By Albert Khachatryan

A decrease of as much as 5.1% in the gross domestic product (GDP) was registered in Armenia this October as compared with this September. So the present state of affairs has confounded the optimistic expectations of a fundamental improvement aroused by the earlier published data for September. We would remind you that, to everyone’s surprise, 4.8% GDP growth was registered this September as compared with the previous month. That growth gave rise to claims that the “ailing” economy was recovering, and Armenia would close this year with better figures. Now that “better figures” have been called in question it is time to think about the ongoing processes and understand the causes of the economic collapse. And it is not only the global economic crisis that has played a role.

The global crisis only exacerbated the negative trends started many years ago. In its euphoria over the two-digit GDP the Armenian authorities “overlooked” the fact that the Armenian market was from year to year getting more and more dependent on the “outer world.” Imports were “snowballing” until they reached U.S. $4bn, a fantastic amount for a small country like Armenia! Quite a good figure – if counterbalanced by adequate exports of goods and services. However, the unfavorable foreign trade balance reached a tremendous amount as well – round U.S. $3.3bn.

In Soviet times a positive foreign trade balance was registered – exports exceeded imports. Exports comprised a rather wide range of products – both industrial and consumer goods. In 1990s, after the USSR collapsed, the foreign markets were lost, and most of the local industrial enterprises, faced with insurmountable problems involving raw materials and energy resources, were closed up. So what is the reason why, after some economic progress, they were not re-operated?

There exist to diametrically opposite opinions. Some think that the gates of the enterprise are padlocked, and “should the Government wish,” it can unlock them. The enterprises will be re-operated, with numerous jobs created and an end put to unemployment – a real idyll! The illusions even experts are entertaining are obviously naïve, and we do not have to dispel them. Those holding the opposite opinion believe that the Armenian industry has no future, and the Government had better focus on such growth sectors as tourism, IT and so on. So, in this respect, we will have a bright future! Incidentally, let us cite the example of India, where the IT industry is showing impressive results: the industry’s share in the country’s GDP has increased from 1.2% up to 5.8% over the last decade. But, has this “breakthrough” enabled the country to cope with the centuries-long poverty? One could hardly say it. It is only “a limited contingent” of intellectuals and the maintenance staff that are “doing well.” Local experts admit that the recent GDP growth pales in comparison with poverty level in the country.

Determining Armenia’s growth economic sectors requires a critical analysis of human resources in the country. The once implemented full employment policy enabled numerous people without any professional education to be employed. At present, however, the same people are either unemployed or running “land-office businesses” at Armenia’s trade fairs. It cannot be helped – even specialists with higher education are unable to find jobs for years. No wonder that thousands of able-bodies citizens are emigrating to the other CIS states or foreign countries. By their financial aid to their own families in Armenia, the Armenian guest workers “proved a great help” to Armenia’s economic recovery. Indeed, the Armenian economy used to be “well nourished” due to private transfers, which totaled U.S. $1.5bn yearly. On the other hand, they proved fatal to the country’s industrial development.

Since early 1990s, about 40% of the Armenian population had received money transfers from their relatives abroad, which enabled them to purchase more goods and services than they would have been able to purchase on their salaries, pensions or allowances alone. A consumer society was formed in Armenia. In other words, the solvent demand significantly exceeded the production output in the country. Armenia had not traditionally manufactured many consumer products – household appliances, a number of food products, etc… Pursuing easy profit, shrewd businessmen promptly arranged the import of the products in question, and the Armenian market was soon flooded with cheap Chinese, Turkish and Iranian goods. Along with the products not manufactured in Armenia, they were importing products that were actively competing with their home-made counterparts. Vodka is a glaring example. Early in the 21^st century the “demon drink” was mainly produced by local enterprises, its import being merely symbolic. At present, however, the imports of this “intoxicating liquor” constitute almost 1/3 of the total amount on the market, with dozens of distilleries, including rather powerful ones, operating throughout Armenia!

As regards habit buying goods (i.e. tobacco), the situation is clear. The worst of it is that the cheap imports prevent the restoration of a number of industries, especially the light industry, in Armenia. A great many reasons can be cited. Among other problems, such as raw materials, relatively expensive energy carriers and low labor productivity is the aforementioned loss of foreign markets. As regards the local market it is too narrow for the giants. Small-scale production results in a much higher cost of production, which makes Armenian products noncompetitive with their Chinese and Turkish counterparts. Could the problems be resolved? We think that many of the “commercially unviable” enterprises would be re-operated if the Government showed an adequate approach. True, we cannot dream of a prospering light industry – it is different times now. It is the golden mean in the opinions on the development prospects of our industry. However, what has been an obstacle to at least partial recovery of the industries?

Trade capital turnover ratio is much higher than that of industrial capital, with a much larger cleanup. Monopoly over the import of a number of products yielded profits industrials did not even dream of. So many Armenian businessmen invested their capital in trade rather than in industry. The high interest rates set banks producers were unable to afford contributed to the process as well. The result is what we have now. Affected by the global crisis, the Armenian economy, which had to a great extent been based on financial transfers from abroad, collapsed like house of cards. Experts estimate a decrease in the financial transfers to Armenia this year at as much as 30%, which, no doubt, has seriously affected the population’s solvency. The low rates of increase in retail turnover (0.1% this January-October), as well as a 1.5% decline in the paid services sector first observed over the last few years, proved to be the first alarming symptom.