Armenia: Promoting Economic Activity and Investment through …

Foundation for Economic Development
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: August 20, 2007

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Armenia: Promoting Economic Activity and Investment through an Improved
Business Environment

By Karen Grigorian


In the early ’90s, the Armenian government successfully implemented its
first generation of reforms, which provided a strong foundation for
sustainable growth. Since 1994, the Armenian economy began to show signs of
recovery from a major contraction experienced during 1991-93 when the
country lost nearly 60% of its output. This transformation rapidly
accelerated from the beginning to mid-2000 thanks to a focused effort aimed
at improving the overall business environment and the supporting framework
for investment. The country continued enjoying relatively high rates of
economic expansion and recorded an incessant double-digit growth since 2002.
Demand for Armenian products abroad also grew significantly.

This strong performance has been largely dependent on financial assistance
from the Diaspora, World Bank, USAID, UN organizations, European Union, and
bilateral donors. Acceleration in private-sector investment, reflecting an
improving business environment, is also a determinant cause of this

The government’s economic policy adopted Private Sector Development (PSD) as
one of its key elements since the beginning. This is mainly evident from the
massive privatization effort undertaken by the state where about 90% of the
economy was sold to private entities, as well as in the enactment of a
number of economic policies that supported the growth of the private sector.
These actions set the tone for the coming economic growth.

Armenia’s good performance in the last 3 years, in particular, was
reinforced by a certain diversification of the economy. While agriculture
and food processing continued to grow, the light industries sector also
showed signs of vitality and at times a very strong recovery. The backdrop
for all this remained a solid and stable macroeconomic framework and an
improved fiscal performance. The latter is a significant achievement for the
state, i.e. while the fiscal situation improves and becomes stronger, the
government has more flexibility in terms of revenue mobilization and public
expenditures. This also means more flexibility to undertake larger and
long-term initiatives rather than crisis management. The government, indeed,
now enjoys a much better prospect for controlling the economy and planning
its development.

The achievements attained by Armenia came at a cost and despite some serious
constraints. Particularly, to-date, transport costs within and out of the
country remains high and freight forwarding is still a complicated affair in
respect to other countries in the region. Nonetheless, the economy continues
to develop — not to a lesser degree thanks to Diaspora interventions. From
this perspective, the importance of Armenians living outside of Armenia
should not be overlooked. Remittances by family members living abroad remain
a very important part of the economy and appear as the single biggest source
of foreign currency source for Armenia. This is also telling from the
point-of-view of Armenians who have successfully established themselves in
foreign countries and continue to support their relatives and friends.

Armenia is one of the most liberal and open market economies in the region
and even globally according to a number of recent studies and surveys. Moody’s
just rated Armenia Ba2, while the Economic Freedom Index released by the
Heritage Foundation and Wall Street Journal ranked Armenia 27th out of more
than 150 countries. The latter uses 50 indicators such as capital flows and
foreign investments, banking and financial systems, monetary, budget and
trade polices, salaries and prices, state interference in the economy,
property rights and regulations and black markets. This demonstrates that
progress in trade and price liberalization, increased investments in
infrastructure, privatization or closure of most state-owned enterprises,
and efforts to streamline government regulation, have considerably enhanced
the business environment.

The 2006Annual Administrative and Regulatory Cost Survey also suggests
noteworthy improvements in the business environment. When asked about the
general satisfaction with the quality of regulations, administrative
requirements and bureaucratic behavior of state agencies, only 38% of
Armenian businesses considered it as a problematic constraint, while the
average rating was 3.50 (somewhat satisfied)[1]. This percentage is
calculated as the sum of the number of companies responding very
dissatisfied, dissatisfied and somewhat dissatisfied. This is a
considerable improvement over the results of the 2004 and 2000 surveys, when
respectively more than 60% and 71% of companies were dissatisfied with the
overall quality of business regulations. It is also worth noting that in the
2006 Survey large companies were somehow more dissatisfied (45.83% of large
companies) with government regulations than medium (41.41%) and small-sized
(35.03%) enterprises. Furthermore, companies operating in different sectors
of the economy have almost the same level of dissatisfaction with government
regulations – commercial companies being a little more constrained with the
overall quality of business regulations.

In spite of all commendable improvements, corruption remains a key area of
constraint and needs to be addressed. Armenia’s ranking in the Corruption
Perception Index has not improved marginally between 2000 and 2004, thus,
indicating persistent administrative barriers/discretion to doing business.

Transparency International Corruption Perception Index

Rank 2000 (1-90)
Rank 2004 (1-133)
Score 2000
Score 2004





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There are also overall concerns regarding the tax, customs and general
public administration areas. Firms, especially small and medium-sized ones,
still feel there is room for improvements in this area. Many argued that
dealing with taxes and other regulatory requirements is time consuming, not
transparent and adds to the overall cost of doing business. In other words,
it evidently puts strain on the private sector’s capacity to do business
since dealing with administrative issues is time-consuming and costly.

On the other hand, Authorities seem to be genuinely pushing for improvements
allowing for transparency and openness. In the tax and customs systems, they
aim to make it easier for clients to interact with these agencies, although
it is obvious that it is not enough to change pertinent laws, but,
institutional cultures must also be changed. However, sustained effort and
time are needed for bringing about institutional change. Sustained effort
means that the government has to commit itself to progressive improvement
aimed at eradicating this cancer from the system. Some of it can be dealt
with by obvious administrative changes such as the ongoing implementation of
self-declarations for taxes and customs that aim at reducing contact with
customs and tax officials.

Another important area for consideration in terms of improving the business
climate is the need to reduce the overall transaction costs for doing
business. This doesn’t just mean bills for utilities or transport, it also
means time and other wasted efforts. This area needs to be progressively
improved and adjusted over time. Confidently, progress is already being
made, but certainly there is no impression that this is a very easy task.

The Administrative Barriers Study prepared by the Foreign Investment
Advisory Services (FIAS) of the World Bank Group suggests that, in general,
there have been notable improvements in a number of administrative
procedures affecting businesses since 2000 — including business
registration and licensing. While strongly commending these achievements, it
is important to record that the more difficult tasks of ensuring efficient
and fair tax and customs administration, transparent privatization and lease
of public land and construction coordination remain to be tackled.
Therefore, it is of critical importance that the government recognizes and
prioritizes some fundamental issues that have not been fully addressed over
the last several years. While certain areas, such as enterprise
registration, licensing and title transfer registration have seen consistent
improvements, there are plenty of administrative procedures that remain
complex and cumbersome, especially for smaller businesses and new entries
(both local and foreign).

Comparing Armenia with other countries based on the official time for
company registration indicates that there is still room for reductions to
catch up with best practice countries in terms of simplicity and speed of
enterprise registration and related institutional arrangements (such as
information sharing among government institutions, use of single
registration form and identification number).

Over the past four years, a variety of changes have occurred in various
locating processes that have helped to accelerate land acquisition and
planning approval procedures. Although significant progress has been made,
further streamlining measures should be implemented to remove existing
development barriers for investors. Attention should be given to further
streamlining the existing land and construction processes, which remain
cumbersome for investors and are not always transparent or accountable.

The activities of the Business Support Council (BSC) were instrumental in
bringing a number of investment climate issues to the agenda of the
government in recent years.

The BSC served as the high-level forum for identifying administrative
barriers, addressing them at the technical level through public-private
sector dialogue, and implementing reform in a comprehensive manner that
ensures accountability within government and to the business community.

Following the findings of the FIAS study, an action plan was developed by
BSC. A critical component of this effort is to assist the Armenian
government in implementing the proposed action plan for the removal of
administrative barriers to investment, which could serve as a tool for
achieving ongoing and sustained improvements.

Experience suggests that an action plan is most effective when it is
detailed, when it accurately presents the concerns of businesses, when it
includes feasible solutions that are the result of public consultations, and
when it mandates responsibilities and imposes realistic deadlines. It
should also contain performance indicators to evaluate if the desired impact
is being achieved. In Armenia, the level of public-private interaction that
took place in preparing the agendas of the Business Council meetings and
follow up on the originally agreed action plan was not sufficient to tap
into the full potential of such an instrument.

In summary, there is no reason to believe that the momentum created in the
country cannot be sustained (despite a number of risks), and, if progress
continues this way, confidently, the economic growth will benefit all
segments of Armenian society.

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[ 1] On a six -point scale, where 6 stands for very satisfied, 5 – for
satisfied, 4 – for somewhat satisfied, 3 – for somewhat dissatisfied, 2 –
for dissatisfied and 1 – for very dissatisfied.

From: Emil Lazarian | Ararat NewsPress

Emil Lazarian

“I should like to see any power of the world destroy this race, this small tribe of unimportant people, whose wars have all been fought and lost, whose structures have crumbled, literature is unread, music is unheard, and prayers are no more answered. Go ahead, destroy Armenia . See if you can do it. Send them into the desert without bread or water. Burn their homes and churches. Then see if they will not laugh, sing and pray again. For when two of them meet anywhere in the world, see if they will not create a New Armenia.” - WS