Pyramid Schemes in Eastern Europe

▪ 1998

      For many citizens of postcommunist Eastern Europe in the 1990s, enhanced intellectual and political freedom paled in comparison with the opportunity to accumulate wealth. Exposure to Western European and North American consumer culture opened up a new world of possibilities to those who had languished under inefficient state-run economies. In their haste to embrace the benefits of the free market, however, some of the fledgling capitalists of Eastern Europe found themselves vulnerable to one of the oldest con games in the book: the pyramid scheme.

      While the structure of individual pyramid schemes varies, the basic premise is that a person gives those managing the scheme a set sum of money and is promised a huge financial return on the "investment." The managers never actually invest the money. Instead, the person is repaid from the money received from the next people to get involved in the scheme, and they in turn are repaid from the funds invested by those who follow them. For such a plan to work, there must be a continuous flow of capital from new investors, for once the cash flow has stopped, no more money can be paid out.

      The promise of incredible returns on a relatively small amount of money can prove to be a strong lure for unsophisticated investors. Nowhere was this more evident in 1997 than in Albania, which had emerged from communism as the poorest nation in Europe. Foreign aid and economic-reform programs had seemingly started the country on the road to a market economy, but Albania's lack of strong financial institutions provided an ideal environment for pyramid schemes to flourish. By 1996 individual investors—often the people least able to afford it—had invested more than $1 billion in such plans.

      By 1997 the inflow of money had decreased, the pyramid schemes were collapsing, and Albanians who had invested their life savings found themselves destitute. In desperation they turned their anger on the government, blaming the administration of Pres. Sali Berisha for failing to impose regulatory controls. The nation faced anarchy as armed mobs took to the streets, and there was fear that the violence in Albania could spread beyond its borders. Berisha froze the assets of the schemes and ordered the resignation of Prime Minister Aleksander Meksi. The damage had been done, however, as the government could not order financial compensation without spurring hyperinflation. The deployment of an Italian-led peacekeeping force in April stabilized the political situation to a degree but could do little to repair the economic devastation.

      These photographs capture scenes in the Albanian seaport of Durrës. They were taken by James Nachtwey, whose work has appeared in many international publications.

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