Summarizing results of the first quarter century of Armenia's independence in various spheres
Text: Armen Harutyunyan / Photos: Pan Photo
Over the past two decades Armenian economy has gone through many difficulties, tests and undergone a remarkable transformation. First years after gaining independence economy was falling at high rates, and stated to recover at average 6 percent from 1994–2001. The first decade of the twenty-first century was unprecedented in economic performance, from 2002 to 2007 economy managed to maintain six years of consequent double digit GDP growth which reached its peak of 13.9% in 2005. During that period in one of the World Bank reports Armenia was names the Caucasian tiger, referring to economic success of four East Asian states; Hong Kong, Singapore, South Korea, and Taiwan. Furthermore, double digit growth period was paralleled with integration of domestic economy into global trade system through membership to the World Trade Organization (WTO) in 2003. Then came the fall. Armenian economy went into a deep recession as the result of global financial crisis and economic turmoil. GDP contracted by 14.4% in 2009 mainly due to sharp decline in construction and mining sectors. After sharp decline in 2009 Armenian economy is slowing but growing. Meanwhile, there are many internal and external challenges to be addressed. Public debt is rising, foreign private transfer declined, aggregate demand is diminishing. On the other side the main trade partner states are facing economic difficulties that have direct impact on export as well as foreign direct private transfers. Fiscal and economic crisis has sharpened debates among economists, academics and policymakers about economic system and development policies.
Soviet Past
Before collapse of the Soviet Union, Armenian economy has been hampered by communist ideology. Central planning system hindered development of entrepreneurship and distorted market mechanism through state planning of production and central government setting prices for main products and services. Foreign trade was mainly limited to soviet bloc counties with single regulated currency. The economy of the Soviet Union was not competitive, and productivity and quality of products was low. In addition, massive resources were financed to sustain communism in many states around the world, and lot more was invested into military. Armenia was positioned as the industrial state with vital dependence on raw material supplies from other states, and agricultural sector was dominated by the collective farm system. Soviet economy has been vulnerable in many ways. Agricultural sector productivity was low, and although large amounts were invested in developing agriculture and food processing, it faces serious challenge of supplied food to population. Import of food was primarily financed through increasing production of oil. This tendency later led to dependence on oil to finance imports of food and nonfood items. Furthermore, as international prices for oil had diminished, Soviet government complemented its financing of imports with gold reserves and credits from west, which came however with market reform conditionality at later stage. In the end of 1980s the situation worsened and gradually led to collapse of the system which had dominated for more than 70 years. In Armenia downfall of the socialistic system was paralleled with severe collapse of entire economic system, distortions in the works of public institutions, massive migration, brain drain and limited supply of electricity and water.
Liberating war for Artsakh led to return of historical justice and independence of Artsakh (also referred as Nagorno Karabakh); however it had resulted in destruction of physical infrastructure, isolation, blockade which eventually held country back from crucial economic and institutional reforms. Dark years as most Armenians coins that times paved difficult time for transition. The first and primary objective of the transition was to move from planned to market economy. Moderate but robust economic growth in the initial years of the recovery accelerated in the late 1990s. Armenia went through massive privatization of land and property, joined World Trade Organization and opened its borders for free trade.
As mentioned in the beginning Armenian had gone through a period of double digit growth which significantly improved livelihood of population. Basically the first stage of transition which aimed at adoption of principles of market economy succeeded. Second round of transition is much complex and requires fundamental reforms, it should aim at increasing efficiency, competitiveness and complexity of the economy. A new economic paradigm should also consider inclusive development issue to ensure elimination of poverty and slow migration of skilled labor force. Four sectors of economy that has the best potential for development are tourism, commercial agriculture, and alternative energy production and information technologies. The logic behind this listing is straightforward and simple. Tourism industry benefits many stakeholders and provide sources of income to many layers of population. In other word tourists are consumer wide range of products and services and therefore their spending are distributed to wide range of producers or service providers. This means that tourism is good sources to ensure inclusive development. In addition, there are many different types of tourism activities that have good outreach, such as ecotourism and agro tourism that creates alternative source of income for people living in rural areas and depending solely on agricultural activities. Ultimately, Armenia possesses rich history, cultural heritage and nature that can be further developed to attract more tourists.
Commercial agriculture is another important branch of the economy, which including food processing constitutes around 25 percent of the GDP and is also source of employment in rural areas. Global demand for food is projected to grow as population in the world is growing; in particularly as global economy will be recovering more food will be necessary to feed people. In this terms Armenian should either attempt to explore economies of scale in some product categories, but also focus on production of valuable crops and food products to earn higher margins at export markets i.e. organic products. Former is more feasible for small countries such as Armenia that possess limited land resources. Furthermore, due to favorable climate and weather Armenia hasexcellent potential to development alternative energy production, such as solar, wind and hydro.
This will boost economy by providing cheaper energy for production as well as for consumers. It has also important political implication from the perspective of energy independence. Finally, information technologies are important to sustain competitiveness of the economy, building knowledge based economy since technologies are shaping the way we live and economies perform, therefore, this branch is utmost important to sustain competitiveness of the economy in the long run. Development of each requires comprehensive diagnose of fundamental challenges hampering competitiveness and hindering development of selected sectors, which should be followed by capacity assessment. The former one is usually underperformed and well written strategy is not realized due to missing or limited capacities, financial, physical, human etc. Based on this medium and long term strategy should be designed which will define specific, measurable targets, outcomes. Furthermore, set of assumptions has to be taken into consideration: a) sectors have to be observed in regional context taking into account developments and regional economic integration processes i.e. large scale infrastructural projects. China has announced One Belt One Road initiative for example, what would be the role of Armenia, what are the benefits, advantages, risks and threats? b) economic and political situation in neighboring states as well as main partners c) slow recovery of global economy d) low global aggregate demand e) automatization and development of robotics and gradual transfer of labor intensive industries back to developed states f) level of economic complexity etc.
One should remember that analysis of success of developed states urges to design exclusive development model, since there is no universal recipe or model that can be completely adopted. Moreover, if Asian Tiger Economies has benefited from golden age of development, nowadays it is much more difficult to manage stable inclusive economic development because of economic difficulties and increasing competition from emerging economies.
In the meantime, there are some basic policies and programs applicable to most developed economies the two common factors are a) availability of good physical infrastructure b) good quality education system.
Think about any developed country that has poor infrastructure or high level of uneducated population? From the data of the World Economic Forum, most developed countries have basic physical infrastructure and one among underlying causes of slow improvements in economic performance is shortage of investments in infrastructure. Literally all aforementioned sectors require infrastructure, such as roads and airports for tourists, water management systems for agriculture, alternative energy requires investments into solar systems or wind energy infrastructure and ultimately information technologies will require high speech internet networks. In this context, infrastructure is apparently a pillar for development. However, from economic perspective these investments should be justified to understand its long term implication on economic development, meaning that if a road or rail project is implemented what is critical success factors, public return on investment, payback period and outcome. A good demonstration is reconstruction of infrastructure in Europe which was one the critical component of Marshal Plan. A more recent example is China, which has been investing in infrastructure development, and infrastructure remains a top priority for government in China. According to McKinsey Global Institute study, China has overtaken US and EU and is consider being the biggest investor in infrastructure. In addition, infrastructure development programs can have short term boost for economy during slow growth, since it would create temporary jobs and therefore reduce unemployment in the short run, but also trigger demand in the short terms which can boost demand and stimulate businesses to invest.
The second issue is human resource and ability of country to train and teach labor force. Taking into account fast rate of technological innovations, development of information technologies, automation countries need to focus more on education and attempt to adopt new technological solutions in production. This can be reached by modernizing education institutions and equipping them with modern facilities, paying more attention on teaching quality. While building schools, renovating university building and provision of equipment is rather expensive; the most difficult part is to ensure good teaching and proper teaching materials for schools. Taking into consideration massive resources that are spent on capacity building programs, trainings and consultancy, these resources could be directed on development of primary and higher education. A latest book on East Asian Development: Foundations and Strategies, highlights positive correlation between education and economic growth. Education and ability to attract skilled labor force also demonstrate the strength of US economy in terms innovations and technological advance. In the review essay on What Does Human Capital Do? A Review of Goldin and Katz’s The Race between Education and Technology Acemoglu and Autor highlight findings on the investments in education leading to economic, political and social development and that primary factor of economic growth in the US is associated with human capital. According to authors, American leadership was linked to the level of investments into human resources, which led to economic growth. In addition, Armenian businesses should also learn to attract specialists and talents from abroad to cover the gab in selected industries. Furthermore, more attention should be directed to language teaching, because many online programs with free access to lectures of the top Universities is available now so everyone who has access to internet can receive education through iTunes U, Coursera etc. and even complete degree programs. These two reforms are only example of critical components of new economic paradigm, which would require many policies and actions, such as institutional and legal reforms, better enforcement of law, access to finance and improved business environment. Nonetheless, complete reform agenda can be designed as diagnose and capacity assessment is completed.