Was there a way to prevent this panic and the losses that so many have incurred?
Yes, certainly, the shock of sudden Dram devaluation would have been mitigated if the government had been frank and honest with the public, and if it had better understood the crisis. The reason the Dram fell so abruptly is because the government miscalculated. They apparently thought they could continue to sustain its artificial strength by continuing to spend dollars to do so. But, look at what we have. They spent more than $400 million just last year and then still had to go to a sudden decision to float. That is irresponsible.
Exchange rate fluctuations are normal. For months, I’ve advocated a free floating, devalued Dram. But devaluation of 25 percent over six months to a year is normal. A drop of 25 percent in two hours is not. That’s why I say they should have known better, more accurately calculated their reserves, more correctly assessed the economic parameters, the effect of the international crisis. That’s the job of government, not the public’s job, not the private sector’s either.
Sadly, the bigger problem is not that the Dram has depreciated, or that businesses have suffered, or that banks have been seriously hurt, or even that so many people with savings are harmed. The bigger problem is that trust in this government is shattered. There was a deficit in confidence generally, but in a crisis that deficit is paralyzing, because everywhere in the world, without trust in the system, there is no way to take the necessary steps to recovery.
Weren’t they trying to avoid this situation?
I don’t doubt that their intentions were the right ones. I don’t think anyone sitting in government aimed to hurt the economy. But at the end of the day, this is an issue of responsibility. Since neither the President nor the Prime Minister intended for things to evolve this way, this leads me to believe that the problem is indecisiveness and uncertainty.
The government miscalculated the financial crisis from the beginning. They developed a budget on incorrect premises, they wanted to believe that in the midst of a global crisis, that somehow Armenians abroad, our compatriots would be willing and able to take their money and bring it to Armenia. They claimed for so long that the Dram was at its natural exchange point. In other words, they miscalculated and misspoke at every stage.
We don’t want that same miscalculation and indecisiveness to cause an even bigger problem. The government today is operating with a budget based on 9 percent growth. We don’t have 9 percent. We didn’t have nine percent at the end of last year when they were doing the planning. We finished the year with under 7 percent. Therefore, it was clear then and it is clear now, we will have a larger budget deficit. The government can do one of three things. Either wait for that deficit to grow, and then near the end of the year, deal with the resultant inflation and even greater Dram devaluation. Or, it can enforce an even more unrealistic, high-pressure tax collection campaign that will hurt small and medium business even more. Or, they can take the difficult but correct step urgently and immediately: Publicly acknowledge that they must revise the budget, and do so now. They must do two things: cut all unnecessary spending, while simultaneously considering where to inject additional targeted spending for specific public programs that will stimulate the economy.
Is a crisis the right time to cut spending?
I’m not talking about cutting all spending. On the contrary. This is the time to cut out wasteful, non-targeted spending in the government budget, and on the other hand, support targeted large-scale programs that will support economic growth, even if this means allowing a manageable budget deficit. The normal cycle is that the private sector works, pays taxes, then government collects those taxes and spends it for public needs. That cycle has been shaken up because of shrinking revenues and lack of trust. The government is trying to meet its budgetary obligations in the short term by focusing on the last part of that cycle — collecting taxes at all cost. For the long term however, this is extremely hard for a business community already suffering from the crisis. Instead, it must focus on shoring up the private sector.
It can do this by considering use of public funds to engage in public works and public benefits programs. The IMF loan will go to strengthen the Central Bank’s reserves. But the loans from Russia and the World Bank – how will they be used? This deserves a deep and substantial debate. In my opinion, those funds must be aimed at public works – like infrastructure and environmental programs – which will create new jobs and strengthen our own structures for years to come. Public benefits programs, if correctly chosen, can support private business, especially small and medium size enterprises, in a way to allow them to offer the public greater services at lower costs – such as financial guarantees to secure affordable housing, such as financial deductions for supporting education, etc.
Can the government directly create jobs?
Clearly it can help those who can. Our people’s income sources can be divided into three categories: There are those who live on transfers, and the devaluation of the Dram has helped them. Without serious inflation, the assistance they receive will be worth more. The second category is those who work for the public sector, for government. That is why the inevitable government budget cuts must be done sooner rather than later, planned and controlled, in such a way not to hurt the workers but to do away with unnecessary expenses. Finally, there are those who work for the private sector. That sector can’t be taxed to death just because the government miscalculated its budget.
That’s the lesson of this crisis. That the government can only reach its ends in cooperation and collaboration with the private sector, not by seeing them as the antagonist or those to be defied or confronted. Government must do what it can to enable healthy economic growth, not leave business alone to sink or swim on its own, and then to appear just when it’s time to collect taxes. There must be a paradigm shift, a new approach to our institutional interaction.
What is that approach?
The government ought to stop assuming that the economy exists in a vacuum. At the core of everything is politics. Development is a political process, not an economic one. Economic development is the result of political directions and policies. Our political system is screwed up and we’re not doing anything to fix it.
Here’s one example: The Millennium Challenge Corporation has money waiting to be injected into the economy. But they have conditions that are purely political: Human Rights, release of detainees, freedom of media. All things that are in our control to do. This is just one example. Domestically, we have to bring everybody on board to tackle our economic problems together. This kind of division or chasm that exists between different segments of our society will make it impossible for us to rally our resources. Whatever economic decisions are taken, they will be tough ones. We can only take such decisions, and implement them, if at each stage, everyone doesn’t see everyone else as the enemy, the competitor, the saboteur.
We have to open up the political environment. The first step is to release those still detained. Then, the media needs to be allowed to function openly. One reason we got into this mess is because our media is controlled and they’re not able to openly, critically review issues from all perspectives. Without open and public debate, we won’t be able to move forward. For years, the government has had this totally wrong. By closing off the media’s access, they have thought that they will contain various situations. Instead and obviously, the opposite has proven true. The sooner we openly talk about our political and economic problems, the sooner different opinions will be heard, reviewed, the sooner the public will be more aware of the real state of our country, the sooner the government will be able to make decisions that can be accepted, and things will find their balance.
I’m not suggesting anything radical. Similar debates and processes are taking place throughout Europe and the US. Not just about what is to be done immediately, but about the government’s role in mitigating crises generally.
What is government’s role in mitigating an economic crisis?
There are two directions to consider: a review of macroeconomic policy, and a fundamental discussion on the role of government in our open market.
Macroeconomic policies which must be reviewed and strategic decisions made based on real facts, not hope. First, the prevalent monopolies in certain sectors, which present a clear impediment to our economic growth, must be eliminated. This is the right time and there are no excuses not to do so. Second, there must be tax relief all around, not just for those who are friends of the government. Third, the inevitable budget deficit must be used by the government to spend more on those most vulnerable. Fourth, there must be the right policy decisions on how to spend the loans that Russia and the World Bank have so generously agreed to give. The wrong decisions will mean those funds will tackle immediate problems and not enable the economy to grow.
And finally, we must engage in the difficult, elusive, philosophical but fundamental debate over differing interpretations of capitalism that the global crisis has raised all over the world. The fundamental question is whether governments in capitalist societies should intervene in economic processes, especially at a time of crisis, with impending recession or depression.
Peoples and governments around the world are asking whether this is the time to compensate for the weaknesses inherent in a liberal capitalist system, whether this is when we need to shift from the libertarian, laissez-faire approach to one where governments are more involved, indeed more responsible, for the effects of their economies on their societies.
Armenia is, or should be, no different. In Armenia’s case, our swing from communism to capitalism was abrupt and unprotected. We did it quickly, haphazardly and not always wisely. But that was the trend in those days. It seemed the right thing to do because what we were escaping was so blatantly wrong. Since then, we have been riding different tides, been swept along by huge transformations internally and externally.
In the 1990s, the fast privatization process took place within the context of war and the chaos of transition and massive reform. There was no time to reflect. It was a chaotic phase of history and transition. After 1998, the same thinking persisted, this time taking on more sophisticated form. We were riding the wave of global prosperity.
Today, it is essential that we review our economic philosophy, debate our policies and legislation, and make the adaptations and modifications right along with the rest of the world. There is a clear paradigm shift; the world’s major economies are reconsidering whether government should keep a distance between public and private and let the business community solve all their own problems. We, too, should reconsider.
Today, the crisis is such that those two cannot be left to function separately. What is needed is a shift in thinking so that the two become one and we build our society and our country and our economy on one solid pillar – a public and private partnership.
This means a completely different governing style and approach. We’ve come out of a soviet tradition where both public and private have been viewed with suspicion. We have continued that system of governance whose purpose was to control, limit and sanction the private sector. The purpose of government is exactly the opposite – it’s to enable the growth of the private sector, to enable it to make money, to expand, to innovate, in a true entrepreneurial spirit, to grow, offer jobs and pay honest taxes, thus meeting its public responsibilities.