ArmInfo. In economic terms, after gaining independence, Armenia from an agro-industrial country, where metalworking, mechanical engineering, chemical, light, food industries developed, turned into a state with a small economy, which could not boast of either a rich natural resource potential or an advantageous geographical position.
Without oil, gas and access to the sea, Armenia also found itself in an economic blockade, because due to the Nagorno-Karabakh conflict it was blocked by Azerbaijan and Turkey, and due to the Georgian-Abkhaz conflict partially cut off from Russia (the main cargo transportation was previously carried out through the Abkhazian railway). Today the situation is somewhat changing, the country's economy is demonstrating high growth rates. However, even in this situation there are "weak points". The correspondent of ArmInfo interviewed Doctor of Economics, Professor Ashot Tavadyan about the need for changes in the monetary and tax policy of the State.
- Mr. Tavadtan, despite the certain growth rates of the domestic economy, recently economists and experts point out the existing problems of the trade balance, the "fixation" of the trade and economic cooperation with Russia, and the monetary policy. How do you assess the situation of Armenia's economy?
- Unfortunately, I have to state that the country's economy, to put it mildly, is unhealthy, and in order to assess the degree of its illness, a diagnosis of this disease is necessary. First of all, we are talking about a sharply negative trade balance, when import volumes are almost twice as large as export volumes. This imbalance is covered by three components - attracting loans from foreign organizations, grants, and, most dangerously, the export of labor. In fact, the main export of Armenia is the labor force, since most of the remittances come into the country through remittances from labor migrants.
An equally important factor in the illness of the Armenian economy is unemployment, which either decreases or rises slightly, but remains at a high level. If the unemployment rate in the country is at a double-digit level, it means that the country's economy is unhealthy, and according to official figures, the unemployment rate is 13% of the total employable population, which exceeds its "threshold of sensitivity". As for why I use the term "threshold of sensitivity" that was put into circulation by me, I will give an example of the temperature of the body, when at 36.9 degrees it is considered healthy, and at 37.1 - sick, since in the latter case the probability of an increase in body temperature to 40 degrees increases sharply.
The same can be true of the economy of a country GDP per capita of which is significantly below the world average.In Armenia, it is about 5 thousand dollars, while the acceptable threshold is 10 thousand dollars.
- What should be done in this case to solve the existing problems?
- It is very important, first of all, to sharply increase the export of finished products with a higher added value, which, in turn, will lead to an increase in additional jobs. It is equally important to significantly increase the output of strategic products. To achieve this goal, it is important to start using new tools, including in the implementation of monetary policy, tax policy and state control. At one time, the famous German economist Daniel Friedrich List proved that without state protectionism it is impossible to achieve the goals set, especially in a state with a transforming economy.
Monetary policy is carried out by the Central Bank, which carries out the two important tasks of ensuring price stability and maintaining financial stability. The level of price stability is directly determined by the law "On the State Budget of the Republic of Armenia". However, our laws are written by the same organizations that are obliged to comply with them, as a result of which an imbalance is formed. As a result, the citizens of Armenia, unlike the Europeans, pay even for low inflation, not to mention high inflationary pressures. Our policy inflation rate is legally set at 4% (+_1.5%) with a low level of monetization and often at a high refinancing rate. An economy cannot develop if there is no financial blood in its body, which leads to a shortage of funds and their rise in cost.
The fact of revaluation of the national currency is also problematic. The revaluation of the dram is beneficial for the Armenian government, but disadvantageous for the state: the executive branch gets the opportunity to reduce the public debt, increase GDP and the state budget in dollars, but exporters begin to suffer, which ultimately affects the general state of the country's economy like a boomerang. On the other hand, the depreciation of the dram below a certain level affects the state of importers, who have significantly reduced opportunities to import the necessary equipment for the production of innovative and competitive products into the country.
For this reason, it is important to keep the course within a certain range, despite external pressures. In my recently published book in London, I called this the "snake in the tunnel" effect. From above it "bites" exports, from below - imports of innovative equipment.
- You have already pointed out the importance of state protectionism. What do you mean by this term, given the market nature of the domestic economy?
- We are "the last of the Mohicans" in terms of using elements of a purely market economy, but for its development, serious political will is needed to restructure the entire monetary and tax policy. This policy should be aimed at increasing the volume of exports of finished products and the growth of production of strategic products through state regulation and the entire banking system. To do so, it is necessary to begin the formation of a system of state banks, which will accumulate funds from state organizations and not only. I can assure you that in this case, inflation will not rise.
State banks will direct cheaper money to areas that can be of crucial importance for the growth of the welfare of the state and citizens. In addition, the presence of state-owned banks will make it possible to regulate the cash flows that should be directed to lending to programs for the export of finished products. This wasn't my idea, this is evidenced by the experience of very many countries, in which control mechanisms are even applied through monthly claims on these loans. Of course, there is a risk of corruption in this mechanism, but it is covered by the effect that the state will receive.
Why is the money of state organizations in private hands? I propose a three-tier model of the banking system - the Central Bank, state banks and banks with public-private participation and private ones. With state regulation and the presence of a state bank, funds could be directed not to making passive investments, say, to building houses, but to increasing the production of export products with high added value, which, in turn, will lead to the opening of new permanent jobs. Since we are a country with a small economy, this is the only way to ensure tangible growth.
- But does this also require a need to revise tax policy?
- The tax policy should be preferential for the export of finished products with the obligatory use of duties on the export of raw materials. At the same time, one should not expect budgetary losses, since one can compensate for the other.
Take, for example, Turkey, which, like us, is a member of the WTO. Meanwhile, agriculture in Turkey is subsidized by the state, which in fact means lower taxes. Despite high inflation of 80%, they, like ours, have a refinancing rate of 10.5%. At the same time, we have inflation at about 9%. We need to solve this problem effectively. On the one hand, not to take the risk of hyperinflation, and on the other hand, to have a rate that would contribute to a higher rate of economic growth, outpacing wage growth compared to inflation. Here, of course, the art of regulating economic processes is required. By the way, in the situation that has developed in the EU, with inflation of about 10%, the key rate is 2%. Turkey, on the other hand, is clearly pursuing a policy of cheap money, thus they have the possibility to actually give concessional lending to the same agriculture. If there is no possibility to introduce a customs duty, then subsidize it. Thus, they have the opportunity to actually give preferential credit to the same agriculture. If it is not possible to introduce a customs duty, then a subsidy is implemented.
At the same time, very strict control over the direction of funds into production is necessary. If the money goes to purchase equipment, then that's fine, but if it goes to commodities, then problems may arise. A high refinancing rate should not be a panacea.
If relations with Russia worsen, the cost of natural gas supplied to Armenia may rise to $1,200 per 1,000 cubic meters. In this case, no refinancing rate will help us. As an example, I will cite the experience of South Korea, in which President Park Chung-hee, including strong-willed methods and strict control, was able to bring the country to a qualitatively new level.
- Yes, but this also requires a qualitative composition of the Cabinet of Ministers, which would implement all this...
- Our ministers often remind employees of the department of the statistical committee, constantly citing its data. But what exactly each minister did for this is modestly kept silent. Therefore, a strict control mechanism is needed. Set certain tasks and questions and let each minister report on the work he has done. You see, after that, unprepared people will stop rushing to become ministers. A semi-literate person manages this or that area, because his rights and duties are very blurred. I am for them to receive very serious money, but for a certain work done. If you simply distribute bonuses, then by doing so, you contribute to a decrease in the level of efficiency of each head of department.
- Let's talk about integration processes. Recently, there has been a lot of talk about the fact that "if Russia <sneezes>, Armenia will get seriously ill". What is your point of view on this matter?
I should note that in the Eurasian Economic Union, of which Armenia is also a member, the integration mechanisms are imperfect, many issues are resolved by the administrative method. And in the countries of the European Union, clear regulatory mechanisms are used. In particular, the difference in inflation in the EU countries should not exceed 1.5%, and in the EAEU it can reach up to 5%. In general, it should be noted that if we just sit back and wait for the influence of the 200,000 immigrants who have arrived from Russia, nothing good will come of it.
We need to seriously reform our economic policy, deriving clear benefits from the integration processes. It is also important to start changing the structure of the state budget, which should be based on the principles of efficiency and purposefulness.
For the development of integration processes, it is necessary to increase their efficiency in EAEU, it is also important to develop relations with other organizations and countries. It is extremely important, for example, to interest Georgia in logistics issues by providing it with preferences. If Russia sells gas to it for $165 per 1,000 cubic meters, as is the case with Armenia, then it will de facto provide an opportunity for duty-free importation of its products to Russia, and thereby increase the likelihood of direct access to a situational partner in the person of Turkey and an ally in the face of Armenia, as well as Iran. Real preferences will contribute to the opening of the railway through Georgia. However, I would like to point out that if Turkey is considered as a first-class partner for Russia, and Armenia as a third-class ally, then nothing good will come out of this approach. Russia, de jure, is a political and economic ally of Armenia. In fact, the Russian Federation adheres to the principle of equality of relations in a number of cases. For example, it does not have an agreement on a strategic alliance with Iran, but there is mutual understanding on many issues at the level of actual alliance relations. The same holds for France, a country parliament of which is seriously concerned with the problems of Armenia and Artsakh, despite the absence of an agreement on allied relations. Relations with India are reaching the level of strategic relations. In a word, while strengthening relations with Russia, it is necessary to actively work on new areas of integration.
- Thank you very much!
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