Thursday, May 17 2018 20:48

ArmInfo.The new young government of Armenia, which has occupied high offices on the wave of velvet revolution, will still have a lot to do to be able to meet the expectations related to the equally high trust received from the "protest street". Emmanuil Mkrtchyan, the Director General and Economic Analyst of ArmInfo, asked Dr. Rouben Indjikian, Professor of Economics and Management at Webster University Geneva and former head of programs on trade finance, e-commerce / e-finance and commodities, founder of the Global Commodities Forum and the Information Economy Report of UNCTAD, to share his opinion about the challenges and problems of the new government.

 

 What, in your opinion, are the priority tasks in the sphere of economy for the new government of Armenia? Under what circumstances is it possible to achieve the unconditional success of radical changes?

 

The new Armenian government should, as Nikol Pashinyan promised, start with the creation of a unified system of market economy based on rules which are reasonable and equal for all. This includes the abolition of privileges for monopolies, the cessation and prevention of the vicious practices of corruption in state bodies, and the reduction in the number of civil servants in parallel with the increase in their earnings as well as their responsibility for violations and the level of accomplishment of the tasks assigned. New rules must be introduced, first of all, in such spheres as customs and tax administration, power and close to them structures.

In parallel, the Central Bank, in cooperation with the Ministry of Finance, needs to conduct measures in monetary and credit spheres to further lower interest rates in the country to activate businesses, while coordinating this policy with commercial banks. With an inflation rate of 3% per annum on average, the loan rate should fluctuate around 6%. This will make financing more rational and avoid creating an excessive debt burden for economic agents, will give an impetus to economic activity and create new attractive conditions for local and foreign investments in the real sector of the economy.

Of course, large companies will continue to enjoy advantages in the market due to their economies of scale, but now the privileged part of them will no longer be able to "exempt" themselves from taxes and will return to a level playing field of equal competition. Moreover, the oligarchs should be obliged to return money from offshores, pay only "white" salaries and as a result - pay all the "hidden" tax arrears in order to obtain legal opportunity to manage further their enterprises. A one-time tax on great wealth and on money returned from offshores would significantly help finance the development of the economy at the first stage. In particular, it would also be justified to create a special large fund to support small and medium-sized enterprises (SMEs), giving them the conditions for access to inexpensive sources of financing, providing an online service system for SMEs that accompanies them in providing business services, realizing their business plans etc. Thus, SMEs will have access to new oxygen, which they so lacked and there will be the possibility of the emergence of new enterprises, new companies and, as a result, more jobs.

 

I completely agree with you, the absurdity of the statistics of the former government is shocking when, with a 7.5% growth of the economy, there is a lack of growth of new companies, a decrease in the number of the corporate client base of the banking system, as well as in volumes of corporate lending. It is clear that the calculated growth of the economy reflects consumption due to the growth of private remittances and some activation of exports.

 

Therefore, measures should be strengthened to encourage exports to reduce the dependence of the country's economy on remittances and reduce the share of external debt in GDP. To do this, we need to develop a wide toolkit to support exporters, especially those who reinvest profits in the further expansion of production and exports. These measures could include the release of reinvested profits from taxes, access to low-cost loans, exemption from import tariffs and export taxes, etc. And all these steps should be clear and lawful, according with transparent government decisions in the framework of its economic and industrial policies. At the same time, good laws and independent courts, as well as an arbitration system, should help enterprises resolve economic disputes quickly and rationally.

It is very important to note here that great positive expectations and popular support provides to the Pashinyan team a great credit of trust. This is a very valuable capital, which must be preserved and multiplied. I think Nikol Pashinyan has gathered literate, honest, and at the same time young and energetic leaders. The latter should be given the opportunity to have advisers, including from among diaspora specialists, who are experts in their fields. In carrying out the above steps and thereby establishing the necessary conditions for the future conduct of sound economic policy, the results should make themselves felt faster than many expect. At the same time, under the new conditions, a democratically elected parliament, independent and fair courts, and the fourth power - the press, should play the role of checks and balances, which at the same time can contribute to the positive agenda and key ideas of the strategy of modernization and dynamic development of the Armenian economy. The politicians themselves must act with integrity and behave responsibly. I hope that the Republican Party MPs will give an opportunity to government pursue such a policy and will not oppose the new elections, and thus some of them will be able to return to politics on the basis of a certain ideology, and the others will find themselves in various equally interesting spheres of activity. The people will remember them for their recent actions, and not by previous mistakes.

It is also important to create a prestigious independent center for analysis of economic policy and development (inclusive institutions). For example, the Armenian Development Institute could, through its analysis and activities such as Armenia's Development Reports and the Development Forum of Armenia, give signals to the government about the quality of its economic program and policy and about the degree of success or threats of failure. By the way, such important institutions could be financed by well-known diaspora funds and structures.

 

In Armenia, for more than two decades, an economic model has formed, consisting, in fact, of two parallel economies - formal and informal, with its often disjointed cash flows and informal economic relations. What recipes can help the new government to cope with the situation and channel the informal part into a single channel, without damaging the country's economic basis?

 

I have already partially answered this question. In Armenia, it was the parallel economy that dominated, where the business structures close to the authorities had monopolies on the import of goods or the export of raw materials and did not pay taxes. At the same time, as in the informal economy, they preferred to work with cash.

Although, you know, the informal economy is something else, mainly related to small and micro businesses, such as street vendors who sell small goods for cash, or providers of small repair services, where there is also cash payment. In developing countries, it absorbs a large part of employment and creates informal incomes, mainly for individuals or non-registered small enterprises. Such an informal economy exists also, but to a lesser extent, in developed countries. In Armenia, however, the parallel economy is the result of the splicing of the oligarchy with the state. The dismantling of this system at the initial stage should be perhaps the most important decision and the key to the success of Pashinyan's government, which makes it possible to create a developmental state and put an end to this very vicious and dangerous practice for economic development. Not only will the country’s economy be improved, but the statistical services will begin to measure at least 80% of the goods and services produced and consumed, while the remaining 20% will account for, as in developed countries, all goods and services that the system cannot formalize, since this part is small and is at a sufficiently low level associated, on the whole, with individual relations. Incidentally, assistance in harvesting at a friend's house and consumption of these fruits and vegetables is not even monetized and can also be considered as a part of the informal economy based on barter. Transfers to relatives and all other assistance are also generally not taxed, and thus are informal income for their recipients.

 

IMF forecasts for Armenia and other countries in the region in 2018 an existence of certain difficulties related to the structural problems that cannot be compensated even by gearing up the "transfer accelerator", ensuring the growth of aggregate demand. What structural changes are necessary in your opinion to increase the diversification of the economy and to reduce the impact of this factor as well as dependence on price jumps for metal raw materials?

 

In case of successful implementation of the reforms that described in response to your first and second questions the structure of foreign trade will change due to a sharp increase in exports, which would give the country hard currency for imports and investment. In addition, the accelerated economic growth accompanying an active export strategy will lead to a reduction in the share of official external debt in GDP and will contribute to an increased inflow of private investment. Investors should also believe in the relative stability and convertibility of the dram for the smooth transfer of dividends received.

Development of Armenia's exports seems to me to involve not only the production and export of mainly light and high value-added goods, agricultural products, etc., but also the ability to sell services to foreigners by using a broadband Internet (software, financial and business services, games and entertainment, architecture and design, etc.), or to foreign visitors to Armenia (tourism, educational and medical services). By the way, with a powerful, affordable and cheap Internet, services such as telemedicine and online courses at competitive prices will also be stimulated. But for this, the structure of financial flows and their use must first change. It is necessary to create conditions for the accumulation of capital and the inflow of long-term investments for the development of local and export-oriented high-performance and high-quality production of goods and services. The accumulation of productive capital and the ability to produce competitively complex goods and modern services is the main challenge for the Armenian economy. This is already happening to some extent in IT and tourism, but should get a powerful push at the peak of positive expectations and enthusiasm through more rational use of financial resources in the economy and their attraction from abroad. In this respect, positive changes in economic policy and the development of inclusive institutions will raise the confidence of foreign investors in Armenia and they will further invest in the IT sector, the production of expensive and light products such as jewellery, watches, small equipment, as well as in the hotel business, clinics, etc.

 

In this regard, do you think that the Armenian Diaspora is able to play the role of a catalyst in attracting investments in Armenia's economy, provided of course, that it successfully suppresses corruption and monopolies? What institutions need to be created in order for the diaspora potential to be fully used?

 

If we can preserve the spirit of optimistic expectations in diaspora, by right economic policies and development of inclusive institutions that promote economic development, Diaspora businessmen can play an important role as catalysts for the inflow of foreign direct and portfolio investments into Armenia. Showing the successes of their business structures in Armenia, they will thus interest potential nonArmenian investors from their countries of residence to follow their example. At the same time, such business development institutions as chambers of commerce, Business Armenia Foundation, trade representatives, as well as Armenian embassies abroad should help organize business forums and exhibitions in the world's major financial and business centers, actively involving all those who have already started doing business in Armenia. Online forums and webinars should also be actively used. Finally, the active invitation of foreign business delegations in various formats should also be accompanied by a high degree of coordination between such institutions as ministries, chambers of commerce and industry, companies, etc., interested in attracting foreign capital and technology. A foreign investor should be sure that in case of dishonesty or mistakes of a local partner, he will find a fair arbitration or judicial decision in Armenia quickly and inexpensively. There should be no "ours" and "theirs", and everyone should follow the established common and fair rules of the game, which in turn should be changed rarely and only for the better.