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ARMENIA'S ECONOMY SINCE INDEPENDENCE
by David Grigorian
hetq
22:04, January 24, 2012
International Monetary Fund (IMF) and Policy Forum Armenia (PFA)
The article was first published at the London-based Foreign Policy
Centre.
Foreword
A common analysis of Armenia's economic performance since independence
typically focuses on the limitations imposed by geography and
geopolitics and mostly ignores, or at best glosses over, the failures
of governance and policy to deliver on what could have reasonably
been expected. Proponents of such views fail to provide conclusive
evidence of trade-imposed barriers to growth and progress in Armenia,
or explain why other countries with similar governance characteristics
but unhindered external trade remain poor. While I recognize the
limitations imposed by the geopolitics and security considerations on
the economic and social outcomes in general and in the Armenian context
in particular, I am of the view that policymakers in Yerevan since
1991 have imposed additional constraints that became significantly
more binding than geography and security and adversely influenced
economic and social outcomes. The remainder of this article builds
on this premise and highlights the specific policy failures that,
in my view, are to be blamed for the current state of economic and
social affairs in Armenia.
Armenia's Economic Performance
Armenia's path since independence from the Soviet Union in 1991 can
be broken down into three rather distinct periods as follows: (i)
1991-99 (ii) 2000-07, and (iii) 2008 to present day. I highlight the
specific features of these periods in Armenia's independent history
in detail below.
Post-Transition Progress (1991-99)
Armenia's return to growth in 1994-the first among the former Soviet
republics still recovering after the collapse of the USSR-was nothing
short of remarkable and was achieved while the economy was recovering
from the impact of a devastating earthquake and a full-blown war with
the neighboring Azerbaijan.
Growth was underpinned by speedy and largely successful small- and
medium-size state-owned enterprise and land privatizations. Yet the
failure to create conditions for proper functioning of the markets
and the lack of a meaningful role for the state became key constraints
for progress thereafter. Ongoing conflict in Nagorno Karabakh and the
legacy of a highly industrialized but by now mostly obsolete economic
structure did not help.
Here is a short list of factors that proved critical and have
influenced much of what had happened next:
~UFirst signs of the nouveau riche concentrating sizable wealth and
getting close to economic decision-making have emerged.
~UThe seeds of authoritarian governance were effectively sown.
Generals, returning from the front lines, were getting increasingly
powerful and had a major role to play in the hotly contested and
violent 1996 election.[1] ~UThe promise to get the Diaspora involved
meaningfully in rebuilding Armenia was effectively reversed.[2] The
assassination of then Prime Minister Vazgen Sargsyan-a controversial
figure, who nevertheless is widely seen as perhaps the only hope
Armenia had for building a strong statehood-and six others on October
27, 1999 in the parliament ended this period. The very high levels
of public buy-in and social cohesion, which were present during the
early 1990s but almost disappeared during the post-war reconstruction
period, surfaced during V. Sargsyan's short tenure in office, to
never re-appear again.
Qualitative Stagnation (2000-2007)
The period coincides with the rule of Robert Kocharyan, whose
particular political skills allowed him to consolidate power after the
October 1999 assassinations and played a dominant role in this handling
of both political and economic affairs in the country. This period
witnessed double digit growth of GDP and macro-financial stability,
but was marred by much of the same lack of regard for good governance
and properly functioning markets.
The construction sector, which was the main engine of growth during
this period, absorbed sizable amounts of credit and labor resources,
driving interest rates, exchange rate, and wages up throughout the
rest of the economy. Under these conditions and without effective
policy intervention, the economy failed to diversify despite very
strong signs of promise shown by some sectors (most notably, IT and
agro-processing), effectively preparing the ground for the dramatic
decline of GDP in 2009 (see below). Remittances and other transfers
from abroad, which fueled this construction boom, complicated the
macroeconomic management and created adverse dependence at the
microeconomic/household level.
On the budgetary side, the period is characterized by a highly
pro-cyclical fiscal policy, with budget being in deficit even during
years of double digit growth. Despite this, Armenia's spending on
health, education, and public investment was among the lowest in the
world measured as percent of GDP. Much of this was underpinned by poor
tax revenue collection, itself a function of the presence of powerful
oligarchs that were outside of the reach of the tax authorities. These
oligarchs have functioned under the direct patronage of country's
political leadership and grew more influential in public life and
economic decision making. The resulting monopolies in production
and import of key commodities curtailed competition, limited growth,
and resulted in higher prices.
"In the doldrums" (2008-present)
This period is characterized by political upheaval of 2008 and
the impact of the global crisis. The poor crisis preparedness and
inadequate policy mix during 2008-09 (with disproportionate reliance
on externally financed fiscal stimulus compared to exchange rate and
structural policies) resulted in a 14.2 percent decline in GDP in
2009, one of the worst performances in the world since the beginning
of the current crisis.[3] After 4 years, real GDP is still below its
2007 level and is projected to grow only modestly in the medium term,
with sizable headwinds from Europe likely to undermine this outlook.
While some attempts were made to raise the level of tax-to-GDP,
these efforts faced resistance from the oligarchs and the decline
in economic activity. This put most of the burden of the stimulus on
foreign borrowing. Public debt, while still largely on concessional
terms, has reached alarming levels and composition (in excess of
40 percent of GDP by end-2011 from 16 percent as of end-2008, with
close to 90 percent of it denominated in foreign currencies), with
a sizable chunk of repayments scheduled for 2012-14.
Here are some highlights that should help get a better sense of the
governance and policy landscape in the country at present:
~UState capture, the control of the economy by special interest groups,
has gotten worse. Economy remains highly concentrated in the hands
of people directly/indirectly involved in politics.
~UMigration, by now of the middle class, has intensified; [4]
inequality and poverty are rising.
~UDevelopmental agenda is lacking and any future plans to vitalize
the economy will face an overvalued exchange rate, corruption, uneven
playing field, and weak property rights.
Overall, it is unclear as to where the potential growth could be coming
from going forward, assuming the same quality of governance, ongoing
political polarization and social discontent following the March 1-2,
2008 killing of demonstrators, and continued disengagement of the
Diaspora (that may have acted as a catalyst for foreign investment and
a champion for better governance). In the meantime, much of the same
policies are being pursued and population is growing frustrated by the
day with the regime's handling of economic and social affairs and the
brave face it puts while explaining its failure to deliver on promises.
In conclusion
Despite the mounting challenges on almost every important front, there
remain grounds for optimism. Clearly, the experience of early 1990s,
with progress made under the most severe of conditions, as well as
the still sizable human capital and strong commitment to "making
it work" among local population and the Diaspora, provide hope for
the economy's future, given better governance. Also, experience of
neighboring Georgia, with swift improvement in governance and the
elimination of retail corruption, is very encouraging. All in all,
with a clean and democratic political leadership that can unite all
constructive forces and help attract investments and talent from the
Diaspora; a technocratic government that understands how the modern
world functions and offers a meaningful way forward; and a strong
public buy-in to underpin the reform efforts, there is practically
no limit to what the country can achieve despite the constraints that
are imposed by geography and security.
But we are not there yet and time is running out quickly given the
scale and the scope of challenges posed by the pervasive nature
of whole-sale corruption, adverse demographic developments, and
challenging geopolitics. The main directions of the effort should be
aimed at de-politicizing economic decision-making and building a vision
as well as development-intensive policy capacity. The alternative to
following this path is worrisome, if not outright scary.
David Grigorian is a Senior Economist at the International Monetary
Fund's Monetary and Capital Markets Department and a co-founder of
Policy Forum Armenia, a virtual think tank with world-wide membership.
He holds a Ph.D. in Economics from the University of Maryland at
College Park and has published on a wide range of issues including
growth and institutions, prices and fiscal policy, remittances,
capital markets, and banking.
References
Amnesty International (1996). "Armenia: Amnesty International
Calls for Investigations into Beatings of Opposition
Supporters Following Election Protests." Available from:
http://archive.amnesty.org/library/Index/ENGEUR540021996?open&of=ENG-ARM.
Policy Forum Armenia (2008a). "Armenia's 2008 Presidential Election:
Select Issues and Analysis," PFA Special Report. Available from:
www.pf-armenia.org/reports.
Policy Forum Armenia (2008b). "Implications of the World Financial
Crisis for Armenia's Economy," PFA Special Report. Available from:
www.pf-armenia.org/reports.
Policy Forum Armenia (2010). " Armenia-Diaspora relations: 20 Years
Since Independence," a State of the Nation Report. Available from:
www.pf-armenia.org/reports.
--------------------------------------------------------------------------------
[1] While no demonstrators were killed, Amnesty International (1996)
describes the use of force and repressions against civilians in the
aftermath of the election, where the incumbent received 51.75 percent
of the vote, barely sufficient to avoid the second round. PFA (2008a)
puts those developments in the context of the prevailing political
culture of the time.
[2] See PFA (2010) for an extensive discussion on this issue.
[3] For a discussion of alternative policies available to the
government in the sake of the crisis, see PFA (2008b).
[4] While still largely anecdotal, some evidence of this began
surfacing following the release of the US diplomatic cables from the
Embassy in Yerevan describing the phenomenon and providing specific
examples.
by David Grigorian
hetq
22:04, January 24, 2012
International Monetary Fund (IMF) and Policy Forum Armenia (PFA)
The article was first published at the London-based Foreign Policy
Centre.
Foreword
A common analysis of Armenia's economic performance since independence
typically focuses on the limitations imposed by geography and
geopolitics and mostly ignores, or at best glosses over, the failures
of governance and policy to deliver on what could have reasonably
been expected. Proponents of such views fail to provide conclusive
evidence of trade-imposed barriers to growth and progress in Armenia,
or explain why other countries with similar governance characteristics
but unhindered external trade remain poor. While I recognize the
limitations imposed by the geopolitics and security considerations on
the economic and social outcomes in general and in the Armenian context
in particular, I am of the view that policymakers in Yerevan since
1991 have imposed additional constraints that became significantly
more binding than geography and security and adversely influenced
economic and social outcomes. The remainder of this article builds
on this premise and highlights the specific policy failures that,
in my view, are to be blamed for the current state of economic and
social affairs in Armenia.
Armenia's Economic Performance
Armenia's path since independence from the Soviet Union in 1991 can
be broken down into three rather distinct periods as follows: (i)
1991-99 (ii) 2000-07, and (iii) 2008 to present day. I highlight the
specific features of these periods in Armenia's independent history
in detail below.
Post-Transition Progress (1991-99)
Armenia's return to growth in 1994-the first among the former Soviet
republics still recovering after the collapse of the USSR-was nothing
short of remarkable and was achieved while the economy was recovering
from the impact of a devastating earthquake and a full-blown war with
the neighboring Azerbaijan.
Growth was underpinned by speedy and largely successful small- and
medium-size state-owned enterprise and land privatizations. Yet the
failure to create conditions for proper functioning of the markets
and the lack of a meaningful role for the state became key constraints
for progress thereafter. Ongoing conflict in Nagorno Karabakh and the
legacy of a highly industrialized but by now mostly obsolete economic
structure did not help.
Here is a short list of factors that proved critical and have
influenced much of what had happened next:
~UFirst signs of the nouveau riche concentrating sizable wealth and
getting close to economic decision-making have emerged.
~UThe seeds of authoritarian governance were effectively sown.
Generals, returning from the front lines, were getting increasingly
powerful and had a major role to play in the hotly contested and
violent 1996 election.[1] ~UThe promise to get the Diaspora involved
meaningfully in rebuilding Armenia was effectively reversed.[2] The
assassination of then Prime Minister Vazgen Sargsyan-a controversial
figure, who nevertheless is widely seen as perhaps the only hope
Armenia had for building a strong statehood-and six others on October
27, 1999 in the parliament ended this period. The very high levels
of public buy-in and social cohesion, which were present during the
early 1990s but almost disappeared during the post-war reconstruction
period, surfaced during V. Sargsyan's short tenure in office, to
never re-appear again.
Qualitative Stagnation (2000-2007)
The period coincides with the rule of Robert Kocharyan, whose
particular political skills allowed him to consolidate power after the
October 1999 assassinations and played a dominant role in this handling
of both political and economic affairs in the country. This period
witnessed double digit growth of GDP and macro-financial stability,
but was marred by much of the same lack of regard for good governance
and properly functioning markets.
The construction sector, which was the main engine of growth during
this period, absorbed sizable amounts of credit and labor resources,
driving interest rates, exchange rate, and wages up throughout the
rest of the economy. Under these conditions and without effective
policy intervention, the economy failed to diversify despite very
strong signs of promise shown by some sectors (most notably, IT and
agro-processing), effectively preparing the ground for the dramatic
decline of GDP in 2009 (see below). Remittances and other transfers
from abroad, which fueled this construction boom, complicated the
macroeconomic management and created adverse dependence at the
microeconomic/household level.
On the budgetary side, the period is characterized by a highly
pro-cyclical fiscal policy, with budget being in deficit even during
years of double digit growth. Despite this, Armenia's spending on
health, education, and public investment was among the lowest in the
world measured as percent of GDP. Much of this was underpinned by poor
tax revenue collection, itself a function of the presence of powerful
oligarchs that were outside of the reach of the tax authorities. These
oligarchs have functioned under the direct patronage of country's
political leadership and grew more influential in public life and
economic decision making. The resulting monopolies in production
and import of key commodities curtailed competition, limited growth,
and resulted in higher prices.
"In the doldrums" (2008-present)
This period is characterized by political upheaval of 2008 and
the impact of the global crisis. The poor crisis preparedness and
inadequate policy mix during 2008-09 (with disproportionate reliance
on externally financed fiscal stimulus compared to exchange rate and
structural policies) resulted in a 14.2 percent decline in GDP in
2009, one of the worst performances in the world since the beginning
of the current crisis.[3] After 4 years, real GDP is still below its
2007 level and is projected to grow only modestly in the medium term,
with sizable headwinds from Europe likely to undermine this outlook.
While some attempts were made to raise the level of tax-to-GDP,
these efforts faced resistance from the oligarchs and the decline
in economic activity. This put most of the burden of the stimulus on
foreign borrowing. Public debt, while still largely on concessional
terms, has reached alarming levels and composition (in excess of
40 percent of GDP by end-2011 from 16 percent as of end-2008, with
close to 90 percent of it denominated in foreign currencies), with
a sizable chunk of repayments scheduled for 2012-14.
Here are some highlights that should help get a better sense of the
governance and policy landscape in the country at present:
~UState capture, the control of the economy by special interest groups,
has gotten worse. Economy remains highly concentrated in the hands
of people directly/indirectly involved in politics.
~UMigration, by now of the middle class, has intensified; [4]
inequality and poverty are rising.
~UDevelopmental agenda is lacking and any future plans to vitalize
the economy will face an overvalued exchange rate, corruption, uneven
playing field, and weak property rights.
Overall, it is unclear as to where the potential growth could be coming
from going forward, assuming the same quality of governance, ongoing
political polarization and social discontent following the March 1-2,
2008 killing of demonstrators, and continued disengagement of the
Diaspora (that may have acted as a catalyst for foreign investment and
a champion for better governance). In the meantime, much of the same
policies are being pursued and population is growing frustrated by the
day with the regime's handling of economic and social affairs and the
brave face it puts while explaining its failure to deliver on promises.
In conclusion
Despite the mounting challenges on almost every important front, there
remain grounds for optimism. Clearly, the experience of early 1990s,
with progress made under the most severe of conditions, as well as
the still sizable human capital and strong commitment to "making
it work" among local population and the Diaspora, provide hope for
the economy's future, given better governance. Also, experience of
neighboring Georgia, with swift improvement in governance and the
elimination of retail corruption, is very encouraging. All in all,
with a clean and democratic political leadership that can unite all
constructive forces and help attract investments and talent from the
Diaspora; a technocratic government that understands how the modern
world functions and offers a meaningful way forward; and a strong
public buy-in to underpin the reform efforts, there is practically
no limit to what the country can achieve despite the constraints that
are imposed by geography and security.
But we are not there yet and time is running out quickly given the
scale and the scope of challenges posed by the pervasive nature
of whole-sale corruption, adverse demographic developments, and
challenging geopolitics. The main directions of the effort should be
aimed at de-politicizing economic decision-making and building a vision
as well as development-intensive policy capacity. The alternative to
following this path is worrisome, if not outright scary.
David Grigorian is a Senior Economist at the International Monetary
Fund's Monetary and Capital Markets Department and a co-founder of
Policy Forum Armenia, a virtual think tank with world-wide membership.
He holds a Ph.D. in Economics from the University of Maryland at
College Park and has published on a wide range of issues including
growth and institutions, prices and fiscal policy, remittances,
capital markets, and banking.
References
Amnesty International (1996). "Armenia: Amnesty International
Calls for Investigations into Beatings of Opposition
Supporters Following Election Protests." Available from:
http://archive.amnesty.org/library/Index/ENGEUR540021996?open&of=ENG-ARM.
Policy Forum Armenia (2008a). "Armenia's 2008 Presidential Election:
Select Issues and Analysis," PFA Special Report. Available from:
www.pf-armenia.org/reports.
Policy Forum Armenia (2008b). "Implications of the World Financial
Crisis for Armenia's Economy," PFA Special Report. Available from:
www.pf-armenia.org/reports.
Policy Forum Armenia (2010). " Armenia-Diaspora relations: 20 Years
Since Independence," a State of the Nation Report. Available from:
www.pf-armenia.org/reports.
--------------------------------------------------------------------------------
[1] While no demonstrators were killed, Amnesty International (1996)
describes the use of force and repressions against civilians in the
aftermath of the election, where the incumbent received 51.75 percent
of the vote, barely sufficient to avoid the second round. PFA (2008a)
puts those developments in the context of the prevailing political
culture of the time.
[2] See PFA (2010) for an extensive discussion on this issue.
[3] For a discussion of alternative policies available to the
government in the sake of the crisis, see PFA (2008b).
[4] While still largely anecdotal, some evidence of this began
surfacing following the release of the US diplomatic cables from the
Embassy in Yerevan describing the phenomenon and providing specific
examples.