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Armenian Economy Is Searching For Other "Variegated" Locomotives

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  • Armenian Economy Is Searching For Other "Variegated" Locomotives

    by David Stepanyan

    Wednesday, June 29, 11:43

    "Horses are not changed at full tilt", the wise saying says. Judging
    by the previous and current actions and statements of Armenian
    ministers responsible for economy, one can suppose that they are at
    least unfamiliar with the meaning of the saying. Over the past few
    years of activity of the governments of at least two presidents of
    Armenia, the long-suffering Armenian economy changed its horses at
    full tilt for 4 times. At the beginning, after Synopsis appeared in
    Armenia, IT sphere was declared a priority. Afterwards, over the
    pre-crisis period the lapidary sphere, which demonstrated certain
    success at that time, was declared to be a locomotive. And finally,
    in 2007-2008, against the background of the construction boom, which
    mostly covered the center of Yerevan by doubtful Russian capitals, the
    sphere of construction was declared to be the locomotive of Armenian
    economy. Thus, before 2009 thanks to huge foreign injections, first of
    all swelling the market of real estate, which actually lacks domestic
    demand, the economy quite really demonstrated two-digit growth.

    However, this led to nothing, as the global financial crisis in autumn
    2008 deprived the economy of the locomotives, i.e. construction,
    "developing" property market and ore mining industry, thereby depriving
    the Armenian ministers of the ungrounded optimism.

    However, against the background of the implacable growth of prices
    for ore materials and non-ferrous metals in 2010-2011, the Armenian
    bureaucracy has come alive again, which is demonstrated by the
    statements of Armenian Economy Minister Tigran Davtyan at the end
    of the first half-year of 2011. Having stated that "the key driving
    force and locomotive of economy in 2011 will be industry", the
    minister stressed that the ground for such optimism is the dynamics of
    industrial production over the first half-year, which exceeded 10%. At
    the same time, according to the specialists of the Economy Ministry,
    in May 2011 versus May 2010 the industrial output growth exceeded 25%.

    Davtyan also expressed confidence that the biggest growth was fixed
    not in the ore mining field, but in the sphere of machine building,
    light industry, and the touchy jewelry.

    However, let's put the minister's convictions aside and be back on
    the disappointing reality. It seems that the reasons of the desperate
    state of the Armenian economy should be looked for not in the lack or
    power of locomotives, but in the serious immune deficiency experienced
    by this sphere of public life. It is the immune deficiency that
    led economy to 14% decline in 2009, which allowed the republic to
    occupy the "honorary" first place in the CIS and the second place
    in the world. At the same time, it is obvious that it was not the
    global financial crisis but the high level of economy monopolization,
    oligarchization of the economic model, and corruption growth in all
    administrative fields that mostly hindered the economic development of
    Armenia. Taking into account that such a state of economy has already
    led to a strong food inflation expressed in the inflow of masses to
    the opposition's rallies, the authorities of Armenia were forced to
    consider possible structural shifts in the economy.

    After the significant consultation with President Serzh Sargsyan,
    the officials seemed to stir a peg. Offices remembered the real
    sector of economy, industry and even small and medium business. The
    strong growth in prices of food produced in the republic made the
    authorities pay attention to the agriculture problem which had been
    neglected because of its "low effectiveness" and cast adrift. Taking
    into account the modest opportunities of the local market, the main
    producers of agricultural products and the processing enterprises may
    only rely on the export opportunities in their development. However,
    over the past few years the opportunities and prospects of this
    development have been persistently ignored in favor of macroeconomic
    stability expressed by artificial, monetary restraint of natural
    inflation. To note, despite all this sacrifice, the inflation level
    in Armenia in 2010 made up 9.2%.

    Such contradictory results have obviously become the regular
    consequence of the economy model imposed on Armenia by international
    financial organizations, in which macroeconomic stability is declared
    a priority. For many years nobody has been paying any attention to
    the fact that the Central Bank's monetary policy applied to achieve
    "stability" delivers a direct blow on the real sector of economy,
    putting an end to its further development.

    The crisis in Armenia in 2009 perfectly demonstrated that the
    two-digit, in fact the arithmetic GDP growth of Armenia had little to
    do with the development of the real sector of economy. This is first
    of all grounded by the fact that the whole monetary policy has been
    applied over the past few years only in order to reach short-term
    success and restrain inflation by monetary methods. Over the past two
    years, as a result of this "activity", the lapidary sphere, which
    had been prosperous once, as well as the enterprises processing
    agricultural products, agrarian sector and other ex-locomotives,
    turned out to be uncompetitive.

    The government and the fiscal structures responded to all these
    challenges only by strengthening the administrative pressing aimed at
    implementation of the fiscal plan, no matter how paradoxical it is. In
    the meanwhile, traditionally the pressing was directed not against
    large monopolists, but against the main consumer of banking services,
    i.e. small and medium business. Afterwards, having come across new
    risks, the commercial banks toughened the conditions of provision of
    loans to the population by considerably restricting their injections
    in small and medium business and property market. The small and medium
    business was not slow to respond to the toughening of fiscal pressing
    and the monetary policy by starting moving to neighboring Georgia,
    whose authorities created a perfect investment climate for Armenian
    business. According to unofficial data, over the past year over 1000
    entrepreneurs moved their business to Georgia at least partly. In
    response, the authorities are only making incomprehensive statements,
    the sense of which is restricted to complete denial of the fact of
    capital outflow to the neighboring country.

    It is getting clear that the state machine not only cannot, but is
    not going at all to stop this process. Instead, the authorities are
    doing their best to prevent the oligarchic system of state governance
    in Armenia from failure. At the same time, the oligarchs themselves
    that are closely interconnected with the power are inherently unable
    to take optimal governing decisions. Against this background, the
    oligarchic authorities are only striving to maintain the current
    situation as long as possible despite the objective premises in favor
    of radical reforming of economy, having no desire to bite the hand
    that feeds. Still, the search for some way out of the crisis remains
    the most complicated task of the government.

    This is especially topical given the fact that it is already getting
    impossible to restrain the public discontent. Apparently, the problem
    can only be resolved by shocking the whole economic system with all
    the following activities. The authorities will take no such a step.

    Instead, half measures are already being taken, which have nothing
    to do with the long-term outlook of economic development and will
    actually give nothing to Armenia. As a result, with every passing
    year the negative trends in Armenia's economy are getting less and
    less controllable. Anything may contribute to radical change of the
    situation, but this cannot be done by means of one locomotive as one,
    even temporarily developing field.

    P.S. The economy minister has recently given another new idea to the
    information market of the country: now production of ... flowers,
    first of all, roses will become one of the most important directions
    of export. With such "traditional" goods Armenia is unlikely to get
    a place in the system of international division of labor, which is
    capable to ensure high export revenues and necessary diversification
    of economy.