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.
Alex Galitsky
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Mr. Galitsky.
I think you make one SOLID point and area that can have a tremendous impact – Agriculture. It is a sector that will get the least amount of FDI but has the greatest immediate impact on the Armenian economy and the massive trade deficits with both the EU and Russia. You failed to mention that before all of Isreal’s hi-tech startup industry, there was a massive investment in agriculture by both the government and the Jewish community.
The tech sector will take care of itself. A simple commitment to focus on better universities and non-university tech education will have a monumental impact. I am an investor in a tech company in Gyumri and a pool of tech educated students is my #1 problem. But a commitment of a $100 million in agriculture greenhouses, automated equipment, better irrigation infrastructure and a campaign to educated in new farming methods will have a 3-5% GDP impact within 16 months. More importantly, it will affect the people most ignored by the last administration.
But I will also add that it had become much more dynamic and growth-focused then you have reported. I think your outlook is shaded on the negative side. Plus it is also good to shine the light on possibilities and where the country needs to focus more. A barrage of negativity will just get your message ignored by the people you most wish to inform.
Both of you, Mr Galitsky and Mr Fabacher have valid an sound ideas and advice! I still think we need to follow Israeli model in EVERYWAY POSSIBLE, (collective farming and all. Whatever works) and as best as we can, within our means! Here, we do not have to reinvent the wheel. Agriculture, creative irrigation systems and energy generating should be our top priorities. Cultivating various fruits, specially apple orchards would be a great solution. I remember being in tiny town of Kessab-Syria in the sixties and seventies, where I witnessed the greatest boom of the best apple orchards of many varieties ever! I mean the best apples, the likes of which I have yet to see anywhere else. If it can be done in Kessab, for sure it can be done in Armenia
Mr. Galitsky has done a perfect job of highlighting the shortcomings but I don’t see any concrete plans or suggestions. It is easy to criticize but when it comes to solutions you face the harsh realities on the ground. Prior to saying what should be done, you need to ask what can be done. It is naïve to assume that Pashinyan or his administration are not aware of the role that modernizing agriculture can play in alleviating poverty. The problem is that modernizing Armenia’s agricultural sector needs billions of dollars of investment. To give you an idea of how costly this process is, building only one reservoir in Vedi which is right now under construction, is going to cost the government almost 100 million dollar. To solve the irrigation problem, the government needs billions to be invested in building large and small reservoirs, canals, subsidized irrigation systems.
The reality is that Pashinyan has inherited a mess. In the last decade, Armenia’s public debt has tripled. Much of this money was squandered by corrupt and incompetent officials with little impact on infrastructure. This means Armenia has to repay hundreds of millions of dollar in debt in the next few years, which limits their ability to borrow more. Pashinyan has already managed to considerably reduce the budget deficit. Their next step is to downsize the government which is an extremely unpopular yet important reform and it shows that the government is serious about cutting spending. Let me make it crystal clear that I am not trying to say that there has been no missed opportunities. There is much more that can and should be done. Firstly, the government needs to further cut the unnecessary spending by completely restructuring the system. It is ridiculous that a country of less than 3 million population has 11 major administrative regions(marzes). Vayots Dzor, for instance, has only 50 thousand population. The number of marzes can be reduced to 6 or 7. governors(marzpets) should be elected directly by people to improve accountability and decentralize the power and the decision making process. Secondly, while theRe is no doubt that agriculture needs attention, more should be done in sectors that have great potential in the short term. Tourism needs much more attention. It is ridiculous that a Chicago-Yerevan ticket is almost 1200 while a Chicago-Tbilisi ticket is only 700! Is it really that difficult to renegotiate the lease agreement with Eurnekians company which manages the airport? These kind of bottlenecks need to be fixed immediately. When it comes to energy, they have already plans to fully liberalize the market but they need to stop this nonsense about building a new nuclear reactor. No one is going to invest to build a nuclear reactor in a small country like Armenia. Better stop the nonsense and instead attract more investment and aid from EU to boost renewable, hydro and thermal for the final closure of the Soviet reactor. And finally, we, Armenians both in Armenia and in diaspora, need to understand that a person or a small group of people cant solve all the problems. Armenia needs our direct involvement, similar to how Jews are involved in Israel.
I would like to thank the author for this article and the valuable points raised.
However, I would like to mention “the elephant in the room” without which the main socio-economic woes of Armenia will be almost impossible to address.
That is of course, the lack of peace (agreement).
1. The threat of full-blown war is one of the main reasons behind depopulation.
2. That risk premium is reflected also in high borrowing costs of Armenian government and hence by extension rest of economic agents hindering competitiveness and profitability.
3.Lack of foreign capital investments(or even domestic that leaves the country every year) especially in long-term projects could be traced to the “riskiness” of the country.
4. High transportation costs due to border closings, inability to access huge markets of neighboring countries cheaply.
5. Posses major headwind to tourism via negative headlines and etc
6. Inability to access cheaper energy sources from neighboring countries, cheaper imported goods pushes inflation constantly higher than it could have been. As a result, higher domestic interest rates & less positive NPV projects.
These are some of the structural negatives stemming from lack of regional peace. Unless a permanent peace is achieved, it would be extremely hard to lift per-capita GDP from 4000$ to somewhere close to Eastern European average via domestic reforms only anytime soon.
Georgia has perfect relations with both Azerbaijan and Turkey yet its GDP Per capita is only slightly more than Armenia. Moldova is not even in this region yet its the poorest country in Europe(much poorer than Armenia) mainly due to corruption. There is absolutely no doubt that solving Armenia’s problems with its neighbors will help with the economy yet it’s oversimplifying to attribute all Armenia’s economic problems to the NK issue and problems with Turkey/Azerbaijan. Many of the items you mentioned have really nothing to do with Armenia’s problems with its neighbors. Armenia buys its gas from Russia, the same source that provides many Eastern European countries with gas. Inflation has never been a serious problem in Armenia. Immigration is a major problem in all former Soviet Union countries including Georgia and Azerbaijan. It will be great to solve Armenia’s external problems with its neighbors but we need to understand that the only way to open the Turkish border is to prove that the closure of the border is useless. Otherwise, the border is going to be a card Turks will always use against Armenia. After all, closing the border takes only a few hours.
Galitsky is on point with his analysis. I would however point out the opportunities Armenia has in becoming a regional education hub. The recent success of the Yeznig Mozian School of Technical Education is Shushi is a shining success story and example of the potential. Armenia’s building trades such as plumbing, electrical , HVAC and general masonry is sorely in need of modern western standardized construction. Our friends from France have identified that and now have the first Western European style construction technical education campus flourishing in Shushi with close to 200 students. This is another industry that can have exponential benefits for the short and long term development of Armenia’s economy.
Thank you ritooli for your comments, but let me disagree.
1. What about Georgia’s relations with Russia? Or Moldova’s with Russia and its Transdnestria issue? Your examples only strenghen my point.
2. Armenian never had issue with inflation?Why do you think then central bank rate is at high single digits or mortgage rate is 18% or business loan rate is at 12%? What would happen if central banks just tries to lower rates? All these monopolies and lack of productivity make sure that a country with 20% unemployment rate still has such high interest rates, because otherwise the other choice would be rampant inflation.
3. Obviously, most poor countries face the problem of depopulation. However, the question is about the pace and underlying specific conditions on the ground. Central Asia, Gerogia and Azerbaijan had their troubling share of wars. Yet, Belorus didn’t and has >0 population growth.
4. There is no doubt corruption is a major problem, and I don’t oversimplify anything. I just mentioned one major problem that my country has and by not mentioning or downplaying it seems irresponsible and a flaw in the analysis.
Emin,
Your Georgia-Russia or Moldova-Russia analogy simply don’t work. Although both countries have bumpy relations with Russia, nevertheless, their problems with Russia is by no means comparable to the total blockade of Armenia’s borders by its 2 Turkic neighbors. Georgia still exports millions of dollars worth goods to Russia. I am not sure how my examples strengthen your point!
Central bank policies are driven by many factors, inflation is only one of them. If the idea is that opening the border will facilitate the import of certain goods and have only a minor impact on prices, I totally agree with you. But if you are trying to say that opening the border will lead to lower interest rates, then, with all due respect, that is almost funny. Sharply lowering the interest rate, with or without open border, will depreciate the Dram and have many consequences on the economy, will make repaying Armenia’s foreign debt extremely difficult.
Immigration has many reasons, some leave for better opportunities, some better life and some injustice. The most important factor is outlook. I don’t think the April 2016 war had any impact on the number of people leaving the country although it certainly increased the risk of a new war. I can give you the Baltic countries were there has been no wars since independence yet they are facing serious population problems as a result of people leaving for better life in Western Europe.
You have the right to mention anything you want. But there is only one way Armenia can survive in that region, to prove that it can fix its economy with or without the open border. Succumbing to Turkey’s precondition will turn the border issue into the kind of leverage that will always be used against Armenia.
ritooli,
I’m glad that my comments make you laugh, although my intention was to have a bit more serious discussion.
So Russia invading Georgia as early as in 2008 and still controlling huge chunk of its territory of Abkhazia and South Ossetia is only “bumpy”? Many Georgians would definitely find that funny or Moldovans from Transdnestria.
I understand that macroeconomics is not for everyone, but I would try the third time: Closed borders lead to higher costs that lead to higher selling prices that lead to higher interest rates. So, if borders are opened, costs will fall = things will become cheaper and that will allow central bank to lower rates which will spur growth (all things equal). Hope this clears my point.
SO you are saying Armenia should fix corruption so people don’t leave and not make peace with Azerbaijan and bring an example of Baltics??? Yet again, that proves my point.
Emin,
It’s good to have the courage to accept your mistakes instead of pretending that you don’t get it.
We are talking about ECONOMY. You really need to explain it how does the invasion of parts of Georgia or Moldova years ago has any impact on their economies while they are doing business with Russia. And is that impact comparable to the impact the closure of 70 percent of Armenia’s border has on its economy. Whether I describe it as being bumpy or catastrophic has no bearing on this discussion.
You don’t need a degree in economics to understand that central banks set interest rates considering myriad of factors. If open borders are enough to lower interest rates then Azerbaijan’s interest rate wouldn’t have been 15 percent! Opening the Armenian Turkish border will have minimal impact on inflation and even if we assume it will bring the prices down that is still not enough for the central bank to lower the interest rate and depreciate the national currency. Unless they want to destroy their own banking system.
I give you Baltic states as examples of countries that are not in war, have no close borders yet have immigration problems similar to Armenia. It simply goes to show that immigration is a global problem and solving the NK issue will not necessarily stop it unless we manage to solve a whole bunch of other stuff. Now, how on earth does that prove your point?!