Questionable Economic Results Do Not Provide Justification For Signing
The Turkey-Armenia Protocols
Asbarez
Jan 8th, 2010
BY ARA KHANJIAN
Those who support the Armenia-Turkey Protocols claim that, when Turkey
lifts the blockade, Armenia will experience a significant amount of
economic gain, which will reduce poverty.
This article questions this claim. It argues that when Turkey opens
the border, economic gains to the consumers, theoretically, could be
positive; however its extent would be questionable. The article argues
that open borders would hurt Armenian producers who could not compete
with subsidized and protected Turkish products, that the open borders
would cause just a modest increase in Turkish imports and finally, in
order to generate economic development and reduce poverty, it is much
more important for Armenia to implement domestic reforms than for
Turkey to the lift the blockade.
1. Will Armenian consumers benefit when Turkey lifts the blockade?
The answer is maybe. Currently Turkish products are imported through
Georgia. When Turkey opens the borders, Turkish products will be able
to enter Armenia directly from Turkey and the transportation cost will
go down. Therefore the Armenian businesspeople who are importing the
Turkish products will be able to bring them to Armenia at a lower
cost. Economic theory assumes that there will be competition among
importers and the price of Turkish imported goods will go down. In
this scenario the Armenian consumer will benefit; however the problem
is that there is no guarantee that there will be competition among
importers. There is the possibility that a few oligarchs might control
the major imports through Turkey. In that case the Armenian
monopolists will be able to keep prices at the same level and the
benefit of lower transportation cost will go to the powerful rich
importers, instead of the consumers. Therefore there is no guarantee
that there will be consumer surplus and that consumers will benefit
from open borders.
>From around 2003 to early 2009 when the value of the Armenian money
Dram (AMD) was going up and appreciating, economic theory predicted
that the prices of imported goods in AMD will go down. However the AMD
prices of many imported goods did not go down or their decrease was
insignificant; therefore the benefit of appreciated AMD went to the
powerful rich importers, instead of the Armenian consumers and the
poor. Armenia could experience the same, when the borders with Turkey
are opened.
2. The lifting of the blockade would hurt Armenian producers who could
not compete with subsidized and protected Turkish products
During June 2009 in Yerevan the ARF Bureau published an excellent
report on the impact of the opening of the Turkish border on different
economic sectors in Armenia. The report provides detailed information
about both Turkish and Armenian economic sectors. [1]
The information of this section, is based on the information available
in this report.
We could divide Armenian producers into two groups: First, large
companies producing energy and raw materials such as copper. Most of
Armenia’s exports are based on raw materials. This group will be
affected very little from the opening of the Turkish border. The
second group could be represented as small and medium size producers,
producing for the domestic markets, mainly in the agricultural and
food production sector. It is expected that the cheap Turkish imports
would hurt this second group of Armenian producers and some of them
would go bankrupt. A major advantage of Turkish producers is the
amount of government support that they receive. It is safe to say that
the Turkish government supports its domestic producers more than
Armenia’s government supports producers in Armenia in three different
ways: protecting domestic production, subsidizing domestic production
and promoting exports.
Protecting domestic production: Turkey protects domestic production
from imports through higher tariffs and quotas than Armenia. In
Armenia, many goods don’t have import tariffs and the highest tariff
is 10 percent, while in Turkey the average tariff is 10 percent and
about 1/5 of the goods have tariffs higher than 10 percent. A major
sector that is protected is the agricultural sector. Relative to
Turkey, Armenia has significantly fewer import restrictions. When
Turkey lifts the blockade this inconsistency must be addressed.
Government subsidies: In Turkey there are many state programs and
agencies that provide state support and subsidies to local producers.
Farmers are supported through law interest loans, and other subsidies,
such as funds to buy fuel and fertilizer. When market prices of
certain agricultural goods, such as olive oil, cotton, wheat etc. go
down significantly, the government subsidizes their producers. Turkey
reduces the tariffs and restrictions on imported goods that are used
as inputs to produce goods in Turkey. These measures act as subsidies
to the local producers. Also, Turkey spends relatively much more on
research and development than Armenia, which could give it an
advantage in the long run. Armenia’s government can’t afford to
provide so many subsidies to its producers; therefore when Turkey
lifts the blockade Armenian production will be vulnerable to Turkish
imports.
Promoting exports: A Turkish government agency called Trade Promotion
Center is the main organization through which the state promotes
exports. This center achieves its goal through promoting research and
development, providing and publishing information about trade,
managing plans for exports and promoting trade through
intergovernmental relations. The government also promotes exports
through reduction in taxes and subsidies. Sixteen product groups, such
as eggs, honey, processed fish, etc., receive export subsidies from 10
percent to 20 percent of their total value.
The Turkish government promotes exports through subsidized loans. In
1987 The Turkish government created a special bank called Eksimbank,
to finance and support businesses that export goods. Its goals are to
increase the volume of Turkish exports, to find new international
markets for Turkish exports, to diversify the Turkish export goods and
to support the businesses that cooperate with Turkish exporters, their
investors or foreign partners. This bank provides loans with low
interest rates to these entities.
It is amazing that the government of Armenia still advocates
unrestricted markets and justifies the signing of the protocols by
arguing that the protocols are promoting free markets, given the fact
that the Turkish government does not just rely on free markets and is
actively involved in the economy,
3. The lifting of the blockade will cause a modest increase in Turkish imports
transportation cost will go down, when Turkey ends the blockade and
Turkish imports start arriving to Armenia directly instead of through
Georgia. This will increase the amount of Turkish products that would
be competitive in Armenia. In 2007 Beilock and Torosyan estimated that
the lifting of the blockade would increase imports from Turkey by
about 50 percent. [2]
During 2008, according to the National Statistical Services of the RA,
armstat.am, imports originating from Turkey represented just 6.1
percent of Armenia’s total imports. Therefore a 50 percent increase of
a small percentage of Armenia’s imports should not have a major impact
on the standard of living of the population and poverty, contrary to
the claims of the supporters of the Protocols. It is interesting to
note that Armenia has open borders with Iran and Georgia; however the
level of imports from these two neighbors is very modest. The imports
from Iran represent 4.6 percent of total imports, while imports from
Georgia represent just 1.1 percent of total imports. This implies that
open borders do not necessarily generate high levels of trade.
If the powerful rich Armenian oligarchic importers artificially keep
the prices of Turkish products high, then the gains of the cheap
Turkish imports would go to the rich Armenian oligarchs, instead of
the Armenian consumers. In this case the Armenian consumers would gain
very little from the lifting of the blockade, while the Armenian
producers would lose significantly, generating a net overall economic
loss.
4. For the reduction of poverty in Armenia, the improvement of the
domestic economic and social environments is much more important than
the lifting of the blockade
If the government and the leadership of Armenia are really concerned
with the reduction of poverty in Armenia, then instead of wasting
energy on lifting the Turkish blockade, which will have debatable
economic impact on the standard of living, they should use their
resources to implement domestic reforms, such as:
1. Reduce the power of rich oligarchic monopolists and promote genuine
competition in Armenia. We could argue that the increase in the level
of competition in the Armenian markets is much more important for the
development of the economy, than the lifting of the Turkish blockade.3
2. Reduce the level of corruption, bureaucratic obstacles and shadow
economy. Improve the legal system. These measures will make it
possible for Armenian small and medium size businesses to thrive and
contribute to the generation of jobs in Armenia. This will also
increase the tax revenues of the government, which are relatively very
low compared even to the other former Soviet republics. With higher
tax revenues, the government will be able and should: [3]
Build public infrastructure in agriculture such as: roads and water
resources. Armenia should increase productivity and competitiveness of
the agricultural sector. We should reduce the sector’s dependence on
the climate, improve irrigation, provide financing to the farmers,
improve marketing etc.
Improve the productivity of the Armenian economy in general. This
could be achieved by increasing expenditures in education, research
and development, health care and the infrastructure of the country,
such as transportation, electricity, irrigation, communication,
internet access, etc.,
Improve pensions, housing and safety nets for the poor.
All these measures would generate economic development and reduce
poverty. They would increase the standard of living of the people and
not just the living conditions of the upper middle class and the rich.
[4]
In conclusion, dubious economic results do not provide justification
for signing the Turkey-Armenia protocols, which will confirm and
accept that Kars, Ardahan, Massis, Ararat and the remaining Armenian
lands occupied by Turkey are Turkish land, which will generate
directly or indirectly doubts about the Armenian Genocide and which
could endanger Karabakh.
Footnotes
_____________________________ ___
1. Download the ARF Bureau economic report HERE.
2. Karine, Torosyan and Richard Beilock (2007). `A Phased Strategy for
Opening Armenia’s Western Border.’ Armenian Journal of Public Policy,
Special Issue.
3. During December 2009, The Civilitas Foundation in Armenia conducted
a poll through its web site and 88% of the respondent `think that
domestic reforms will have a better influence on the economy’ than the
lifting of the blockade. See the poll results.
4. Read a very good article by Serouj Aprahamian and Allen Yekikian,
`In Who’s Interests? The Political Economy of Armenia-Turkish
Relations,’ Asbarez, December 28, 2009. This is an excellent
investigative reporting and analysis of the economic interests of the
ruling class in Armenia.