By Emil Danielyan
When a country sees its gross domestic product soar by over nine percent, making its economy one of the most rapidly growing in the world, it should presumably have a cause for celebration. But jubilation is the last thing most Armenians would want to indulge in as they enter into the 11th year of painful social and economic transformation. For the simple reason that the unprecedented upswing claimed by the government statistics has hardly improved their plight.
The official figures are impressive indeed. They show the Armenian economy growing at a record-high rate of 9.1 percent under a three percent inflation from January through November this year. Exports were up 14 percent, while imports remained virtually unchanged during the same period, putting Armenia’s huge current account deficit on track to fall from 14.5 percent to 11 percent of GDP in 2001. Equally important is a 13 percent rise in retail sales.
“Despite how unhappy people seem to be with the situation there is a definite improvement here,” said a Western diplomat in Yerevan. “Even if the statistics are not really entirely reliable…no one should question that there is a macroeconomic improvement going on.”
Armenia’s macroeconomic performance is described as encouraging by the International Monetary Fund, a key driving force behind the decade-long reforms. But IMF officials are also quick to point out what analysts and some government officials alike would agree with: the Armenian growth has so far benefited mainly the rich and widened income disparity.
At least half of the population remains mired in poverty, and unemployment is still extremely high.
“There is a robust growth in Armenia but we don’t see the level of poverty declining as there is only one small class that enjoys its fruits,” said the IMF representative in Armenia, Garbis Iradian.
President Robert Kocharian’s chief economic adviser painted a similar picture in a recent interview with RFE/RL. Vahram Nercissiantz, who headed the World Bank office in Yerevan in the 1990s, argued that the rise in low living standards is seriously hampered by poor tax collection and the resulting low level of public spending.
Indeed, tax revenues are expected to make up less than 15 percent of Armenia’s $2.1 billion GDP this year. This ratio is twice higher in ex-Soviet states like Russia and Ukraine. As a result, Armenia gets an annual budget of less than $500 million, which is nowhere near enough to meet its basic needs. Economists warn that the meager amount of public funds spent on education and healthcare may cost the country dearly in the years to come.
The government’s tax revenues have increased this year but not enough to meet the revenue targets set by the 2001 budget. The government is now scrambling for funds to offset a shortfall in third-quarter revenues. This fact gives its critics reason to assert that the growth is either not being fully taxed or is not as rapid as the authorities claim.
Hrant Bagratian, the former liberal prime minister, believes that the real growth rate is unlikely to be more than five percent. “It’s hard to believe in the credibility of these figures,” he told RFE/RL in an interview.
The more dominant view is that the bulk of the extra wealth generated by the economy ends up in the pockets of wealthy businessman, many of them with close links to the ruling regime. Otherwise, the argument goes, the authorities would not have trouble implementing their modest budget.
The fiscal problems highlight the existence of a huge informal or shadow economy based on tax evasion. Some analysts suggest that it might about the size of the legal sector.
Hidden employment is one of its by-products. Hundreds of thousands of Armenians are thought to have jobs that are not listed in the document registry of the tax authorities. This makes it difficult to gauge the real impact of the growth on people’s lives.
President Kocharian has announced recently that the formal sector has generated more than 40,000 new jobs over the past year – a figure questioned by his political opponents. But even if it is true the situation on the ground has not improved markedly, with Armenia’s GDP still at 70 percent of its 1990 level.
“Such a growth – from eight to nine percent – has to continue for at least four or five more years in order to make a difference to the economy,” said the IMF’s Iradian.
Kocharian opponents also point to the structure of the GDP growth. With industrial output rising by just three percent during the 11-month period, the economy has been largely pushed up by the construction and agricultural sectors. The latter has simply recovered from last year’s severe drought due to a better harvest.
Skeptics also cite the continuing lack of foreign investments in the Armenian economy. They are unlikely to exceed $100 million this year.
The figure does not include the substantial money remittances from the Diaspora and Armenian nationals working abroad, mainly in Russia and the United States. The Armenian Central Bank estimates that the total amount of the private transfers has reached $300 million this year. But the real figure could be even higher.
“It’s a lot of money -- hard currency generated say from Moscow or Los Angeles that’s somehow getting here,” one Western diplomat told RFE/RL. “Where it is going is not clear. Sometimes I think a lot of the wealth in this country is driving around the streets of Yerevan in $90,000 cars.”
Only a small proportion of that money gets into the local banks. No wonder that most business transactions in Armenia are done in cash.
Trying to understand what really drives an economy where growth is not fueled by the banking system and capital markets is a mind-boggling task. Nor is it easy to assess its growth prospects.
The Western donors’ recipe for sustained growth is the improvement of the business climate, which still leaves to be much desired in Armenia. Throughout 2001 they increasingly urged Yerevan to clamp down on endemic corruption and ensure the rule of law.
In ex-premier Bagratian’s view, the current authorities could have secured a double-digit growth if they had kept up the momentum in structural reforms of the healthcare and pension systems, taxation and licensing policies, and the energy sector. He said they should also find a way to channel the huge cash resources into the legal economy.
Nor less important, it appears, is peace and stability in the region. Each of its three impoverished countries is too small a market to be attractive to large foreign investors, not including several oil multinationals developing Azerbaijan’s oil reserves. The reopening of borders and a free movement of capital and goods across the South Caucasus is hardly possible without the settlement of the conflicts in Nagorno-Karabakh and elsewhere in the region. The current status quo thus harms Armenia and neighboring Georgia and Azerbaijan.
“We risk being left on the sidelines of globalization,” said Eduard Aghajanov, a former government minister who now runs a private economic think tank in Yerevan. “The regional states will be of little interest to international business unless they act together.”
When a country sees its gross domestic product soar by over nine percent, making its economy one of the most rapidly growing in the world, it should presumably have a cause for celebration. But jubilation is the last thing most Armenians would want to indulge in as they enter into the 11th year of painful social and economic transformation. For the simple reason that the unprecedented upswing claimed by the government statistics has hardly improved their plight.
The official figures are impressive indeed. They show the Armenian economy growing at a record-high rate of 9.1 percent under a three percent inflation from January through November this year. Exports were up 14 percent, while imports remained virtually unchanged during the same period, putting Armenia’s huge current account deficit on track to fall from 14.5 percent to 11 percent of GDP in 2001. Equally important is a 13 percent rise in retail sales.
“Despite how unhappy people seem to be with the situation there is a definite improvement here,” said a Western diplomat in Yerevan. “Even if the statistics are not really entirely reliable…no one should question that there is a macroeconomic improvement going on.”
Armenia’s macroeconomic performance is described as encouraging by the International Monetary Fund, a key driving force behind the decade-long reforms. But IMF officials are also quick to point out what analysts and some government officials alike would agree with: the Armenian growth has so far benefited mainly the rich and widened income disparity.
At least half of the population remains mired in poverty, and unemployment is still extremely high.
“There is a robust growth in Armenia but we don’t see the level of poverty declining as there is only one small class that enjoys its fruits,” said the IMF representative in Armenia, Garbis Iradian.
President Robert Kocharian’s chief economic adviser painted a similar picture in a recent interview with RFE/RL. Vahram Nercissiantz, who headed the World Bank office in Yerevan in the 1990s, argued that the rise in low living standards is seriously hampered by poor tax collection and the resulting low level of public spending.
Indeed, tax revenues are expected to make up less than 15 percent of Armenia’s $2.1 billion GDP this year. This ratio is twice higher in ex-Soviet states like Russia and Ukraine. As a result, Armenia gets an annual budget of less than $500 million, which is nowhere near enough to meet its basic needs. Economists warn that the meager amount of public funds spent on education and healthcare may cost the country dearly in the years to come.
The government’s tax revenues have increased this year but not enough to meet the revenue targets set by the 2001 budget. The government is now scrambling for funds to offset a shortfall in third-quarter revenues. This fact gives its critics reason to assert that the growth is either not being fully taxed or is not as rapid as the authorities claim.
Hrant Bagratian, the former liberal prime minister, believes that the real growth rate is unlikely to be more than five percent. “It’s hard to believe in the credibility of these figures,” he told RFE/RL in an interview.
The more dominant view is that the bulk of the extra wealth generated by the economy ends up in the pockets of wealthy businessman, many of them with close links to the ruling regime. Otherwise, the argument goes, the authorities would not have trouble implementing their modest budget.
The fiscal problems highlight the existence of a huge informal or shadow economy based on tax evasion. Some analysts suggest that it might about the size of the legal sector.
Hidden employment is one of its by-products. Hundreds of thousands of Armenians are thought to have jobs that are not listed in the document registry of the tax authorities. This makes it difficult to gauge the real impact of the growth on people’s lives.
President Kocharian has announced recently that the formal sector has generated more than 40,000 new jobs over the past year – a figure questioned by his political opponents. But even if it is true the situation on the ground has not improved markedly, with Armenia’s GDP still at 70 percent of its 1990 level.
“Such a growth – from eight to nine percent – has to continue for at least four or five more years in order to make a difference to the economy,” said the IMF’s Iradian.
Kocharian opponents also point to the structure of the GDP growth. With industrial output rising by just three percent during the 11-month period, the economy has been largely pushed up by the construction and agricultural sectors. The latter has simply recovered from last year’s severe drought due to a better harvest.
Skeptics also cite the continuing lack of foreign investments in the Armenian economy. They are unlikely to exceed $100 million this year.
The figure does not include the substantial money remittances from the Diaspora and Armenian nationals working abroad, mainly in Russia and the United States. The Armenian Central Bank estimates that the total amount of the private transfers has reached $300 million this year. But the real figure could be even higher.
“It’s a lot of money -- hard currency generated say from Moscow or Los Angeles that’s somehow getting here,” one Western diplomat told RFE/RL. “Where it is going is not clear. Sometimes I think a lot of the wealth in this country is driving around the streets of Yerevan in $90,000 cars.”
Only a small proportion of that money gets into the local banks. No wonder that most business transactions in Armenia are done in cash.
Trying to understand what really drives an economy where growth is not fueled by the banking system and capital markets is a mind-boggling task. Nor is it easy to assess its growth prospects.
The Western donors’ recipe for sustained growth is the improvement of the business climate, which still leaves to be much desired in Armenia. Throughout 2001 they increasingly urged Yerevan to clamp down on endemic corruption and ensure the rule of law.
In ex-premier Bagratian’s view, the current authorities could have secured a double-digit growth if they had kept up the momentum in structural reforms of the healthcare and pension systems, taxation and licensing policies, and the energy sector. He said they should also find a way to channel the huge cash resources into the legal economy.
Nor less important, it appears, is peace and stability in the region. Each of its three impoverished countries is too small a market to be attractive to large foreign investors, not including several oil multinationals developing Azerbaijan’s oil reserves. The reopening of borders and a free movement of capital and goods across the South Caucasus is hardly possible without the settlement of the conflicts in Nagorno-Karabakh and elsewhere in the region. The current status quo thus harms Armenia and neighboring Georgia and Azerbaijan.
“We risk being left on the sidelines of globalization,” said Eduard Aghajanov, a former government minister who now runs a private economic think tank in Yerevan. “The regional states will be of little interest to international business unless they act together.”