Inflation is a Result of… Four Steps Needed to Surpass the Current Deadlock

The recent legislative initiatives undertaken by the government to contain inflation showed that the government is not ready to, or even worse, does not want to implement radical reforms.
Inflation is not the only challenge confronting our government today. It is merely a result of a range of economic issues that need to be directly addressed. Four urgent steps should be taken to surpass the current deadlock.

The first is to restore macroeconomic stability; in other words provide for fiscal and debt sustainability. Today, our national debt and the budget deficit have surpassed acceptable limits.

The second challenge is to boost growth and reduce poverty. Today’s rate of economic growth, taking into consideration the 14% decline in 2009, is dangerously low. At this pace, it will take a long time to regain our former position. Poverty is reaching 40% – that’s catastrophic. That means more than 200,000 additional citizens are living in dire, desperate conditions than even only three years ago.

Third, the government must address external imbalances. The difference between import and export rates equals 29% of our GDP, which is excessive.

And the fourth, the government must execute serious institutional reform. That’s where the monopolies come in.

The simultaneous tackling of these challenges, however, would create several serious dilemmas for the government. For example, addressing the national debt and the budget deficit requires actions which go counter to the steps required to foster growth. A second dilemma – addressing external imbalances, among other things, assumes a devaluation of AMD. This would go counter to efforts to restrain inflation. The third dilemma is that the nature and scope of the reforms that are necessary today, on the face of it, contradict the interests of the few businessmen who control a large portion of Armenia’s economy.

Except for the problem of oligarchy – where economic and political power rest with the same limited group of people – the other dilemmas are also testing developed democratic countries, too. This global crisis has forced everyone to review their institutional structures.
The difference is that with normal market conditions, given time and given bold efforts to address fundamental structural problems, these dilemmas can be resolved.

Unfortunately, in Armenia, free market conditions are disjointed. Just as in the case of democracy, the fundamental principles – rule of law, tolerance, freedom of expression, and the right to elect – are undermined; so too in the case of the economy, the fundamental principles of a free market are also undermined. That’s why in order to come out of this mess, it’s essential that the last problem – the urgency of reform – be tackled first.

First, we should impose the law and extricate politics from business. Our laws say that a member of the National Assembly cannot be a businessman. This is a good law and is good for the big businessmen as well. Today, those businessmen believe they need political power, because they, too, don’t believe in the system. Each believes that if he doesn’t have political levers, he can be trampled over. If his contribution to the ruling elite is not visible, then he is vulnerable. The issue then is not capital accumulation but that they can dictate the rules through it.

The second step that the government must take is to bring large businesses into the tax environment. This, too, is good for the businessmen because then, no one can force them during each election cycle to contribute enormous amounts. The timing of such forced donations; the size of such contributions are not less – and at times are even more – than their fair share of taxes. Taxes are predictable and a businessman can calculate such costs. But an oligarch will never know when his political liabilities will come at additional financial cost.

Finally, the third thing that a government must do is to assure businessmen that they can keep what they have, but that from this point forward, the market is open to all, the field is open to all, and if a small economy like Armenia’s can’t handle several players in one sector, then let the market make that determination and not financial or political power. If these processes were determined behind closed doors before, let them be fair and open from this point forward.

These steps should be undertaken in a simultaneous and consistent manner. Only then we can expect to restore public trust towards the government.

The government has lost its credibility. Its promises and reality are disconnected. And the government has demonstrated inability to predict and plan ahead. For that reason alone, the public, the consumer, the producer and the businessman are all experiencing a deficit of confidence. But consumer and investor confidence, along with a positive outlook, are the drivers of economic growth. We don’t have them. We don’t see them.

Investors are affected by this, just as they are affected by external factors – the situation surrounding Karabakh is more unpredictable than ever. Although we don’t think we’re at the brink of war, our opinion is not the only one that counts. A potential investor, especially foreign investors, who hear the rhetoric of war, the hopelessness of negotiations, the daily ceasefire violations and incidents along the line of contact, are naturally concerned about the risk to their investment.

Then there are the international indexes – they are quiet but very important indicators for anyone looking to make a determination on investment or expansion. When the authorities close a TV station, or openly tolerate corruption, we may think that this only has domestic implications. When there are stories of injustice and inequality, especially in the judicial sector, we think we’re the only ones who talk about this. When individual and civil rights are restricted, we dismiss them as mere domestic, even cultural specificities. But all these developments are followed internationally and they resonate in various international organizations’ annual reports and in international rankings. And they obviously affect investors. Our standing has diminished in many of these reports and rankings.

There is a minimal level of reform and change that is essential, critical and urgent. And without them it will be impossible to bring our country out of this downward spiral.

Vartan Oskanian
Former foreign minister and President of the Civilitas Board
Aravot Daily