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No Development Without Better Governance, West Tells Armenia

By Emil Danielyan

Armenia is facing mounting pressure from Western governments and lending institutions to shift the focus of its decade-long economic reforms, which have made it a strong macroeconomic performer but have yet to get the majority of its people out of poverty. The donors are now acknowledging that seven consecutive years of economic growth, achieved in strict compliance with their policy prescriptions, have benefited only a small segment of the population.

Their message to Yerevan is clear and unequivocal: make your country a better place for doing business if you are to enjoy real economic development.

Hardly any meeting of the donors or a visit to Armenia by their representatives ends without a call for improving the business environment, strengthening the rule of law and combating corruption. In the words of a high-ranking official from the International Monetary Fund, this is “the single most important thing” the authorities can do to alleviate enormous hardships suffered by most Armenians.

“Everything possible must be done to create a healthy environment for private business, especially new business entities,” the director of the Fund’s Second European Department, John Odling-Smee, declared on Tuesday as he wound up a two-day visit to Armenia. “There is a need to push ahead as rapidly as possible with the elimination of unnecessary regulations and harassment of small private businesses and to implement other concrete measures designed to reduce the government in the economic life and opportunities for corruption.”

The IMF’s emphasis on the microeconomic issues is quite remarkable, illustrating how acute they are in Armenia. Known as a champion of fiscal and monetary austerity, the Fund is now telling the government that a business-friendly environment is no less important than a low inflation and budget deficit.

This was also the key point made by a World Bank vice-president, Johannes Linn, on a recent trip to Armenia. He said an improved investment climate would be a “very helpful contribution to maintaining the growth.” The removal of “constraints for private sector development” such as corruption and bureaucratic red tape was also emphasized by the donor states and organizations in a statement issued after their meeting in Paris on July 12.

A distant look at Armenia’s basic macroeconomic figures does not give a cause for alarm. GDP growth has averaged 5.5 percent since 1994, while annual inflation has been kept in single digits for the past three years. The growth rate reached 6.4 percent in the first half of this year, helped by a rise in exports.

Yet that is overshadowed by the fact that 55 percent of the population still lives below the poverty line and that the economy remains strangled by extremely high unemployment. The growth began in 1994 after two years of what economists call one of the steepest declines in history for any economy. The collapse of the centrally planned Soviet economy and the start of the war in Nagorno-Karabakh took a heavy toll on the Armenian economy, with the GDP shrinking by more than a half in 1992-93. It will take at least several more years to regain the level of 1990.

The seven-year growth has not had a major impact on the living standards of most ordinary people. The World Bank regards this as an “economic paradox.” Its recent Country Assistance Strategy report on Armenia gives two explanations of the phenomenon. First of all, it says, Armenian growth has had a “limited impact” on job generation as it has mostly taken place outside the manufacturing sector. And secondly, the rampant corruption and favoritism mean that only a privileged minority has reaped benefits of development.

The IMF’s Odling-Smee drew a similar conclusion in a speech at the American University of Armenia.

The donors’ recipe for economic development takes account of this reality. Underlying it is the argument that foreign investors will not come to Armenia in large numbers unless they are treated by the authorities the way they are used to. The experience of Western companies operating in Armenia proves a strong case for improving the investment climate.

“For a Better Business Environment,” reads the motto of the American Chamber of Commerce (AmCham) in Armenia. Its president, Tom Samuelian, believes that the government should start from changing Armenia’s image of a typical ex-Soviet state run by a corrupt elite with no respect for the rule of law.

“The perception is that there is something wrong, and that perception affects the overall impression of the country,” he tells RFE/RL.

A recent study cited by AmCham claims that an average company manager in Armenia spends 45 percent of his time on dealing with state bureaucracy -- three times the worldwide average. This, in particular, takes the form of frequent and lengthy financial inspections by tax officials. “There is a sense of presumption of guilt in Armenia that people have but they are not used to in the West,” Samuelian explains.

A pledge to improve the business environment and crack down on corruption is part of the government’s three-year economic program approved by the executive boards of the IMF and the World Bank in May. The move paved the way for the release of a total of $140 million in fresh loans to Yerevan. Their disbursement is pegged to the
successful implementation of the program.

It appears that microeconomic reforms are now seen by the donors as even more important for economic development than the settlement of the Karabakh conflict. Many Western officials and analysts insisted until now that Armenia stands no chance of getting on its feet until it makes peace with Azerbaijan and Turkey.

“We certainly exaggerate when we blame too much on that (Karabakh),” said one Western diplomat in Yerevan, who argued that political stability and low crime makes Armenia “an island of sanity in a crazy region.” But since the landlocked country is in a more geographically unfavorable position than its neighbors it must make more efforts to attract the badly needed foreign investment. “Nothing comes easy here, especially in the beginning when you need to have a critical mass of foreign investments,” the diplomat said. “Many things here are better than in the neighboring states, but they must be much better to make a difference.”

Government officials seem to agree with this, but have yet to prove that they are serious about changing the situation.

“Most foreign investors are beginning to sense that things are getting better, but not quickly enough,” says AmCham’s Samuelian. “There is some things that foreign investors have complained about for the past five to ten years that haven’t been changed yet. That makes people doubtful that there is a real commitment to change.”