When things fall apart: Albania 1997

Uprising in Albania, 1997

 One of the main characteristics which distinguish a Ponzi scheme from any other investment activity is its inevitable and systemic collapse, and some times, when things fall apart, the consequences can be dramatic.

A clear example of this  is what happened in Albania in 1997, where the magnitude of the man-made disaster caused by the multiple collapse of the Ponzi schemes perpetrated across the country was unprecedented and the political, social and economic repercussion as a result of them were profound if not devastating.

It all initiated in the mid 1990's when Albania started its transition from a central planning to a market economy. Soon, and for different reasons - such as banks unable to satisfy private sector demand for credit with consequent growth of the informal credit market, an inadequate regulatory framework (was not clear who had responsibility for supervising the informal market) and Albanians' unfamiliarity with financial markets - the Albanian 1990's rudimentary financial system became dominated by Ponzi schemes.

When in 1997 the schemes inevitably collapsed involving approximately two-thirds of the population, the total losses amounted for $ 1.2 Billion. As a consequence people took their protest in the streets culminated in what has become known in history as the Albanian 1997 rebellion or Anarchy in Albania.
For ten days from the 1st of march 1997 until the 9th of march 1997 Albania descended into anarchy and violence in which the Government felled and more than 2,000 people were killed whilst more than 3,700 suffered physical injury.

In addition to these dramatic social and political repercussions must be added the economic damage caused by the collapse of the Ponzi schemes in Albania.
Although the short term impact on the economy are principally related to the civil war rather than from the Ponzi scheme itself, it is interesting to see which were these consequences.
A fall in output by 7% of the GDP, an increase in inflation by 40% (due to a depreciation of the local currency) and a decline in both capital inflows and imports.

Fortunately, tragic events due to Ponzi schemes such the one just described are not frequent, specially in terms of its scale relative to the size of the economy, but still - as the Albanian case demonstrates - possible.