CHAPTER 5. PROSPECTS FOR SUSTAINABLE HUMAN DEVELOPMENT

5.1. Comprehensive Investment and Economic Development Strategy, Investments in Human Capital

Society's genuine development is predicated on the implementation of balanced economic, social and environmental protection policies, which put people first and target a higher quality of human life as the ultimate goal. Along with development, economic growth and sustainable human development are increasingly grounded in the use of human and social capital, since growth based only on natural and physical capital may lead to an unequal distribution of incomes and neglect the principle of equality between generations.

Investing in human capital, i.e. in education, professional training, research potential of society, public health care and in promoting good health, has proven much more efficient since it ensures a healthy, educated and intelligent workforce. According to international research data¹ which assess national wealth through the share of each of its constituent elements (physical, natural and human capital), physical and natural capital account for only 16% and 20% respectively, whereas human capital accounts for 64 % (on average, worldwide). In Armenia investment in human and physical capital is not yet at a sufficient level, though it appears to be on the rise. In 1998 investments in real assets, including capital assets and circulating material assets, increased over 7 times in comparison to 1993 and equaled 350.8mln USD, or 18.7 % of GDP². Almost half of the overall amount of capital investment came from population's pocket (44%), and money allocated from the national budget (19.3%). The share of foreign investment was more than halved, a fact that can be accounted for by a more than 3-time reduction in loans received through the State administration system.

While assessing investment in human capital, it should be noted that in 1998 total allocations from the national budget spent on public health, education and research sectors amounted to only 3.5 % of GDP. To keep the existing high level of human capital in Armenia, allocations to education should be raised to 3-5 % of GDP and to the public health care sector, to 2.5-3 %.

The current low economic activity in RA has left most people unable to pay for social services. Several factors combine to contribute to a growing rate of school dropouts. The lack of funds allocated to education and public health care together with the dire poverty of parents make it necessary for children and adolescents to work, to contribute to their families' budgets, rather than attend school.

Box 5.1 Expenditure for Human Capital The State's reduced expenditure on the education and public health care sectors is not related to the State income sources. The specific share of collected taxes that would be earmarked for education and public health care has not been determined. Had that share been set, it would have been possible to consistently meet the needs of the education sector. The total tax burden of the Armenian economy nevertheless, remains crushing. Mandatory social insurance contributions are currently burdensome (the rate amounts to about 28 % of the gross payroll) and are used entirely used for social needs. In the foreseeable future it is not possible to increase the tax rate (and the entire tax burden), nor for a certain portion of funds from the social insurance contributions to be re-allocated to another sphere of the budget.

Taking a number of well-targeted measures will improve the situation in the above-mentioned sectors. In education these are basically related to the process of broadening the autonomy of educational institutions. The role of non-government sources in funding the education, public health care and science sectors has significantly increased, which should never infringe upon the freedom of thought and choice of beneficiaries.

"Social capital" as a totality of "instruments" enabling human interaction and the attainment of goals (including the level of development of civil society and of an information system, behavioral norms and social sanctions) greatly enhances Sustainable Human Development (SHD). Sometimes the opinion is voiced that it was a deficit of social capital that significantly aggravated the depth of the crises in CIS countries.

The prevailing priority of economic development since the 1980s has put the major focus on an open economy, free market relations and privatization of state-owned enterprises. This, however, did not prove productive in restoring the standard of living and production capacities in the countries of the former socialist bloc and especially in the CIS countries.

An outflow of capital (including human capital) from the country is underway. Taking into account the negative consequences of the this phenomenon, a new, endogenous growth theory3 has been advanced. It is rooted in the idea of ensuring long-term growth of gross domestic product on the condition that the State takes active participation in promoting this process.

Development based on the principle of economic efficiency is the basic approach needed for securing fast economic growth. It would be advisable to lighten the tax burden of Armenia's entire economic sphere (of small- and large-scale entrepreneurship), thus broadening its base and increasing State revenues. Of special significance is the strengthening of competitive principles in economic activities. In that respect it is important in the near future to extend the practice of placing State orders on a competitive basis and to neutralize the manifestations of monopoly, which are not a rare occurrence on the domestic market. A functional system for accumulating temporary free assets has not been established in Armenia yet. It is necessary to encourage the development of insurance companies, pension funds and funds for public health care, university education, etc.

Trading banks are another key element in a country's financial activities. In Armenia, so far, these banks have been operating inefficiently. This can be seen in the fact that a significant portion of the banks' loan investments, nearly one-fourth, are bad loans and that an excessively high interest, 40%, is charged on loans. Investment banks are non-existent, and share of long-term loans is extremely low even though these are necessary first of all for industrial investments. Armenia will become more attractive for investors upon becoming a member of WTO and EC.

An analysis of the implementation process of recent socioeconomic reforms in the RA reveals that in the near future, development of entrepreneurship and implementation of an active investment policy will be possible only if a comprehensive approach is taken toward the strategy of ensuring a "comprehensive cycle" (see Figure)4. This cycle also takes into consideration the principles of transition from human development to economic development described in the 1996 UNDP Human Development Report5. The division of planes is conventional and does not reflect the prevalence of any plane over others.

The "comprehensive" cycle should include the following important elements:

I. Measures, entities and institutions that support market relations, including:

· privatization of State-owned property,
· primary and secondary markets of securities,
· developed banking and insurance systems,
· commodity exchange and national securities exchange,
· other entities that service market relations (tax, customs, licensing and other levers).

II. Provision of guarantees and appropriate legislation for the implementation of active entrepreneurial and investment policies, including:

· establishing an independent judiciary that would ensure genuine implementation of legislation that has already been enacted,
· adoption of new laws, such as the "Anti-Trust Law" or "Law on Contractual Rights," which would promote investments and competition.

III. State and national security, including the elaboration and adoption of fundamental provisions for economic and vital security, including:

· ensuring country's domestic stability,
· establishing defense and political doctrines,
· designing a program for economic security and nurturing trust in entrepreneurial activities,
· preparing a program for strategic security.

IV. Solution of Social Problems and Raising the Living Standards of the Population, including:

· availability of a long-term comprehensive program for labor market regulation, creation of new jobs, first of all in the leading and important industries,
· introduction of the social insurance system, including pension insurance and medical services insurance systems,
· availability of the program for improving the education system and for the efficient use of the research potential,
· closing the gap between minimum wages and the consumer goods basket, ensuring income growth,
· providing a wide range of opportunities to individuals and in general to public at large in social and economic spheres under the conditions of globalization and the industrial and post-industrial societal systems that ensure a person's all-round development and psychological adaptation.

Figure 5.1 From human development to economic development and back by means of a comprehensive cycle of the development of entrepreneurship and of the implementation of investment policies

¹ Bartelmus, 1995, World Bank 1995, United Nations 1997.

² "Specific Features and Stages of Economic Reforms in Armenia in 1991-1998". Statistical representation. RA Ministry of Statistics, 1999 (in Armenian).

³ "Economic Reforms in the Transition Period. Theory and practical results". Civil servant. Yerevan, 1999, p. 50 (in Armenian).

⁴ M.Melkonian. Entrepreneurship and investments. Current fundamental issues in RA. Yerevan, Luys, 1998, p. 340. (in Armenian)

⁵ Human Development Report, UNDP 1996, Oxford University Press, p. 68.