police to disband the protesters. In the following days other investment schemes have collapsed.

At the time of the demonstrations, seven out of ten households invested their money in one or more schemes, to spread the risks. People from all socio-economic platforms took part in it. Directors and intellectuals, shop and restaurant owners, government employees and policemen, city-dwellers and rural people flocked to the investment firms. A deposit of US$70,000 was not an exception. Others sold their land and house to live with families or invested the remittances sent by family members working abroad.

The get-rich-quick pyramid scheme worked according to the rule that investors in the scheme firstly obtain their profits from the money deposited by the following group of investors. To draw more investors, the firms have to continue raising their interest. When the number of participants became stagnate, the system began to crumble. Those who invested at the early stage could still obtain their profits. Many of them even abandoned their job to take part in the scheme while employment was scarce and the unemployment rate reached 16 percent. In the cities it reached 40 percent and in the capital city, Tirana it hit a high 80 percent. When I recently met a friend who works as an administrator for an NGO, he proudly showed me his second-hand Mercedes bought from his profit obtained from deposits in various pyramid firms.

For more than three weeks now Albania has made international media headlines because of the pyramid scheme scandal. What began in Tirana has spread to other parts of the country. The riots are larger and longer in the port city Vlore and have already resulted in three deaths and dozens of casualties. Riot police were unable to control the crowd and retreated, some of them being stripped of their uniform and weapons as they did so. Beaten by protesters, they too could have been unfortunate victims of a collapsed pyramid.

The port city Vlore is located on the coast of Albania some 100 kilometers south of Tirana, near the Italian border. It is a spring-board for many illegal migrants entering Italy at a cost of around $2,000 per passage. These crossings are organized by a mafia group whose members are participating in Gjallica, the local pyramid scheme. The collapse of this pyramid touches the long purse of these Mafioso as well and this has also led to violence.

The rise of the pyramid system in Albania is not unique. Recently a firm was found in Germany, and other schemes existed in Russia and Romania following the fall of the communist regime in 1989. Such a pyramid scheme is not a typical Eastern European phenomenon. The United States had the Ponzi scheme and in Zimbabwe it is called money-club.

The difference with pyramid firms in other Eastern European countries is that in these countries the schemes did not last long whereas in Albania it has been going on for almost four years. This is possibly because the government has supported the system as some of the firms made a generous donation to the ruling Democratic Party of the president during the last election campaign in May 1996. A poster in Vlore portrayed a candidate of this party framed with names of some pyramid companies. As in many Central and Eastern European countries the close links between government and business have a distinguished history in pre-reform communist economies. Higher up in the government hierarchy major fortunes have been made through contacts, contracts and bribes. Organized crime is widely perceived as a bed fellow of the government.

Albania shook off its most isolanist communist regime in 1991. Since then it is in a process of transition toward a democratic society and market economy. At this stage the financial and banking system as well as property rights are still very rudimentary. This process is proceeding with pains and rumbles.

According to the World Bank, the average income of the 3.3 million inhabitants is US$550 a year in 1995 (this compares with $900 in Indonesia). One-fourth of household expenditure is met by remittances from (legally and illegally) migrated family members in Greece, Italy and other parts of Europe. These migrants are estimated at 400,000 or one-third of the population at working- age. Around one-fifth of the population is living below the poverty line of $40 a month for a family of four persons. Such an income is insufficient to make both ends meet. The lure of big money through the get-rich-quick pyramid investment scheme is therefore enormous.

The question raises concern of why such a high interest rate is being maintained in a country with an inflation rate of 16 percent. The chairman of the industrial association indicated that profits for arms deal is flourishing considering the situation in East Europe and money laundering from trade in drugs and women. Notwithstanding warnings from the International Monetary Fund and the Central Bank of Albania, the government did not take measures against the mushrooming of the pyramids. It even stated that it was safe to participate in such a scheme and speculated that these pyramids could be turned into official insurance and investment companies.

For years these alleged pyramids have drawn millions of dollars from depositors in Europe's poorest nation. The pyramids are managing around $1 billion against the GNP of Albania of $2.4 billion.

Last summer they created tremors in the exchange rate when one of them promised a high interest for investments in Lek, the local currency (1 US dollar is about 100 Lek). The dollar dropped from 125 to 95 Lek. The fall of these investment schemes is understandably creating social and economic unrest at national level. It also has a dramatic effect at personal level in this impoverished country.

Many Albanians lost thousands of dollars but added that they were the luckier ones, as they still had their homes. Others had to donate their blood to earn some 40 Lek which is the price of two cups of coffee in a coffeeshop on the sidewalk.

The writer is an economist-demographer based in The Hague, the Netherlands.