Wednesday, July 28 2010 18:29
Real economy is captive to macroeconomic parameters
Interview of Candidate of Science, expert for governing Haroutyun Mesropyan with ArmInfo news agency
Mr. Mesropyan, it is known that the statistical data in 2010 demonstrate the beginning of economic growth. Does it mean that the crisis is over or the world economy may still find itself on the crest of the crisis wave?
First and foremost, I’d like to say that all of us should get rid of a widespread disease in economy: assessing by quantitative parameters the processes that have qualitative components. When assessing quantitatively, we violate one of the fundamental laws of governing that the investigation method should not be simpler (in our case – not more primitive) than the object of investigation. The world economy, particularly, the economy of Armenia is a system having many parameters, factors and dimensions, and it is inadmissible to assess the system with thousands of quantitative and qualitative indices only by several parameters, for instance, the GDP growth.
Therefore, as a rule, economy either “explains” the events that have already taken place, for example, crises, or offers unreal but “scientifically grounded” ideas and experiments. In particular, such an important qualitative, I would even say mental, parameter as elementary human greed, which motivates any economic crisis.
As regards the second wave of the global crisis, one should retrospectively assess what has happened. It is well known that the specificity of modern crisis ands its main reason is the incredible growth of derivative tools of the financial market. The thing is that the volume of derivatives before the crisis considerably exceeded the real debts that are formed during real economic mutual relations. When in 2007-2008 that “bubble” was blown up, first via mortgages and then via the market of derivatives, many countries chose one path: they started extinguishing the “flame” with those tools that led to the crisis, i.e. they started generating debts. As a result, part of the debts that are derivative “bubbles” moved to the state field.
The problem is that nobody has yet analyzed what part of real debts and what part of unreal debts was refinanced by states. If it turns out in case of detailed investigation that the states refinanced mostly unreal debts, i.e. the debts that arose due to active use of derivatives, this will mean that the unreal debts were transferred to the zone of real debts for the state. In this case one can state that we have all witnessed a global-scale speculation.
That is to say, the real money of many states’ taxpayers covered part of debts “drawn” by speculators with the help of derivatives. And the real debts for the state mean growth of budget deficit, which causes acute social problems. Now there are several approaches to this situation. The toughest approach supported by Germany and France implies improvement of the situation via qualitative and quantitative stiffening of regulation of the financial market and expenditure item of the budget.
And how do the second world countries behave?
The second and third world countries, including Russia, want to make advantage of the situation and attract “hot” money to their markets if Europe starts toughly regulating the market. America is inclined to neither Europe’s nor Russia’s position because such behavior is beneficial to it as it has the biggest state debt, and if the “mash” with debts goes on, America’s debt will become unreal in the financial sense. Moreover, there are no serious premises for appearance of another reserve currency, and Euro’s behavior has caused many questions recently, and many state reserves may turn from EUR to USD, which is beneficial for the United States. That is to say, the bankruptcy of the USA as the largest debtor of the planet will first and foremost be unbeneficial for creditor countries themselves. Thus, the USA has the biggest printing machine, the state debt, the state reserves of other countries are in its national currency, and the situation will be under its control. This is why the latest legislative changes in the US financial sphere are more “combed” than the approaches of Germany and France.
The second wave of the crisis is apparently approaching if its main premises are not removed. Unhealthy diversification of debts has taken place, as I have said, serious state debts have emerged. This means that the states should revise their budget and fiscal policy. When a debt emerges, the revenues of the budget cannot catch up with the expenditures, and sooner or later this misbalance becomes critical. To say it figuratively, the states have suppressed the high temperature with strong drugs. Temporary relaxation has appeared, but it is not used effectively yet. The second wave of the crisis may be displayed in quite unexpected shapes, as the whole world financial and economic system has been shocked. No universal model has been found so far, which would reduce the accumulated risks and debts on the one hand, and ensure progressive and balanced, i.e. without “bubbles”, development of the world economy. The phantom of the second wave of the crisis will be getting more and more visible until a methodologically new solution is found.
As regards Armenia, in this situation we notice that when in 2009 USD was weakening against EUR, an interesting event took place in Armenia – abrupt consolidation of USD against AMD by almost 30%. In 2010, when USD started consolidating against EUR and consolidated by over 25%, we witnessed the situation when in Armenia USD has weakened by almost 10% - from 400 AMD to 365 AMD. This shows that in our country the financial and economic processes are absolutely unsynchronized with the processes in the world. Secondly, when we experience prevalence of non-market mechanisms, one shouldn’t look for links to the market processes. Thus, two big problems are typical for Armenia: inadequacy towards financial markets from the viewpoint that Armenian economy is not involved in the general global processes, and the subjective factor – the system is oligarchic and does not obey the market laws.
This means that any changes of “macroeconomic figures” in Armenia are not qualitative. In particular, when we try to improve the structure of both budget and trade balance, this reminds me of the Soviet statistics propagandizing such statistical data as: in Soviet Union the number of produced tractors against 1913 grew 10 thsd times, which means: if in 1913 they produced one tractor, in Soviet period their number reached 10 thsd. This is why I think it dangerous to work only with figures. When we speak of growth, we should know the basic parameters to compare this growth with. For instance, if we compare industrial growth with a ridiculously low figure, one-time action is enough to considerably increase these figures, but this will mean nothing.
Yes, but according to statistics, the GDP growth is conditioned by the output increase in various fields, including growth of the foreign trade turnover. Though, on the other hand, the national debt of the state has also grown…
In Armenia, like in the whole world, the national debt abruptly grew over the crisis period. The second signal is that the export and import structure has not changed qualitatively. In this context, it’s high time we started distinguishing the concepts of “growth” and “development”. Growth implies improvement of only quantitative parameters, while development – both qualitative and quantitative ones. In 2010 the inflow of transfers has also grown, which is good on the one hand, but dangerous on the other hand, as our “diseases” are again neutralized thanks to the money as grants. When economy receives money, which needn’t be returned, this perverts any economic system. For instance, in the zone of Spitak earthquake people have got accustomed to receiving gifts and donations. Such a situation psychologically suppresses competitiveness at least. And finally, our economy has one more problem: we cannot understand what kind of economy we want to have. They are going to build a tourism center one day, and financial or educational center another day. When they make such statements, this shows that there is no strategic vision that implies dynamic development (not growth). When they announce that some place in Armenia must become a certain center, I get concerned over the fact that they will try to pay more financial attention to the announced “centers”, and the vital directions of economy will be sagging.
How will the second wave of the crisis endanger Armenia? The impression is that Armenia is already preparing for it, taking into account the fact that it is constantly attracting resources from international financial structures.
The foreign debt will be growing; it must be served, even at the expense of foreign borrowings. This means that we’ll have extra load on the expenditure item of the budget in terms of serving the growing borrowed funds. This means that misbalance of the budget will increase even more. And what if the transfers start falling again, while transfers matter for us as much as oil for Russia? If the unfavorable balance of trade is maintained, we’ll again generate future economic problems, but alongside with a huge national debt, and everybody will feel this debt. In the first phase of the crisis the problem arose in the revenue item of the budget, and now the expenditure item will grow, and if it grows quickly, the revenue item will make no difference. That is to say, the estrangement between the revenues and expenditures of the budget is expected to increase.
What is the way out? Before the crisis, when the so-called “Dutch disease” was observed, we considered that one should start serious reforms, including in infrastructure, financial sphere, industry, one should get rid of monopolization of markets. Do you see the vision of these reforms in what the government is currently doing? And in general, what can the government do if sand is thrown in the wheels high and low?
The most important problem is that nobody says clearly what country we want to have; consequently, it is unclear what economy we are building. Hence the uncertainties about what trade balance structure we need, where we’ll choose the path of import substitution, and where – the path of export-orientedness. The first task to be faced by us is to straighten the unfavorable balance of trade in every possible way. If we manage to do this, we’ll be less dependent on transfers, because the unfavorable balance of trade is expressed only in foreign exchange. And if this straightening happens in Armenia, the transfers coming to Armenia will stop financing the unfavorable balance and will be directed to development of economy, real sector, and in some time we’ll less depend on transfers.
On the other hand, political will is needed to fulfill this important task and purposefully destroy the oligarchic system in the country. If the political will of the first person of the state is lacking, not a single government is able to ensure economic development, even theoretically. We have two problems – what we want and what disturbs us. We do not say what we want and do not fight what disturbs us. As a result, all the ongoing processes in Armenia are not connected logically, even with the processes in the world. But they are connected indirectly: if the world conjuncture worsens again, we’ll feel it via transfers, extra state borrowings, and the so-called “point projects”, i.e. the centers will start turning into “soap bubbles”. Let’s recall the priority with mortgages, which has turned into a great number of half-constructed houses over the crisis period! Whenever they say that it is necessary to develop a certain direction, I realize at once that “bubbles” are likely to appear there. In general, any high statements are dangerous for economy if they are not based on the strategic vision of development. Therefore, the owners of “hot” money penetrate into these “point projects”. Since the general strategy of the state is unclear, it is less probable that serious investors will enter this field; it is more probable that people working on “bubbles” will enter it. To remind, Armenia should have become a lapidary center, but the “diamond industry” was blown up in Armenia when the demand for precious stones abruptly fell and the process of revaluation of the national currency started.
Let’s talk about such projects as the pension system. This is not a “point project”, but a promising concept for the economy and social sphere. What prospects does this reform have?
In the pension system the transition period will last till 2014, while earlier it was envisaged to transit to the contribution pension reform in 2010, then starting 2011. I came out against its rapidness pointblank. This system should operate not compulsorily for a certain period to reveal the possible problems in practice. Now the pension systems worldwide are in the focus of attention, as after the crisis many contribution pension systems have faced huge problems, including the problem of their liquidity. All over the world long money is treated with vigilance because of the aftermath of crisis phenomena. Armenia, being still an unaccomplished state by many parameters, may come across big problems, as the state wrapped with the oligarchic cobweb needs no long money. Long money is needed for strategic development of the state when it is known that it is impossible to implement strategic projects with short-term and long-term money. At present the only more or less operating long asset is the government securities. That’s all.
The second danger is that failing to prepare the long money absorbing market by that time, their considerable part will leave Armenia. That is to say, we are trying to create long money, but we are unable to apply it in real economy, as there is no accurate plan on strategic development of state and economy. Actually, we will thereby finance the economies of the USA and EU with our pension funds.
Against this background, one can observe absolute lack of public confidence in not only the economic policy, but also the state itself. The population sees no prospects and lives for the day. But in order to solve the problem of long money, one should first of all solve the problem of some confidence in the future. However, the country’s authorities do their best to weaken this confidence day by day.
The value of the money containing all risks, including currency risks, is high in our country. This condition does not contribute to implementation of strategic long-term projects.
Yes, but if there is strategic vision and a development program, all risks decline, economic strategic programs, as well as development programs in a number of economic fields are estimated. If there is no strategic vision, there is a full package of risks, as well as expensiveness of borrowed funds for economic entities. For instance, one of the problems of our currency risk is focused on the misbalance of the trade turnover. If we have a program on import substitution and export-orientedness, we’ll have an opportunity to reduce the trade balance deficit. This means that the currency to cover the trade balance deficit is needed less in unit time, and this means that the load on the currency component will start dropping, which implies reduction of pressure on the currency exchange rate. One should pass from strategy to tactics, not from tactics to nowhere, as we have been doing for 20 years.
For example, Armenia has been “solving” the problem of the state’s independence on sugar import or over 10 years. And if we have been unable to solve a local problem for such a long time, then what centers (tourism, finance, education, etc.) are we speaking about? Or what socially-oriented budget can one speak in case of low tax collection? If this budget has no serious items on expenditure strategic development, one should not be surprised at the long-term negative balance of trade.
But the state wants to come to light at the expense of SME development. For instance, in the United States SME makes up over 70% of economy.
The topic of SME development in Armenia can be closed at the very beginning. If the economy system is oligarchic, it is even theoretically impossible to speak of SME development, and there may be no other explanations. This is an unattainable goal today. Certainly, the Armenian parliament may adopt a law that women are to give birth to babies within the first three months of their pregnancy and the president may ratify this law, however, any reasonable man will say this is impossible. The same is here – under the conditions of oligarchic capital it is impossible to develop small and medium business.
If there is a certain zone of business, which gives good profits, an oligarch will want to have it, and this means that there will be no small or medium business in this zone. So, SME in Armenia can develop only very problematic and hazardous zones of economy. All the dripping roasts are swallowed by large business, and this rules of development of SME. If the state announces privileges and preferences in the low-income sphere of economy tomorrow, the big sharks will swallow it the very next day.
When the interest rates were falling worldwide to inject liquidity in economy, and first of all in its real sector, Armenia was undergoing the opposite process – the rates were rising to maintain inflation. That is to say, money was getting expensive, and economy was gasping for air. It’s abracadabra, not economy!
The situation in Armenia is considered in methodologically wrong way. When they say that inflation is targeted, this is not serious. It was said before the crisis that under 3% inflation was good and they tried to “target” it. One should first determine the priorities of economic development, see the structures of these priorities, assess them, and only afterwards determine what macroeconomic parameters will help fulfill the tasks of these priorities. Then it will be clear what corridor the exchange rate will have, at what level the inflation, money stock and other macroeconomic aggregates must be.
Otherwise we reach a deadlock in economic development. If, for example, inflation is to be 7.26% to ensure certain progress in the trade balance or in some other field, then 7.26% is correct, even if all international financial structures were of a different opinion. The structure of our economy shows that either this goal has never been set in real economy or it has not been achieved. All macroeconomic parameters should serve the strategic development of the state, not vise versa, as required by the same international financial structures.
Now an important question arises: shall we work the same way under the new conditions? If yes, the question is closed, as our system is oligarchic. After all, w should be able to hold a tough dialogue with the international structures demanding macroeconomic parameters of us. This is also on the state’s functions. If you cannot do this, say that you cannot, but don’t say that inflation should be maintained at the level required by these structures. I doubt the professionalism of the International Monetary Fund. Over the past two years IMF changed its forecasts not only about Armenia, but also about the whole world dozens of times. If any structure having its professional field of activity regularly makes mistakes, the impression is that this structure is unprofessional.
When various economic entities in Armenia (e.g. Nairit Plant and ArmCommunicationBank – currently Araratbank) were recovering in 2001-2004, I used to toughly argue with the IMF mission, and so did the present prime minister, by the way. IMF was doing its best to close acknowledge the bank bankrupt and close the plant. And we won these disputes: today the bank is operating, and the bank is not closed. A principal and competent position is needed. There are issues, in which one should stand its positions toughly. The more rights, the more obligations, and they should be synchronized. If the power assumes numerous rights, let it be so kind as to fulfill its obligations complying with these rights.
Today Armenia resembles a tourist applying to the air ticket window and asks for a ticket, but doesn’t say the direction because he doesn’t know. Our problem is the crisis of state governance, which has been lasting since the very first day of independence. To solve economic problems, we should know what economy we want to have. In order to know what economy we want to have, we should know what state we are building. To know what state we are building, we should have development strategy, and for that purpose we should have elite, as only the elite is capable to work out and implement the development strategy of the state. But we have no national elite as a phenomenon. Those considering themselves the elite are mistaken, since drinking “elitist” aerated water, living in an “elitist” house, driving an “elitist” car and failing to “getting off” the TV screens does not mean being the elite. But this is a topic of another conversation.
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