The hundred thousand steps taken by the Armenian people this Spring in Yerevan and other cities allowed to change the country’s political order and will go down in history. The American economist Daron Acemoglu calls these moments “critical junctures”, paving the way to a new system of inclusive (efficient) institutions. Now it is up to the new government. The main goal is to provide strong economic growth that can be achieved through drastic reforms.
In 2001-2007 Armenia’s GDP doubled. If the current economic growth rates will remain the same, the size of Armenia’s economy will double only by 2037. In order to return to high growth rates in the coming decade, about $4 billion of investments a year are to be attracted. Even if all Armenians from the Forbes list will invest all their money in Armenia, it will cover only couple of year’s needs. That is why institutional changes should become a priority, that will help to improve the investment climate in the country. With regard to this fact it is highly important to focus on reforms of the judicial system and government sector, as well as military reorganization and elaboration of strategic economic decisions.
According to the Heritage Foundation’s estimate, Armenia ranks 42nd in the world index of economic freedom. It would be a good result for a developing country if scores on property rights and corruption were not on such a low level. It is precisely these two indicators create fundamental conditions for economic growth. If property rights are not protected, there is no stimulus for long-term investments, while corruption leads to additional costs of setting up and doing business.
The new administration should start from reforms of the judicial system and the system of law enforcement. Opinion polls show that now only 20% of Armenians trust the court system. In order to improve the situation, it is necessary to transfer commercial disputes to a court based on the principles of English law. This practice is already in use in Singapore, Hong-Kong and some Arabic countries. The latest and closest example to Armenia is Kazakhstan. A new court with the above-described characteristics was recently established in Astana. Independent English lawyers run the activities of the court. It is likely that in the nearest future Armenian businessmen will settle disputes not in Yerevan, but in Astana. Armenia should not simply copy the structure of this court, but also expand the list of cases to be considered in order to successfully compete with foreign equivalents. Moreover, the system of law enforcement also needs to be transformed. Georgia’s experience demonstrates that with enough political will corruption, for example, in highway patrol, can be defeated quickly and efficiently.
Implementation of IT-education in the armed forces
Considering the difficult geopolitical situation, changes are to take place in the military sphere to contribute to country defense capability and increase its efficiency. In addition, it is likely to transform the army into a modern tool of social mobility that will also improve its prestige. Dan Sencor’s book “Startup Nation” describes the experience of Israel’s military where young people not only learn to defend the country, but also to code, to work as a part of a group, to think systematically. As a result, many people after the military service get a job in the leading technology companies. The experience of Israel’s military can be used in Armenia. Implementation of IT-education in the army will encourage the technology sector where despite its rapid growth in Armenia only 15 thousand specialists are employed.
Optimization of the public sector
Reformers should pay close attention to the government sector. It is necessary to improve the bureaucracy, to enhance management efficiency, to liquidate functions that are attributed to more than one executive authority and to assign them to a single responsible party. The previous government has already initiated such changes. The new government should proceed with their implementation.
In addition, it is essential to make use of human resources and skills. The new government should do their best to involve high-skilled professionals in the working process of the state agencies. For instance, in the previous government those responsible for matters related to the economy were one of the world’s most qualified experts. At the same time, it would be useful to implement certain practices that proved to be effective in the private sector such as KPI and employee bonus plan.
Improvement of Armenia’s position in the Doing Business ranking
Investors should receive a strong signal to make them believe that Armenia is about to experience substantial positive changes. Currently Armenia ranked 47th by the ease of Doing Business. Developing a detailed plan in order to improve Armenia’s position could be a way to send such a signal. This approach can be viewed as rather vague, but it is a clear and quite convincing evidence of successful economic reforms easily understood by the world community. The fact that Georgia has been in top 10 in the World Bank’s Ease of Doing Business rankings for many years is an instructive example of how to obtain a high score.
In order to improve Doing Business indicators it is necessary to invite well-known world experts in the field of rankings and to establish a suprastate expert board responsible for business environment development. The Minister of Economic Affairs' KPI is to be related to the concrete results of the indicators’ improvement.
Secure budget stability
The state’s budget deficit should not become a tool to deliver during political clashes. Nowadays 15% of Armenia’s budget goes to military-related expenditures and about 40% of the budget goes to expenditures related to social welfare and health care. Now higher social expenditures do not comply with the country’s capabilities. It also applies to raising the minimum wage that equals 55 thousand drams a month. At the current level of economic development, this increase will result in a higher unemployment rate and growing shadow economy. The only secure long-term basis for a higher income of the population should be economic growth.
The Armenian community should set ambitious, but still reachable long-term goals, for instance, for a period of 20 years. They are to become a roadmap not only for the government officials, but also for the whole Armenian community. The entire Armenian population, diaspora, public servants and world experts should participate in drawing up a strategic plan, that can be called as “Vision Armenia 2040”. The crucial criteria for these long-term goals is their ability to contribute to economic freedom and opportunities for self-fulfillment in Armenia.
Losing to win
Form the very beginning reforms can harm population’s well-being. Just look at the examples of the former Soviet Union countries and Latin American states. Quite often, especially in the short-term period6 reformers’ fate is rather unfavorable. Reforms in the post-soviet space show that the higher competition among the political community, the lower probability of reforms’ reversal even after the shift in power. That is why the new government should hold independent democratic elections. The establishment of open and efficient institutions is more important than political expediency. We could even say that the current government should create all conditions to lose the next elections. This is probably the hardest step to take.
Samvel Lazaryan is an economist, head of the Macroeconomic Research Centre of the Financial Research Institute of the Ministry of Finance of the Russian Federation.
These views are his own.