This report's purpose is to introduce the priorities of the economic policy of Armenia within the overall context of the development strategy of the country, define the role of the state in the process of implementation of economic reforms, depict the possible limitations and obstacles that still exist in the Armenian economic domain and outline efficient ways to overcome these, analyze the new economic environment emerging as a result of transformation of the ownership subject as the axis of transitional economy and outline strategies for further development, as well as reflect an extremely important role that the Diaspora can play in the economic development of the country.
Independent Armenia received a harsh legacy. The earthquake of 1988 had a devastating effect on the national economy. The conflict over Nagorno Karabagh also affected the economic priorities of Armenia. The subsequent blockade and energy crisis completed the hardships we all lived through during the last years.
All this, of course, had negative impact on the main economic indicators. It is enough to mention that in a few years following 1989, the gross domestic product decreased by more than 40%, the volume of foreign trade fell dramatically.
This was probably the reason why, in 1993 Armenia adopted the policy of economic stabilisation that is closely linked with the introduction of national currency in the same year of 1993.
Due to the collapse of the economic links established in the former Soviet Union and resulting deterioration of integration, and in the context of acute hyper-inflation, the government adopted the only possible solution: liberation all economic and financial relations, creation of adequate legal framework, and implementation of a tight fiscal policy. The financial stability was taken as the basis of this policy, since ensured trust towards the newly introduced national currency was essential for implementation of structural reforms, as well as harmonisation of the governance system with new economic conditions. Consequently, Armenia became almost the only CIS country that recorded stable economic growth in spite of the fact that it did not have any visible impact on the living standards of the population.
Nevertheless, the stabilisation policy was characterised by strengthening of the economic base that enabled the state to come up, already in 1998, with the doctrine "from stabilisation to economic growth" that necessitates large scale foreign investment which is only possible provided the private ownership rights are ensured by the state and the corresponding legal and institutional frameworks are in place.
Any nation and any people at a certain period of its history establish a state in order to maintain its national identity. Today, Western Democracy is probably the most efficient model of the state known to human civilization. This model answers all the requirements that a civil society poses to the state.
The selection of the model of our state was made back in 1991, when the national referendum established sovereign and independent republic.
The Republic, as a state model, naturally comprises several absolute values: division of power, independent judiciary, free economy, freedom of conscience, press, faith, and political organisations.
By making such choice, our people became an established and accomplished ethnic unity adherent to the democratic values. The main principles of democracy, that are in essence absolute values, should be enforced in social practice. Consequently, as new democracies, these values are extremely fragile. The main role of the state is to promote adequate social practices that ensure enforcement of these values and make them irreversible.
In the above context, the key function of the state is to ensure conditions for the economic development of the country, achieved through formation of free economy based on private ownership. The state should organise the process of privatisation and elaborate workable mechanisms for efficient management of the privatisation process.
It is essential that the state changes its role as immediate participant of the economic process to that of facilitator and organiser of private economic activity, with ensured legal framework for fair competition. On the other hand, in natural monopolies like energy, water supply, communications, telecommunications, etc., the state assumes the functions of coordination and protection of interests of the consumers. Such transformation of the role of the state implies fundamental revisiting of the legal framework that should be based on the judiciary reform and introduction of enforcement mechanisms. This task is so comprehensive and large-scale that it is hardly possible to address it without support of international organizational and individuals.
The government of Armenia has undertaken a comprehensive civil service reform, and the Diaspora, with its vast experience, may make a tremendous contribution to implementation of this reform.
At the threshold of a new millennium, the countries of the region face numerous problems. In the context of prevailing integration tendencies, no state can follow an isolationist policy. The imperative of the day is economic cooperation and integration into the world community. Establishment of economic, commercial and institutional cooperation in the Caucasus will provide necessary prerequisites for sustainable development.
Cooperation and integration should become the main remedies for the crises (natural, political, economic and social). Economic and commercial links are the best way to promote mutual trust.
The Caucasus region has a considerable potential for cooperation and out objective is to capitalise on this potential. Attempts for artificial isolation of countries in the region would undermine the cooperation as such, and would have a negative impact both on such countries and on the region as a whole.
Armenia is ready to strengthen and contribute to the efficiency of regional organisations - the CIS, BSEC, "Traseca," "Inogate" - by its active membership. It is most likely that due to this active participation, Armenia is included in the map of inter-state oil and gas pipe-lines, in "Traseca" railway upgrading project, and in Armenia-Georgia highway construction project, that currently negotiates possibilities of financing by the European Union. Armenia will continue strengthening its role of the most politically and economically stable country in the region by serving as a reliable bridge for the Mediterranean countries to the CIS economic markets, and putting the available mechanisms to work for the regional economic integration.
Due to its geographic location, political stability and predictability, and a stable economy, Armenia can become a principal economic mediator between Europe, Russia and Near East countries.
Armenia has privatised most of its former public ownership. The private sector produces more that 75% of the national GDP.
The government of Armenia is confident that prevalence of private economy, with regulation by the state, is the only prerequisite for the economic prosperity. While during the first phase of privatisation the main emphasis was on the extensive development and creation of a critical mass of private owners, now as the transition towards the market economy is irreversible, efficiency of post-privatisation processes comes to the fore; in this context, attraction of domestic and foreign investment in the privatization process becomes a priority.
The completion of the first phase of privatization came with the termination of the voucher privatization. In 1997, the country started Dram privatization that provided to our Diaspora compatriots vast opportunities for investment in Armenia.
One of the current priorities is further issuance of shares and attraction of capital through the exchange mechanisms. The practice of international bidding for the most attractive public enterprises will continue, and preferential conditions will be created for proposals that along with adequate price, contain provisions for investments aimed at employment generation. Quite a few enterprises in the hotel, energy, agriculture, brandy and other branches of business have been privatized by foreign investors.
These opportunities will develop as Armenia improves its economic legislation that would be based on the land code that would recognize private ownership rights both for the agricultural, and for urban land.
The success of economic reforms is preconditioned by a comprehensive approach to their implementation. Structural adjustments in the economy, reforms of the governance system, establishment of liberal economic and fiscal systems, and creation of market infrastructure should take place in the conditions of concurrent development of the corresponding legal framework. However, we in Armenia have not been able to achieve such concurrent development. The judiciary reform was delayed for 2 - 3 years, and was implemented at the time when re-distribution of ownership was almost completed. The Civil Code answering provisions of the market economy was adopted only in 1998 and entered into force only on 12 January 1999. The Civil Code stipulates inviolability of the private ownership, inadmissibility of arbitrary interference with private ownership matters, and the principle of court protection of the rights. This is the only way to ensure stable development of entrepreneurship and regular foreign investment in Armenia. Needless to say, another priority is the establishment of a law enforcement system that would enable further improvement of the Civil Code.
With the implementation of the Civil Code, Armenia will ensure all conditions required for circulation of private ownership titles. This primarily refers to circulation of land ownership titles. While the country was the first among FSU countries to conduct land privatization back in 1992, the land ownership certificates were distributed to the farmers and farmer associations only in 1998. That is, our privatization did not create an market for privatized commodities, and it did not create not only land, but also security markets enabling circulation of property and pertinent rights. The corresponding legislation is currently under discussion and the government will do its utmost to ensure that a full package of laws on securities, as well as on circulation of ownership rights, is completed and adopted by the end of 1999.
The adoption of international accounting system is also an essential prerequisite for protection of ownership rights, and an imperative for strengthening of the economic system. The new accounting system is mostly required by emerging economic subjects and owners. This reform primarily serves the private sector since this sector is most interested in accurate assessment of efficiency of its economic performance.
Our strategy for fostering economic growth and promoting investments prioritises creation of an inductive investment climate. In this context, introduction of new standards would ensure a transparent and benevolent environment for investors. We should be able to speak the same language with international business circles. We should be able to present our economic opportunities and industrial potential in a clear way.
In 2000, we will complete the process of introduction of an international accounting system and norms, but their implementation will be accompanied by numerous problems and obstacles. First of all, at issue is the professional training of our accountants for which we are looking forward to support from our Diaspora compatriots. In this respect, the work undertaken by KPMG - Armenia and Amyot Exco companies is very much welcome, but insufficient. We are confident that the Diaspora can have a much more substantial role in this issue.
The financial system of the country is based on the banking system that was shaped by the laws "On the Central Bank of RA," and "On Banks and Banking Activity" that established two-level system comprising the Central Bank and universal trade banks, and whereby the Central Bank , in addition to its functions of minting the national currency, also coordinates the activities of the entire banking system. The liberal model of banking transactions adopted from the outset enables unrestricted access of foreign capital to the Armenian banks both by means of capital an deposit gains.
Armenia is one of the few countries that provide conditions for unrestricted transactions on payment balance current accounts, and pose no obstacles for transactions related to flow of registered capital, i.e. any investor can freely import or export capital from Armenia. At the same time, the oversight functions of the Central Bank are extremely important not only to ensure smooth operation of the banking system, but to increase confidence towards the banking system of Armenia.
It is also worth mentioning that albeit stable, the banking system of Armenia is under-capitalised. Many Diaspora entrepreneurs now have shares in the capital of Armenian banks, but this process should develop. Moreover, our Diaspora compatriots can invest their savings not only as capital share, but also as deposit, since the interest is not taxed, and this money works for the development of the national economy.
Another prerequisite for stable financial system is tight, but transparent and predictable fiscal policy. The government ensures equality of all subjects in the domain of the tax law, and the tax law will be revised only according to a scheme publicized in advance, in the overall context of economic reforms.
A benevolent investment climate and stable entrepreneurial mechanisms are essential for the accomplishment of the state: a middle class composed primarily of entrepreneurs is the most stable element and ardent supporter of the development in any country.
Implementation of economic growth policy requires attraction of foreign investment that contributes to the solution of the employment problem. Consequently, the development model is epitomised by "Economic growth in conditions of employment generation" formula. A social programme aimed at charity and social benefits cannot be as efficient as that creating employment and income generation opportunities.
The same objective is pursued by the current tax policy that in essence encourages industry and production. Of course, there are still quite a few problems hindering full implementation of such approach. For example, in spite of absence of any customs and import duties on imported raw materials, we still witness numerous occasions when the importer has to prove to the customs authorities that the materials imported are raw materials. Faults in law enforcement should be eliminated whatsoever thus fostering national production and creating most inductive conditions for producers and service providers.
In order to ensure equality before the law in the economic domain, the government prioritizes the establishment of the institutional framework (creation of agencies dealing with anti-monopoly, bankruptcy, financial recovery, re-activation of non-privatised enterprises, etc.). At the same time, Armenia continues establishment of the institutional framework for export promotion and attraction of foreign investment (particularly, investment companies, export and import bank, export state agency, insurance companies), where the Diaspora entrepreneurs can have their important contribution.
For the purpose of introduction of an international marketing system, an institute of economic attaches at Armenian embassies will be established to ensure acquisition of information on distribution markets, targeted and comprehensive analysis of foreign and domestic markets, and information exchange.
Considerable attention will be put to registration and licensing of entrepreneurs and private enterprises. The current cumbersome system of permissions and agreements does not contribute to the entrepreneurship development. The state should ensure the most simplified procedure for enterprise registration and licensing enabling registration of both resident and non-resident enterprises, with registration time-frames reduced to one day utmost.
An essential prerequisite for the enterprise development in Armenia is the state support to small and medium enterprises. To this effect, we have undertaken design of a package of laws dealing with state support of enterprises that would greatly promote entrepreneurial activity in the country. The participation in international initiatives for SME development is also extremely important. Quite a few business proposals are submitted to the World Bank and Linse Fund. The government will gladly welcome any contribution of our Diaspora compatriots.
The process of negotiations for Armenia's accession to the World Trade Organization is nearing completion.
In view of the required creation of most favorable foreign market conditions for the Armenian producers, the WTO membership would enable acquisition of preferential terms of import of Armenian goods to all member countries which is essentially important in view of departure of Armenian producers from the CIS markets (due to their partial insolvency) to other markets.
In view of quality demands in the international markets, any attempt to promote export of domestic products may be doomed to failure unless a system of international quality standards is adopted whereby domestic circulation of low quality goods is curtailed and the access of domestic goods to the international markets is ensured.
As a country of political democracy and free market, and as a trustworthy partner in the international arena, Armenia should ensure confidence of foreign partners towards domestic trade and economy regulatory framework by conducting predictable policy. By joining the WTO, the country obliges to conform to the "rules of the game" accepted in the Organization thus providing an additional guarantee for the investors.
Membership in the WTO would enable Armenia to offer fair competition conditions for all import companies doing business in Armenia.
Developed infrastructure (energy, potable and irrigation water systems, roads, aviation, communications, telecommunications, heating) is an essential prerequisite for enterprise development in the country, and in this respect Armenia still has a long way to go. We have not yet managed to attract any considerable investment in this area and due to the obsolescence of the material base, as well as inefficiency of the management system, the infrastructure has appeared in dire straits. The priority issue is this area is separation of functions and ownership rights.
The national strategy in this domain is to gradually withdraw its management functions and maintain the regulatory functions only. The management function, along with the ownership rights, is transferred to the investor.
This approach enabled Armenia to overcome the energy crisis and create conditions for not only meeting energy demands of the country, but also for exporting it to the neighboring countries. The generating stations were separated from the transmission enterprises, and the latter - from the distribution networks. The relationship between these is regulated by the market principles, with the state ensuring competition and regulating tariffs. The logical continuation of this policy will be the privatization of the system and capital investment by the owners. In view of the fact that the volume of investment required in this, as well as in all other infrastructure areas is quite significant, an investor consent can be acquired only upon institution of stable and well established management system. The infrastructure development is also essential in terms of establishing economic relations with the neighboring countries.
Efficient management of public roads, transmission lines, telecommunication systems, water supply systems, oil and gas pipelines are prerequisites for economic development of the countries of the region. In this context, the construction of Iran - Armenia gas pipeline, design and construction of Meghri hydro power station, construction of the 5th unit of Hrazdan thermal power station, construction of south-north highway to Tbilisi, completion of Yerevan Zvartnotz airport cargo terminal and other projects are extremely important.
In spite of stable annual growth of the national gross domestic product, the industry profile remains highly inadequate. At the same time, constant and stable growth of the industrial sector is a guarantee of sustainable economic development.
The industrial policy in the country will be based on technology, production and organisational innovation. The priority will be the establishment, on the basis of domestic resources, of competitive processing industry that will be resource-, material- and energy- efficient, labor intensive and, to the extent possible, will rely on domestic raw materials.
Effective interaction of sectors of the economy and efficient use of natural resources require implementation of a comprehensive programme of mining and metallurgical industry development that would derive from the international experience and engage services of internationally recognised consulting companies.
The first steps are undertaken for the revival and technology upgrading of Armenia's chemical industry, plans are made for the rehabilitation of Vanadzor chemical complex, activities are underway for assessment and re-activation of "Nairit" research and production enterprise.
Considerable progress has been made in the revival of light industry. The stable growth in the sector during the last several quarters is an indicative outcomes of these initiatives. The government of Armenia is confident that the light industry is one of the most promising branches of national industry.
Several large-scale projects in the agricultural processing industry are underway. The successful completion of technological upgrading and provision of circulating capital to the largest processing plant will considerably improve the supply of agricultural products in the country.
The creation of an international specialised network for gold processing and diamond cutting is aimed at the establishment and fostering of business partnerships between the Armenian jewelers worldwide. The government will support the establishment of a jewelry centre in Yerevan and implementation of large-scale jewelry projects.
The human potential of Armenia can become a basis for the development of information technologies industry. The thirteen enterprises working in the sector have been quite successful. The primary task of the government is to strengthen the corresponding legal framework and to facilitate the establishment of the centralised technical support to these enterprises.
The Armenian entrepreneurs have tremendous opportunities to contribute to the development and make investments in the above and many other branches of the national industry.
Armenia is not rich in natural resources. However, the management of the available resources has been extremely inefficient since the sector was neither transparent nor predictable, and lacked efficient management strategy.
The government is ready to withdraw from the management of the sector. By providing the natural mines to investors on a long-term lease (with subsequent ownership rights) and maintaining the regulatory function, the government will establish one requirement, i.e. consistent increase of export of the goods produced from the natural resources.
Ten years have passed after the devastating earthquake. However, time has not healed our wounds and pains. Today, on the tenth anniversary of the earthquake, we have to admit that very little has been done to mitigate its consequences. The people still live in deteriorated temporary shelters, one generation grew up in make-shift houses and schools, and the issues of the earthquake area were not addressed in a comprehensive manner.
The burden is heavy. But it is our common burden. It is our duty to exert all efforts to finalise the rehabilitation of the earthquake area in the tightest time-frame possible.
In the above context, we expect the cooperation of the Diaspora on a mutually beneficial basis. With the adoption of the new Land Code, stipulation of ownership rights on urban land and approval of earthquake area master plans, we will propose to our Diaspora compatriots to participate in the formation of a real estate market thus contributing to the economic recovery of the earthquake area.
It is obvious that an ancient country, full of historical monuments and picturesque sites can become very attractive for tourists and travelers. However, developing tourism as a profitable industry requires establishment a corresponding infrastructure and adequate promotion by the most efficient and modern means. In this respect, little can be done without cooperation of the Diaspora.
As the first joint initiative, the government proposes to immediately undertake "Let's Enter The New Millennium In Mother Armenia" project. Celebrating the New Year and Christmas of 2000 in Armenia, our Diaspora compatriots will not only enjoy meeting the new century in their homeland, but will also considerably contribute to the tourism development in Armenia by establishing a tradition of celebrating the New Year in the motherland on the eve of the 21st century.
On the eve of 1700 anniversary of the adoption of Christianity the government will support any business proposal for the tourism development that would enable our Diaspora compatriots to start a profitable business in Armenia and contribute to employment generation and economic development.
The Armenian Development Agency under the auspices of the Prime Minister of Armenia was established to foster business contacts between Armenia and the Diaspora, provide information on Armenian economic policy and legislation to the Diaspora, render design and consulting services for specific business initiatives, and eventually establish a one-stop shop for non-resident entrepreneurs. The Agency Trusteeship Council will include internationally renowned entrepreneurs and sponsors, as well as representatives of reputable international organizations.
The Agency will provide comprehensive services to foreign businessmen and entrepreneurs who intend to undertake any type of investment activity in Armenia.
The Agency will enable to register Armenian companies and receive all necessary licenses and certificates required for its operation without any bureaucratic delays. The Agency will become a bridge between foreign entrepreneurs and the government of Armenia, also enabling the Armenian authorities to keep abreast of all issues of concern to the business community. The government will ensure utmost transparency of all the activities of the Agency.
Any nation, any ethnic unit, at a certain stage of its development establishes a state as a quintessence of its national identity. An established state forms a civil society. An empowered civil society supports the state.
The state is the embodiment of the nation's need for self-organisation. A republic is the most efficient model of the state. A democratic republic is an absolute value.
We have a behest from our ancestors: to create an independent Armenian state, build and produce, and embellish the Armenian House - free, modern, democratic. We are obliged to have enough willpower to overcome the current difficulties, and jointly take the road of reforms. The reward will not be late to come.