For many ex-socialist states, the rapid transition to a free-market economy was a calamity. In contrast to slower and more successful transformations, like that of China, the nations of Eastern Europe inaugurated their market economies with deep depressions and high inflation. Some of the blame for the disastrous ‘shock therapy’ that characterized the transformation of these economies has been levied at its breakneck pace. However, such nations also lacked the strong public institutions even free-market systems require and public unfamiliarity with market economies also hampered transition.

           As just one example, and a topic for another day, many Eastern Bloc countries privatized state enterprises in the 1990s by issuing shares directly to the public, so-called ‘voucher privatization.’ Ordinary people, unfamiliar with the concept, sold these shares for next to nothing to a handful of speculators who would go on to become today’s oligarchs in countries like Russia.  

           Perhaps still more tragic was the troubled economic transition experienced by Albania, whose transformation was shaken by numerous Ponzi schemes in which much of the country was invested. The story is as grim as it is peculiar. Their simultaneous collapse in 1996-97 went on to cost many their savings, with invested sums totaling around 30% of the country’s GDP, and provoked unrest that cost thousands their lives. Tracing the story of this unusual disaster involves exploring the history of a nation completely unknown to many. 

Transition from Communism

           During most of its time under communism, Albania was ruled by Enver Hoxha, a man whose fractious relations with other socialist heads of government had great implications for the country. When the Soviet Union’s foreign affairs were guided by Khrushchev’s policy of ‘peaceful coexistence’ with the West, the more revolutionary Hoxha drifted into the Chinese orbit and became firmly Maoist. However, two decades later, following warming relations between the US and China, Hoxha came to regard the Chinese as revisionist sellouts as well.  

           The result was reduced aid from abroad as Soviet and Chinese patronage dwindled, a more absolute application of socialism at home, and an emphasis on self-reliance. Albania would not therefore experience the softer forms of socialism to be found elsewhere in Eastern Europe. There was none of the ‘goulash communism’ of Hungary or the worker autonomy and self-management of Yugoslavia. The result was that just as communist regimes were collapsing around it in the late 1980s, Albania was particularly isolated and removed from even the most basic familiarity with free-market economics.

           Albania’s transition to capitalism however, started out rather like that of its neighbors, which is to say it came about dismally. The country’s GDP roughly halved from the late 1980s to the early 1990s, a decline not far out of line with that experienced by other socialist states in transition, such as Ukraine, or even that being experienced by Venezuela today. However, Albania’s political transformation was somewhat delayed. Despite the abandonment of socialism underway in neighboring countries, the ruling Party of Labour of Albania (soon to be rebranded as the Socialist Party) actually won the first free elections held in decades, in 1991, though this government was short-lived.

           Nonetheless, the transition to a market economy looked better in Albania than elsewhere, at least at first glance. By the mid-1990s, economic growth had resumed and inflation fell much faster than it did elsewhere, like in Russia for example. The Albanian state also embarked on a rapid privatization program after the Democratic Party of Albania defeated the Socialist Party in elections in 1992. However, disputed elections in 1996, which saw the incumbent Democratic Party government returned to power, created a fragile political situation. This set the stage for the coming Ponzi scheme mania and its disastrous aftermath.

           Before wrapping up this introduction, it is worth noting the north-south political divide revealed by these elections. The history goes back to the country’s socialist past and Enver Hoxha in particular. Hoxha, who hailed from the southern city of Gjirokastër, is often accused of having favored the region at the expense of the neglected north. Thus, Albania’s south recalls the socialist years differently; the region was, and remains to this day, more leftist and tended to support the Socialist Party. Northern Albania, by contrast, was firmly Democratic Party territory.  

Banks and Pyramid Schemes

           With the historical and political context out of the way, we can turn to the topic at hand. An important characteristic of Albania’s early market economy was its underdeveloped financial sector. In the early 1990s, the country’s banking system was composed almost exclusively of three state banks. These banks were not established with personal banking in mind and were judged to be unreliable; it took about two weeks to transfer money between accounts held at different banks.

           An underdeveloped banking sector was a common feature of socialist economies transitioning to a capitalist system. The situation was not too dissimilar to China’s, whose state-run banks often lacked strong personal banking offerings in the past. Unlike in China though, popular distrust of the state banks was more widespread and Albania had no conventional private alternatives. This was one feature of Albania’s economy that created a perfect environment for the proliferation of pyramid schemes.

           Initially starting small, numerous Ponzi schemes were launched by dubious schemers in the early to mid-1990s. They were established as companies that accepted customer deposits without being licensed to do so. They promised high returns, starting at around 4-5% per month when they launched and then rising from there. Of course, Ponzi schemes simply use new deposits to meet interest payments as opposed to lending and using investment proceeds. However, these companies did invest in some high-profile publicity-generating ventures; one such project was a new hotel in the Albanian capital, Tirana. A legendary example was that of the Xhafferi company, one of the more infamous of these pyramid schemes.

           The owner of the Xhafferi company used deposits he collected to buy the local soccer team of a small Albanian city, his hometown of Lushnja. Customer deposits were then used to hire a celebrity coach, Mario Kempes, an Argentine World Cup star. That such a famous player from abroad would become the manager of a curiously financed small team in Albania was foreboding.

           Nonetheless, these high-profile investments made the schemes look legitimate to others, feeding the frenzy. Thus, the Xhafferi company and others drew large numbers of depositors, many funded with remittances from relatives abroad as Albania at this time experienced a wave of emigration. It is hard to overstate how quickly and widespread the schemes grew; it was a national craze. Even before reaching their height, total deposits in the schemes ranged anywhere from $300 million to $1 billion. That was at least $500 for every family in Albania, a country whose GDP per capita at the time stood at around $750.

“I don’t know how it’s possible for them to pay these interest rates, but everyone was depositing money with them” – words of an anonymous Tirana shopkeeper

Government Inaction

           Despite the obvious cause for concern, government intervention was absent when it could have curtailed the mania. There were no investigations into the Ponzi schemes despite allegations of fraud and of funding criminal enterprises. Indeed, if running a Ponzi scheme wasn’t enough, many of these companies financed organized crime. Among the rackets backed by pyramid scheme money was the smuggling of goods into Yugoslavia, which was then subject to UN sanctions during the Yugoslav Wars.

           Questions around where regulators’ jurisdictions began and ended prolonged inaction. It did not help that some of these schemes were run by powerful individuals. For example, the Xhafferi company was run by a former military general. The operators of the pyramid schemes also made contributions to the ruling Democratic Party. Thus, while there were warnings made by international institutions such as the IMF, they were ignored by the Albanian government.

           There is no doubt that the state failed its people by neglecting to curtail the schemes. However, hindsight is 20/20 and as is often the case, circumstances may have looked okay at the time. One might still have been optimistic of Albania’s economic trajectory and it helped that the government was not judged to be entirely incompetent. To start, the administration of then President of Albania, Sali Berisha, did manage to avoid some of the disasters faced by other ex-socialist states, such as high inflation, and was marshalling significant foreign aid and investment. The country was also stable, unlike its neighbor Yugoslavia to the north.

           Regardless, the government lacked the motivation to act and because of sharp political divisions and the disputed elections of 1996, it may also have lacked the legitimacy required to successfully shut down the ventures, which looked to be making people rich. 

Mania and Meltdown       

           Faced with no state intervention, the Ponzi schemes grew to mammoth proportions in 1996; this coincided with some of the first signs of imminent collapse. First, the few real projects backed by the pyramid schemes started to go belly up. Among these were the criminal enterprises mentioned earlier; for example, smuggling revenue fell when UN sanctions against Yugoslavia were suspended. To make interest payments on existing deposits, the Ponzi scheme companies raised their promised interest rates to attract new deposits. Interest rates grew from a norm of round 4-5% a month to 6-10% monthly, or over-100% rates in annual terms. All this in a country with modest inflation, which stood at around 5% in 1996.

           With rising interest rates, the schemes continued to succeed in attracting fresh deposits for a while. Two companies alone, Xhafferi and Populli, had over a million depositors by 1996. Keep in mind that all this took place in a country of just three and half million people, and in terms of financial liabilities, neither of these was even the largest of the Albanian Ponzi schemes. The financial charade had become a nationwide frenzy in which nearly everyone was partaking themselves or knew many who were. Driving the mania was the fact that each of these schemes needed to one-up the other in terms of interest rates offered or else they would face withdrawals from depositors moving to other funds. This factor accelerated the collapse of the companies.

           It is worth making the intriguing point that competitive dynamics among the pyramid schemes only furthered their instability. Though unlikely, it is at least conceivable that a single scheme can be unwound in a controlled, even if dubious, manner. However, this requires keeping promised returns under control and making at least some real investments whose reported costs or losses can be inflated to obscure outflows that were actually due to distributions to depositors and the schemer. In Albania though, multiple competing schemes caused liabilities, and their cost, to balloon uncontrollably as they competed for deposits. For example, near the end of 1996, Populli was offering rates of 30% a month and Xhafferi offered 44%. By this point, the likely size of the schemes’ liabilities stood at over $1 billion.

           In the winter of 1996-97, the house of cards tumbled down; the resulting panic and anger would go so far as to destabilize the country. The first company to miss an interest payment did so in late 1996; within three months, they had all collapsed. In February 1997, the largest of these schemes, Vefa Holdings, announced by megaphone from their headquarters in Tirana an unwinding involving large losses to investors. The savings of a large swath of the population was quickly evaporating. 

           By that time, the crisis was already threatening peace in Albania. Protests started peacefully in Lushnja, the same city where the Xhafferi company’s owner bought the local soccer club. Despite the government promising otherwise, substantial force was used against protestors and the right to protest was curtailed as mobs stormed armories and stole weapons. From this point on, the protests turned violent, morphing into part-anarchy, and due to the north-south political and ethnic divide, the unrest also turned into a peculiar kind of civil war. Ultimately, the disorder in Albania caused upwards of 2000 deaths by the end of 1997. The crisis prompted a UN intervention as well as new elections. With that, an unusual chapter in Albania’s history and just one example of enormous, ill-fated, and outright fraudulent financial schemes came to an end.


           By reason of its scale, the story of Albania’s Ponzi schemes is an especially distasteful and mind-boggling example of financial madness. Yet, its lesson is more practical than its bizarreness would suggest. It reveals just how destructive such dubious schemes could be if allowed to flourish in ripe conditions. A competent and prudent government, a financially literate public, and healthy conventional investment and banking practices all could have stemmed the frenzy. Perhaps any one of them alone could have prevented the mania that would cost over a million people their money, many of them losing everything they owned. That the Albanian pyramid schemes were fraudulent should have been obvious, but in the years since, more elaborate hazards have been allowed to fester in still more developed financial systems. Follies can captivate even the sophisticated and intricacy only increases the need for a healthy skepticism and close scrutiny of unusual financial schemes.

Further Reading

1.     Gumbel, Andrew. “Albania on Brink as the Pyramid Totters.” The Independent, Independent Digital News and Media, 2 Feb. 1997.

2.     Hockstader, Lee. “Albanian Dreams Shatter in Pyramid Schemes’ Fall.” The Washington Post, WP Company, 2 Feb. 1997.

3.     Jarvis, Christopher J. “The Rise and Fall of the Pyramid Schemes in Albania.” IMF Working Papers, vol. 99, no. 98, 1999.

4.     Jusufi, Islam. “Albania’s Transformation since 1997: Successes and Failures.” Croatian International Relations Review, vol. 23, no. 77, 2017, pp. 81–115.

5.     “The Pyramid Crisis in Albania Examined.” Culture Trip, The Culture Trip Ltd., 9 Feb. 2017.

6.     “The Pyramid Scheme That Collapsed a Nation.” Rare Earth, YouTube, 13 Oct. 2018.

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