Beyond Quick Fixes

Armenia-Turkey relations have dominated public discourse over recent months and understandably so. As a result, our attention has strayed from a topic that is at least equally crucial for our national security – Armenia’s economy.

The new indicators issued by the Armenian Statistical Service make plain that the economy is in free fall. In the first four months of 2009, our GDP declined 9.7% over the same period last year. There is the danger that this will become double-digit decline. Poverty, which had been palpably declining, will now rise according to World Bank projections. Growing unemployment is becoming more visible. Indeed, a full 40 percent of employers foresee further cuts, according to the Economy and Values Research Center.

Armenia is in recession and this can be explained by a series of factors of which the global economic crisis is only one.  

The government’s responsive actions have focused on infrastructure rehabilitation – increased construction in the earthquake zone, in water distribution systems, roads, as well as highlighting such monumental projects as a new nuclear power plant and a new railroad from Iran.  The government’s second direction has been to offer financial assistance to private enterprises that utilize local resources and export their products. Finally, the government will also increase loans to small and medium size enterprises and has recently also decided to offer loans to stalled construction projects.

All this is too little, too selective and too slow. Infrastructure funding is already a regular segment of our national budget and the total amount of money available for each of these directions is too small to have a critical impact. The other problem is that the two major new economic generators in this formula – the nuclear power plant and the railroad – are distant programs in conceptualization and implementation and therefore can’t have immediate impact. The combination means that at best, these programs will succeed in slowing the decline but will not offer long-term prescriptions for new growth. 

The other cause of Armenia’s economic decline is the government’s misplaced tax policy that unfortunately stresses tax reforms whose aim is to identify and maximize current taxing opportunities. Of course, reforms need not cease during a crisis. But this is a chance to venture into more daring, far-reaching reforms which aim to foster broad economic growth, thus resulting in increased tax revenues.  Administrative reforms of the kind we have undertaken maintain budget revenue without benefiting, and instead even obstructing, economic growth. Asking for cash register receipts in formal, established businesses is possible. It’s also possible to justify requiring cash registers of small enterprises. But to impose them now, at a time when consumers’ cash flow is already diminished, means draining every last drop of cash to fill the state coffers, at the expense of a small business’s functionality and survival. The new intention to place tax officials within the largest enterprises is another decision that is not well thought-out and hasty, and will clearly be ineffective. Without the political will to equally apply the rule of law, an army of monitor-observer-supervisors will not increase tax revenue in any significant way. 

In other words, if our response to the crisis is to focus only on short-term needs – that is, immediate budgetary requirements – then we cut the branch on which we sit and preclude long-term benefits or growth.  

Another subject of real concern are the foreign loans. During the next few years, their total amount may approach $1 billion. The key to Armenia’s weathering this storm lies in the use of these funds. They do not come cheaply and they will noticeably augment the foreign debt burden of our GDP. Only by using the loans correctly, that is using them to foster economic growth, will it be possible to avoid a deeper crisis. Using the loans in a way that is politically expedient will make it impossible to recover economically in the coming years.

The triad of resources – money, creativity and human capital – cannot be squandered. The solution lies in increasing economic productivity and putting money into people’s pockets – money they can spend, money that will generate demand, and stimulate the economy. The funds must be maximally utilized to create jobs – and with jobs, hope which is the most important element in economic stability.

We can benefit from the experiences of other countries undergoing deep recession. US President Franklin Roosevelt used the period between the wars to bring the US out of deep recession by embarking on novel, creative, some called them revolutionary programs. Roosevelt summoned a brain trust to create unconventional programs which reversed a destructive socio-economic situation, and brought stability and hope.

I don’t want to draw parallels with the US nor pretend to offer absolute solutions. But one thing is clear. In this situation, business as usual is not the way to go. What is essential is new, audacious, broad-reaching policies which assumes more tightly linked public-private partnership. 

In other words, greater involvement by the government in creating jobs, resolving the priority problems and ensuring economic growth. 

One of the programs can be aimed at improving our rural economy. Subsidies and tax allowances can palpably stimulate agriculture which will definitely be reflected in the economy as a whole.  Agriculture is responsible for one-third of our GDP. One-third of our population depends on the bounties of nature and the wisdom of our government.  

Equally critical is the employment future of our young people – in villages and cities. A broad-based one-time environmental clean-up and conservation program can produce a variety of dividends. Multi-year employment can be created for a brigade of thousands of young people tasked with cleaning up Armenia’s cities, towns and villages, relieving our roads, bridges, fields, and streets of excess trash and putting a new, clean face on our country, more closely tie our young people to our land and our country, and most importantly put money in their pockets and stimulate demand.

These are mere examples based on the experience of others. What is appropriate for Armenia can only be determined through frank and profound discussions. But such new daring programs require a series of audacious steps intended to secure competitive economic conditions, real results in the fight against corruption and in resolving political problems.

It is essential to acknowledge that neither development nor economic growth are simply economic processes. The honest difficult public discussions that must take place during a crisis like this one, in order to rally resources and support, require authority and legitimacy, not power and force. In Armenia, our biggest loss of economic resources is political, not economic. We have a polarized society on the one hand, and a deeply divided polity where government and governed are divided by a wide abyss. The political crisis can be assuaged by normal, clean Yerevan City elections. A normally elected city government will ease the partisan political pressure and allow the authorities to find a formula to release the prisoners who have become a political liability and an immovable obstruction to any sort of progress – including economic.