Conference on Armenia’s economic development in the University of California, Los Angeles

Conference on Armenia’s economic development in the University of California, Los Angeles


Press Release?14 May 2006


“Armenia: Challenges of Sustainable Development? was the theme of an international conference at the University of California, Los Angeles (UCLA), on 6 May 2006. Specialists in economics, finance, and public policy assessed the achievements and shortcomings of Armenia in economic growth and poverty reduction and issues related to tax revenues, business investment climate, and financial sector development.


The conference was organized by the Armenian Educational Foundation Chair in Modern Armenian History at UCLA (Professor Richard Hovannisian) and the Armenian International Policy Research Group (Dr. David Grigorian), with support from the UCLA Center for Near Eastern Studies and Department of Economics. The gathering was dedicated to Professor Armen Alchian, a world-renowned Armenian-American economist, who was born in Fresno in 1914, received his Ph.D. in Economics at Stanford University 1943, served in the U.S. Army Air Force during World War II, and joined the UCLA faculty and the Rand Corporation in 1946. His career at UCLA spanned a half-century.


In a discussion with Dr. Vartiter K. Hovannisian, Alchian recalled his childhood in Fresno. His father was an early immigrant from Erzerum, while his mother was one of the first native-born Armenians in California, a member of the pioneering Normart family of Fresno. Alchian has vivid childhood memories of General Antranig (Ozanian), who lived with his family for several months in the 1920s, and of the constant fear of Mrs. Ozanian that the lad might hurt himself as he played with Antranig?s sword. Alchian added that he had not discussed his Armenian childhood for a very long time and was happy that someone had rekindled early twentieth-century memories of Fresno. At the end of the program, Richard Hovannisian presented Dr. Alchian with the volume ?Armenian Karin/Erzerum,? from the UCLA conference series on Historic Armenian Cities and Provinces.


Professor Hovannisian opened the conference with an overview of the historical role of Armenians in the world economy. Turning to the Republic of Armenia, he highlighted the tradeoff since 1991 between the pressures to privatize the economy and move swiftly to a full free-market system, on the one hand, and the inadequate preparation and negative social impact of these processes, on the other hand. As for the current conference, he stated: ?After sixteen semiannual conferences on Historic Armenian Cities and Provinces and, more recently, on the Armenian Genocide, the present one takes us in a new direction with a hard look at the immediate challenges facing the Republic of Armenia and its citizenry.? He added that it was a pleasure to have the young organization, AIRPG, serve as a cosponsor and noted that several of the participants were also members of that group, which seeks to facilitate public policy discussions in Armenia and in the Diaspora and to foster interaction among researchers and professions in economics, political science, law, and government.


Professor Harold Demsetz, a long-time colleague and friend of Armen Alchian, assessed Alchian?s important contributions to development of economic theory, his major works in the field relating to consumer rationality and behavior of the firm, and his enduring legacy as a teacher and mentor. He lauded Alchian for his ?clarity, originality, willingness to break free from old approaches,? Professor Alchian then was introduced to a highly appreciative audience that rose to applaud him before he reflected briefly on his life and career.


Growth and Poverty Reduction

?Growth and Poverty Reduction in Armenia: Achievements and Challenges? was the subject of the morning session, with UCLA Professor of Economics, Political Science, and Public Policy Michael Intriligator serving as chair and the central presentation given by Dr. Enrique Gelbard, a Deputy Division Chief of the International Monetary Fund (IMF) and former Mission Chief to Armenia, who has co-authored a book with that title. The IMF has been involved with Armenia since 1994 through technical assistance and support of macroeconomic reforms. Gelbard used projected charts and graphs to demonstrate Armenia?s significant economic growth rate and low inflation after the severe crisis in the economy during the early 1990s He considers Armenia?s present macroeconomic performance to be solid, even ?impressive,? but he also stressed the need to complete the reform agenda if the momentum is to be maintained. Specifically the reduction of poverty is a fundamental challenge, along with strengthening confidence in fiscal management, improved expenditure control, and restructuring of the energy sector and banking system. ?Over the next few years, economic growth, exports, and capital formation will need to become more broad based and generate employment.? And ?Armenia?s fiscal framework and the banking system have to play a more prominent role in supporting private sector growth and channeling resources to their best possible use. In addition, the proper functioning of key economic institutions and effective anti-corruption polices can support growth by lowering transaction costs and increasing rates of return on investment.? Dr. Gelbard ended on an optimistic note, maintaining that liberal economic policies and the steady privatization process were ultimately helping to reduce poverty in the country.


Dr. William Ascher, McKenna Professor of Government and Economics at Claremont McKenna College, was the first of three discussants of Gelbard?s presentation. The report, he began, confirmed the healthy cooperation between the Armenian government and the IMF and World Bank, allowing the government to embark on ambitious economic reforms, including fiscal consolidation, opening trade, and strengthening the energy and banking sectors and public administration. He regards an increase in the salary of civil servants as ?a first step in combating corruption.? Armenia, Ascher stated, has important advantages, including a high level of education, it diasporan connections, and opportunities to integrate more closely with both Russia and Western Europe. Yet Armenia still faces major challenges, as even the strong economic growth in recent years has brought the level of the Gross Domestic Product (GDP) back only to its pre-independence level. The economy is now very vulnerable to the global business cycle, while the rural population is far more at risk than the ?most politically-mobilized groups, typically the urban sector.? He questioned the validity of the statistics provided to the IMF regarding the sharp reduction in poverty and called for an independent evaluation. The reduction of poverty is closely related to the government?s ability to collect taxes, an area in which serious problems exist. Professor Ascher emphasized that it is critical that major investments be made in education, health, roads, and irrigation in the neglected rural areas, and he pointed to the important role that can be played by non-governmental organizations and the Diaspora in focusing on this challenge. ?The Diaspora Community must demand accountability and transparency in interacting with the government. International interactions are important for promoting greater governmental honesty and competence.?


PARTICIPANTS AT THE UCLA CONFERENCE ON ARMENIA'S ECONOMIC DEVELOPMENTProfessor Daniel Mazmanian, Bedrosian Chair in Governance and the Director of the Judith and John Bedrosian Center on Governance at the University of Southern California, noted that the IMF report presented by Enrique Gelbard showed that strong economic progress had been registered in the ?take-off? and recovery period in Armenia. But the report also cautioned that to remain on a high-growth trajectory a number of deeper changes would be needed which go beyond macroeconomic policy. Of particular importance is the challenge of combating corruption. ?While no society is exempt from the plague of corruption, it is clear that for Armenia to move forward changes will be necessary across not only the economic sphere but also in civil society and the governmental sphere to address this deeply rooted problem.? Dr. Mazmanian then outlined the minimum reforms in the economic sphere (transparency in business transactions; adoption of international best-management protocols; joint-venture with reputable international companies); in civil society (protection of free speech and free press; cultivation of civic engagement in school and community; encouraging NGO participation in society); and in government (high standards of professional training and expectation of public officials; international networking; clear performance goals for public agencies; greater transparency in government; balancing public administrative authority with parliamentary and judicial review and accountability).


Dr. Ara Khanjian, Professor of Economics at Ventura College, gave three explanations to the observation that poverty rates in Armenia are decreasing, while, on the other hand, there is the broadly-held perception that most of the population is experiencing economic hardship. ?First, certain segments of the population are not benefiting from these positive statistics. Second, there are regional disparities. Third, the poverty line is very low, and it underestimates the true amount of poverty in Armenia. Economic growth alone is not sufficient to reduce poverty. The government should increase expenditures on pro-poor economic policies such as rural roads, water resources, education, healthcare, reduction of corruption, and redistribution of assets. There are two feasible ways of generating higher government pro-poor expenditures: First, Armenia?s budget deficits are low as a percentage of the GDP. Additional spending through barrowing, even if resulting in higher deficits, could be beneficial to economic development if it is directed toward improving the infrastructure, human capital, and productivity. Second, Armenia?s tax revenue as a percentage of the GDP is very low. A major challenge faced by Armenia is to increase its tax revenues and raise its tax revenue to GDP ratio.? Dr. Khanjian suggested that ?one way to achieve this is to increase the marginal tax rate which was reduced in the year 2000.?


Moderator of the session, Michael Intriligator, introduced the discussion period by referring to his colleague Armen Alchian as ?the Armenian Adam Smith.? He then related his own experiences in dealing with the transition of the post-Soviet states to a market economy. He questioned the wisdom of the ?shock therapy? that was laid on the newly independent republics, including Armenia, for the purpose of a rapid transformation to market economics. ?I have been criticizing the initial package of reform proposed by the World Bank and IMF, a recipe for a transition to a market economy, sometimes referred to as the ?Washington Consensus,? that called for Stabilization, Liberalization, and Privatization, what I refer to as ?SLP.? As I saw it, this package omitted three critical parts of reform that are necessary components of a transition to a market economy. These were the development of Institutions, the need for Competition, and the need for a proper role for the Government, which I refer to as ?ICG.? Without them, as I had warned, this shock therapy SLP package has had disastrous consequences for the economies of the post-Soviet nations, representing, as many have noted, more shock than therapy.? Professor Intriligator then explained each of the points in the two formulas, SLP and ICG, arguing the SLP had led to a pseudo-market economy of artificial capitalism and that problems from this approach, without implementing ICG, still remain. He concluded: ?A true transition to a market economy requires a strong and activist government, which must take a leading role in establishing institutions, enforcing the rule of law, and overseeing an appropriate regulatory framework, as is still true today.? A brisk discussion period concluded the morning session.


Taxation, Trade, and Banking

The afternoon session, moderated by Professor Lee Ohanian of UCLA?s Department of Economics, featured three specialists on economic development. Dr. David Grigorian of the IMF and a co-founder of AIPRG assessed the issue of tax collection. He summarized his paper as follows: ?The Armenian economy has performed strongly, particularly since 2000, by almost any macroeconomic criteria. Yet, despite years of consecutive double-digit growth, ratio of tax revenues to nominal GDP has been low and fairly stable at about 14? percent. Clearly, Armenia?s record income growth has not resulted in buoyant revenues, a point that has also been underscored by many observers of the Armenian economy. This limits the government's ability to address serious poverty and social issues, as well as to invest in infrastructure to enhance the economy's long-term growth potential.? Dr. Grigorian assessed the factors that account for Armenia?s stubbornly low tax-GDP ratio and then discussed the impact of tax reforms and tax revenue performance under IMF-supported programs with a comparative econometric study of the main determinants of tax revenues across a large number of countries. He found that the persistence of Armenia?s low-tax GDP ratio is explained by the presence of weak institutions, poor governance, and a large informal shadow economy, and concluded by offering several policy recommendations to boost revenue performance.


Dr. Federica Saliola of the University of Rome and the World Bank discussed her work on the business climate, using a newly-constructed index that puts Armenia in a comparative regional perspective. She maintained that Armenia?s recent impressive economic performance is not sustainable unless reforms to improve the investment climate are implemented. In fact, based on an index constructed with her World Bank colleagues Giuseppe Iarossi and Giovanni Tanzillo, Armenia experienced a deterioration in its business climate between 2002 and 2005. Dr. Saliola explained that the major reason of such a phenomenon is the decline in Armenia?s institutions, as the quality of those institutions and the costs associated with the ?institutional environment? has become worse. ?In particular, political influence, corruption, red tape, and inefficiency of the judicial system are the main culprits.? The second part of the paper discussed the bottlenecks in private sector development as perceived by Armenian entrepreneurs.


The issue of tax evasion was analyzed as was the link between evasion and corruption. Evidence was presented ?that red tape, access to finance, and corruption remain the main impediments to productivity growth in Armenia.? The last part of the paper established an order of priority of reform and assessed Armenia?s competitiveness with countries in the region, including measures that would help to bridge the existing 40 percent productivity gap when compared with Turkey.


The third afternoon speaker, Mr. Nerses Yeritsyan of the Central Bank of Armenia reviewed the country?s progress in financial sector reforms. He noted that Armenia has gone through several stages of consistent sustainable reforms since the collapse of the Soviet Union, with the purpose of building a stable and well-functioning financial system. During the period of transition, ?the financial sector reforms in Armenia have achieved substantial progress, especially in the banking sector, where much has been done, including the closure of weak and inefficient banks and the strengthening of others.? Shortcomings are unavoidable and to correct them is a real challenge but at the same time it opens up new opportunities for further reforms and development. ?This leads to a new reform program?the third generation reform agenda?that takes into account the lessons learned and addresses the problems of the entire financial structure, that is, banking, insurance, capital markets, and private pension schemes. The main lessons of past reforms persuaded the policymakers to become more outward oriented, devise longer-term ambitious but realistic targets, and eventually internationalize or globalize Armenian?s financial markets.? Yeritsyan concluded: ?Attracting foreign direct investment by reputable transnational financial firms is the best way to achieve these objectives. In this context, among other institutional measures, integrity and maintaining Armenia?s distance from money laundering and terrorist financing is key.?


Session moderator Lee Ohanian observed that the conference highlighted both the considerable economic progress Armenia has made during the past decade and the economic challenges it still faces. ?The most exciting aspects of the research presented show the potential for future economic growth in Armenia. There is considerable room for improvement in the business environment in Armenia, especially in making it more competitive. This is important because increases in competition tend to go hand-in-hand with increases in efficiency and productivity. Improvements in the Armenian business climate, particularly reduction of bureaucratic costs and firmer institutional changes, may bring about considerable increases in productivity and income. Moreover, the Armenian financial system has developed considerably and is on track to becoming a modern center of financial intermediation. To the extent that modern economies are successful because they are efficient and allocate capital to the most productive uses, Armenia indeed has a potentially bright future.” The session concluded with another lively discussion period with the engaged and concerned audience. Following Professor Hovannisian?s closing remarks, the conference ended with renewed sustained applause in a standing ovation for 92-year-old Armen Alchian, who listened attentively throughout the program.


Mr. and Mrs. Vahik and Alice Petrossian of the Armenian Educational Foundation hosted the participants, other visiting scholars from Armenia, Great Britain, and Canada, and the UCLA Armenian Studies faculty to a post-conference dinner reception with a number of other AEF members.