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ECONOMIC DEVELOPMENT, PERSPECTIVES AND ROLE OF THE DIASPORA |
Prepared
for the Armenia Diaspora Conference |
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Purpose of the
Report
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. LANDMARKS OF
ECONOMIC DEVELOPMENT OF ARMENIA 1. We
see Armenia as a country adherent to the principles of political and
economic democracy, participating in all regional economic and
institutional development projects, and implementing all measures for full
utilisation of the potential available in all sectors. 2. Any development initiative is doomed to
failure without participation and support of the people. The government
must ensure full participation of the people in the economic, social, and
political reforms. 3. The objective of the government of
Armenia is to ensure state protection of the private ownership rights and
decrease, to the extent possible, interference of the state with the
private business matters. 4. The state should gradually decrease its
participation in the economic process and assume coordinating functions
mainly, i.e., the state should take charge of setting the rules of the
game and ensuring that these are kept. There is still much to be done in
this area: the conditions of fair competition are yet to be established,
anti‑monopoly mechanisms are to be put in place to prevent a certain
few economic subjects from establishing domination over a selected sector.
Anti‑monopoly mechanisms should be established in all sectors
of the economy with the exception of natural monopolies like natural gas
supply, railway, communications, water supply networks, and even here
management should be vested in private companies on a competitive basis. 5. The creation of a land market is a
priority. When distributing agricultural land, we did not support farmers
with equipment and facilities. The land ownership right has not become a
market commodity. The first step in this direction was distribution of
land ownership certificates that was accomplished last year. 6. All land, with the exception of those
which have strategic importance or are state reserve lands, should fall
under either community or private ownership. In the case of communities,
preparation and approbation of master plans of all settlements remains a
priority. 7. The government of Armenia will continue
implementing the policy of financial consolidation, including the system
of community revenues. The budgetary policy of the communities should
become a matter of serious discussion by the government, and its
priorities should be established accordingly. 8. State protection of small and medium
enterprises is the essential prerequisite for their existence, especially
in Armenia. It should be mentioned that at times, the landplot allocation
procedures are extremely inadequate, the administrative process for
leasing of premises for the business is extremely cumbersome and
complicated, especially at the community level. The priority issue for the
government is the clarification and simplification of landplot allocation
procedures. 9. Armenia will enforce the bankruptcy law
in order to ensure fair distribution of ownership rights. The main
principle should become "from bad entrepreneur to good entrepreneur,
from inefficient owner to efficient owner." 10. Fighting corruption and ensuring
equality before the law is a priority for the entire governance system. ECONOMY OF THE
REPUBLIC OF ARMENIA AFTER INDEPENDENCE 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. The Role of the
State 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. Regional
Cooperation 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. Privatisation 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. Protection of
Ownership Rights 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. Finance and Banking
System 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. Entrepreneurship
Development and Investment Climate 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. Armenia's
Membership in the World Trade Organization 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. Economic
Infrastructure 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. Industry 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. Management of
Natural Resources 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. Disaster Area 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. Tourism 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. Armenian
Development Agency 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. Conclusion 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. ---END--- |
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