1.1. Transition Period: Initial Conditions

In due course, the implementation process of the political and economic transformation in Armenia reveals the complexity and scope of a host of interlinked problems to be solved, especially under extremely unfavorable initial conditions, which predetermined the subsequent course of developments. From the first years of transformation Armenia had to resolve the following fundamental issues:

· to build an independent, democratic state,

· to form civil society,

· to create a socially oriented market economy system,

· to become integrated into the global economy.

There were no historical precedents, theoretical expertise or world experience for such a transformation. At the initial stage, external factors, such as the transportation blockade, grave energy crisis and armed conflict in Nagorno Karabagh played a certain role in the drastic aggravation of the socioeconomic situation. Adding to these complexities were internal factors related to Armenia's resource potential and the peculiarities of the branch structure of the economy, which became incapacitated almost overnight due to the breakup of the USSR and of the common economic space. In fact, the processes were often unfolding in a chaotic fashion through ad-hoc solutions and without any well-defined strategies.

In Armenia as well as in most of the other former Soviet Republics, the transition period was heavily influenced by a number of factors, among which,

a) the recovering (in some cases gaining) of state independence that coincided with the transition period. Therefore, along with the revamping of the

Box 1.1. Consequences of Economic Policy Pursued in the Transition Period The economic strategy carried out in the post-Soviet space had a serious flaw, grounded already in its theoretical elaboration, i.e. it ignores an important fact that only the correct and careful sequencing of reforms can bring about the desired outcome. The outstripping of price liberalization over the changes in property forms predetermined the failure of the strategy's implementation. Liberalization of prices from "above" by administrative methods changed forthwith the principles and technology of payments and relations between partners at all levels. Monetarist methods and liberalization of prices were entirely out of tune with the State-monopoly system in the economy, which led to the imbalance and destruction of the existing system instead of reforming it. Expectations that market self-organization would automatically set up an appropriate system of relations between producers were inevitably doomed to failure due to the absence of market institutions to underlie it. Price liberalization under the conditions of monopoly and deficit of goods resulted in an abrupt price rise and in galloping inflation. Earlier subsidized prices for fuel and raw materials started to approach international prices, bringing about a rise in prices and making the output of the processing industry cost intensive. Competitive foreign products started to force domestic products out of the consumer market. Price liberalization preconditioned an increase in unrealized commodities and, later on, in reciprocal defaults on payments bringing both "strong" and "weak" enterprises on the verge of bankruptcy. All of this finally led to a structural crisis, breakup of cooperation ties, a loss of markets and dismemberment of industry. Rampant inflation triggered by price liberalization aggravated the crisis. Certain measures were undertaken aimed at financial stabilization, which were already means for fighting the consequences but not the cause. Tough fiscal policy and drastic reduction in monetary stock contributed to further isolation of production and to the curtailment of social programs.

existing state institutions it was necessary to establish entirely new ones (the army, banking, taxation and customs systems, etc.),

b) a severe economic downturn that occurred parallel to the transition period, as the result of a number of political factors (including armed conflicts) that accompanied the overall crisis of the Soviet economy and the breakup of the USSR and the pursued economic policy (Box 1.1),

c) the overwhelming impact of processes unfolding in Russia, on reforms, especially economic ones, underway in the former Soviet Republics, at least until 1993 when the unified ruble zone was eliminated,

d) high degree of dependency on external financing stemming from the scarcity of domestic resources of financing, so vital for the consolidation stage of independent statehood and the implementation of structural reforms,

e) disintegration of the network of raw materials, purveyance, foreign trade, economic and other infrastructures set up by the central Soviet authorities,

f) much deeper dependence of Armenia's economy on other Republics, which led to the collapse of the national economy in the conditions of erosion of traditional links and transportation blockade.

The factors mentioned above prevented efficient exploitation of the production sectors inherited from the Soviet economy, or a timely creation of alternatives.

¹ Human Development Report 1993. Oxford University Press, New York, page 135.