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By Emil Danielyan

The lack of a significant rise in Armenia’s living standards after seven years of economic growth was termed a “paradox” Friday by a visiting senior World Bank official who urged the authorities to ensure benefits of development accrue to the entire population. Johannes Linn, the bank’s vice-president for Europe and Central Asia, said the authorities should strive to bring about economic betterment by "improving the business environment” -- the watchword of the World Bank’s new Country Assistance Strategy (CAS) for Armenia.



“Armenia has made a lot of progress. What we still see though is a lot of challenges that perhaps can be summarized in the form of a paradox,” Linn told a news conference in Yerevan at the end of a one-week tour of the south Caucasus. “On the one hand, we see good growth and macroeconomic stability. On the other, we still see a lot of poverty, limited domestic and foreign investment. We see a lot of progress in terms of policy reform and improved legislation, but at the same time hear a lot of skepticism among investors and the population about real progress.”

The chief challenge facing the Armenian government and international donors is “how to bridge this paradox and make sure the people and investors broadly feel that the progress is benefiting everyone,” he added.

The CAS report, which supports the government’s three-year interim poverty reduction program, was approved by the World Bank’s Board of Executive Directors on May 22. Both documents call for improving the business environment, strengthening public sector management and reducing corruption.

“Despite strong macroeconomic performance, the country has not benefited from commensurate job creation or poverty reduction. Human capital has deteriorated, in part through migration,” according to the CAS. It emphasizes the need to expand budget allocations to education, health and other areas.

The new CAS points to the “narrow base” of Armenian growth, which has averaged 5.5 percent per annum since 1994 and, according to the World Bank, had a “limited impact on job generation and, hence, on poverty.” “Overall, most growth has taken place outside the manufacturing sector -- the very sector where Armenia may have the strongest comparative advantage, particularly through its educated labor force,” the document concludes. “Agriculture and construction have been the main contributors to GDP growth, but even in these sectors real labor incomes have grown relatively slowly.”

The absence of a “large-scale entry of new private enterprises” and substantial investments is singled out as the root cause of Armenia’s failure to reduce widespread poverty.

In an interview with RFE/RL last week, the World Bank’s chief Armenia economist, Lev Freinkman, similarly warned that the Armenian economy will run out of steam in the next several years unless the authorities take radical steps to make it more attractive to private investors. “Factors that fuelled growth in the last five or six years are not long-term ones, and that is of great concern to us,” Freinkman said.

But Linn, who met with President Robert Kocharian and other senior Armenian officials on Thursday, struck a more optimistic note, saying that he is “very pleased” with this year’s macroeconomic indicators. He praised government efforts to improve the investment climate and reform Armenian civil service. He said the existing GDP growth rates can be maintained even without a resolution of the Nagorno-Karabakh conflict, which Western analysts believe is vital for Armenia’s economic revival.

“We see a continuation of this growth feasible because Armenia has been able to work around some of the issues of blockade and other difficulties created by the conflict,” Linn explained. “So we see the improvement in the business climate and policies as a very helpful contribution to maintaining the growth. There is no question, however, that with peace, fully open borders and regional cooperation growth could be higher and life better.”

The World Bank is Armenia’s largest single creditor with a total of $654 million worth of various loans approved to date. The bank envisages to provide between $150 million and $190 million in additional loans within the next three years.

Linn announced that the World Bank will further increase its economic assistance to Armenia, Azerbaijan and Georgia if they find solutions to ethnic conflicts in Karabakh and elsewhere in the volatile region. He said a settlement of the conflicts “would much enhance the prospects for in-depth and extensive regional cooperation,” adding that peace in the south Caucasus is also “highly desirable” because it would enable the three states facing similar economic problems to “share their experiences and lessons.”

All three nations are still reeling from the economic collapse of the early 1990s. Many economists believe that economic integration would held them attract more badly needed foreign investments.
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