This Week In Development – Did Someone Mention Growth?

The Caucasian Tiger or what’s behind the pretty picture of Armenia’s economic growth.

During the last decade, the economy of Armenia has been showing steady growth reaching over 13 percent in the last year (see the graph below). The impressive growth of the country has been compared to that of East Asian Tigers in earlier decades, giving Armenia the name of Caucasian Tiger by the Word Bank experts.

For those interested in reading more about country’s “stellar” performance, current situation and further policy advice, check out The Caucasian Tiger: Sustaining Economic Growth in Armenia recently published by the World Bank (also available at Google Books).

Using some of the information from the book, as well as PRSP of the country, below find a very brief brief on the history of growth.

Armenia gained independence after the collapse of the Soviet Union in 1991. The rapid transition from one economic system to another resulted in economic crisis due to the country’s lack of institutional infrastructure to function in market economy. At the same time, the country was still dealing with the still tangible aftermath of a devastating earthquake of 1988, as well as experiencing a large influx of refugees into the country from Azerbaijan due to the ongoing Nagorno-Kharabakh conflict. The country was in blockade, had shut down its main source of energy – the nuclear power plant and was undergoing a period that in economic terms was characterized by hyper-inflation, drastic increase in unemployment, liquidation of previously owned state enterprises, migration and emergence of widespread poverty among the population (55% according to 1992 estimates).

The country’s economy started showing growth in1994, when series of reforms re-established macroeconomic stability in the country and created favorable environment for economic growth. The average GDP growth from 1994 to 2002 was 6.68 percent, with a gradual increase to 13.4 percent in 2006 (see the graph).

Source: World Development Indicators 1990-2006

World Bank experts attribute this growth to successful implementation of “first generation” policy reforms that lowered the inflation and created macroeconomic stability which led to expansions of markets and growth of the private sector. Poverty dropped from 55 percent to 26.5 percent (2004 estimates). Large amounts of capital inflows into the country in form of official development assistance, contributions and private transfers by the Armenian Diaspora and remittances also played their part in the growth of the nation’s economy.

This doesn’t mean that the country isn’t still poor. The aforementioned book gives a detailed outline of what’s still wrong together with policy advice, similar to those outlined in country’s PRSP on how to deal with the existing constraints to the sustainability of growth, such as unemployment, unhealthy taxation system, still unstable business environment, poverty in rural regions, so on and so forth.

Now, those who are REALLY concerned about the state of the Armenian economy and the quality of recent growth, check out what independent experts have to say. Concerns raised in these posts appear to be quite legitimate - economic growth weakens, instead of increasing the competitiveness of the country's markets. It is unevenly allocated among the population - inequality between rural areas and the capital, where most of the growth is concentrated, is quite tangible. Most profitable imports are monopolized, after having been appropriated by state officials under names of “foreign entities” and there is virtually no foreign direct investment coming into the economy, contrary to belief.

It can be stated that everybody is content and no one realizes that were this dynamics to continue, in ten years this ‘miracle’ can turn into a real crisis, a true hell…

Make your conclusions at your own risk.