by Haroutiun Khachatrian
According to the European Bank for Reconstruction and Development (EBRD), the Armenian economy is roaring.
Last year EBRD announced that Armenia joined the list of former Soviet republics that managed to regain the level of Gross Domestic Product (GDP) they had before the breakdown of the USSR. According to EBRD's annual Transition Report, Armenia has fully recovered from the catastrophic decline in the economy that, in the 1990s, had convinced some that independence was a bad idea.
EBRD was created by the European Union to assist market transition in the former socialist countries of Central and Eastern Europe. Its evaluation demonstrates that, by the single definition of economic stability, Armenia's transition has been a success.
By 2005, only six of 15 former Soviet republics had regained their Soviet-era economic might. Uzbekistan was the first, in 2001, followed by Estonia, Turkmenistan, Belarus, Kazakhstan, and then Armenia. The Central Asia countries' recovery was largely due to their natural oil and gas resources and to the fact that they did not suffer as great a decline as others. For example, the GDP of Kazakhstan has never been lower that 89 percent of its 1989 level. (Interestingly, though Estonia, Latvia and Lithuania have joined the EU, they have not yet recovered to their previous levels. Their recovery is expected by the end of this year.)
In 1993, and in the grip of the Karabakh War, Armenia plunged to only 42 percent of its 1989 GDP. It was the only republic of the six that have recovered which fought a post-breakup war. The recovery to its present-day economic growth of 12.5 percent (double digits for the fifth consecutive year) has attracted the attention and admiration of international bodies, including the World Bank, which has branded Armenia the "Caucasian Tiger".
The "tiger", however, is still on the list of "poor" countries, due to its GDP of only $1,500 per person. This is double what it was six years ago, but still too little to move it from its undesirable category; nor does the official GDP count reflect the actual population numbers, which still are skewed by nearly one-fifth of the population having migrated in search of a better living.
APPLES AND ORANGES
The rapid recovery of the Armenian economy does not mean that its well-being matches Soviet times. Compared to 1990, when industry accounted for about 45 percent of GDP (down to about 20 percent now), today's economy is driven by services (about 37 percent, compared with about 23 percent 15 years ago). Indeed, industry is now the lowest contributor to the GDP, outdone by agriculture (21 percent) and construction (24 percent).
The service industry—from taxis to provision of household goods—predictably dominates Armenia's post-Soviet economy, as that sphere had been so poorly developed under socialism.
Meanwhile, the decline of industry has been the subject of strong dispute by politicians and experts who argue that Armenia should concentrate on recovering its position as an "industrial economy", which was a matter of pride for Armenians. And it is a valid argument, as goods produced by factories established for the welfare of the empire, properly reapplied, might now be competitive in the free market.
Standing in the way of industrial output, though, is the familiar obstacle: blockade. There is reasonable speculation, too, that goods produced for consumption by Soviet partner states might not meet standards of the international market and would therefore not be competitive.
Armenia was obliged to shift its production focus to spheres that would be less influenced by high-priced raw materials, transportation problems, and the loss of previous markets. The backbone of the Armenian industry now is not chemicals of the giant Nairit factory, nor machines once put out by the 10,000-employee Hayelektric plant. It is food processing (accountable for nearly half of the output of the processing industry), based on its dynamically developing agriculture, a pillar of the economy.
Mining and metallurgy come next. These sectors had a sizable share in Soviet Armenia and today have attracted significant foreign investment (from Germany, in copper and molybdenum production, and from Russia, in aluminum foil production).
The strong growth of the recent years was, to a large extent, due also to sharp growth in construction (up to 30 percent and more a year) of both housing and infrastructure. This is a basis for optimism as it indicates that investors see the country as a good haven for their cash. And finally, the service sector, as said, is expanding, including tourism.
In short, the economy of modern Armenia is not a replica of that of Soviet Armenia. In fact, Armenia would not have restored the level of its pre-crisis GDP, should it have tried to keep the structures of economy unchanged. Incredibly, having restored the pre-crisis GDP level in monetary terms, Armenia has become much less resource-dependent. The country presently consumes less than half of the electricity and about a third of the natural gas it consumed in the last years of the Soviet era. Its foreign cargo turnover in 2005 was 2.3 million tons, down from 19.3 million, 20 years earlier. The latter fact shows that, among others, the modern Armenian economy has become more self-sufficient; it produces more goods for the local, than for the external, market.
In other words, the economy of independent Armenia is, indeed, more independent; i.e., less dependent on external factors, than in the Soviet era. This is how the economy has met the above-mentioned challenges.
Not surprisingly, when asked to compare the economy of Armenia today with its Soviet era, James McHugh, the International Monetary Fund (IMF) resident representative in Armenia, said it is like comparing apples with oranges.
ECONOMY AND THE GOVERNMENT
he effectiveness of the government in Armenia's economic recovery has been mixed.
Having privatized most of the producing assets, (now over 80 percent of output is produced in the private sector), the government does not, at the same time, restrict itself to the role of an outside observer.
While it continues efforts to improve the business climate, making Armenia a more attractive site for investments, it remains true that government authorities—especially certain oligarchs—are usually the ones to profit from the country's economic growth.
Another important aspect is the role of the government in determining the pattern of the economy (or its "economic strategy"). The current pattern has flourished despite little design.
Many critics argue that the government should provide tax privileges to the spheres having "strategic importance" for the country (e.g., chemicals). The government rejects the idea, saying that privileges do not guarantee success, and, moreover, they can stimulate corruption.
Instead, the government seeks to eliminate technical obstacles.
Enhancement of precious stones is an example of how Armenian industry can prosper from government-aided low overhead.
Enough diamonds (worth $10s of millions) to keep several cutting and polishing factories working for several months can be imported to Armenia on a single flight.
Recognizing the value of Armenia's respected heritage in jewelry production, a few years ago Prime Minister Andranik Magarian initiated a bill that would exempt importers of precious stones from paying a Value Added Tax (VAT).
However, this was not a privilege, as it might seem at first sight. According to Armenian tax legislation, exports are free from VAT, but imports are not. So, diamond companies from Belgium, Israel, etc., were paying a VAT while importing the raw materials, then getting it back a few months later when the product was exported. The change in law simply cut out the paper work on the front end, and made Armenia's cutting and polishing industry—in which several thousand are employed—more attractive to clients.
In other sectors, such as information technology and tourism, similar government policies have sought to eliminate technical bottlenecks.
However, very recently, a new means of business support appeared in the form of government-supported small loan guarantees. This is a part of the government strategy of supporting small and medium business: the government guarantees bank loans up to 10 million drams (approximately $25,000). The program is targeted mostly to business in the provinces, where business activity is lower and unemployment is higher than in the capital (Yerevan is home to one third of the country's population, but provides slightly more than half of its production).
Finally, the post-Soviet Armenian governments have gotten good marks of another sort: effectively using foreign assistance. This assistance, both in grants and concession loans, has been provided by international financial organizations (mainly the IMF and the World Bank) along with their advisory assistance. The assistance was in fact the basis of the economic policy of the country during the last decade. In addition, many foreign countries have offered individual assistance programs, the United States being by far the largest single donor. During most of 1990s, Armenia was the third largest per capita recipient of American assistance (after Israel and Egypt).
The bulk of these funds was allocated to investments in infrastructure (roads, power lines, irrigation systems, etc.). The fact that Armenia was recognized as an effective steward of foreign assistance was a decisive factor for it to become one of the first countries eligible for the Millennium Challenge Award, the new vehicle of U.S. assistance proposed by President George W. Bush. (In contrast, Georgia lost IMF assistance in 2003, one condition that cultivated the "Rose Revolution").
If Armenia meets the Americans' criteria of just rule of law, it stands to receive $235 million over several years for programs that would help develop the provinces.
DIASPORA: ARMENIA'S UNIQUE ASSET
In 2003, a German humanitarian fund published Diaspora, Oil and Roses, a book of analyses about the different aspects of conditions in the three former Soviet republics of the South Caucasus. Armenia does not have government opposition like Georgia, capable of producing roses. Comparison, though, of Armenia's Diaspora with Azerbaijan's oil resources is valid.
Diaspora remains Armenia's vital asset for economic growth. First, Diaspora represents roughly one-third of the assistance received by the country since independence. This number includes the programs of the Hayastan All-Armenian Fund and the large investment program of the Lincy Foundation in 2001-2003. In 2003, the Armenian GDP grew 15 percent, of which three percent was due to the Lincy program.
Another form of Diaspora's contribution to the Armenian economy is money remittances from abroad. According to household surveys, not less than 15 percent of families in Armenia are recipients of regular private transfers from their relatives abroad. These funds are sent mostly (more than 65 percent) by recent emigrants, but other tiers of the Armenian Diaspora also contribute.
Finally, Diaspora is an important source of investments in the Armenian economy. Official statistics lack data about the share of foreign Armenians among investors. However, according to estimates of the Ministry of Trade and Economic Development, about 70 percent of Armenian companies having foreign investment involve Diaspora investors and/or leadership. According to the same source, Diaspora Armenians are involved in relatively small businesses, which account for 70 percent of the registered companies (but less than 50 percent of overall investments). The largest investments in Armenia, such as ArmenTel (Greek), Yerevan Brandy company (French), and energy projects (Russian), were achieved without participation of Diaspora.
It is still too early to assess if Diaspora can become for Armenia an asset comparable to the oil that is expected to bring Azerbaijan billions of dollars in the years to come. It is without question, however, that Diaspora has been Armenia's most reliable natural resource.