AN AMBITIOUS ECONOMIC AGENDA FOR ARMENIA: IS THE NEW GOVERNMENT UP TO THE TASK?
By Haroutiun Khatchatrian
Caucaz.com, Georgia
July 18 2007
Armenia’s newly elected government has unveiled an ambitious
economic agenda, which the National Assembly approved on June 21. The
government’s program plans for steady economic growth which, according
the plan, "will enable Armenia to move to the group of medium-income
countries, by the end of 2009." The term "medium-income countries" is
usually used to refer to Eastern European EU member countries. This may
appear to be an unrealistic ambition for Armenia, a country which less
than a decade ago had a per capita income of 600-700 dollars. Although
impressive economic results in recent years allow the new Armenian
government to show some optimism, it will have to face the challenge
of making the Armenian economy truly competitive.
Parliamentary elections on May 12 marked a landslide victory for the
Republican party of Armenia (RPA), which has been the leading force
in the previous two governments since 1999. The RPA, which positions
itself as a national-conservative party, has become a typical "party
of power", whose members include most of government officials and
heads of local communities. Following the recent elections, it has
increased its presence from 40 to 64 seats in the 131-member National
Assembly, and the notorious "administrative resource" was not the only
factor that helped achieve this result. While in a position to form a
one-party government, the RPA preferred to share responsibility with
its old and new partners.
The RPA’s main partner, the Bargavach Hayastan ("Prosperous Armenia"
BH) party, emerged just one year before the elections with the
declared ambition of becoming a second "party of power". Created by
one of the richest man in Armenia, Gagik Tsarukian, it is believed
to be a project of president Robert Kocharian, who needs political
support after his second term expires in 2008. To say the least, the
BH’s status is ambiguous. While an official competitor to the RPA,
it acknowledges at the same time the economic success of the previous
government and claims only to participate in the government in order
to make these past successes more tangible for the average citizen.
Nonetheless, the BH party’s achievements fell below expectations and,
with 25 seats in the National Assembly, it agreed to be the RPA’s
junior partner in the coalition.
The third party in the government, the Armenian Revolutionary
Federation Dashnaktsutiun (ARF) is not a formal member of the
coalition. The traditional nationalist party, which was a member of the
previous governments, signed a formal co-operation agreement with the
two-party coalition. This enables ARF to keep both the three portfolios
it had in the previous government, and relative independence, which
may be needed during the presidential elections next year.
As in the previous eight years, the Republican Party will be the
principal actor in determining the country’s policy in the coming five
years. There is a general belief that Prime Minister Serge Sargsian,
the former defense minister, is Kocharian’s most likely successor
as president. As a result, in the coming years the RPA may gain a
sort of monopoly on governmental power, creating challenges both
for the very weak opposition and the RPA itself. At the same time,
the monopoly of power could prove a favourable factor to push the
government’s ambitious economic agenda, building upon the RPA-led
governments’ previous economic successes.
The challenge of making Armenia’s economy competitive
The new government’s economic programme is more than ambitious. It
envisions GDP growth at 8-10% per year over the government’s five-year
mandate. For comparison, the previous government’s programs were more
modest, foreseeing growth targets at 6-8% a year, which in reality
were repeatedly exceeded. Higher targets are difficult to reach,
especially now, after several years of strong performance.
High growth rates are easier to reach in poorer countries where
devastated economies are rapidly recovering. A simplified illustration
is the fact that growth of 6% or more per year is seen in many
post-Soviet countries, whereas EU countries are satisfied with rates
above 3%. The same is true for another of the program’s targets,
an increase in investments of at least 10% a year.
The new government has expressed its intention to lower the poverty
level to nearly 12% of the total, a level comparable to mid-level
European countries. Strong growth is planned in all spheres of social
security, including an increase in pensions from one half of the
poverty line to 1.5 times the poverty line.
Following its independence, Armenia faced a severe economic crisis.
GDP fell to 43% of the Soviet levels, leading to a collapse in
living standards and large-scale migration. At least one quarter
of the population left the country seeking work. Despite lacking
any significant natural resources and suffering from a blockade of
land communications (Azerbaijan and Turkey have closed their common
borders with Armenia for more than 13 years), Armenia’s economy has
rapidly recovered from the crisis. Beginning in 2001, GDP growth has
been above 10% a year and as a result, by 2005 Armenia had regained
its 1989 GDP level. In parallel, the level of poverty fell from 56% to
29% of population. In other words, a quarter of the population or some
700 thousand people escaped the poverty zone. Nowadays, the challenges
are quite different, as Armenia has to become a competitive economy.
The government has unveiled a three pillar plan to meet the challenges
of further economic growth.
The first objective is to improve the investment climate. It is
generally recognized that Armenia has one of the best investment
climates among the CIS countries (according to the Heritage Foundation
Economy Freedom Index). However, the government has defined a series
of bottlenecks to overcome, and hopes to obtain the assistance of
Western donors to that end.
A second major objective is the fight against corruption. In
Transparency International’s corruption perception index, Armenia
ranks 93rd among 163 countries studied. This is the second best result
among the CIS countries after Moldova, but it is still too high for a
country with strong economic ambitions. The government has presented
an elaborated plan to fight corruption, and international donors,
including the European Union, have pledged support. Not surprisingly,
this is the sphere which has received the most skepticism. Several
observers argue that in order to fight corruption, government officials
have to fight against themselves.
The new government hopes the combination of these two factors will
attract investment in innovative sectors such as technologies, in
which Armenia is traditionally believed to have good potential.
A third objective is the development of the countryside. This is
expected to be not only the key to decreasing poverty (as poverty in
Yerevan is significantly lower than outside the capital Yerevan), but
also one of the engines for boosting domestic consumption, and thus,
expanding markets for local producers and the construction industry.
Construction has been the fastest growing sector in the country’s
economy in recent years, but the prospects of repeating the success
outside of Yerevan are not evident.
Apart from these obstacles, one factor that has been detrimental to
Armenia’s competitiveness over the last years is the appreciation
of the Armenian national currency, the dram. In the last four years,
the dram moved from 580 to 340 per one US dollar, a factor which made
Armenian goods and labor more expensive and thus less attractive for
investors. Between 2004 and 2006, average salaries increased by 52% in
drams, but when expressed in US dollars, the growth was 90%. This rise
is due to a growing influx of dollars, which is linked in part to an
increase in foreign investment. This factor complicates the challenge
of building and maintaining the competitiveness of Armenia’s economy.
It remains to be seen how the new government will face the challenge
of achieving high growth rates in the current context and whether
political continuity will prove a favourable environment for the
achievement of these economic ambitions.