Thursday, November 17 2022 17:23

ArmInfo. In economic terms, after gaining independence, Armenia from an agro-industrial country, where metalworking, mechanical engineering, chemical, light, food  industries developed, turned into a state with a small economy, which  could not boast of either a rich natural resource potential or an  advantageous geographical position.

Without oil, gas and access to  the sea, Armenia also found itself in an economic blockade, because  due to the Nagorno-Karabakh conflict it was blocked by Azerbaijan and  Turkey, and due to the Georgian-Abkhaz conflict partially cut off  from Russia (the main cargo transportation was previously carried out  through the Abkhazian railway). Today the situation is somewhat  changing, the country's economy is demonstrating high growth rates.  However, even in this situation there are "weak points". The  correspondent of ArmInfo interviewed Doctor of Economics, Professor  Ashot Tavadyan about the need for changes in the monetary and tax  policy of the State.

- Mr. Tavadtan,  despite the certain growth rates of the domestic  economy, recently economists and experts point out the existing  problems of the trade balance, the "fixation" of the trade and  economic cooperation with Russia, and the monetary policy. How do you  assess the situation of Armenia's economy?

- Unfortunately, I have to state that the country's economy, to put  it mildly, is unhealthy, and in order to assess the degree of its  illness, a diagnosis of this disease is necessary. First of all, we  are talking about a sharply negative trade balance, when import  volumes are almost twice as large as export volumes. This imbalance  is covered by three components - attracting loans from foreign  organizations, grants, and, most dangerously, the export of labor. In  fact, the main export of Armenia is the labor force, since most of  the remittances come into the country through remittances from labor  migrants.

An equally important factor in the illness of the Armenian economy is  unemployment, which either decreases or rises slightly, but remains  at a high level. If the unemployment rate in the country is at a  double-digit level, it means that the country's economy is unhealthy,  and according to official figures, the unemployment rate is 13% of  the total employable population, which exceeds its "threshold of  sensitivity".  As for why I use the term "threshold of sensitivity"  that was put into circulation by me, I will give an example of the  temperature of the body, when at 36.9 degrees it  is considered  healthy, and at 37.1 - sick, since in the latter case the probability  of an increase in body temperature to 40 degrees increases sharply.

 The same can be true of the economy of a country GDP per capita of  which is significantly below the world average.In Armenia, it is  about 5 thousand dollars, while the acceptable threshold is 10  thousand dollars.

- What should be done in this case to solve the existing problems?

- It is very important, first of all, to sharply increase the export  of finished products with a higher added value, which, in turn, will  lead to an increase in additional jobs. It is equally important to  significantly increase the output of strategic products. To achieve  this goal, it is important to start using new tools, including in the  implementation of monetary policy, tax policy and state control. At  one time, the famous German economist Daniel Friedrich List proved  that without state protectionism it is impossible to achieve the  goals set, especially in a state with a transforming economy.

Monetary policy is carried out by the Central Bank, which carries out  the two important tasks of ensuring price stability and maintaining  financial stability. The level of price stability is directly  determined by the law "On the State Budget of the Republic of  Armenia". However, our laws are written by the same organizations  that are obliged to comply with them, as a result of which an  imbalance is formed. As a result, the citizens of Armenia, unlike the  Europeans, pay even for low inflation, not to mention high  inflationary pressures. Our policy inflation rate is legally set at  4% (+_1.5%) with a low level of monetization and often at a high  refinancing rate. An economy cannot develop if there is no financial  blood in its body, which leads to a shortage of funds and their rise  in cost.

The fact of revaluation of the national currency is also problematic.  The revaluation of the dram is beneficial for the Armenian  government, but disadvantageous for the state: the executive branch  gets the opportunity to reduce the public debt, increase GDP and the  state budget in dollars, but exporters begin to suffer, which  ultimately affects the general state of the country's economy like a  boomerang. On the other hand, the depreciation of the dram below a  certain level affects the state of importers, who have significantly  reduced opportunities to import the necessary equipment for the  production of innovative and competitive products into the country.

For this reason, it is important to keep the course within a certain  range, despite external pressures. In my recently published book in  London, I called this the "snake in the tunnel" effect. From above it  "bites" exports, from below - imports of innovative equipment.

- You have already pointed out the importance of state protectionism.  What do you mean by this term, given the market nature of the  domestic economy?

- We are "the last of the Mohicans" in terms of using elements of a  purely market economy, but for its development, serious political  will is needed to restructure the entire monetary and tax policy.  This policy should be aimed at increasing the volume of exports of  finished products and the growth of production of strategic products  through state regulation and the entire banking system. To do so, it  is necessary to begin the formation of a system of state banks, which  will accumulate funds from state organizations and not only. I can  assure you that in this case, inflation will not rise.

State banks will direct cheaper money to areas that can be of crucial  importance for the growth of the welfare of the state and citizens.  In addition, the presence of state-owned banks will make it possible  to regulate the cash flows that should be directed to lending to  programs for the export of finished products.  This wasn't my idea,  this is evidenced by the experience of very many countries, in which  control mechanisms are even applied through monthly claims on these  loans. Of course, there is a risk of corruption in this mechanism,  but it is covered by the effect that the state will receive.

Why is the money of state organizations in private hands? I propose a  three-tier model of the banking system - the Central Bank, state  banks and banks with public-private participation and private ones.  With state regulation and the presence of a state bank, funds could  be directed not to making passive investments, say, to building  houses, but to increasing the production of export products with high  added value, which, in turn, will lead to the opening of new  permanent jobs. Since we are a country with a small economy, this is  the only way to ensure tangible growth.

- But does this also require a need to revise tax policy?

- The tax policy should be preferential for the export of finished  products with the obligatory use of duties on the export of raw  materials. At the same time, one should not expect budgetary losses,  since one can compensate for the other.

Take, for example, Turkey, which, like us, is a member of the WTO.  Meanwhile, agriculture in Turkey is subsidized by the state, which in  fact means lower taxes. Despite high inflation of 80%, they, like  ours, have a refinancing rate of 10.5%. At the same time, we have  inflation at about 9%. We need to solve this problem effectively. On  the one hand, not to take the risk of hyperinflation, and on the  other hand, to have a rate that would contribute to a higher rate of  economic growth, outpacing wage growth compared to inflation. Here,  of course, the art of regulating economic processes is required. By  the way, in the situation that has developed in the EU, with  inflation of about 10%, the key rate is 2%. Turkey, on the other  hand, is clearly pursuing a policy of cheap money, thus they have the  possibility to actually give concessional lending to the same  agriculture. If there is no possibility to introduce a customs duty,  then subsidize it.  Thus, they have the opportunity to actually give  preferential credit to the same agriculture. If it is not possible to  introduce a customs duty, then a subsidy is implemented.

At the same time, very strict control over the direction of funds  into production is necessary. If the money goes to purchase  equipment, then that's fine, but if it goes to commodities, then  problems may arise. A high refinancing rate should not be a panacea.

If relations with Russia worsen, the cost of natural gas supplied to  Armenia may rise to $1,200 per 1,000 cubic meters. In this case, no  refinancing rate will help us. As an example, I will cite the  experience of South Korea, in which President Park Chung-hee,  including strong-willed methods and strict control, was able to bring  the country to a qualitatively new level.

- Yes, but this also requires a qualitative composition of the  Cabinet of Ministers, which would implement all this...

- Our ministers often remind employees of the department of the  statistical committee, constantly citing its data. But what exactly  each minister did for this is modestly kept silent. Therefore, a  strict control mechanism is needed. Set certain tasks and questions  and let each minister report on the work he has done.  You see, after  that, unprepared people will stop rushing to become ministers. A  semi-literate person manages this or that area, because his rights  and duties are very blurred. I am for them to receive very serious  money, but for a certain work done. If you simply distribute bonuses,  then by doing so, you contribute to a decrease in the level of  efficiency of each head of department.

- Let's talk about integration processes. Recently, there has been a  lot of talk about the fact that "if Russia <sneezes>, Armenia will  get seriously ill". What is your point of view on this matter?

I should note that in the Eurasian Economic Union, of which Armenia  is also a member, the integration mechanisms are imperfect, many  issues are resolved by the administrative method. And in the  countries of the European Union, clear regulatory mechanisms are  used. In particular, the difference in inflation in the EU countries  should not exceed 1.5%, and in the EAEU it can reach up to 5%. In  general, it should be noted that if we just sit back and wait for the  influence of the 200,000 immigrants who have arrived from Russia,  nothing good will come of it. 

We need to seriously reform our economic policy, deriving clear  benefits from the integration processes. It is also important to  start changing the structure of the state budget, which should be  based on the principles of efficiency and purposefulness.

For the development of integration processes, it is necessary to  increase their efficiency in EAEU, it is also important to develop  relations with other organizations and countries. It is extremely  important, for example, to interest Georgia in logistics issues by  providing it with preferences. If Russia sells gas to it for $165 per  1,000 cubic meters, as is the case with Armenia, then it will de  facto provide an opportunity for duty-free importation of its  products to Russia, and thereby increase the likelihood of direct  access to a situational partner in the person of Turkey and an ally  in the face of Armenia, as well as Iran. Real preferences will  contribute to the opening of the railway through Georgia. However, I  would like to point out that if Turkey is considered as a first-class  partner for Russia, and Armenia as a third-class ally, then nothing  good will come out of this approach. Russia, de jure, is a political  and economic ally of Armenia.  In fact, the Russian Federation  adheres to the principle of equality of relations in a number of  cases. For example, it does not have an agreement on a strategic  alliance with Iran, but there is mutual understanding on many issues  at the level of actual alliance relations. The same holds for France,  a country parliament of which is seriously concerned with the  problems of Armenia and Artsakh, despite the absence of an agreement  on allied relations. Relations with India are reaching the level of  strategic relations. In a word, while strengthening relations with  Russia, it is necessary to actively work on new areas of integration.  

- Thank you very much!