ARMENIA A MODEL FOR DEVELOPING NATIONS
by S. Adam Cardais
Eastern Europe October 23, 2007, 12:32PM EST text size: TT Business
Week
ECONOMIC REFORM AND INVESTMENT BY ARMENIAN EXPATRIATES HAVE HELPED
THE COUNTRY BOOST GDP BY MORE THAN 10% A YEAR FOR A DECADE
To appreciate just how far Armenia has come in the last 15 years,
it helps to imagine yourself living through an Armenian winter in
the early 1990s.
It’s the middle of January, it’s five degrees below zero, and you
and your family have only two hours of electricity a day — such
was the abysmal state of the energy sector in a country crippled by
the dissolution of the Soviet Union, a traumatic earthquake in 1988,
and war with neighboring Azerbaijan.
But Armenia has been "radically transformed," in the words of one
World Bank official, since its independence from the former Soviet
Union. Today, the average Armenian has electricity around the clock.
An influx of cash and a series of reforms have taken Armenia from
economic basket case, with GDP plummeting 50 percent between 1990
and 1993, to "Caucasian tiger," to quote a World Bank report issued
earlier this year. It has become a model transition economy that
should continue prospering with a second wave of reforms.
GDP has increased more than 10 percent a year for a decade largely
thanks to robust investment in a booming construction industry by the
Armenian diaspora in Europe and the United States. Sharp growth in the
services sector, including the financial sphere, and retail trade are
also contributors, according to the European Bank for Reconstruction
and Development.
"Given the fact that it doesn’t have natural resources, its growth is
quite impressive," says Heike Harmgart, country economist for Armenia
at the EBRD.
And the most laudable aspect of that growth, World Bank economist
Aristomene Varoudakis says, is "that macroeconomic stability has
been preserved. Inflation has remained low," between 3 percent and
4 percent. Last year was an exception to this trend, with inflation
climbing to 5.6 percent, but the International Monetary Fund forecasts
a fall to 4 percent in 2007.
REFORMS REAP REWARDS
This fiscal discipline is an indication the government has backed
up the bountiful diaspora remittances, which are more good fortune
than anything else, with sound policy. Indeed, remittances alone
don’t make Armenia a model transition economy. A series of early,
sustained governmental reforms enabled the country to capitalize on
the cash inflow.
For instance, the government eliminated wage controls and privatized
the majority of land and small businesses in the mid 1990s to encourage
investment in construction and other sectors. The central bank has
also been a key reformer, streamlining its operations and improving
supervision over the banking industry to spur a dynamic financial
services sector in a short period.
More recently, a new credit bureau to bolster small business lending
and a modernized bankruptcy law have further improved the investment
climate, two reasons Armenia ranks 39th out of 178 economies in the
World Bank’s "Doing Business 2008" report.
On all of these reforms, Armenia has been wise to cooperate closely
with international institutions such as The World Bank and the IMF.
"The Armenian government has been listening to institutions very well,
which is positive," Harmgart says. "The government has always been
open minded."
It would be hard to overstate the benefit this economic revolution
has brought the population. According to the World Bank report, the
poverty rate has fallen from more than 55 percent in the early 1990s
to 30 percent. Extreme poverty had dropped to 5 percent two years ago.
GENTRIFYING NEIGHBORHOOD
The good news for the region is that Armenia’s prosperity isn’t
unique. Georgia’s economy is growing at just under 10 percent and is
one of the leading reformers in the world, at No. 18 on the "Doing
Business 2008" report. Azerbaijan posted a whopping 34.5 percent GDP
growth in 2006 thanks to its thriving oil industry.
As in these countries, though, there’s still a lot of progress to
be made in Armenia. Tax evasion remains rampant. It’s extremely
costly for an individual or business to file taxes, and tax revenues
are only 15 percent of GDP, one of the lowest rates in the region,
resulting in less money for strengthening the economy or fighting
poverty through spending on education or health care.
The government is trying to increase tax compliance by introducing
a system that allows payers to submit their returns by post or
electronically, publishing a list of the country’s largest contributors
in a sort of ego-driven motivator, and opening specialized collections
units, but more progress is needed.
Corruption, though becoming less pronounced, is also a major concern,
as is Armenia’s over-reliance on the construction industry. Though
analysts predict Armenia will sustain double-digit growth in the short
and medium term, it has to begin diversifying its economy by making
trade more dynamic and attracting new knowledge-based investments,
such as IT companies.
Reforms in corporate transparency, competition, and education will be
central to realizing this goal, but "these are more complex reforms
than the first round," Varoudakis points out.
Armenia has without a doubt taken great strides, but nothing highlights
progress like starting from nothing. If the country wants to remain a
"Caucasian tiger," it had better prioritize these difficult reforms
now.
These will take a lot longer than turning on the power.
S. Adam Cardais has been writing about business and economics in
the European Union since 2004. A former editor at The Prague Post,
Cardais is now a business reporter based in Berlin.