| http://www.youtube.com/watch?v=_rXlFtqiYlk | Vartan Oskanian, former foreign minister and president of the Civilitas Board, will be featured in a regular Civilitas interview on issues of the day. Today, he speaks about inflation, the government’s new draft law on trade and services, emigration, its effect on economic growth, monopolies, and their adverse effect on the natural development of an open market. The interviews will expose current issues of concern to the ordinary Armenian while offering a thoughtful contribution to the main discussion and highlighting priority areas for the public to deliberate. |
Q. Mr. Oskanian, for the government of Armenia today, the main challenge is inflation and control of prices on goods. The government proposes to implement changes in the “Law on Trade and Services”; the goal of which is to control price increases on essential goods. The Prime Minister has admitted that such a practice is not desirable and rarely applied, yet on the other hand has a positive effect on the marketplace. Do you believe that this new legislative instrument will work?
A. I don’t believe that the government’s approach is correct. Government interference through price control has never been effective. On the contrary, this approach may have a very negative impact on the markets. The government should not pursue legislative changes; rather they should implement reforms instead. Inflation has two sets of causes – internal and external. Domestically, when demand is higher than supply, prices naturally go up. But in Armenia today, that’s not the case. Demand is low; the economy is growing at a very slow pace. Purchasing power has also declined. What we have today is stagflation – inflation even with a stagnant rate of growth. Armenia’s inflation is imported. Because global prices are on the rise and we rely heavily on imported goods, we are, of course, affected. But, at the very least, the Armenian government can wo rk to eliminate the rights of certain oligarchs to maintain monopolies on those basic products on which we all depend. If there is competition on basic import items like food and oil, then the price increases that we experience will at least be subject to competition and excessive price hikes will be restrained.
Q. Are monopolies the major issue facing the government? Would all our problems be resolved if monopolies were curtailed?
A. Monopolies are only part of the problem. The economy is highly sophisticated. The economic picture is complex and interconnected. If I look at this issue from a macroeconomic perspective – there are four challenges facing the government today.
The first is to restore 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.
So, without disentangling these knots, we can’t move ahead. But given the present domestic political situation, the very tight bonds between business and government and the market’s economic deficiencies, it is not possible to disentangle them.
Q. Is that it? Is our discussion over? Is this a dead-end? And are these problems unique to us? Coming out of the global crisis, don’t other countries face similar paradoxes?
A. 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.
These principles of an equal playing field, open and fair competition, and protection of private property are the fundamental pillars of a free market economy. 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.
Q. You mean disentangling the linkages and inter-dependencies between personal wealth and political power? But that means threatening the fundamental interests of the deep-rooted oligarchy.
A. In every developing market, there were always individuals at the beginning who amassed capital – sometimes fairly, sometimes unfairly. Capital accumulation is essential for large scale investment and growth. But just as necessary is open competition and the opportunity for all businesses – small and large – to prosper.
So, in every free market, there came a time when the government drew a line and said the rules must now change. Armenia must do that too. The sooner a country leveled the playing field for all, the quicker that country was able to move towards prosperity. Armenia must dismantle the oligarchic structure without threatening or endangering the wealth and entrepreneurship of the wealthy. In other words, everyone, including those with businesses and money, must function within the law, within a fair competitive environment.
Why do I think this is even possible? Because I believe that those who are indeed enjoying substantial wealth can continue to make money. It is not their wealth that is the problem; it is that through the power of their wealth they are able to dictate the rules.Can this be done? Yes, but it will require a government that is elected by the people, not by the money of those who wish to retain their special privileges. When those who govern are elected by the people, and are not dependent on a small oligarchy, that government can therefore do specific things. First, they can 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 second step that a freely elected 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.
Q. Do the tax authorities have a role to play here?
A. Taxation is a difficult and responsible process throughout the entire world. No one likes to pay taxes, but everyone wants to receive the public services that only a tax base can provide. In Sweden, taxes are more than 50% of GDP, and the public expresses satisfaction because they have equal and universal access to a good education, to quality health services, to decent roads and responsible police services. In our case, it’s becoming a political tool and a measure of power.
Business circles view the tax authorities with fear; the general public views them with total cynicism and no expectations that their services will at any time come back to meet their needs; and the tax collectors themselves know that they are performing an undesirable service, but that all eyes in government are on them, because they must – at any and all costs – literally, meet their quotas.Despite all this pressure and these expectations, in our tax environment, the results are appalling.
According to international financial institutions, a country like Armenia should have a tax collection rate of around 22%, but we’re actually collecting only 17% of GDP. The five percent difference means 193 billion AMD less in taxes, less in the state budget then we could have had. Our entire defense budget is less than that amount. We spend half of that on education. Clearly we can do better if we implement the outlined reforms.
Q. Mr. Oskanian, it seems that emigration is once again emerging as a serious challenge facing Armenia. What must be done to stem this new tide?
A. Emigration is the most urgent problem facing us, because its impact is not reversible. And it is indeed the very grave consequence of seemingly hopeless political, economic and social situations. I think because our people don’t believe they can implement change, they instead choose to leave, dejected. The government must demonstrate their intention and ability to address fundamental political and economic problems in order to curtail this new wave of emigration. Ironically, emigration is not just a consequence; it’s also a factor that further deteriorates our economic and social potential. Economically, since Armenia is already a small market, tens of thousands of emigrants every year further shrinks that market and makes growth even more difficult. Socially, Armenia’s already small critical mass of educated, working, professionals diminishes and with it, so do opportunities to demand real change.
The worst part of this is that it is becoming harder to prevent emigration, since immigration into other countries is becoming easier. Some of our neighbors, as well as others not so close, are doing so at the expense of countries like ours to resolve their own demographic issues and to increase their human and intellectual resources and opportunities. Look around us. Russia offers liberal opportunities to meet its huge manpower needs. Each hour that the Russian consulate is open here in Yerevan, there are 50 applications to leave. Georgia, too, is increasing immigration, offering citizenship to those who make a minimal investment. With Europe offering them visa facilitation, Georgia will naturally attract Armenian citizens. I’m not even talking about American, Canadian and Australian immigration policies which are also far more welcoming for professionals.
This is the urgency. The solution is not to introduce legislative restraints. The only path is to be competitive and to offer hope. With fair legislation, with real educational, professional and business opportunities, our professionals and our businessmen must have hope.
Q. Our discussion again comes back to the same question: Is there a way out?
A. Of course there is, but that requires a plan, that requires hope and vision. 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.
So, the answer to your question about ‘what now?’ is simple: 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.