X
    Categories: News

Back To Basics

BACK TO BASICS
Vardan Oskanian

Capital daily
ml
September 12, 2009

Armenia’s double-digit economic decline continues, and is approaching
20 percent. The question in everyone’s mind is how long this drop
will continue and whether the government’s policies are effective or
sufficient to stop and eventually reverse it.

Today there are two substantial problems with the government’s response
to this economic situation. The first is that the government’s guiding
document, the budget adopted for 2009, is obsolete. The document is
based on 9 percent economic growth while today we are experiencing 18
percent decline. There is a 27 percent discrepancy in the budget. Such
a distorted document cannot serve as a blueprint or even a simple
guideline for the government’s economic programs.

The second is that the government’s anti-crisis efforts have mainly
focused on the supply side. Promoting supply side growth by financing
certain industries so that they maintain production may generate
short-term growth and enhance GDP. But this will not be sustainable
even in the short term if approximate effort is not made to stimulate
demand.

Clearly, the government’s main aim should be to do what most countries
have already done: first, to revise its budget to reflect the current
reality, and second to stimulate the demand side of the economy
utilizing the nearly one billion dollars in financial resource that
has already been received.

It is a truism that the main engine of growth for any economy is the
demand for goods and services. Consumer demand, government spending,
investments and foreign purchases (exports) are what constitute the
aggregate demand in any economy.

We should look to see what is being done by the government to
strengthen each component of the aggregate demand and what other
steps can be added.

First: consumer demand; this is the most significant component. High
unemployment, economic decline, decreased income and a sharp drop
in remittances have all dramatically diminished the capacity of this
component to fuel the economy. There is nothing in the government’s
plan to address this. To revive consumer demand, a consumer needs more
disposable income. This must be the case for all segments of society,
indiscriminately. The only way to achieve that is to cut profit taxes
on employers and income tax on the employed.

Second: government spending. This is a critical component that
has immediate and direct impact in a time of crisis. Although the
government envisages infrastructure projects, they are either too far
off or too small to have a major impact on the economy. A new nuclear
power plant and a rail line to Iran are long-term projects. Yet,
the more immediate ones are too small in scope to serve as real
stimulants. In fact, they are no different from projects that have
been part of all budgets in normal pre-crisis times. The government
can only make a real difference with well-thought out projects with
the greatest multiplier effects and which create the most jobs.

Third: investments. This is possibly the most ignored component. This
elements depend largely on investor confidence in the government
and in the future of the country. Here, both confidence-building as
well as tangible economic measures must be employed. The government
should inspire confidence through both words and deeds. But as an
immediate practical measure, the cost of borrowing must be brought
down. Banks must be encouraged to reduce interest rates on both
deposits and loans, and to do so in such a way as to maintain the
same differential so that loans will still be profitable for banks
yet affordable for borrowers. And, specifically to encourage and
attract foreign investment, there must be tax holidays.

Fourth: foreign demand or exports. This component, too, has
suffered greatly. Exports have declined an average of 46 percent
in the past year and a half. Yet exports are critical for Armenia’s
sustainable growth given the small size of our domestic market. Here
of course the decline of international demand, low commodity
prices and transportation constraints have all contributed to this
decline. Although, the government has no influence on these factors,
some modest measures can ameliorate the situation. The two main
impediments for our exports are first, our low competitiveness
often due to higher costs of transportation, and second, the lack
of financial resources to get our products out. These two can be
compensated by revisiting our exchange rate policy and finding an
optimal rate that will be win-win for both importers and exporters,
and by setting up a mechanism for providing short-term concessionary
export loans.

There is one additional danger. That is the one billion dollars in
foreign loans which, in the next two years, will bring the country’s
foreign debt to 50 percent of GDP. If the government is not able
to direct those funds to stop the decline and reverse the trend
and assure real sustainable growth, then that debt will become an
additional burden on our economy, and in the coming years, pull us
into even a deeper quagmire.

And finally, one of the shortcomings of the government’s program to
beat the crisis is that solutions are sought exclusively within the
economic sphere and within the context of the international economic
crisis. However, Armenia’s problems are internal and unfortunately,
not only in the economic sector.

Rule of law, obviating monopolies, prohibiting the deepening linkages
between business and government are exclusively internal issues and
without real steps aimed at addressing those problems, it will be
extremely difficult to achieve stable economic growth.

I am confident that if the economic and political interventions
identified here can be implemented together, they will not only stop
the decline, but will also create serious opportunities to reverse
the negative trends.

http://www.lragir.am/engsrc/comments15159.ht
Tadevosian Garnik:
Related Post