The Velvet Revolution was built on an uncontroversial three-pronged reform agenda; stamping out corruption, facilitating democratisation, and spearheading national economic development. A previous article examined the first two points in depth, addressing the need for democratisation and governance to be substantiated with ideological consistency. This analysis will focus on the economic aspects of Pashinyan’s reform agenda.
Pashinyan identified four broad economic priorities for Armenia. The first is addressing mass depopulation. The second was breaking down oligopoly in Armenia, related to his government’s anti-corruption campaign. The third is Armenia’s integration into the global economy. And the fourth is attracting international investment. But thus far, the government has been largely inactive in addressing these priorities. In fact, much of what has been said or done either doesn’t necessarily align with the priorities or, at worst, appear counterproductive. This is symptomatic of a lack of clear direction in national development strategy.
So, what do the proposed solutions to these challenges look like, and, perhaps more importantly, what are their consequences? Naturally, these issues are highly intertwined and can’t be approached as if they were in a vacuum.
Depopulation and brain drain are tied to the issues of poverty alleviation, economic opportunity, and employment. But, as Pashinyan has made clear, it also entails re-population – or, more specifically, repatriation. With a refreshed Ministry of Diaspora, headed by a young Pashinyan loyalist in Mkhitar Hayrapetyan, repatriation has become a centrepiece of the administration’s development policy. Its flagship initiative “Neruzh” is designed to accelerate Armenia’s developing technology industry by incentivising repatriation through training and grants. But while the tech sector has seen significant growth in recent years, profits in the industry are not necessarily redistributed in a way that translates into poverty alleviation. Niche specialised industries with low employment rates driven largely by both diaspora investment and manpower will have a limited impact on reducing the country’s 18-percent unemployment rate and 30-percent poverty rate.
Without dismissing the value of sectors such as technology, in an assessment of need it is impossible to look past the agricultural sector – one that employs over 30-percent of the country’s workforce, and accounts for between 20 to 25-percent of the country’s GDP. Moreover, the agricultural industry has the potential to promote development in rural Armenia. Another target area needs to be urban centres outside of Yerevan, former industrial regions which suffered with the collapse of the Soviet Union contributing to the highest poverty rates across the country. Secondary sector development, including energy production, chemical manufacturing and resource processing were once significant components of this urban economy. Private sector solutions, particularly in the renewable energy space, have remained as of yet untouched.
Emerging sector investment is another means of mitigating and preventing oligopoly – the second major economic challenge. Armenia is in many ways a victim of its geography and a hostage to its neighbours on this front. Even if robust competition laws and market regulations were introduced to protect against market monopolies, Armenia would have to grapple with the fact that its major import and export partners – Russia, Iran, and China – are rife with them, meaning the country would still be highly susceptible to price-fixing.
This could be offset by import substitution, particularly on the energy front where Armenia has the capacity to reach self-sufficiency. But another route would be greater international market integration – the third point. Diversifying import sources can offset the influence of foreign oligarchies and monopolies over Armenian markets. The most obvious alternative is the European Union – however, this comes with its own challenges. Being a member of the Eurasian Economic Union (EEU) places Armenia at an advantage in some regards, as a conduit between European and Eurasian markets, but presents severe political challenges. The free trade agreements between Armenia and Russia as a result of its EEU membership inhibits Armenia’s ability to integrate further with the European Union at an economic level due to the sanctions regime currently enforced against Russia.
If Armenia were to have any preferential import arrangements, such as subsidies, free trade zones, or tariff relief, Russia and EU member states would be able to bypass trade restrictions by using Armenia as a middle-man. Further integration with Europe would also involve exposing Armenia to a new regulatory environment which may prove prohibitive for emerging markets and sectors by increasing costs of labour, decreasing Armenian competitiveness, exposing the country to new market volatilities, and accelerating foreign corporate market entry. This is not to suggest Armenia shouldn’t pursue European integration, but that it must be managed in a way that ensures Armenian interests are upheld and its sovereignty protected. Armenia’s promising hydro-electricity industry is almost entirely foreign owned, calling into question energy security, and major foreign-owned mining companies and their international institutional investors have shown consistent disregard for environmental regulations and local industry. Without regulation on foreign ownership, nor rigid sector-specific restrictions, Armenia will remain susceptible to reckless foreign corporate adventurism – particularly as China turns its eye towards the region.
This last issue ties into the fourth economic target – international investment. Outside of this question of foreign ownership, however, is the diaspora direct investment market.
In Armenia, international investment has been largely diaspora driven – and almost exclusively by a wealthy diaspora elite. However, over the past decade there has been a steady decline in gross foreign direct investment (FDI) in Armenia. Russian Armenians contribute the largest share, although the volatility of the Russian economy has precipitated significant declines in Russian-origin investment. The Ministry of Diaspora has sought to capitalise on the diaspora’s potential through the proposed introduction of a diaspora bond system. The bonds would offer a stable return on investment and provide the government with a source of external liquidity to finance development initiatives – similar to the Israel Bonds program which regularly raises in excess of a billion USD per annum.
However, such a system is not risk free. Much of the diaspora’s direct investment has been directed towards the tourism sector, the total contribution of which accounts for 15-percent of national employment and 15-percent of GDP with one of the highest growth rates in the world. Leading projects in the tourism sectors have included the Tatev Revival Project undertaken by IDeA – a development organization founded by Russian-Armenian billionaire Ruben Vardanyan. As with other emerging FDI initiatives in the tourism sector, IDeA has proven highly effective in generating income, employment and a global profile for Armenia (through projects such as the Aurora Initiative and the UWC World College in Dilijan). As such, there is no guarantee existing foreign investors will become bond-holders when their current initiatives and investment networks are proving both lucrative and developmentally effective.
Initiatives aimed at attracting diaspora direct investment also need to consider their target market. In the case of Israel, national bonds were first issued in 1951 – soon after the foundation of the state. There was an immediate impetus to invest to support the fledgling state, but significant traction for the bond program did not occur until the Six -Day War and the Yom-Kippur War – with bond sales not only doubling over the previous years but sustaining themselves at the new rate. The Israel Bonds program was also largely based out of the United States, with the Development Corporation of Israel (DCI, the main bond issuer) headquartered in New York and leveraging local community networks to sustain direct engagement in Israeli development.
Armenia lacks the same conditions. Remittances are a key indication of an interest in investment, but Armenia’s largest remittance market is Armenian labour migrants based in Russia. These communities are in no position to invest, and an attempt to convert remitters into investors would likely prove more costly for the government as it would take away a valuable security net for the hundreds of thousands of Armenian families reliant on remittances so supplement income. The largest remittance market in terms of economic potential, the United States, only contributes 10-percent of total remittances despite estimates that place the net worth of the community there well in excess of 10 times the GDP of the Armenian state. Furthermore, even those contributions have been in overall decline. Many of these communities tend to participate in development through third-parties, namely diaspora-based community organisations and charities.
Convincing these communities to adopt low-yield bonds with significant patriotic discount is far from a guaranteed outcome. Unlike Israel, the Armenian diaspora, particularly in the early years of independence, has been at best alienated and at worst vilified by Armenian governments of the day. Even with the spectre of corruption in decline and a renewed sense of confidence in the direction of an Armenia with Pashinyan at the helm, the task of changing the behaviour of an established diaspora and redefining its relationship with the homeland is monumental. Israel’s experience with diaspora bonds may be more an exception than a model. To illustrate, one comparable state, Greece, was unable to utilise its sizeable diaspora of seven million to relieve the pressures of the national debt crisis. Only India has been able to achieve modest success through diaspora bond issuance, but well below its capacity given the size of its expat community. Ultimately, bonds are more of a gamble than sound investment policy – and much of its success hinges on factors well out of a government’s control.
Summarised, Pashinyan has thus far been unable to demonstrate the economic management he has promised. Largely because the challenges he’s identified require more than short-term policy items. Repatriation will not abate the cumulative losses associated with depopulation. Emigration can only be reversed when employment opportunities emerge, and standards of living improve. However, with the largest sector of the Armenian economy by both GDP and employment share – agriculture – falling by double digits in the last quarter, Pashinyan’s vague budgetary announcements have done little by way of promising relief for the industry outside of band-aid solutions like subsidies to farmers. The overall message is that the country is looking to transition away from the agricultural sector towards an industrial tech-based economy. However, the international investment and expertise this would necessitate has not proceeded from discussions concerning the protection of Armenian industry from predatory foreign practices, particularly in terms of regulatory compliance.
One area neglected thus far in this analysis has been the time factor. The expectations fostered by Pashinyan during the Velvet Revolution has placed the government on a clock. The public is impatient, and structural economic reform is not a fast-moving process. It could take years for policies aimed at attracting international investment, encouraging emerging sector development, developing trade agreements and attacking poverty and depopulation to become noticeable. Over the past 6 months, Pashinyan has been able to use mass mobilisation in the forms of protests and rallies, symbolic arrests and political scapegoating to divert attention from the ticking clock. The decision to bring elections forward in many ways was a recognition of the fact that the government needed to secure its parliamentary mandate quickly in order to avoid the electoral costs of public impatience and the dissipation of widespread revolutionary enthusiasm.
Economic reform is not a hard sell to people who have suffered from economic disenfranchisement under a corrupt system for the past 27 years. But Pashinyan’s economic platform is fraught with inconsistencies – torn between a utopian vision of socio-economic empowerment coupled with a capitalistic urge to expedite foreign investment and expertise. The division became most apparent recently, when Pashinyan’s proposal to drastically increase the minimum wage was opposed by Deputy Prime Minister Tigran Avinyan in favour of facilitating a business environment that would produce a market-based increase in wages. Both are inadequate. Increased wages without increased productive output will only drive up the rate of inflation as demand outpaces supply. Whereas while investing in business may increase wages in Yerevan’s service sectors, other urban centres and rural populations would not only continue to experience stagnant wage growth, but feel additional pressures in the form of a deepening economic disparity.
These inconsistencies have lent credence to the arguments surrounding the young administration’s hostility to Armenian traditionalism. The internationalist agenda of the government has been perceived not only as an attempt to supplant ‘Armenian values’ with progressive European ideals, but a pro-business agenda that places the interests of foreign investors over the Armenian worker. Comments by Avinyan coupled with the administration’s refusal to introduce a system of progressive taxation and a tax-free threshold for those below the poverty line – instead of the proposed flat tax – have contributed to this perception.
If economic development is a core objective of government, economic strategy needs to be targeted. It is possible to pursue both social development goals and private sector growth – but not if resources are being divided inefficiently. The growth of the technology has never been contingent on government financing, foreign investment from the diaspora, international organisations, and foreign states’ aid budgets have been largely responsible for that. In an environment where private capital is succeeding, other economic sectors can be prioritised in the budget. Basic infrastructure such as road and rail improvements could vastly increase the country’s value as a regional conduit. The failure of the previous government to take this sector seriously led to the collapse of the Armenia-Iran Railway Concession, hindering the viability of Armenia’s role as a node in Russia’s North-South Transport Corridor, China’s Belt and Road initiative, and Europe’s warming relations with Iran.
Infrastructure development could revitalize Armenia’s free-falling construction sector, which in the mid-2000s constituted one of the largest industries in the country at 15 to 20-percent of GDP. Much of the construction boom came at the behest of the country’s elite – Northern Avenue’s residential and retail district, for example – and was marred by corruption. Much of the growth in the sector was squandered; an uncompetitive tender process allowed profits generated through boom to go untaxed and accumulate in the hands of the oligarchy. At the same time, the boom was doomed to bust – the increasing inaccessibility of the residential market to the average citizen prevented expansion. This became a driving factor in depopulation – over 50-percent of Armenian labor migrants in Russia are employed in the construction sector.
Strategic investments also need to be made in the agricultural sectors to improve yields, to maximise efficiency in land use, to ensure greater predictability in output, and to expand use of technological developments in greenhouses and irrigation systems that could prove both cost efficient and more economically sustainable. Armenia’s energy sector is another area of potential growth, particularly in the renewable space which already accounts for approximately 40-percent of electricity production. Further development would not only decrease dependency on imported Russian gas, reducing overall costs, but catalyse growth in tertiary and quaternary sectors supporting industrial expansion.
These three sectors are particularly important because their impact on the Armenian economy is multifaceted. Infrastructure projects in and of themselves are of net benefit to the economy in terms of employment – but when those projects promise continued return on investment and enhance the overall economic capacity of a country, their value increases exponentially. Residential and retail spaces are short-term projects – power plants, agricultural facilities, roads and rail will future-proof Armenia. In addition to both the employment and investment potential these sectors would promise, they also work towards a guarantee of food security (despite the size of the sector, Armenia is still a net importer of basic foodstuffs including meat and wheat), energy security (to decrease dependence on Russia) and human security – through mitigating, and ideally reversing – depopulation.
This is by no means a comprehensive blueprint for economic development. But it does work towards demonstrating how an integrated economic strategy can affect multi-sector development outcomes. But this has not been part of the transition government’s approach – similar to the previous administration, sectors with limited development impact have been prioritized in order to produce short term gains that are marketable to the broader public. What Armenia needs is structural economic reform, not superficial outcomes that suit a political agenda.
Even in the presence of untamed populism and the absence of a viable opposition, the economy doesn’t lie – and that may make it the single greatest tool of not only holding the government to account, but ensuring democracy takes root in Armenia.