How Neoliberal Shock Therapy Brought Albania to the Brink of Civil War

In Albania after the fall of the Soviet Union, firms promised big returns to ordinary people who invested in them. The investments turned out to be massive pyramid schemes, and their 1997 collapse set off a deadly conflict that killed 1,500 people.

Albanian refugees attempting to flee to Greece during the crisis that gripped Albania in 1997. (Ivo Lorenc / Sygma / Corbis via Getty Images)

In late February 1997, students at my high school in the Albanian capital, Tirana, boycotted classes and gathered in the schoolyard. We started shouting slogans in solidarity with university students in the coastal city of Vlorë, around fifty of whom had gone on hunger strike the previous week demanding the government’s resignation. Many of us held this administration responsible for the bankruptcy of the pyramid schemes that had recently robbed many Albanians of their life savings, sparking widespread anger and desperation.

Soon, someone proposed that we take to the streets and meet up with students from other schools to form a larger protest. After marching 200 or 300 meters, a group of plainclothes police officers approached us and began physically attacking us. Terrified, we scattered.

Fast-forward a week. Near my neighborhood, I saw a large crowd marching toward the city center. Someone pointed at a civilian, exposing him as a plainclothes police officer. A group of men tried to catch him and beat him up, but the armed policeman started firing into the air. A few minutes later, skirmishes between protesters and riot police were breaking out in every corner of my neighborhood.

The night before, in Vlorë, protesters had seized army barracks and distributed weapons among the population. This triggered a series of events that destroyed the Albanian state’s ability to govern. Approximately 1,500 people died in the nationwide chaos that ensued.

How could it come to this? Only a few years earlier, the International Monetary Fund (IMF) had praised Albania as a model of postsocialist economic reform. By 1997, a confluence of factors created a perfect storm, sparking a popular rebellion against injustice and inequality. Yet with the working class disorganized and socialism largely discredited in the public eye, the revolt was unable to formulate an alternative vision — and soon devolved into violent chaos.

Bureaucratic Socialism and Shock Therapy

Albania’s transition to capitalism began later than other Eastern European countries. The first anti-government demonstrations began in late 1990 and radicalized over the following year, but the formal transfer of power from the ruling Party of Labor to the anti-communist Democratic Party (PD) didn’t occur until 1992 — months after the Soviet Union had ceased to exist.

Being the last to overthrow bureaucratic socialism didn’t hinder Albania’s new elite from being among the first and most enthusiastic proponents of radical neoliberal restructuring. The economic shock therapy imposed by the PD soon brought rapid deindustrialization, full-throttle privatization, a rapid fall in productivity, mass unemployment (with almost 200,000 laid off in 1992 alone), and emigration. A mix of enthusiasm and desperation spread across the wider population, depending on where one ended up in the new, capitalist society.

The privatization process was highly corrupt. Public assets, beginning with small- and medium-sized enterprises, were sold off to private individuals at artificially low prices. Yet this mass transfer of property and infrastructure failed to create a proper bourgeoisie capable of running productive industries. Most of the new rich simply sold off the old firms for spare parts while engaging in trade and financial speculation.

For the average Albanian, these were years of exploding inequality and growing poverty. To survive, many emigrated or else relied on remittances from relatives working abroad (roughly $500 million annually). This desperation helped to facilitate the rise of a quasi-authoritarian regime led by the PD leader and Albanian president Sali Berisha. Opposition parties and critical journalists were harassed. Fatos Nano, leader of the Socialist Party (PS) — the allegedly social-democratic offspring of the Stalinist Party of Labor — was jailed in 1993 on corruption charges, though many considered this an act of political revenge.

Albania’s Casino Capitalism

The widespread disillusionment after the high expectations of 1991–92, when the capitalist future still looked bright, fueled a growing network of pyramid schemes. Speculators began lending money at high interest rates, charging 8-10 percent per month. Initially this was done without legal permission, but from 1995 these “rentier firms” achieved legal status, became ever-more powerful, and not surprisingly, started to bear political influence. At their peak in 1996, the money tied up in them amounted to 10 percent of Albania’s GDP.

These schemes’ emergence owed to the need to accelerate the primitive accumulation of capital following the transition from bureaucratic socialism. Albania’s capitalist system had emerged as the result of popular revolts in 1991, and thus the political elite and the emerging ruling class couldn’t afford to just evict people from their newly earned agricultural land and urban dwellings. Something else had to be devised in order to convince ordinary people to commodify more parts of their life and transfer them to the rentier firms as assets.

During the first years of capitalism, a lot of Albanians hoped that the new system would allow them to get rich quick, or at least substantially raise their living standards. Many first put their life savings in the pyramid schemes. Then as the speculative frenzy heated up, many sold their houses. Another source of money was the growing remittances from Albanians working abroad, especially in Greece and Italy. Occupying the lower rungs of the local working class, faced with discrimination and living and working illegally, they couldn’t save enough money to start a small business back home as most had dreamed and increasingly decided to “invest” their savings in the rentier firms, hoping for quick returns.

As ever more people “invested” in these enterprises, they became, paradoxically, not only a medium-term economic and political liability but also a temporary pillar of Albania’s economy. The most powerful among them, Vefa Holding, even sponsored a Formula 1 race in 1996. In this situation, no political actor dared to take a stand against the growing financial bubble.

The government hoped that this financial vortex would magically ease social discontent, at least temporarily — while also accepting the rentier firms’ financial support during the May 1996 elections. The opposition parties, led by the Socialist Party, didn’t dare to defy the popular enthusiasm for these firms. The Democratic Party ultimately won, helped not only by the artificially improved economic situation but also by rigging the vote process and beating up their opponents when they tried to organize protests.

But the speculative bubble couldn’t last forever. In fall 1996, rumors emerged that the rentier firms were in financial difficulty. That September, the IMF publicly asked the Albanian government to curtail and control them. For several years, the IMF had praised the country as a model for other postsocialist economies. But the looming disaster and worsening political relations between Sali Berisha and the United States following the rigged election pushed the IMF to sound the alarm.

Faced with these growing doubts, the rentier firms’ countermove was to raise interest rates. Some promised to return 200 percent of the money they borrowed within three months. The vortex continued for a couple more months, with some people taking back their money while others invested more, but in January 1997 the first firm, Sude, declared bankruptcy. This started a domino effect, and within just weeks, the others did the same. The Albanian government tried to freeze their assets in state banks and promised the lenders would get 30 to 40 percent of their money back while still claiming that most rentier firms had enough productive investment to withstand the crisis.

The Grapes of Wrath

The first protests erupted that same month. They began spontaneously, with hundreds of people gathering in front of the firms’ offices to demand their money back. The police tried to disperse the crowds, prompting violent clashes. Protests soon spread to almost every major city in Albania. After the Xhaferri firm went bankrupt, particularly violent demonstrations in Lushnjë saw protesters take the Democratic Party chairman Tritan Shehu hostage. He had gone to the city’s stadium to calm protesters and explain the government’s measures. In almost every case, the police sought to violently repress the protesters, further radicalizing them.

The opposition parties led by the socialist PS tried to give the popular discontent a political articulation. For years they had accused the government of being authoritarian and kleptocratic. The government responded by claiming the ex-communists wanted to turn back the wheel of history. The PS’s countermove was to form a large coalition of opposition parties ranging from the center-left to the Right called the Forum for Democracy, led by three former prisoners of conscience from the pre-1992 era. They organized several protests in Tirana, leading to occasional clashes with the police, but the most radical protests were independently organized in other cities, where the opposition had only meager influence.

The last and most radical phase of protests began in February, mostly in southern Albania, where more people had invested in the pyramid schemes and there was more political animosity toward the PD government. After the Gjallica firm filed for bankruptcy, protests erupted in Vlorë, the south’s largest city, where a protester was subsequently killed on February 5. Protesters expelled the police from the city center and kept them out for several days, demonstrating the weakness of the state’s repressive apparatus.

The spiral of violence appeared to be finding a strategic political outlet when the students of Vlorë’s Ismail Qemali University launched a hunger strike on February 20. Their demands were a mix of economic — for the rentier firms to return the money they appropriated — and political, urging the resignation of the government led by Aleksandër Meksi, a subordinate of President Berisha. The students’ hunger strike functioned as a daily rallying point for tens of thousands of protesters in Vlorë. Meanwhile, opposition parties compared it to a hunger strike students organized in Tirana in February 1991, which played a major role in the fall of the previous regime. They emphasized the potential for a new democratic revolution in the spirit of 1990–91.

Breaking Open the Barracks

The situation in the city radically escalated the night of February 28. Rumors spread that agents of the Shërbimi Informativ Kombëtar (SHIK), an institution somewhere between a secret service and a paramilitary gang, had kidnapped one of the hunger strike supporters and planned to violently evict them from the university grounds.

This led to a violent response by a group of protesters, some of whom were armed. Nobody knows where they got their weapons from. They went to SHIK headquarters in Vlorë and, after exchanging fire with officers stationed there, killed two of them. Later testimonies suggest that the rumors about SHIK violently crushing the hunger strike weren’t true, but protesters were so indignant that the rumors were easily believed.

The next day, with events in Vlorë still shrouded in the fog of civil war, the opposition parties organized a large protest in Tirana that ended in another round of intense clashes. Most importantly, from March 1 onward — first in Vlorë, then in other southern cities — organized groups of people went to army barracks, overwhelmed the discouraged and disoriented soldiers, seized the armories, and distributed weapons among the population.

Angered by what many people viewed as state-led organized theft in the form of the pyramid schemes, fearing the government’s violent response and the snowball effect of civilians (including a number of criminals) appropriating arms, increasing numbers of people went to army barracks and practically broke down the state apparatus in Southern Albania during the first weeks of March. The government responded by declaring martial law and sending what was left of the army to crush the revolt. But faced with armed popular resistance and, most importantly, the very low morale among soldiers and officers (most of whom had lost their own savings), the army soon folded.

This victory encouraged the armed protesters, who began to think in terms of dual power. In Vlorë and other Southern cities, “Committees of Public Safety” were formed, evoking the French Revolution. They were composed of common citizens: local intellectuals, ex–army officers, students, and migrant workers who had returned home to demand their money back. Despite the revolutionary rhetoric, the committees’ demands were fairly modest: all they wanted was their money and the resignation of Sali Berisha.

Some hinted at an armed march on Tirana to overthrow Berisha, but no such thing ever materialized. The local committees in various towns tried to link up, and different meetings were held to coordinate political actions. During early March they tried to become a third pole between Sali Berisha and the PS, sounding more radical than the latter. But in the end, due to the committees’ lack of political experience and penetration by local PS representatives, they gradually fell under that party’s hegemony.

Chaos Not Revolution

The biggest shortcoming of the Committees of Public Safety was the lack of organized labor in their ranks. The Albanian working class — or rather, the parts of it that hadn’t already emigrated — had been disempowered, pulverized, and scattered into a plethora of small enterprises in the years of neoliberal reforms. The official trade unions were very weak and thoroughly controlled by the main parties. Consequently, workers didn’t participate in these events as a class, nor did their class consciousness go beyond several Luddite acts of revenge against machines and factories during the first days of March.

Lacking a working-class movement, the uprising proved unable to overcome its ideological limitations. The people participating in the revolt, though armed and emboldened by the breakdown of the state, didn’t imagine a radically new society — they just wanted fresh elections and their money back. Beyond that, many had a vague conception of social justice as prioritizing the interests of the poor and common people but little more.

Seeking to control the quasi-revolutionary fervor, the political parties in Tirana agreed to share power. On March 9, Sali Berisha and opposition representatives formed a common government of national reconciliation led by PS representative Bashkim Fino and agreed to hold new elections in June. Berisha wanted to salvage what he could of the state’s authority, while the PS needed a legal political transition, fearing that the armed uprising could otherwise escape their control.

Yet the parties didn’t seem to trust each other fully. Thus after the agreement was signed, army barracks were opened in Tirana and cities across Northern Albania. Some eyewitnesses claim that the barracks were deliberately opened by Sali Berisha’s supporters, supposedly to counterbalance the armed population of Southern Albania. Some feared that the political conflict could escalate into civil war, with the Socialists dominating in the south, while the Democrats were more popular in the north. But nothing of the sort happened. The common people were armed everywhere, but there was no regional animosity or even a hint of organizing people against each other. The main parties, it appeared, had decided to consolidate their armed power bases and wait for the general elections of June 29.

In this paradoxical situation — in which the new government in Tirana didn’t control more than the main boulevard of the capital city, the two main parties were biding their time until the elections, and the Committees of Public Safety were subordinated to the PS — there was no alternative other than anarchy, which led to the emergence of criminal gangs as local power brokers. In the three months of chaos that followed, many people were killed in fights between these gangs, some of which were connected to political parties in Tirana, or as innocent bystanders when large groups fired their guns into the air.

The latter became fairly popular across Albania, when common people, lacking a political target, expressed their frustration and a kind of childish enthusiasm by shooting into the air — enabled, ironically, by the experience they accrued during socialism, when citizens were obliged to take part in annual military exercises. I can still remember some of my neighbors shooting into the air in our building’s courtyard every evening.

The Italian Cavalry Arrives

The uprising, the breakdown of state authority, and the fear that the conflict might spread into neighboring countries while also creating huge waves of migrants, triggered the intervention of European states and the United States. Former Austrian premier Franz Vranitzky was appointed by the Organization for Security and Co-operation in Europe (OSCE) as a mediator between the conflicting parties.

One of the first acts of the new government in Tirana was to sign an agreement with Italy, allowing it to patrol Albania’s territorial waters and prevent illegal emigration. On March 28, a boat filled with 120 migrants was intercepted and hit by an Italian frigate. Eighty-one people drowned, including small children. The tragic news deepened the social desperation in Albania right at the time when the political dimensions of the uprising were fading.

In an ironic twist, the center-right Italian opposition led by Silvio Berlusconi accused Romano Prodi’s center-left government of inhumane treatment of refugees. As a public display of remorse, Prodi visited Albania on April 13. He was welcomed by a huge crowd in Vlorë, where one of the most notorious local gangsters served as his bodyguard. This tragedy within a much larger tragedy, in a context where Albanians generally viewed the Italian government as benevolent, seemed to convince most people that what happened was just a tragic accident, or at least a crime without a political component.

On the same day, the United Nations passed Resolution 1101, which created a multinational peacekeeping and humanitarian force of seven thousand soldiers, mostly Italians. Yet this Operation Alba did not engage in any “peacekeeping” in Albania. Its duty was quite modest: to deliver humanitarian aid to the population in need, take control of Albanian ports to prevent migration, and protect international observers during the June 29 elections. They kept their distance from armed confrontations and looked on passively during skirmishes between criminal gangs.

The elections were held in a climate of fear, with armed vigilantes positioned near polling stations. Regular Albanian police and Operation Alba soldiers were present but didn’t have much of an impact, at least outside Tirana. Nevertheless, it seemed that the political parties had implicitly agreed to a transfer of power, and the Socialist Party won the vote overwhelmingly.

In the years that followed, the two parties hurled mutual accusations at each other over the events of 1997 — the PD branded them as a communist rebellion, while the PS stressed their antiauthoritarian aspects. Over time, however, an ideological cross-party consensus emerged that 1997 had simply been a cursed year for the people of Albania. The images of armed chaos overwhelmed the uprising’s emancipatory potential, while the causes of the uprising were discussed in terms of the violent legacy of communism, the country’s lack of democratic institutions, and even the collective madness of people with nothing left to lose.

The Cunning of History

After leading the liberation of Albania from fascist and Nazi occupation in World War II, the Communist Party of Albania (renamed the Party of Labor) ruled the country for forty-seven years, turning it into Europe’s last hard-line Stalinist dictatorship. After changing its name to the Socialist Party in1992, it portrayed itself as a social democratic party that aimed to establish a mixed economy and democratize the state. For a couple of years, the party was quite close to the Austrian Social Democrats and adopted a critical stance toward NATO membership, while openly talking about democratic socialism. Deputy leader Servet Pëllumbi, who basically led the party after the imprisonment of Fatos Nano, used to shock visitors by keeping a small statue of Karl Marx in his office.

Nonetheless, having lost the bulk of the working class during the 1991–92 transition — a class that soon faded away as a political actor in itself — the PS’s social democratic stance functioned more as an ideological cover. Effectively, it was the party of the professional middle classes of bureaucratic socialism, which lost their status during the neoliberal restructuring led by the Democratic Party.

Consequently, the party shifted its alignment. Fatos Nano changed its motto from “democratic socialism” to “market economy plus social solidarity” in 1995. The party accepted NATO integration and became increasingly influenced by the Blairite Third Way. After taking power in 1997, the Socialists became the perfect political agent to deepen neoliberal reforms in Albania. They worked closely with the IMF and the World Bank to privatize big state enterprises and initiated the privatization of the strategic sectors of the economy — from the extractive sector to banks, telecommunications, and more.

Albania’s economy became an appendix of Italian and Greek capital, and the only manufacturing that continued to exist consisted of subcontracted textile factories. The organization of the working class deteriorated even more rapidly. For example, in 1994, some 93 percent of the shrinking working class was still organized in trade unions. By 1996 this figure had dropped to 40 percent and to 12 percent by the end of 1997. Nowadays only insignificant numbers are officially unionized.

In 1991, Albanian workers rose up against the tyrannical and clueless socialist bureaucracy while dreaming of a new society of prosperity, freedom, and equality — animated by a vague idea of socialism with a human face, or perhaps a Jeffersonian capitalism. They won politically but lost as a class when the neoliberal reforms pulverized them as a social force. In 1997 the remnants of the working class, together with the multitudes of the poor and those who had been impoverished by the pyramid schemes, fought with weapons, dreaming of a more social and democratic society. Their Pyrrhic victory gave power to a party that betrayed them every step of the way.

Even today, the Socialist Party constitutes the backbone of neoliberalism and oligarchic capitalism in Albania. This leads to a conception of sociopolitical developments in terms of unintended consequences, or the “cunning of history,” which can have a debilitating effect in promoting the ideology of “there is no alternative.” Yet as the protests and strikes of the recent years show — from the large student demonstrations of December 2018 to the founding of new independent unions in the mining, textile, and call center sectors, and the recent massive protests against price rises — there is hope for a just and democratic future in Albanian society.