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«Holger Kächelein Endrit Lami Drini Imami Working Paper No. 71 April 2010 b B A M B AMBERG E CONOMIC R ESEARCH GROUP k k* BERG Working Paper Series ...»

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Elections Related Cycles in Publicly Supplied Goods

in Albania

Holger Kächelein

Endrit Lami

Drini Imami

Working Paper No. 71

April 2010











BERG Working Paper Series

on Government and Growth

Bamberg Economic Research Group on Government and Growth Bamberg University Feldkirchenstraße 21 D-96045 Bamberg Telefax: (0951) 863 5547 Telephone: (0951) 863 2547 E-mail: public-finance@uni-bamberg.de http://www.uni-bamberg.de/vwl-fiwi/forschung/berg/ ISBN 978-3-931052-79-9 Reihenherausgeber: BERG Heinz-Dieter Wenzel Redaktion Felix Stübben∗ ∗ felix.stuebben@uni-bamberg.de Elections Related Cycles in Publicly Supplied Goods in Albania Holger Kächelein Faculty of Business Administration and Economics, University of Tirana DAAD-Lecturer Economics holger@kaechelein.de Endrit Lami Part time Lecturer, Faculty of Business Administration and Economics, University of Tirana endrit333@yahoo.com Drini Imami Faculty of Economics and Agribusiness, Agriculture University of Tirana Institute of Advanced Studies, University of Bologna Open Society Institute - GSGP Grantee drinimami@yahoo.com Abstract The phenomena of manipulation of the economy by the incumbent for electoral purpose are called Political Business Cycles (PBC), introduced by Nordhaus (1975). Using policy control economic instruments, as fiscal and monetary instruments, government may manipulate the economy to gain electoral advantage by producing growth and decreasing unemployment before elections.

In addition to increased public expenditures, also the production/supply of certain publicly provided goods may score improvements. In Albania, production and supply of electricity (for the time span of our analyzes) was controlled by KESH (Korporata Energjitike Shqiptare – Albanian Energy Corporation) which is a quasi- monopoly in the supply of electricity in Albania, and it is publicly run. Throughout the transition, supply of electricity, due to various technical and economic reasons, has not been stable, and characterized by systematic interruption for households and businesses users, affecting their well-being and performance (electricity is a main source of energy for households, including heating and cooking). Therefore, it seems so that there is an incentive and rationale for the incumbent to use also the provision of electricity to impress the voters before elections, beside of the classical instruments of expenditures.

In this paper we analyze consumption, production and import of electricity in Albania.

Our hypothesis is that before elections, electricity consumption may increase above usual levels, followed by a contraction after elections. In our analysis we use modern standard econometric approach, used widely for research related to PBC. By ARMA modelling it is possible to prove if elections can explain changes in electricity production, in addition to the past history of the variable and the random error term.

Keywords: Political Business Cycle, Electricity, Albania JEL classification code: P26, E32, D72, H72


Elections Related Cycles in Publicly Supplied Goods in Albania

1. Introduction It seems to be obvious that the economic performance of a government determines to a large extent its likelihood of reelection as confirmed by Fair (1978, 1982, 1988), Madsen (1980) or Lewis-Beck (1988), and therefore economic factors influence political factors and the other way around. Furthermore, incumbents may use their power and the instruments available to influence the economic environment especially prior to election to improve the likelihood of reelection. Over the last decades, there has been plenty of research and articles published on such an opportunistic behaviour of politicians, aiming to analyze and explain the use of fiscal and monetary instruments by the incumbent to stimulate economic performance before elections, to impress the voters. The traditional Political Business Cycle (PBC) literature, as introduced by Nordhaus (1975), concentrated on an exploitable Phillips curve, to explain the use of economic instruments to affect macroeconomic variables, such as unemployment, GDP, etc. Evidence of PBC was also found in several less developed and democratic countries. Gimpelsen (2001) made a research on the existence of PBC in Russia, finding evidence in support of it.

Another study of Asutay (2004) provided clear evidence for the presence of PBC in Turkey. The incumbent in Turkey has used fiscal and monetary policy instruments to create PBC in order to improve the chances of being reelected. Also previous research on the existence of PBC in Albania indicated that the incumbent manipulates fiscal instruments, increasing public expenditures before elections, including public investments, expenditure on compensation of employees in parliamentary, social assistance, while regarding the macroeconomic outputs, we have found, partial evidence of PBC in GDP and unemployment but not in inflation (Imami and Lami, 2006).

After Nordhaus (1975) initial contribution there was an increasing research interest focusing on budget cycles, based on the observations of Tufte (1978) and Frey and Schneider (1978a, b). Even though there is a wide consensus about the importance of the actual economic conditions in pleasing the voters, there is still doubt about the ability to influence the macroeconomic indicator in a precise 4  Holger Kächelein, Endrit Lami, Drini Imami   predictable manner. Taking the limitations into account, newer approaches focused on pre-election manipulations of fiscal policy instruments. As shown by Brender and Dazen (2005) and Shi and Svensson (2006), especially new democracies are vulnerable for such political budget cycles. While Alt and Lassen (2006) show the relevance of transparency, Brender and Dazen (2005) also pronounce the lack of experience that voters have in new democracies regarding the existence of political fiscal cycles. Meanwhile, Shi and Svensson (2006) see beside the aspect of information also the incumbents’ rents of staying in power as a relevant aspect.

However, incumbents may not use only classical instruments as the composition and the size of the public budget if there are also other instruments available. These approaches mentioned above may explain why political budget cycles arise even though those voters should punish such behaviour. Another problem related to political budget cycles is the timing of the activity. Since the incumbent cannot precisely estimate the lag between the stimulus as a change in the public budget and the impact on the economic environment, they may be interested to use other instruments having a more direct impact on the economy and the well being of the voters.

We try to shed light on the question, whether incumbents may use other instruments available, beside classical fiscal instruments, to impress voter in years of election. Based on the results that political budget cycles seems to be a phenomenon of developing countries or new democracies, we focus on Albania, a country with a relatively short experience of democracy, which provides only a minimum of fiscal transparency (IBP 2009a, b). In this paper, we focus specifically on electricity, which is a publicly provided good in Albania and which is characterized by special features. Given that electricity represents one of the most basic needs, households should be highly sensible concerning sufficient supply of electricity. Furthermore, it is quite expensive to storage electricity and only for selected purposes, such as heating or cooking, substitutes are available and partly used. Furthermore, in the case of Albania we have a limited supply meanwhile demand has increased dramatically after the system change. And finally, the Albanian electricity market was a quasi public monopoly.

Given that electricity supply (consumption) relies largely on both imports and domestic production, it is important, in this context, to analyze both these sources of electricity – in addition to consumption per se. In our paper we analyze consumption as well as production and import dynamics of electricity by KESH which is a quasiElections related cycles in the publicly supplied goods in Albania 5 monopoly in the supply of electricity in Albania, and it is publicly run.1 Our hypothesis is that before elections, electricity consumption, production and import may increase above usual levels, followed by a contraction after elections. In this paper we focus on the parliamentary elections in 2001 and 2005 – during that period was common to observe electricity supply shortages throughout Albania. In our analysis we use modern standard econometric approach, used widely for research related to PBC, aiming to test if elections can explain changes in electricity supply in form of production and import.

In the upcoming chapter we will present a short overview about the electricity provision in Albania, to provide background information concerning the existing undersupply as a precondition for using electricity supply as an instrument around elections to impress the voters. Chapter three provides an overview about the method and data used while chapter four presents the main findings.

–  –  –

As percentage of 7.3% 13.1% 13.7% 10.4% 8.5% 9.8% Demand Source: World Bank (2006): p.235, own calculations


In the time span of our analysis, OSSH (Operatori i Sistemit te Shperndarjes – Distribution System Operator) was part of KESH.

6  Holger Kächelein, Endrit Lami, Drini Imami   Major problems are also the low tariffs which do not cover the costs, network losses and unpaid bills. As a results, the Albanian government has had to subsidize the state own electricity company KESH. In 2005, KESH produced a quasi public deficit of 1.8 percent of the GDP, implying losses to be covered by the public budget (World Bank: 2006: p 25).

There are different reasons for interruption of electricity. One of the main reasons is that more than 95% of electricity production, is based on hydro power (Nashi 2009), so oscillation in hydro deposit levels, affected by natural factors (rain, draught) directly affect the availability of electricity. The gap, between the demand and production, is partially covered by imports, while the remaining gap, not covered by domestic production or imports (for natural, financial or technical reasons) is translated into systematic, but oscillating, interruption of electricity.

Turning to household consumption, Albanians have still suffered under unmet basic needs. In 2002, based on the non income poverty indicators, every third Albanian has to be considered as poor and every 10th Albanian as extremely poor.

Indicators as inadequate water and sanitation, inadequate housing, crowding or lack of education can only be influenced in the longer run. Meanwhile, the supply of electricity can be influenced even in the short run, as the electricity grid has a broad reach and therefore, electricity could be virtually everywhere available. In 2002, more than 13 percent of the Albanian households suffered under power shut offs for 6 hours or more per day (World Bank, 2003: p. 17).

Table 2. Frequency of power supply interruption

–  –  –

Table 2 gives an overview of the frequency of the interruptions based again on the Living Standard Measurement Survey (LSMS) of 2002. The time without electricity supply varied between more than 9 hours in rural areas and 5.6 hours in Elections related cycles in the publicly supplied goods in Albania 7 the capital Tirana. The situation has improved in the following years; however, in 2005 nearly 40 percent still reported daily interruptions of power supply (World Bank, 2007: p. 11).

These irregularities hamper the economic development of Albania as well. In 2002, more than three out of four firms stated power supply as a problem for their business, which is more than three times higher compared to the South Eastern Region. As a result of the insufficient electricity sector, a loss of 2.7 to 5.4 percent of GDP is estimated for 2001-2002. Concerning the total costs, we have also to add cumulative investments in backup power supplies, roughly of the same extend the direct impact, however, spread over several years (World Bank 2006, p. 239-240).

3. Method and Data

3.1 Specifications of Variables, Data and empirical tests Since electricity is an essential good for households and businesses, we assume that the incumbent may try to improve its supply before elections, by increasing production and/or increasing imports. Electricity is an important source of energy in Albania. In addition to the wide use in the industry, electricity is a main source of heating and cooking for households. As already discussed before, supply of electricity in Albania, is characterized by systematic interruptions whose effects have been deemed as very negative for development of businesses, especially in some sectors, in addition to direct implications for households’ well-being.

In this research work, we intend to test for possible statistically significant increase of electricity consumption, production and import before elections, in line with the incumbent interest to “please” voters, in order to increase likelihood to be re-elected. The time series of production, imports and consumption of electricity time are on monthly basis, spanning from M1-2000 to M12-2008 (from January 2000 to December 2008), adding up to 96 observations. The unit on which the data analysis is based is MW/H. There are two parliamentary elections taking place in this period, namely June 24, 2001 and July 3, 2005.

Following the standard approach in this field,2 we will apply the Intervention Analysis based on Box and Tiao (1975), a methodology for constructing a statistical model in our study. In this paper we test the hypothesis of the existence of changes in the supply – as production and imports – as well as consumption of electricity.

Basically the test proceeds by subjecting the monthly seasonally adjusted time series


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