Notes from the Pink City
Are Tariffs Protecting Local Jobs or Corporate Welfare?
This week, the workers at the Ararat Cement plant took to the streets in protest following news of mass layoffs. The plant, located just outside Ararat, is one of two in the country and employs almost 1200 workers, making it the single largest source of jobs in the impoverished region. A number of other Soviet-era manufacturing plants have long shut their doors.
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Another thought-provoking article and excellent economic analysis. You are correct Raffi when you mention the “mismanagement”of the Ararat cement factory. I had written a “letterfromArmenia” on this subject (an eye-witness account f my experience buying cement there in 2007, when I built my garage in Yeghegnadzor). See: http://lettersfromarmenia.blogspot.com/search?q=cement
I totally agree with Raffi that tariffs kill competition but I am surprised he made no mention of the fact that Iran itself is the country of tariffs. Free trade leads to competition and prosperity when both sides are equally interested in it. Iran has one of the most protectionist economies in the world. Armenia sells more goods to Iraq than Iran which is it’s neighbor. Not because Armenian goods are of low quality but simply due to the barriers that Iran creates for foreign companies. One more thing that the article makes no mention is the unprecedented depreciation of Iranian currency. Iranian Rial is now literally worthless and that is the main reason their export to Armenia including cement has surged the last few years.
Thank you for adding these important discussion points. I wish I had mentioned them in more detail, but alas, I was constrained by the article’s length.
You’re right about Iran’s protectionist policies being some of the absurd in the World, but it’s worth noting that these same policies were in place back in 2006 (when Armenian cement sales to Iran were supposedly high) – Furthermore, a free trade agreement is expected to enter into force between Armenia (& the EEU) and Iran this year, which should make it cheaper for Armenian cement exports to Iran, not higher.
As for the second point: Despite the hit to the Iranian currency following the new sanctions, the Rial has almost doubled in value since 2006 – so again, this goes against conventional explanation for why Iranian cement is suddenly more competitive than its Armenian counterpart.
Raffi,
Additionally to the good points made by ritooli, you missed some crucial points in your analysis.
1. Iranians cement producers, and overall all the Iranian companies that need a lot of energy to produce their goods, are now getting their gas almost for free. It wasnt the case in 2006 when oil prices were high, as Iranian gvt was at that time prioritising export of crude/refined/gas over export of goods. Subventionning energy and encouraging export of energy related goods is a way to mitigate the effect of sanctions to get the max foreign currency possible. So the competition is not exactly fair. Not mentioning the transportation cost, importing from Iran will always be cheaper than exporting to Iran.
2- I dont know where did you get that Rial value almost doubled, it seemed highly doubtful to me, so I checked amd/ rial and could only get the 10y history. Rial plummeted x4, about. I dont need to check any further until 2006, patterns were the same.
3. Cement is a strategic asset. As where fertilisers (RIP Vanadzor khimprom). Although investing in increasing the productivity of the factory should be the priority, you need to protect such strategic assets at least momentarily with tariffs, if needed. It is called the protection of infant industry. Its a macro economic basic and widely used all over the world to industrialise or re industrilise a country. Considering the unfair competion faced by our cement producer, it is only fair to apply those tariffs for some time, if we dont take into consideration all other political/strategic issues such as gas vs electricity agreement, very advantageous to Armenia.
4. Armenia has already the most open economy of the region. We wipe ourselves with Turkish paper, we have Belarusian apotatoes and Iranian carotts. Carotts, potatoes and toilet paper for god sake. These are just examples among many others that should raise questions about the comparative disadvantages of our economy. Shall we, on the holy principle of “laissez faire laissez passer”, stop producing those goods together with your subliminal suggestion of letting Ararat cement go bankruptcy? Tarrifs are not a solution, but it is high time for more economic patriotism and Ararat cement is a good place to start with.
Last but not least, since you question the quality of the domestic cement, Im sure you had done analysis performed by a survey cie? It cost abt 500 usd + DHL.