By Emil Danielyan
Armenia’s robust economic growth, which hit a record-high rate of about ten percent last year, will not be sustainable unless it encompasses the stagnating manufacturing sector, according to a study conducted by the World Bank.
The study examining economic trends of the past eight years warns that a massive creation of new jobs in the unemployment-stricken country requires a substantial increase in industrial output. It says that so far the growth has had little impact on the low living standards because it has been mainly driven by the construction and services sectors and has not benefited all segments of the population.
“We are concerned about the sustainability of the growth because it is concentrated in construction, utilities, the energy sector and services. An employment-creating growth will come from the industrial sector,” the World Bank’s resident representative to Armenia, Owaise Saadat, told a news conference on Wednesday, presenting the findings of the report.
“Our greatest disappointment in Armenia is that industrial sector growth has not been fast enough,” Saadat said. “Its share in the overall GDP growth has to go up. That’s where the jobs are going to be.”
The study suggests a package of policy recommendations designed to speed up the restructuring of Soviet-era enterprises, attract investment, and encourage the creation of new businesses in the next three to five years. It concludes that poor business and investment environment, weak managerial skills in the private sector, and instability in the region are the key constraints to sustainable economic growth in Armenia.
Official figures show the Armenian economy growing by 9.6 percent under a three-percent inflation last year. The authorities say this has resulted in the creation of more than 40,000 new jobs.
Analysts and government officials agree that the rapid growth must continue for several more years in order to have a tangible impact on the lives of most Armenians impoverished by the Soviet collapse.
Saadat said the Armenian government “has been making good progress” on the macroeconomic front but should do more to spur the emergence of new export-oriented businesses if it is to continue to boast high growth rates. That is impossible to achieve without ensuring the rule of law and improving the investment climate, he added.
Saadat pointed to another study conducted by the World Bank recently. According to it, barriers to the creation of new firms are “a critical obstacle” to sustained growth in the former Communist states of Eastern Europe and the former Soviet Union. The comprehensive research has found that in those Eastern European countries that have been most successful in the ten-year transition to the free market at least half of the workforce is employed by new enterprises.
“Our study has shown that the engine of growth will come from new enterprises,” Saadat explained. “The threshold for [that employment ratio] to become the engine of sustained growth is about 40 percent. Armenia is still far from it, we are in the 26-28 percent range.”
The World Bank economists believe that the new competitive enterprises would give a strong boost to Armenia’s manufacturing sector which accounted for only 26 percent of GDP in 2001. The share of agriculture and the trade and services sector was 30 percent and 35 percent respectively.
“There has been a healthy trend in the last two years. But we need to accelerate this so that it has a snowball effect and what is only a slide becomes an avalanche of investment and prosperity,” Saadat went on.
He said the World Bank advocates the creation of a special Armenian government agency tasked with promoting enterprise restructuring, foreign investment and exports.