ARMENIAN ECONOMY AGAIN RANKED MOST LIBERAL IN CIS
Emil Danielyan 1/24/07

EurasiaNet, NY
Jan 24 2007

Armenia has received plaudits for possessing the most liberal
and open economy in the Commonwealth of Independent States, as
the country ranked a highly respectable 32nd in a recent survey on
economic freedom. However, government critics and a few independent
economists contend that the study does not accurately represent the
country’s economic conditions.

The survey, prepared by The Wall Street Journal and the Heritage
Foundation and released January 16, covered 157 countries. It found
an "impressive amount of freedom" in the Armenian economy, which is
still recovering from the Soviet collapse and remains hamstrung by
the unresolved conflict over Nagorno-Karabakh.

The Index of Economic Freedom rated economies in 10 areas, including
the extent of government involvement in economic affairs, trade and
monetary policy, property rights and business regulations. Armenia
received high scores in most of these categories, surpassing all
other non-Baltic ex-Soviet states in recent years’ rankings.

WSJ/Heritage researchers went farther this year, putting it ahead of
economic powers like France, Italy and South Korea.

"Armenia is ranked 19th freest among the 41 countries in the
European region," concluded the study. "Armenia’s score puts it
above Europe’s average — an impressive feat for an impoverished
landlocked country." It cited, among other things, low tax rates,
modest government expenditures, a fully private banking sector,
and tight government monetary policies.

The WSJ/Heritage appraisal is largely in tune with the findings
of similar studies. Armenia, for example, was judged to have the
most investor-friendly business environment in the CIS in a 2005
World Bank survey that assessed "the ease of doing business" around
the world. Also in 2005 the European Bank for Reconstruction and
Development (EBRD) said in a report that it leads the way in the CIS
transition to a market economy.

Armenia launched its reform efforts amid adverse circumstances. The
conflicts in Karabakh and elsewhere in the South Caucasus effectively
cut off the country from the outside world, causing its Gross Domestic
Product to shrink by half from 1992-1993. The Armenian economy began
its slow but steady recovery after a Russian-mediated truce stopped
the Armenian-Azerbaijani war for Karabakh in 1994.

According to government statistics, it grew in 2006 at a double-digit
rate for a sixth consecutive year. Official figures also suggest that
the poverty rate in the country fell from 56 percent to 35 percent
between 1999 and 2005.

The World Bank and the International Monetary Fund say Armenians are
finally reaping the benefits of free-market economics. "Armenia’s
economic performance has been impressive in recent years," the IMF’s
managing director, Rodrigo de Rato, said during a June 2006 visit
to Yerevan.

The Armenian government is certain to seize upon the WSJ/Heritage
survey as vindication of its economic policies. Meanwhile, government
critics, along with some independent experts, say that economic
appearances are deceiving in Armenia’s case. The country’s economic
environment is not as liberal as it is portrayed, due to weak rule
of law, endemic corruption, and a lack of judicial independence,
they contend. Government connections are still essential for doing
business, and virtually all local millionaire businessmen operate
with the support and protection of various government factions and
pro-establishment parties. The richest of them are believed to have
close ties with the country’s two most powerful men, President Robert
Kocharian and Defense Minister Serge Sarkisian.

"Armenia is the most centralized state in the region," said Hrant
Bagratian, a liberal economist who served as prime minister in
1993-1996. "Forty or so families control 58 percent of our GDP."

A controversy surrounding the redevelopment of Yerevan underscores
the weak protections for private property. Hundreds of city residents
were forcibly evicted and their homes bulldozed so that expensive
residential and office buildings could be built. The process has been
regulated by a 2002 government directive, despite a constitutional
provision requiring that urban renewal be governed by parliamentary
approved legislation. Armenia’s Constitutional Court declared the
redevelopment process unconstitutional in April 2006, but stopped
short of ordering the state to pay additional compensation to the
evicted families.

Government corruption is another serious problem hampering economic
activity and competition in the country. Armenia ranked 93rd out of 163
countries in the Berlin-based Transparency International’s most recent
Corruption Perception Index. Fearing retribution, local entrepreneurs
rarely challenge bribe solicitations by government officials. One of
them who did, the owner of a coffee importing company, is currently
standing trial on tax evasion charges that were leveled after his
public allegations of high-level corruption in the Armenian customs
service.

The Index of Economic Freedom acknowledges these problems, putting
Armenia’s scores in the Property Rights and Freedom from Corruption
categories well below the world’s average. But its authors’ assertion
that the low level of Armenian public spending is a blessing will
be dismissed by many local and Western economists. The Armenian
government’s 2006 tax revenues accounted for less than 16 percent
of GDP, an extremely low proportion even by ex-Soviet standards that
highlights the scale of tax evasion among the local rich.

Consequently, the government’s 2007 budget, projected at a record-high
$1.5 billion, will still be insufficient for meeting the basic needs
of the country’s public sector.

The World Bank and the IMF regard tax evasion as a key economic
challenge facing Armenia, pressing the authorities in Yerevan to
tackle the problem in earnest. Kocharian admitted its gravity at an
extraordinary meeting on January 10 with top government officials. "I
don’t see in the [tax collection] services sufficient energy to fight
against the shadow economy," he told them. "There is improvement,
but it can not be considered satisfactory in the existing situation."

Editor’s Note: Emil Danielyan is a Yerevan-based journalist and
political analyst.