Illicit Flows Flourish in Western Balkans Due to Informal Economy
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A recent investigation has uncovered the alarming prevalence of illicit financial flows (IFFs) in Albania, Kosovo, and North Macedonia. The study reveals that the region’s informal economy, which accounts for a significant portion of GDP, provides a fertile ground for IFFs.
Challenges in Combating Illicit Flows
Experts interviewed for the study pointed out that the interconnectedness of the three countries makes it challenging to identify and implement national solutions to combat IFFs. The region’s history of political instability, conflict, and insecurity has created an environment in which organized crime thrives.
Strategic Location and Infrastructure Investments
The Western Balkans’ strategic location at the crossroads of Asia and Europe, coupled with significant infrastructure investments under China’s Belt and Road Initiative, has intensified flows moving through the region. This has led to a surge in illegal commerce, including drug trafficking, arms trading, and counterfeiting.
Informal Economy: A Fertile Ground for IFFs
According to estimates:
- Albania’s informal economy accounts for 30-40% of its GDP.
- Kosovo’s informal economy represents 31.7% of its GDP.
- North Macedonia’s informal economy is estimated to be worth around a third of the country’s GDP.
The lack of oversight and regulation in these economies has created an environment conducive to IFFs. Many businesses operate outside of the formal financial system, dealing in cash or using informal transfer mechanisms such as hawala.
Limited Reporting and Oversight Obligations
The region’s limited reporting and oversight obligations also make it easier for illicit funds to move undetected. The dominance of small businesses with limited accounting systems and controls provides a wide-open playing field for IFFs.
Low Average Wage Rates and Illicit Economy Attraction
Low average wage rates in the region, which average €400-600 per month, have driven many young people to seek opportunities in both the informal and illicit economies.
Recommendations to Combat IFFs
The study highlights the need for greater cooperation between governments and international organizations to combat IFFs. It also emphasizes the importance of:
- Strengthening state institutions
- Improving financial transparency
- Increasing public awareness of the risks associated with IFFs
Figures: Estimates of Formal vs Informal Sector Economic Activity in Albania, Kosovo, and North Macedonia (%)
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Source: Ernst and Young
Figure: Average Monthly Wage Rates in the Western Balkans (€)
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Note: The figures are based on data from 2018.