Armenia: From Central Planning to a Market Economy
In 1991 fifteen republics emerged as the successors of the Former Soviet Union (FSU). Since then the world has watched with intrigue waiting to see which paths these republics will choose in their transition from centrally planned to market economies. There have been several proposed theories as to how this should be done and whether or not it can be done. The fall of the USSR has been attributed to several factors: the validity of Marxism and Communism, the implementation and consequences of Lenins and Stalins economic policies, theory vs. practice of Marxism, and so on. Regardless of the actual causes of the great powers demise, the obstacles or transition that awaited its former republics was complicated, long, difficult and unclear.
The world had to pay attention to the outcomes in these nations. The population of people living in a former Soviet Republic was over 141 million. These nations also had a wide array of natural resources and several of them had nuclear weaponry (Grais). For these reasons as well as others, the future of the fifteen republics became a critical topic for much of the world.
In the case of Armenia geopolitics became a factor. This small nation is strategically located at a pivotal point. It borders the Middle East, connects Europe with Asia and borders Turkey. Its stability is extremely important. Historically Armenia has experienced several invasions. The location of this nation for trade routes. Overall, the strength and stability of [Armenia] can contribute greatly to the peace and the welfare of the rest of Europe (Grais). The republics of Belarus, Ukraine, Moldova, and Georgia share these characteristics with Armenia. Although all of the former Soviet Republics are unique and must pursue distinct economic reform policies, they share many of the same obstacles.
In 1991 the fall of the USSR hit these FSU nations hard and suddenly. Armenias economy, like many of the others mentioned earlier, was heavily intertwined with that of the Soviet Union. Therefor, the weakening and collapse of the USSR was a negative blow to the economic situation in the region, which made the attempts of transition even harder. For example, the change from a centrally planned welfare state to a market economy is very costly in terms of providing insurance and security for citizens. Russia can no longer supply these nations with budgets. To begin with in 1991 the republics of Georgia, Armenia, Maldova, Ukraine, and Belarus were considered middle-to-low-income states (Grais). The rise of inflation of the ruble, the disappearance of the tax collection base, decrease in revenue from output and the rise in the unemployment all contribute to the lack of funding the governments have to implement these reforms in the early 1990s (Grais).
Armenia had other obstacles, which complicated its transition to a market economy. Dependency on oil imports and energy resources makes Armenia extremely vulnerable. It consumes a great deal of oil each year and is extremely susceptible to oil prices. Political situations and geographic conflicts have irritated Armenias situation. The land dispute over the enclave of Nagorno-Karabakh with Azerbaijan resulted in an economic blockade imposed by Azerbaijan in 1988 on Armenia. This blockade has made Armenia even more susceptible to its oil needs and foreign imports. During 1988 Armenia also experienced a setback due to an enormous earthquake which devastated the nation. The blockade prevented aid from Russia and the West from entering Armenia.
During the early 1990s Armenia, like many FSU nations, was experience economic contraction. In 1997 and again in 1998 Armenia experienced slowdowns in growth. The economic performance was weak and output was low. The high unemployment from privatization and the high inflation and weak exchange rates caused much of this. Still being significantly reliant on other FSU and Russia, Armenia was negatively influenced economically by the financial crisis in Russia in 1998 (Embassy)
With these set backs in mind, Armenia has invested in a daring reform policy towards free market and democratic structural change. The focus of these policies has been on the privatization, economic reconstructing, social program reform, and modernizing the finance sector. Central planning of state owned enterprises has led many nations like Armenia to have to deal with subsidizing or compensation of production slowdown. The termination of these types of procedures left FSU republics to fear more unemployment and increased political pressure from their citizens. However, subsidizing by the government was taking up large proportions of the budget and creating an increasing deficit. Armenia has privatized 90% of its agricultural land and its government is a strong proponent of privatization within other sectors. The growing private sector enables a freer allocation of resources and the establishment of market-set prices. These changes will result in productivity growth, and employment.
Armenia has extended its reform policies to its financial sector, social protection sector, and macroeconomic framework. Armenia adopted an adequate banking law (in 1992) to fulfill its role of an efficient financial intermediary supporting the development of private entrepreneurial activity (Grais). Today insurance is no longer state provided, as it was under central planning. The Ministry of Finance now monitors the insurance sector. Currently, the nature and conditions of insurance and insurance premiums are determined freely by insurance companies and their clientele (Embassy). These improvements in the transition with privatization and a developing protective sector have improved Armenias macroeconomic framework as well. There is more foreign investment within the nation and trade relations are growing. The decrease in inflation and the stabilizing of the exchange rate by the government has also improved the macroeconomic position of Armenia. The government is also ordering state-owned enterprises to operate under the principles of a market economy (Embassy).
Armenia is improving and getting closer to a complete market economy. It is doing better than many other FSU nations. However, it remains to be susceptible to outside pressures due to its size, dependency on imports, energy and oil sources and neighboring disputes and conflicts. Armenia has shown definite potential and motivation in its path of transition. On July 5, 1995, the Armenia people voted to adopt the Constitution of the Republic of Armenia. This signified their dedication towards civil rights, the development of democratic institutions, and the creation of a market economy to secure the future stability of Armenia (Embassy).
1) Armenian Embassy. Economic Background and Current Economic Situation. http://www.armeniaemb.org
2) Grais, Wafik., Economic Transition in the Western Regions of the Former Soviet Union November 3, 1992. http://www.eurasiacenter.org/winter92_93/gais.html
Armenian Economy after the Collapse of Communism
Before the breakup of the Soviet Union in 1991, Armenia had a central planning system. Under Soviet rule, Armenia was a highly industrialized republic with a well-established high-technology sector. Ninety-five percent of industrial production was exported to other parts of the Soviet Union and outside. Armenias economy and thriving industries collapsed after 1991. Besides the disintegration of the Soviet Union, there have been other factors that have led to Armenias economic decline, such as an earthquake in 1988, an energy crisis, the Nagorno-Karabakh conflict, and the blockade of major transport infrastructure and communications. This has all led to Armenia experiencing drastic output reductions, falling incomes, declined trade flows, extreme energy shortages, and scarcity of many consumer goods. Despite all of these overbearing economic problems, the Armenian government has persisted with its economic reform program, which is pursuing free market reforms within a democratic framework.
Since 1991, the Armenian government has emphasized liberalization, stabilization, and economic restructuring. Also, most agricultural land is now privatized and the government is engaged in privatizing industries. Price control is barely in existence and the stabilization policy is a major priority and a challenge for the government. Although a great challenge to contain inflation and maintain exchange rate stability, the government has met its objectives with success by bringing down the monthly inflation rate to single digits, unlike the triple-digit levels Armenia was experiencing in late 1993. In addition to making stabilization a main priority, Armenia is committed to the full integration of the national economy into the global economy. This objective will be achievable for Armenia because of its commitment to privatization and free trade. Armenia has established a central bank, introduced a new currency, created new tax laws, and adopted a bankruptcy code. In order to stimulate capital growth in the financial sector, Armenia established a stock exchange and a Treasury bill market. Policies were also adopted to encourage inflows of Foreign Direct and Portfolio Investment.
Before seeing some signs of improvement around 1995, Armenias struggling economy seemed hopeless. By early 1993, industrial production was confined to two main enterprises in every sector because of Armenias loss of major suppliers and markets after the Soviet Unions collapse, and as a result, real GDP fell drastically at around 75% by the end of 1994. Factors such as an economic blockade or a severe natural disaster can deteriorate a country for several decades. However, in addition to dealing with these obstacles and others, Armenia has also had to attempt to make the transition from a centrally planned to a market-based economy, a seemingly insurmountable task. Armenia has proven to be on the right track in its quest for economic stability, and it is making great strides in a small amount of time. This can be attributed to the vigor of the Armenian government and people. Armenia has a high quality labor force in terms of having a good education, solid scientific skills, a disciplined work ethic, and entrepreneurial mind-set. Although the labor force is presently underemployed, the government is working on establishing industries where they can be employed. Armenia used to be the Silicon Valley of the Soviet Union, and there is still a large quantity of specialists in electronic and electrical engineering, physics, and chemistry. If Armenia succeeds in establishing its high-technology industries again, it will prove to be a great asset for the global economy.
Since 1994, there has been a cease-fire in Nagorno-Karabakh, and as a result, Armenia has been given the opportunity to truly work on its economic reform program that is sponsored by the IMF. Armenia was given $47.2 million by the IMF Systemic Transformation Facility in 1994, and $60 million Import Rehabilitation Credit from the World Bank in February 1995. This aid-helped Armenia privatize agricultural land, leading to agricultural output to increase by fifteen percent; one positive change of many.
All the reforms that the Armenian government has undergone have began to yield promising results. After suffering decline from 1988 to 1993, the Armenian economy has improved considerably. The real GDP growth rate has been positive for five consecutive years, reaching a level of 7.2% in 1998. Despite continuing problems such as an economic blockade by Turkey and Azerbaijan and the ongoing conflict with Azerbaijan over Nagorno-Karabakh, Armenia has proven that it can overcome its economic difficulties. With additional international aid, domestic restructuring, and foreign direct investment, Armenia will prove to be a major force in Eastern Europe. Armenia is a country that has overcome obstacles that would have crippled other countries for a much longer time.