Holy Etchmiadzin
Holy Etchmiadzin


by Richard Giragosian

Editor's Note: As Armenia has entered another national election season (Parliament, May 12; President, next February), campaign rhetoric focuses on the republic's considerable economic development, underscored by five years of double-digit growth. How, though, is Armenia doing in other areas and how does development here compare with conditions in other post-Soviet states? AGBU asked analyst Richard Giragosian for an assessment...

As with each of the countries to emerge as independent states following the collapse of the Soviet Union, Armenia has been engaged in a long struggle to forge new institutions of statehood and overcome a daunting set of economic, political and social challenges. The most immediate task facing the Newly Independent States centered on the imperative to overcome the economic constraints and political challenges inherited from seven decades of Soviet rule. This Soviet legacy, which included a centrally planned economy and centrally governed political system, forced each of these states to quickly build their own economic and political institutions capable of both defining and defending a new found independence.

The course of economic and political reform in Armenia was especially difficult. From the very beginning of its independence, Armenia struggled to overcome the effects of a severe earthquake, a war with neighboring Azerbaijan over Nagorno Karabakh, and an imposition of a complete East-West trade and transport blockade by both Azerbaijan and Turkey. This early reality represented more than mere challenges to Armenian reform; it posed serious threats to the country's very viability as a state.

Unlike other former Soviet states-even including some countries that shared similar threats from civil war, as with Georgia and Tajikistan-none faced the scale and scope of threats such as those bearing down on the new Armenia.

Against the backdrop of the particular severity of these early years of independence, Armenia was faced with a sudden collapse of its traditional markets and virtual isolation without fuel or electricity. This period was marked by a drastic decline in standards of living, a rapid surge in unemployment, and the onset of triple-digit inflation, which combined to spur large-scale emigration from the country.

The very nature of these severe threats forced Armenia to quickly adapt and adjust. And from the challenges, she emerged as a leading reformer on the post-Soviet landscape.

Armenia Adapts to Severity

Armenian economic reform was already underway even at the onset of independence, with extensive land privatization introduced as early as January 1991 and through the adoption of measures safeguarding private property. These early reforms were among the first of their kind among the former Soviet states and provided an early foundation for the subsequent expansion of the Armenian private sector, which now accounts for more than 80 percent of Armenian Gross Domestic Product (GDP).

Additionally, Armenia introduced first-generation structural reforms embarking on the path from the Soviet-era centrally planned economy to a mostly private-market economy. These early reforms also included a significant liberalization of prices and trade, quickly creating the most "open" economy in the region with minimal import tariffs and neither tariffs nor quantitative restrictions on exports. By 1998, these initial reforms helped Armenia to stabilize its economy, with low, single-digit inflation and one of the most stable currencies of all former Soviet states.

Armenia from a Broader Perspective

Most assessments of the Armenian economy are defined by the country's impressive record of double-digit economic growth and a gradual, yet consistent decline in national poverty.

There is, though, a need to examine Armenia's place in a broader context, beyond both the perspectives of its statistical economic growth and its regional position within the South Caucasus. It is also necessary to include an examination of Armenia's performance in other key areas, such as the state of political, social and even military/security reform, within a more expansive post-Soviet context.

Although there is a case to be made to include the transitional countries of both Eastern Europe and the Baltic states, the differences in geography, history and geopolitics are simply too pronounced for meaningful comparison. Assessing Armenian reform in comparison to the states of the Commonwealth of Independent States (CIS), as an informal successor to the Soviet Union, is more applicable. The vast area of the CIS consists of three distinct regions, composed of a Slavic, Russian-dominated core, a bridging South Caucasus region, and a more peripheral region of Central Asia. In terms of economic, political and strategic orientation, the component states of each of these regions shared similar characteristics.

Of these regions, the South Caucasus has long been viewed as a "crossroads," or as a bridge for both Russia and Central Asia. The South Caucasus, comprised of Armenia, Azerbaijan and Georgia, is relatively small, only slightly larger in area than the country of Syria, endowed with a population of about 15.6 million last year, roughly comparable to the Netherlands, and a regional GDP of about $73.5 billion in 2005 (see Table 1).

Table 1
Regional Profile: The South Caucasus 2006

(million)    GDP
(2005, $billion)
(purchasing power parity)    Area
(sq miles)    Comparison
Armenia    2.98    14.45    11,620    the size of Belgium
Azerbaijan    7.96    42.99    33,774    the size of Austria
Georgia    4.66    16.03    26,872    the size of Ireland
Total    15.60    73.47    72,266

Sources: World Bank, CIA World Factbook, U.S. Department of State

Within the South Caucasus, Armenia has had a long and difficult history, marked by constant threats and chronic challenges and, as a small, landlocked state, the region's potential as a crossroads has yet to be fully attained, serving instead as a virtual prison as much as a potential platform.

But it is more than the region's geographic constraints that has imprisoned Armenia. The blockades of Armenia by Azerbaijan and Turkey in 1993 imposed a degree of vulnerability and dependence, forcing Armenia to rely almost exclusively on its sole outlet to the Russian market through Georgia. This vulnerability has not only enhanced Georgia's pivotal role as a "transit state" but has also allowed Georgia to exploit, and extort Armenian dependence.

Through 2006, the Armenian economy has enjoyed double-digit growth for the past five years (see Table 2), surpassing the CIS average. Yet even with this notable record of economic growth and reform, the stark reality is that the Armenian economy is only about 92 percent of its pre-reform level of 1989. But it is also important to note that the Armenian economy of today is starkly different than that of 1989, with an altered economic structure that defies any real comparison in output.

Table 2
Real GDP Growth 2000-2006 (percent change)

Year    Armenia    Azerbaijan    Georgia    CIS Average
2000    6.0    10.3    1.9    9.0
2001    9.6    9.6    4.7    6.2
2002    13.2    9.7    5.5    5.3
2003    13.9    10.8    11.1    7.8
2004    10.1    10.2    5.9    8.1
2005    14.0    26.4    9.3    6.8
2006    13.4    34.5    8.6    7.5

Sources: International Monetary Fund (IMF); CIS Interstate Statistical Committee

The record of Armenian economic reform, consistent growth and low inflation, is readily seen by the International Monetary Fund (IMF) and others as an economic success not only notable among CIS countries, but also comparable to the Baltic states, Hungary and Poland. Another important milestone has been a reduction in poverty in Armenia, which has fallen from more than half the population five years ago, to one-third today, and extreme poverty from over a fifth of the population five years ago, to only about six percent for 2006.

Despite the relatively high economic growth in Armenia, however, the country remains poor, with a GDP per capita that is only about a quarter of that of the Baltic states, and is plagued by a serious economic polarization of society.

Armenia's Socioeconomic Divide

The most disturbing aspect of the Armenian economy is the paradox of several years of positive economic growth that is only partially enjoyed or shared by the overall population.

As with most of the other CIS states, and profoundly evident in both Azerbaijan and Georgia, there is a disturbing widening of economic inequality and income disparity. This socioeconomic divide is magnified in Armenia more than the other countries by virtue of Armenia's higher and longer rates of economic growth. But current policies do far too little to adequately address Armenia's growing disparities in wealth and income.

In terms that matter most to average citizens, Armenia compares to its neighbors in this way:

The average per capita GDP in Armenia nearly tripled from 2000-2005, from $592 to $1,514. Still, the average is less than half that of Armenia's neighbors; Georgians average $3,400 and Azeris $3,800.

Similar to Azerbaijan and Georgia, but on a deeper level, the Armenian labor market has also become rigidly divided between a small number of organized workers and owners enjoying rising wages from impressive productivity gains, and a larger informal labor market that has become stranded in a stagnant and immobile, largely service-based sector of the economy.

There is also a geographic aspect of this socioeconomic divide, along the urban-rural lines. This divide is apparent in many of the CIS countries and is marked by the concentration of economic activity and opportunity in urban centers and national capitals, fostering pronounced regional and rural income inequalities.

This Armenian disparity is demonstrated by higher income levels, lower unemployment rates and a greater level of economic activity in Yerevan. And as in Azerbaijan and Georgia as well, this is fueled by a more ample and easier access to key public services, such as health, education and other social services, as well as improved infrastructure services, which contributes to an already serious migration to urban capitals from the countries' outlying rural areas. This rural-urban divide is also reflected in politics in each of these countries, as power is overwhelmingly concentrated in the capital.

In terms of the socioeconomic divide, Armenia holds one ironic advantage-the lack of energy resources. The disadvantage of Armenia's lack of oil, for example, is actually a comparative advantage in terms of disparities in wealth and income. This "advantage" is particularly evident in the case of energy-rich Azerbaijan. Specifically, the challenge for Azerbaijan stems from the fact that economies endowed with natural resources have shown that such resource wealth has only tended to hinder political modernization and distort economic development in three ways.

First, the over-reliance on energy as both a source for state revenue and as the center of economic activity distorts economic development and diversification, and thwarts economic reform.

Second, without strict controls and transparency, it fuels corruption and exacerbates a widening societal divide between a small wealthy elite and an impoverished majority.

Thirdly, the "inherited" nature of resource wealth also hinders the development of political institutions, fosters authoritarian government and weakens the rule of law. Such "entitlement" from a resource-rich state is driven by the lure of immediate energy revenue, rather than from the more difficult task of forging institutions and economic structures capable of generating national wealth on their own.
Armenia's Economic Outlook

The outlook for continued economic expansion in Armenia is far from assured, and some fundamental problems have only been obscured by the country's statistical growth.

Specifically, Armenia faces two significant medium-term vulnerabilities. First, future economic growth remains vulnerable due to a reliance on increased exports, which is inherently limited by both the closed borders and by restricted access to markets and the limited commodity-based nature of the country's leading export sector, diamond-polishing.

Future gains in productivity depend on a need for greater investment and deeper reforms, especially in the banking and financial services sector, to open and expand capital markets. A second vulnerability is the continued dependence on the influx of remittances, or money from Armenians abroad, which is vulnerable to economic conditions in those countries.

According to International Monetary Fund (IMF) and Central Bank of Armenia calculations from last August, about $950 million in remittances entered Armenia in 2005-an amount that exceeded that year's state budget by about $40 million.

Experience in other developing countries, particularly in the Asian economies with similarly high, yet uneven growth, has shown that rapid growth over prolonged periods tends to conceal underlying vulnerabilities in an economy and soften the incentive for deeper reform.

In the Armenian case there are related questions of political will. The country is facing a political transition that will most likely only delay second-generation reform of inadequate corporate governance, exacerbated by a weak and arbitrary rule of law, and of corruption within a closed oligarchic structure.

The Link between Economics and Politics

Every country is unique in the pursuit of its own political and economic development based on its own needs and from starkly different starting points reflecting its unique endowment of natural resources, size, and by its own competitive advantages in trade and development. But there is a significant linkage between economy and politics in every country. This linkage has been an important consideration in both Armenia and Azerbaijan, as each country has used economic growth for regime legitimacy.

For Armenia, the government has long used economic growth as an element of power and legitimacy, in both foreign and domestic eyes, and to justify and defend both its policies and politics in the face of limited popular support and standing.

The Azerbaijani leaders have also engaged in such a tactic, holding out the promise of pending economic growth and the looming influx of oil wealth as a pillar of political power and legitimacy. In both countries, such a reliance on economic growth as a core element of political legitimacy is dangerous, however, as it confers serious vulnerability in the event of economic crisis or decline.

A Regional Arms Race?

This vulnerability on relying on economics alone for political legitimacy is further seen in the recent trend toward a regional competition in defense spending.

As Azerbaijan escalates its defense spending on a new, massive scale, Armenia is compelled to keep pace as best it can (see Table 3). But over the medium term, the danger for Armenia is not simply in failing to match Azerbaijan's military development and rearmament. Rather, the compulsion to increase the Armenian defense budget may crowd out other areas-especially in the social sector-and thereby endanger the country's critical needs for its future generation, namely in education. This is not meant to dismiss the pressing challenge of a shifting military balance of power in the region, but is instead a warning that not all national power stems from its military and that Armenia is also faced with other long-term needs just as crucial to its security and stability.

Table 3
Military Spending (2004-2007)

Year    Armenia    Azerbaijan    Georgia
2007 projected    $212 million    $1 billion    N/A
2006    $166 million    $700 million    $218 million
2005    $136 million    $300 million    $146 million
2004    $81 million    $175 million    $60 million

Sources: SIPRI Database, Jane’s Information Group

A similar relationship between economics and political power can also be seen in the course of apathy within Armenian society. Although the country's relative economic prosperity is far from evenly shared, there has been a significant improvement in contrast to the early years of reform. The country adapted and overcame the depravity of the "dark years" of the 1990s, when the population faced daily life without heat or electricity. But for the Armenian population, surviving those years and even overcoming the war-related strains of the Nagorno Karabakh conflict were politically draining and only served to ferment the broad apathy that currently afflicts Armenian society.

That general apathy, even more than public mistrust or distrust in Armenian politics, represents the most significant obstacle to true and meaningful political change in Armenia. And that apathy is sustained by the promise of a more prosperous future, even if most of the population concedes that the mirage is attainable for only a corrupt few. In other words, the overwhelming tendency is to share from the corrupt system, not to change it.

The Cancer of Corruption

This challenge of corruption, common to the entire region, is a significant impediment to both equitable economic development and good governance, no matter how impressive a country's economic growth.

According to the Berlin-based Transparency International's most recent Corruption Perceptions Index, Armenia ranks 93rd in corruption among 163 countries. And, while it is considered less corrupt than its neighbors (Azerbaijan is at number 130; Georgia, 100) initiatives should emphasize elimination, rather than tolerance or relativity.

Over the longer term, corruption also weakens the state and its institutions by undermining legitimacy and credibility, further deepening an already fragile public confidence in government policies.

Seen in a broader perspective, it is corruption that poses one of the gravest challenges to the national security and statehood of both Azerbaijan and Armenia (while in Georgia, the Saakashvili regime has made significant inroads). There are also negative economic effects from corruption, as it denies the government essential tax revenue necessary for vital social spending on education, health care, and pensions, affirming that it is in no way a "victimless crime."

There are some important measures for the Armenian state to adopt in order to combat the cancer of corruption. These steps must be bolstered by an overall strengthening of the rule of law and require the implementation of a careful combination of measures to enhance the powers and independence of state structures, starting with a focus on creating and strengthening regulatory agencies and bodies.

In contrast to blanket measures endowing the state with more powers, the fight against corruption must be carried out by oversight bodies empowered to supervise privatization and the emerging securities markets as well as to police the economy for monopolies, cartels or trusts. Such regulatory bodies should be independent from, but accountable to, the government and governed by norms of transparency and strict oversight.

But given the reality of today's Armenia, these measures can only be effective within a new context of "good governance," reflecting the prerequisites of transparency, ethics, accountability and competent administration.

These prerequisites are notably lacking in Armenia, however, as the country remains defined by an overly dominant executive that tends to both marginalize parliament and intimidate the judiciary. Thus, for Armenia, building democratic institutions remains critical, and judicial independence and meritocracy over favoritism in governance are essential for real democracy and an open market economy.

There is a further link between economics and politics in terms of governance. This is demonstrated by the tendency to implement economic reforms based on political considerations or vested interests. Although such linkage is natural, in the case of Armenia, the combination of a closed political system hindered by corruption and a weak and arbitrary rule of law places more painful economic reforms under greater pressure and undue political influence.

A related problem in this context is the powerful role of Armenia's small, wealthy political elite, the so-called "oligarchs" who hold seats in the parliament and, thereby, serve as vested interests in influencing the formulation of public policy and exerting leverage over the course of governmental policies.

In the case of the other former Soviet economies, this new class of oligarchs has tended to exploit the privatization process to gain economic power first, followed by an appetite for political power. Left unchecked, their role threatens democratization and political reform and, as in Armenia, allows them to consolidate their informal networks of power through informal cartel-based semi-monopolies. The cronyism of today's oligarchic structures of economic monopolies and cartels in Armenia flourished within the closed economy of blockade and embargo and solidified under the unique conditions of "conflict economics" of the Nagorno Karabakh conflict.

Political Reform & Democratization

The key to combating these discrepancies between economic development and democracy in Armenia lies in political reform and democratic institution-building. But: If the general population remains politically disengaged, economically marginalized, and socially apathetic, how can political reform in Armenia match the seemingly apparent gains of economic reform?

This is the real test for the former Soviet states, not to mention its follow-up question of how to ensure truly lasting democratization. In the cases of the dramatic changes of government in Georgia, Ukraine and even Kyrgyzstan, the initial promise of those "revolutions of fruits and flowers" quickly dissipated. The aftermath of those changes may have resulted in genuine shifts in foreign policy and even strengthened statehood, but the newly gained power of the ascendant political elite in those cases soon devolved into yet another model of maintaining slow, status-quo power politics.

For Armenia, the "revolutions of fruits and flowers," encompassing Georgia's "rose," Ukraine's "orange" and Kyrgyzstan's "tulip" revolutions, hold an inverse lesson. The lesson for Armenia is not found in any shared characteristics with those revolutions, but is seen instead in what Armenia lacks-a viable opposition.

While the colors and fruits of revolution have faded and become bittersweet for the Georgians and Ukrainians, the Armenians have ha

Originally published in the April 2007 ​issue of AGBU Magazine. Archived content may appear distorted on your screen. end character

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