Armenia - NHDR 1999

The predominance of social issues and the social responsibility of the State should become one of the most important prerequisites for the implementation of reforms. It is important to secure the efficiency and targeting of state expenditures as well as undertake respective measures for fair distribution of incomes aimed at the reduction of glaring social inequality. Budget revenues can be increased at the initial stage through the taxation of those potential taxpayers who are not contributing now to the budget (mostly in the shadow economy, which exceeds 50% of the GDP, experts contend).

The State should undertake the coordination of the structural reform policy and enhance competition on the domestic market, the establishment and improvement of market institutions and of the legal infrastructure for the market since the State policy of non-involvement during a most complex transition period proved counterproductive. At the same time, the State should pursue foreign trade policy aimed at the assistance to domestic producers by using mechanisms of tariff and non-tariff regulation.

Armenia should pursue the course of self-development. Foreign loans can support but never replace domestic efforts. It is imperative that a conceptual framework of national development be designed, top priority directions for economic development be selected, so that they are used as bases to further implement development-enhancing investment and tax policies, which boost structural reforms.

A controlled, strictly targeted issue of money in compliance with selected priorities is a viable way out of stagnation. Such a course would enable potentially competitive though currently idle production capacities to restart operations, to broaden the tax base and to increase budget revenues, to reduce unemployment and to solve numerous social problems. The issue of money will enable the Government to set a realistic national currency exchange rate ensured by the cover of commodities. That will improve export conditions, will contribute to the balance of foreign trade and help to the forestall outflow of national capital.

The strengthening of local self-government bodies is one of the most important guarantees for the country to take the democratic path of development. Due to current legislation, local self-government bodies do not have sufficient economic and legal autonomy. Their tax base is inadequate to ensure self-sufficiency and most of them depend on subsidies from the national budget. Besides, the government is, in fact, entitled to dismiss at its own discretion any member of the community government body. These two factors curtail communities' powers, which contribute to underestimating their role and artificially inflating that of central authorities. It is necessary that legislation be amended to include additional rights of local authorities and a special section on taxes that are paid directly to local budgets.

Struggle against corruption acquires special importance. Corruption is inherent practically to every country and society. It is, however, especially dangerous for the transition societies since it becomes self-perpetuating and jeopardizes the country's economic development and democratization process in its initial stage. Experts assume that the level of corruption in Armenia is lower as compared to CIS countries on average. A major root cause that leads to perpetuation and reproduction of corruption is the low remuneration of a vast majority of civil servants, which prompts them to seek (usually illegitimate) ways of augmenting their incomes.

Alleviation of political tension in the region has become a serious development factor. It is worth mentioning the dual impact of tension: first, it forces Armenia to maintain a high level of defense spending; second, it limits the flow of investments and even stimulates the outflow of capital. The resolution of conflicts in the region (primarily but not only the Nagorno Karabagh issue) is an important prerequisite for the development of Armenia.

It is necessary to make political efforts to overcome finally the isolation and transportation blockade and to restore railway communication with Russia and Turkey. More important for Armenia is the project of connecting Iranian and Armenian railways, which would facilitate cargo transportation from Central Asia to Europe via Iran, Armenia and Georgia. The implementation of the project will be beneficial for Armenia both in financial and economic terms and will be instrumental for the development of trade and economic cooperation in the region.

To conclude, the transition period in Armenia is temporary in nature and could be considered close to completion in political or qualitative terms. From a formal point of view, the main goal has been achieved - a state with democratic features has been built, property rights secured, prices are liberated and contemporary monetary, taxation and banking systems have been established, to name a few achievements. However, from a qualitative standpoint, Armenia has yet a long way to go. Based on official data and about 20 years of expert evaluation, it could take 16 years, with 5.7% average annual economic growth or 7-8 years if by some miracle 10-12% could be realized, to mitigate the social cost of reforms and approach the pre-reform standard of living without losing the achievements in democracy and pluralism.