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Questionable Economic Results No Justification For Signing Protocols

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  • Questionable Economic Results No Justification For Signing Protocols

    Questionable Economic Results Do Not Provide Justification For Signing
    The Turkey-Armenia Protocols
    Asbarez
    Jan 8th, 2010


    BY ARA KHANJIAN

    Those who support the Armenia-Turkey Protocols claim that, when Turkey
    lifts the blockade, Armenia will experience a significant amount of
    economic gain, which will reduce poverty.

    This article questions this claim. It argues that when Turkey opens
    the border, economic gains to the consumers, theoretically, could be
    positive; however its extent would be questionable. The article argues
    that open borders would hurt Armenian producers who could not compete
    with subsidized and protected Turkish products, that the open borders
    would cause just a modest increase in Turkish imports and finally, in
    order to generate economic development and reduce poverty, it is much
    more important for Armenia to implement domestic reforms than for
    Turkey to the lift the blockade.

    1. Will Armenian consumers benefit when Turkey lifts the blockade?

    The answer is maybe. Currently Turkish products are imported through
    Georgia. When Turkey opens the borders, Turkish products will be able
    to enter Armenia directly from Turkey and the transportation cost will
    go down. Therefore the Armenian businesspeople who are importing the
    Turkish products will be able to bring them to Armenia at a lower
    cost. Economic theory assumes that there will be competition among
    importers and the price of Turkish imported goods will go down. In
    this scenario the Armenian consumer will benefit; however the problem
    is that there is no guarantee that there will be competition among
    importers. There is the possibility that a few oligarchs might control
    the major imports through Turkey. In that case the Armenian
    monopolists will be able to keep prices at the same level and the
    benefit of lower transportation cost will go to the powerful rich
    importers, instead of the consumers. Therefore there is no guarantee
    that there will be consumer surplus and that consumers will benefit
    from open borders.

    >From around 2003 to early 2009 when the value of the Armenian money
    Dram (AMD) was going up and appreciating, economic theory predicted
    that the prices of imported goods in AMD will go down. However the AMD
    prices of many imported goods did not go down or their decrease was
    insignificant; therefore the benefit of appreciated AMD went to the
    powerful rich importers, instead of the Armenian consumers and the
    poor. Armenia could experience the same, when the borders with Turkey
    are opened.

    2. The lifting of the blockade would hurt Armenian producers who could
    not compete with subsidized and protected Turkish products

    During June 2009 in Yerevan the ARF Bureau published an excellent
    report on the impact of the opening of the Turkish border on different
    economic sectors in Armenia. The report provides detailed information
    about both Turkish and Armenian economic sectors. [1]

    The information of this section, is based on the information available
    in this report.

    We could divide Armenian producers into two groups: First, large
    companies producing energy and raw materials such as copper. Most of
    Armenia's exports are based on raw materials. This group will be
    affected very little from the opening of the Turkish border. The
    second group could be represented as small and medium size producers,
    producing for the domestic markets, mainly in the agricultural and
    food production sector. It is expected that the cheap Turkish imports
    would hurt this second group of Armenian producers and some of them
    would go bankrupt. A major advantage of Turkish producers is the
    amount of government support that they receive. It is safe to say that
    the Turkish government supports its domestic producers more than
    Armenia's government supports producers in Armenia in three different
    ways: protecting domestic production, subsidizing domestic production
    and promoting exports.

    Protecting domestic production: Turkey protects domestic production
    from imports through higher tariffs and quotas than Armenia. In
    Armenia, many goods don't have import tariffs and the highest tariff
    is 10 percent, while in Turkey the average tariff is 10 percent and
    about 1/5 of the goods have tariffs higher than 10 percent. A major
    sector that is protected is the agricultural sector. Relative to
    Turkey, Armenia has significantly fewer import restrictions. When
    Turkey lifts the blockade this inconsistency must be addressed.

    Government subsidies: In Turkey there are many state programs and
    agencies that provide state support and subsidies to local producers.
    Farmers are supported through law interest loans, and other subsidies,
    such as funds to buy fuel and fertilizer. When market prices of
    certain agricultural goods, such as olive oil, cotton, wheat etc. go
    down significantly, the government subsidizes their producers. Turkey
    reduces the tariffs and restrictions on imported goods that are used
    as inputs to produce goods in Turkey. These measures act as subsidies
    to the local producers. Also, Turkey spends relatively much more on
    research and development than Armenia, which could give it an
    advantage in the long run. Armenia's government can't afford to
    provide so many subsidies to its producers; therefore when Turkey
    lifts the blockade Armenian production will be vulnerable to Turkish
    imports.

    Promoting exports: A Turkish government agency called Trade Promotion
    Center is the main organization through which the state promotes
    exports. This center achieves its goal through promoting research and
    development, providing and publishing information about trade,
    managing plans for exports and promoting trade through
    intergovernmental relations. The government also promotes exports
    through reduction in taxes and subsidies. Sixteen product groups, such
    as eggs, honey, processed fish, etc., receive export subsidies from 10
    percent to 20 percent of their total value.

    The Turkish government promotes exports through subsidized loans. In
    1987 The Turkish government created a special bank called Eksimbank,
    to finance and support businesses that export goods. Its goals are to
    increase the volume of Turkish exports, to find new international
    markets for Turkish exports, to diversify the Turkish export goods and
    to support the businesses that cooperate with Turkish exporters, their
    investors or foreign partners. This bank provides loans with low
    interest rates to these entities.

    It is amazing that the government of Armenia still advocates
    unrestricted markets and justifies the signing of the protocols by
    arguing that the protocols are promoting free markets, given the fact
    that the Turkish government does not just rely on free markets and is
    actively involved in the economy,

    3. The lifting of the blockade will cause a modest increase in Turkish imports

    transportation cost will go down, when Turkey ends the blockade and
    Turkish imports start arriving to Armenia directly instead of through
    Georgia. This will increase the amount of Turkish products that would
    be competitive in Armenia. In 2007 Beilock and Torosyan estimated that
    the lifting of the blockade would increase imports from Turkey by
    about 50 percent. [2]

    During 2008, according to the National Statistical Services of the RA,
    armstat.am, imports originating from Turkey represented just 6.1
    percent of Armenia's total imports. Therefore a 50 percent increase of
    a small percentage of Armenia's imports should not have a major impact
    on the standard of living of the population and poverty, contrary to
    the claims of the supporters of the Protocols. It is interesting to
    note that Armenia has open borders with Iran and Georgia; however the
    level of imports from these two neighbors is very modest. The imports
    from Iran represent 4.6 percent of total imports, while imports from
    Georgia represent just 1.1 percent of total imports. This implies that
    open borders do not necessarily generate high levels of trade.

    If the powerful rich Armenian oligarchic importers artificially keep
    the prices of Turkish products high, then the gains of the cheap
    Turkish imports would go to the rich Armenian oligarchs, instead of
    the Armenian consumers. In this case the Armenian consumers would gain
    very little from the lifting of the blockade, while the Armenian
    producers would lose significantly, generating a net overall economic
    loss.

    4. For the reduction of poverty in Armenia, the improvement of the
    domestic economic and social environments is much more important than
    the lifting of the blockade

    If the government and the leadership of Armenia are really concerned
    with the reduction of poverty in Armenia, then instead of wasting
    energy on lifting the Turkish blockade, which will have debatable
    economic impact on the standard of living, they should use their
    resources to implement domestic reforms, such as:

    1. Reduce the power of rich oligarchic monopolists and promote genuine
    competition in Armenia. We could argue that the increase in the level
    of competition in the Armenian markets is much more important for the
    development of the economy, than the lifting of the Turkish blockade.3

    2. Reduce the level of corruption, bureaucratic obstacles and shadow
    economy. Improve the legal system. These measures will make it
    possible for Armenian small and medium size businesses to thrive and
    contribute to the generation of jobs in Armenia. This will also
    increase the tax revenues of the government, which are relatively very
    low compared even to the other former Soviet republics. With higher
    tax revenues, the government will be able and should: [3]

    Build public infrastructure in agriculture such as: roads and water
    resources. Armenia should increase productivity and competitiveness of
    the agricultural sector. We should reduce the sector's dependence on
    the climate, improve irrigation, provide financing to the farmers,
    improve marketing etc.
    Improve the productivity of the Armenian economy in general. This
    could be achieved by increasing expenditures in education, research
    and development, health care and the infrastructure of the country,
    such as transportation, electricity, irrigation, communication,
    internet access, etc.,
    Improve pensions, housing and safety nets for the poor.
    All these measures would generate economic development and reduce
    poverty. They would increase the standard of living of the people and
    not just the living conditions of the upper middle class and the rich.
    [4]

    In conclusion, dubious economic results do not provide justification
    for signing the Turkey-Armenia protocols, which will confirm and
    accept that Kars, Ardahan, Massis, Ararat and the remaining Armenian
    lands occupied by Turkey are Turkish land, which will generate
    directly or indirectly doubts about the Armenian Genocide and which
    could endanger Karabakh.

    Footnotes
    _____________________________ ___
    1. Download the ARF Bureau economic report HERE.

    2. Karine, Torosyan and Richard Beilock (2007). `A Phased Strategy for
    Opening Armenia's Western Border.' Armenian Journal of Public Policy,
    Special Issue.

    3. During December 2009, The Civilitas Foundation in Armenia conducted
    a poll through its web site and 88% of the respondent `think that
    domestic reforms will have a better influence on the economy' than the
    lifting of the blockade. See the poll results.

    4. Read a very good article by Serouj Aprahamian and Allen Yekikian,
    `In Who's Interests? The Political Economy of Armenia-Turkish
    Relations,' Asbarez, December 28, 2009. This is an excellent
    investigative reporting and analysis of the economic interests of the
    ruling class in Armenia.
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