Politico-economic institutions and the informal sector in Albania

When formal institutions are unfavorable for the development of a free market economy, one reaction in many countries is a spontaneous development of informal economies. This study analyzes the conditions for the informal sector to emerge in a transition country, to wit, Albania. The consequences of these conditions are reflected in the various appearances of the informal sector in this country, only two of which are analyzed in this paper. These are the occurrence of financial pyramid schemes and street vending. The analyses are based on the existing scarce evidence with respect to both aspects of the informal sector in Albania. These two examples provide evidence of the importance of the informal sector in a country in transition. This study concludes that overall, the negative implications dominate the positive ones, and argues that the informal sector should be formalized. Finally, it recognizes that this formalization can only be done in an environment with the relevant and efficient institutional framework and enforcement mechanisms.