SEEKING SOLUTIONS WITHIN

By Vartan Oskanian

February 26, 2009

The official statistics released in February simply reiterate the
inarguable truth: Armenia is heading towards a recession.

Although these facts are not being hidden, they are not being
explained either. The government continues to believe (and rightfully
so) in the importance of confidence as a key factor of economic
stability and is therefore trying to inspire trust and faith. But it
is doing so without basing its oratory and encouragement on economic
realities, or without actions which assure the population that steps
are being taken to ameliorate the situation.

These are unconventional times and require unconventional remedies,
including some outside the IMF-World Bank prescription box, not unlike
those to which the major economies of the world have already resorted.

I believe that several steps, taken together, can minimize the
economic decline.

First, there is a need for open, courageous and sustained public
dialogue which is missing, and which would go a long way to inspire
confidence and faith in the steps being taken to improve the financial
situation. Consumer confidence regarding the government’s economic
policies are equally critical in this formula. Some of the
government’s actions raised doubts in the public’s mind about the
government’s ability to respond to this crisis.

First, there were the early pronouncements about this global crisis
circumventing Armenia, which raised questions about the government’s
sincerity and did nothing to meet the government’s concern about not
creating a panic. Earlier, the government insisted on passing a budget
based on a high 9 percent growth even as the government’s own numbers
were already indicating that this is not a realistic goal. They
preferred the politically desirable picture but instead got an
economically unrealistic scenario, counting as they said they were, on
a quick global rebound. As a result, the compact between business and
government remains broken. The confidence-inspiring rhetoric was not
able to transform reality.

Second, it is important that the government discuss the Russian
Federation $500 million loan with the public and engage it in a
conversation about its efficient use. There is no doubt that Armenia
clearly needs this money to mitigate the impact of the crisis. The
challenge is that it be used to ensure economic growth. Does the
Armenian government intend to use the funds to meet its current
budgetary obligations? Will it loan at least part of the funds to
local banks? Or will it invest the funds in competitive sectors, such
as agriculture and mining which have growth potential and local social
and economic significance? In other words, shall Armenia use the
crisis to solve existential issues and address the short-term
challenge of restraining social disenchantment, or should it think
about sustainable development? Third, new money alone will not solve
the economic woes either. A step the government must take, and is
already late in taking, is to let the Dram find its normal market
exchange rate. Already, since early 2008, over $440 million of
Armenia’s reserves has been spent to maintain this stability.

This spending is nearly equal to the $500 million we are going to owe
the Russians. This is not sustainable. Sooner or later, the government
will be forced to adopt a more flexible exchange rate policy. In fact
a depreciated Dram and more realistic Dram rate will boost the value
of foreign capital, will enhance the purchasing power of the many who
rely still on foreign remittances, will stimulate exports and will
promote tourism, which have already suffered as a result of the high
Dram value.

Fourth, a government committed to tax reforms must judge correctly not
just the nature of the reform but also its timing. While taking the
crucial step of modifying the tax structure to help small and medium
enterprises, the government is at the same time placing the heaviest
burden on the smallest taxpayer by insisting on cash registers for the
tiniest individual entrepreneurs, thus driving many out of
business. This step could have been delayed. Taxes on the little guy
can and should be assessed, but only after the real bottlenecks in our
economy are lifted. Monopolies and non-competitive systems are the
real causes constricting our economy.

Fifth, the time is right to allow for a larger budget deficit. In an
economy where inflationary pressures are low, when credit is tight,
when there is a clear economic slowdown, enlarging the budget deficit
is not only acceptable but necessary. Armenia’s deficit has been well
within the internationally advocated three percent of GDP. Under
today’s unusual circumstances, the budget deficit can be allowed to
grow to even six percent of our GDP. That additional emission of money
can fund public works, thus creating jobs, improving infrastructure
and stimulating the economy.

Sixth, this is indeed the time to bring back the best of government
intervention on the basis of public-private partnership. It was a
laissez-faire, non-regulated market that led to this global crisis.

Depending on more of the same unrestricted market developments now
means tolerating the excesses of capitalism instead of reining them
in. That is what the world has learned. In Armenia, if we were hoping
that at the end of this transition, the pendulum that swung from
abject communism to extreme capitalism was to come to rest somewhere
in the middle between unrestricted competition and total dependency,
this crisis allows, indeed forces the government to take on greater
responsibility for wise engagement in the economy and at the same time
take practical steps to address social problems and ameliorate the
conditions of the most vulnerable in society.

Finally, there is a seventh area of action that cannot be avoided or
ignored any longer and that is our political reality. The economy
rests firmly on politics and law, on predictability and consistency,
on transparency and equality. The political situation that exists
around us today does not provide space for our economic dreams. It is
not just the polarization, it is not just the cynicism, it is not just
the lack of trust. It is also the insufficient respect for property
rights, it is the sense of impunity on the part of those on whom we
depend to reinforce the rule of law, it is the inarguable monopolies
at the basis of so much of our trade. The government’s responsibility
is to secure our economy and our security. Both require a healthy
domestic situation. The government may not be solely responsible for
today’s mess, but it has the sole capacity to bring the country out of
this mess. There is no way to withstand today’s economic crisis
without addressing and resolving today’s political crisis. This crisis
is economic and domestic, but it will inevitably affect our foreign
relations and thus can affect our security.

In other words, the global economic crisis may have exacerbated the
weaknesses of our own economy. The domestic political crisis may have
come about as a result of bad judgments on the part of all political
actors. But the solution must be sought from within. Not from the
Diaspora, which is living its own economic crisis. Not from Russia and
China, where money and political expectations come together. But from
our own small economy whose problems we see, whose solutions are
within reach.

This is the time for responsive governance, for a demonstrated
willingness to share the burden for the well-being of all
citizens. This is also the time to rally the brainpower and good
intentions of those in and out of government, the experience of those
in and out of business, the insights of civil society, to make the
right decisions.

—
This article was published in Yerevan’s CAPITAL Daily newspaper, in
Armenian. Vartan Oskanian is the founder of the Civilitas Foundation
and former foreign minister of the Republic of Armenia.