The Armenian Economist

Season's Greetings

2011-12-30T15:42:00.001+04:00

Happy New Year and Merry Christmas

Շնորհավոր Նոր Տարի եւ Սուրբ Ծնունդ

2010 Household Survey Released

2011-12-29T23:46:00.001+04:00

The 2010 Household Integrated Living Conditions Survey was recently released by Armstat. As with previously released surveys, observations are aggregated at the household level and information is released for a subset of the variables. You may download the survey for free but registration is required. A couple of days earlier the survey aggregated at the household member level, with a smaller subset of variables, was also released (no registration required).
The survey of 7872 households (29986 members) is available as an xls and sav (spss) files. See my previous post to read or convert sav files to dta (stata).
The limited number of variables available in these public releases, as well as the aggregate nature of the underlying data, undoubtedly reflect an attempt to protect the confidentiality of respondent information. But by doing so, these surveys have very limited uses. One wonders whether a better approach to confidentiality can be found. Why not drop high income individuals, or regional identifiers, or just cap reported amounts? Otherwise, such a valuable resource will continue to be underutilized!
As always, links to this and other survey data on Armenia are provided in the Resources page of aea.am.

Who is Responsible for the Global Crisis

2011-07-14T13:12:00.001+05:00

Many blame financial institutions, mostly in the US, for causing the global crisis. But these views do not seem to be universally held. In the recently released 2010 Life in Transition Survey database by EBRD, 1000 Armenian households were asked (along with those in 33 other countries) which country they blame for the global economic crisis. The raw data shows that 45 percent responded that the Armenian government is partly responsible (question q803aa), 27 percent the US, and so on. When asked who is the most responsible, the Armenian government was held to blame by 37 percent (question q803b). Another 28 percent did not know who to blame.

It is difficult to make the case that much of the population is ill informed. But if the LiTS survey is representative of Armenian households, then this raises questions on a number of fronts with financial literacy way at the top. The bad news is that the blame does not seem to vary much with education (probit estimates). The good news is that Armenia is not alone; similar findings can be obtained for a handful of other countries.

Who is most responsible for the economic crisis?
(computed from the 2010 LiTS Armenia sub-sample)

Note: above are not weighted as sampling weights are not reported on the released file.

Food Prices

2011-06-02T01:03:00.002+05:00

Food prices have risen sharply over the past 8 years. The trend in part reflects the de-dollarization of the earlier years followed by the dollarization of the past couple of years, as well as world prices and local competitive conditions. Regardless of the causes, this rise in prices by far exceeds the growth in income of much of the population.

Milk prices have experienced the narrowest swing in prices, from 250 drams in 2002 to 328 Drams in 2010. In contrast, the price of rice rose from 302 to 648 Drams over the same period. As reported in the table beow, similar trends are observed for flour, beef, sugar, and grapes. More is reported on the Resources/Economic Data page of www.aea.am (food_retail_prices.xls).

Source: Armstat, combined releases

Armenian Economic Association Call for Papers

2011-05-10T08:45:00.004+05:00

Deadline extended to July 25, 2011.

The Armenian Economic Association (www.aea.am) will hold its 2011 Conference on October 22-24, at the Yerevan State University (YSU), in Yerevan, Armenia.

Scholars, graduate students, and researchers are invited to present their research in all areas of economics. The language of the conference is Armenian and English, and sessions will be organized by language and JEL fields below:

Mathematical and Quantitative Methods
Microeconomics; Industry Studies
Macroeconomics and Monetary Economics
International Economics
Financial Economics
Public Economics
Labor and Demographic Economics, Health, Education, and Welfare
Growth, Economic Development, and Transition Economics
Agricultural, Natural Resources, and Environmental Economics
Urban, Rural, and Regional Economics

Please send an abstract of less than 500 words to annual2011 [at] aea.am by June 25, 2011, addressed to Zareh Asatryan or Nune Hovhannisyan. Abstracts should include: title of paper, name(s) of author(s), affiliation, current position, an email address, and at least one keyword. In the abstract, please identify the research question, methods, and outcomes obtained or expected. Authors will be informed of the acceptance of their proposals by July 10, 2011.

The final draft is required by October 15, in time to post online before the conference. Select papers, including best student papers (in English), will be considered for publication in the Armenian Journal of Economics (AJE) subject to peer review.

Those interested in attending the meetings but without presenting a paper, and wish to serve as session chairs, discussants, help edit papers, or offer any other assistance, may email annual2011 [at] aea.am. Conference participation is free.

The aim of the conference is to bring together scholars, researchers and students to promote the exchange of ideas and advance economics scholarship.

FDI yet to recover

2011-05-02T00:40:00.001+05:00

Foreign Direct Investment (FDI) continued its steep decline from its peak in 2008. In 2010, FDI stood at USD 483 million, almost 60 percent below where it was in 2008. Had it not been for the investment by the french, mostly in telecom, this would have been much lower.

Below are figures for the countries with the largest FDI. As always, more detail is provided on aea.am or here.

Table: FDI through 2010, in USD millions. Source: Armstat

One more study of the value of the Dram

2011-02-02T11:51:00.003+04:00

A recent IMF working paper addresses the value of the Dram. The paper discusses various methodological aspects of estimation techniques as it replicates previous findings.

Here is the abstract:
This paper uses a range of different methodologies to estimate the equilibrium real exchange rate in Armenia with both single-country and panel estimation techniques. We estimate a country specific autoregressive distributed lag model and then proceed with the estimation of a cointegrated panel consisting of transition economies in Europe and Central Asia. This addresses cross section dependence by using common correlated effects estimators. While our analysis focuses on Armenia, the methods are applicable to a large number of transition economies, and the paper thus provides an overview of methods that can be used to assess a country’s equilibrium exchange rate.

Season's Greetings

2010-12-29T22:30:00.004+04:00

This being the season for giving, please consider sponsoring an Armenian student.

Happy New Year and Merry Christmas

Շնորհավոր Նոր Տարի եւ Սուրբ Ծնունդ

2009 Household Survey Released

2010-12-29T17:14:00.000+04:00

The 2009 Household Integrated Living Conditions Survey was recently released by Armstat. As with the previously released 2004-2008 surveys, observations are aggregated at the household level and information is released for a subset of the variables. You may download the survey for free but registration is required. As always, links to this and other survey data on Armenia are provided in the Resources page of aea.am.
The survey of 7872 households is available as an xls and sav (spss) files. See my previous post to read or convert sav files to dta (stata).

Paper on the monetary transmission mechanism in Armenia

2010-12-14T08:55:00.002+04:00

A recent IMF working paper addresses the effectiveness of monetary policy in Armenia.
Here is a summary:
The introduction of inflation targeting in 2006, together with important economic developments such as dedollarization, marked the beginning of a new macroeconomic framework in Armenia, which is likely to have changed the effectiveness of monetary policy. This paper is the first attempt to analyze whether the transmission mechanism in Armenia has been subject to a structural break by employing a Markov-Switching VAR framework. Results support the existence of such a structural break around the time inflation targeting was introduced and reduced levels of dollarization were observed. Results from introducing a threshold variable into this framework furthermore show that reduced levels of dollarization are an important determinant of the effectiveness of monetary policy.

A very bumpy recovery

2010-10-25T09:10:00.004+05:00

The rapid recovery experienced through May of this year seems to have stalled. Except for the drop in July, the economy seems to be growing at a rate around one percent now (compared to same month in 2009). The cumulative growth for the year through September is 2.8 percent.

Source: Cumulative GDP growth from Armstat (Blue); Monthly GDP growth (Orange) computed from Armstat published cumulative GDP and GDP deflator figures. Also see May and January posts.

Real estate prices through 2010Q1

2010-06-15T23:04:00.001+05:00

After peaking in 2008, and jolted by the global financial crisis, real estate prices seem to have stabilized recently. Stated in USD, the slide in prices accelerated with the devaluation of the Dram in March of 2009. But stated in Drams, the decline has been more modest. More specifically, the price per sqm in Yerevan in 2010Q1 was 761 USD compared to 968 in 2008; down by 27 percent. Converted to Drams, the respective prices are 271400 vs 296300, for a reduction of 8 percent only.

Properties changing hands also follow a similar pattern but up through 2007. The number of transactions peaked in 2007, with August 2008 as a major turning point.

A recent IMF working paper attributes much of the growth in housing prices in Armenia and a number of countries in the region to factors such as GDP, remittances, and external financing. See House Price Determinants in Selected Countries of the Former Soviet Union.

Average price in USD per sq meter in Yerevan (excluding New Marash): 2003-2010Q1
Source: Calculated from Cadastre data. For greater detail see data page of http://www.aea.am/ (under Resources).

Number of transactions in Armenia: 1998-2009.
Source: Cadastre. For greater detail see data page ttp://www.aea.am/ (under Resources)

Rapid Recovery

2010-05-26T22:16:00.001+05:00

The government reported that the economy grew by 7.2 percent during the months January through April when compared to the same period last year. However, if one were to look at indicators for the monthly performance of the economy a much faster growth pattern would emerge. In April, for instance, the economy grew at a rate of 12 percent; 10.5 in March, 2.8 in February, and 2 percent in January. But because the governmental statistical agency (Armstat) reports these figures on a cumulative basis for the year, sharp expansions and contractions are smoothed over. An example of the latter, GDP shrank by some 20 percent in April of last year; the published cumulative figures showed 9.8 percent contraction only.

There are potentially many factors at play in shaping this recovery. But regardless of the nature or sources of these factors, if this trend continues the country is likely to experience very rapid growth that could very well be in the double digits.

Source: Cumulative GDP growth from Armstat (Blue); Monthly GDP growth computed from Armstat published GDP and GDP deflator figures (Orange). Also see earlier post.

2008 Household Survey Released

2010-04-23T09:15:00.001+05:00

The 2008 Household Integrated Living Conditions Survey was released recently by Armstat. As with the previously released 2004-2007 surveys, observations are aggregated at the household level and information is released for a subset of the variables. You may download the survey for free but registration is required. As always, links to this and other survey data on Armenia are provided in the Resources page of aea.am.
The survey of 7872 households is available as an xls and sav (spss) files. See my previous post to read or convert sav files to dta (stata).

Educational assortative mating

2010-02-04T20:38:00.001+04:00

The choices that men and women make in who to marry have implications that go well beyond the social fabric of a society. Income mobility, for instance, is an important consideration. If highly educated women always marry highly educated men, and the least educated intermarry, then little income mobility may take place.

The 2001 Armenian population census provides an opportunity to gauge the extent of educational assortative mating in Armenia. Do Armenian women marry men of similar education, do they marry down, or do they marry up? These questions can be explored by comparing the educational level of husbands and wives.

The top panel of the table below summarizes the choices made by women as gleaned from a 10 percent sub-sample of the 2001 census data (Armstat). About 60 percent married men with similar educational attainment (sum of main diagonal), 20 percent married down and 20 percent married up. About 8.2 percent of women had education below the fourth grade (primary or less). Close to 18 percent had completed tertiary education (university), but only 15 percent married university graduates.

The middle panel reports similar statistics but restricted to women born in the 1920s. About 62 percent of women married men with similar education, 23 percent married up, and 15 percent married down. About one third have an education below the fourth grade level, and around 10 percent are university graduates; 15 percent of male partners are university graduates.

The bottom panel replicates the analysis for those born in the 1960s. Here 60 percent of women married men of similar education, 19 percent married up, and 21 percent married down; more marry men with lower education when contrasted with the older generation. About one percent of the women have an education at the third grade level or below in contrast to one third of those born in the 1920s. This highlights the spectacular educational expansion from the formative years of Soviet Armenia.

This is part of a paper co-authored with Shushan which contains further description of the data and additional analyses that address the choices made in the 1930s, 1940s, and 1950s, as well as estimation of the probability of the various choices made (ordered probit). One finding of interest is that women who marry younger men are more likely to have married down. Drop a note if interested.

Is the worst over?

2010-01-12T19:45:00.005+04:00

Here is the monthly year over year real GDP growth in Armenia. Is the economy at a turning point?

Source: Constructed from cumulative monthly GDP and deflator figures reported by Armstat. Any errors are mine.

Armenian micro data

2010-01-04T08:55:00.000+04:00

As an early present for the new year, Armstat made available for public use household surveys for the years 2004 through 2007. For the first time researchers will be able to examine the size and sources of household income, among other variables of interest; registration is required to access the databases.

The variables made available represent a subset of those compiled by Armstat (see databases on armstat.am or armstat.info). For instance, information is available at the household and not its members level. Obviously confidentiality of the information is critical, and the new releases strike a balance between the interest of the research community and the protection of the privacy of those surveyed.

Earlier in the year, Armstat made available a 10 percent subset of the 2001 population census for public use. The provision of these micro databases is nothing short of impressive. It would be good to see researchers make use of these.

Technical notes:

The surveys are available in xls and so there is little need for programming skills. But for more advance analyses they would need to be imported into some statistical software. Fortunately, the data are also available in SPSS. However, spss files (sav files) are not very useful to economists. But it is very easy to convert these files into Stata. Just install an ado file, and the data can be converted into dta files (and retain the labels). More specifically, in Stata type the following to install (and describe) usespss ado file.

ssc describe usespss
ssc install usespss

Next, and at any time using Stata to read "sav" files, type:

usespss using "filename.sav"

For more further info, consult the Stata website as well as RePEc.
As always, links to the databases are reported in the data page of aea.am.

Season's Greetings

2009-12-29T19:30:00.000+04:00

This being the season for giving, please consider sponsoring an Armenian student, a teacher, or, if it is within your means, a school.

Happy New Year and Merry Christmas

Շնորհավոր Նոր Տարի եւ Սուրբ Ծնունդ

Resources for Economists-Armenia

2009-12-12T13:05:00.002+04:00

The Internet provides incredible amount of economic data and information. Conveniently almost all of them, especially for economists in the U.S. or about the U.S., are available through a single gateway "Resources for Economists", http://www.aeaweb.org/RFE/ The site is part of the web site of the American Economic Association and is managed form many years by Bill Goffe of State University of New York at Oswego.

There are many sections, such as:
• Data
• Dictionaries, Glossaries, & Encyclopedias
• Economists, Departments, & Universities
• Jobs, Grants, Grad School, & Advice
• Meetings & Conferences
• Organizations & Associations
• Other Internet Guides
• Software
• Teaching Resources
• Blogs, Commentaries, and Podcasts
• Neat Stuff
If you just try the “Teaching Resources” you would find out incredible amount of lectures and economic learning resources available on line.

Clearly we, Armenians, and Armenia, need a similar web site. My impression is that the www.aea.am is designed to play such a role; however it requires lots of additional work and effort to get better and to provide a superior service. We could learn from the experience and format of “Resources for Economists” and improve the aea.am. I hope more volunteers join and support the effort of aea.am .

The negotiators in Switzerland

2009-10-12T08:01:00.005+05:00

A scorecard of the negotiators in Switzerland -- just to put things in perspective.

Armenian survey data

2009-09-17T17:50:00.000+05:00

With the increase in the availability of survey data on Armenia, the opportunities of undertaking research have also increased. With this in mind, I plan to give a talk at CRRC on the sources and uses of surveys (micro data). My goal is to provide a brief overview of the various data sources with applications. Examples of the latter include business tax evasion, return to education, education spending, income mobility, assortative mating, and income distribution.

Hope you'll be able to join me at CRRC, 3rd floor, Room 305 (Economics Department, Yerevan State University), September 18, 2:30-4 pm.

Armenia's Trade Partners and Free Trade Agreements

2009-07-25T23:40:00.005+05:00

Early this year the World Trade Organization launched a Regional Trade Agreements (RTA) database. Armenia's profile lists the RTAs which are currently in force. Unfortunately, this list is not reflective of the trade patterns in recent years. The only countries Armenia has any RTA with are the countries of CIS (Kazakhstan, Moldova, Russia, Turkmenistan, Ukraine, Georgia, Kyrgyzstan). Some of these agreements are no longer relevant (i.e. little trade takes place).

Although Russia still remains the largest single destination for Armenian exports, the network of Armenia's trade partners has expanded significantly over the last decade to include European Union countries and the USA. The European Union, the country's largest trading block partner, has the most extensive network of preferential trade agreements (PTAs) of any WTO member. However, Armenia only qualifies to export its products under the EU's Generalised System of Preferences (GSP) which is a trade arrangement providing preferential access to the EU market to 176 developing countries and territories, in the form of reduced tariffs for their goods when entering the EU market. This stands in contrast to the free trade agreements that countries like Turkey and Moldova concluded bilaterally with the EU. The free trade agreements go beyond GSP preferences giving duty free access to the EU market.

The US Generalized System of Preferences (GSP) is a program designed to promote economic growth in the developing world by providing preferential duty-free entry for about 4,800 products from 131 designated beneficiary countries and territories. The number of product categories (at 8-digit level of Harmonizated Tariff Schedule) exported from Armenia to the US has increased from 71 in 1997 to 174 in 2008. Over this time period, the GSP preferences were claimed on average for 64 percent of GSP eligible product categories of which 14 percent on average were partial claims. In value terms, the share of exports shipped to the US under GSP preferences has grown from 7 percent in 1997 to 34 percent in 2008.

So why do we not yet have a PTA with our top trade partners other than Russia? Is anyone aware of the state of negiotations with the EU or USA to conclude free trade agreements? Does anyone know the extent of the usage of the EU GSP preference program, to compare with the usage of the US GSP program as indicated above?

Trading partners, 2008

2009-05-17T23:10:00.001+05:00

The EU continues to be the leading trading partner of Armenia. It accounted for over one half the country's exports, or $576 million, in 2008. It also accounted for some 25 to 30 percent of its imports, or $1,174 to 1,359 million, depending on how they are valued. At some distance, it is followed by Russia (15-20 percent). The greatest increase in trade, both in volume and rate of growth, is with China and Turkey.

Below is a list of countries with either exports to or imports from Armenia in excess of $100 million in 2008. There are two sets of import figures. The figures in the second set, the last column, reflect the value of goods from the country of origin. In contrast, the middle column reflects values shipped through intermediaries. The United Arab Emirates (UAE), for instance, accounted for imports of $516 million. But once this is adjusted for the fact that this country is an intermediary, the actual figure drops to $32 million. Similarly, the $122 million attributed to Panama dwindles down to insignificance once the figures are adjusted.

Source: Armstat, in USD millions. Export and import figures for the years 1993-2006 (first two columns of the table) are available on the data page of aea.am.

Cross country performance comparisons

2009-05-11T07:20:00.001+05:00

The IMF just released a study where Armenia's performance is contrasted with that of countries in Eurasia. It provides a useful review of past economic performance and prospects for the future. It touches virtually on all the factors at play in influencing economic performance.
The report is entitled Regional Economic Outlook: Middle East and Central Asia.

FDI in 2008

2009-05-04T09:21:00.006+05:00

Despite all the doom and gloom, 2008 turned out to be another banner year for foreign direct investment. FDI grew by 34 percent in 2008 to 935 USD million; in Q4, FDI grew by 30 percent, year over year. Much of this investment was in the energy related sectors (Russia), followed by telecom (Russia, France), and transportation (Argentina), among others.

FDI in USD millions, source: IMF

Armstat provides detailed figures on who invests in the country and in what sectors. The table below provides figures on annual FDI for the largest investors (except for Iran and Turkey) through 2007, as well as the net stock which accounts for mergers and acquisitions (eg, Russia vs Greece and Lebanon in telecom). An xls file with more detailed information is available on the data page of aea.am. With the exception of the past couple of years, the EU was the largest source of FDI to the country.

What explains this robust growth in FDI? Is it because the base is too small? How much of this is accounted for by Diaspora investments? And why Russian firms, again with the exception for the past couple of year, had so (relatively) little presence in the country?

FDI in USD millions, source: Armstat. These figures have been slightly revised in recent data releases which also include 2008.

June 4: FDI in Q1 of 2009 was USD 139 million, surpassing the investment level in 2008. The EU accounted for much of this, France (mostly telecom) in particular with 84 million. It was followed from a distance by Russia (28 million), Argentina (11 million), and the US (8).

Lecture notes

2009-04-26T22:55:00.009+05:00

For the past couple of years aea.am was populated with links to lecture notes in economics from leading universities around the world. The goal was to provide educational materials in advance economics training. Students are able to click on links to lecture notes in advanced economic theory, trade, econometrics, IO, among others, and learn what graduate students are learning around the world. Faculty could tap into this resource in preparing their lectures and shaping their syllabuses. Most of the early beneficiaries of the posted materials were graduate students in Turkey where the economics training is more advanced. But now we're seeing more from Armenia and Georgia.

Initially the entire effort was aimed at the doctoral level, where training is yet to reach its full potential. It turned out that undergraduate students have similar needs as well. Textbooks for the most part don't really exist, and training in many fields is lacking. But undergraduate training materials pause a unique problem. Unlike graduate training which is universally undertaken/available in English, language and relevance are serious concerns. Much of these need to be in Armenian. They also need to contain examples or case studies relevant to conditions on the ground.

To date, only two lecture notes in undergraduate finance written in Armenian are posted on the server, with an average of 100 downloads per month. One can only imagine the benefits to students (and faculty), who could be located anywhere, from having access to lectures in Armenian or that related to Armenia. And so this is a call to educators out there to share their lecture notes and have them posted on (or linked to) aea.am.

DSGE model for Armenia

2009-04-17T10:50:00.007+05:00

The use of Dynamic Stochastic General Equilibrium (DSGE) models has grown among central banks in the evaluation of policy. Unlike the larger time series macro models, DSGE models are better grounded in theory.

A recent IMF working paper co-authored by an economist from the Central Bank (CBA) presents such a model for Armenia. The paper lays out the economic foundations, parameter assumptions, calibration and estimation procedures using data over 2002-2007, and a review of the accuracy of predictions.

The short history exploited in the model is a source of concern. It would have been good to use the model to predict 2008 or much earlier periods to test for prediction precision. Nevertheless, the paper is very nicely written and makes very useful addition to our understanding of the performance of the Armenian economy.

I have seen some of CBA's working papers written in Armenian. But it is good that this recent paper is made available in English which will allow for greater exposure and scrutiny.

For a review of DSGE, also known as new-Keynesian, models see here.
For an alternative view of the usefulness of such models, see American Economic Journal: Macroeconomics 2009, 1:1, 242–266. Added April 19.

Call for Contributors

2009-04-13T08:05:00.000+05:00

With growing demands on my time I have scaled back on many endeavors including, most regrettably, cancelling plans to teach in Yerevan. And with so much to write about, the Blog can really use additional contributors.

Two contributors to the blog have been very helpful directly or on background in its success. Ara is a professor of economics in California, and worked at the Economic Institute of the Ministry of Finance and Economy of Armenia in 1991. Shushan is a fourth year PhD student in the US, and a graduate of the Yerevan State Institute of Economy; she contributed much of the lecture notes and data posted on aea.am. But they too have heavy demands on their time.

Qualifications: The ideal candidate must be a professor, researcher, or an advanced graduate student. This can be a great opportunity for someone who wants to develop expertise and/or a research agenda on Armenia.

Purpose: The primary purpose of the blog is to encourage research and critical thinking. The majority of posted articles fall into one major category, namely to inform and educate. In its simplest form, a posted article may be viewed as the starting point or inspiration for a term paper, a thesis, or a research paper. Data are presented to establish a trend or a relationship between two or more variables, and an article concludes with a question or two for further research. This may seem a bit professorial but it is quite effective.

Politics: By its very nature, the government is responsible for the course of the economy. Care should be taken in making sure that critiquing policy is not the same as siding with those who oppose the government. But given that the average Armenian cannot separate economics from politics, you will not make anyone happy; just keep in mind the benefit to students and researchers.

Media: Generally, the media in Armenia is not independent; some are pro government and some oppose it. Therefore, no media outlet should be criticized directly even though most of the economy related news reported is biased (bus. related outlets such as ARKA are the exception). Foreign outlets are fair game.

Moderating: No political/partisan comments are allowed. There are some political activists who will push the envelop. The lesson learned from past experience is to draw a strict rule that would allow only comments relevant to the posted article and only if they contain some economic reasoning or shed further light on the topic.

Niche: This Blog is the only Armenia related outlet that provides data intensive analyses of economic activity. But this can be quite time consuming.

Topics: All topics listed in the header of the Blog are of interest. Armenia continues to be a blank sheet in terms of research coverage. With the exception of IMF/Worldbank economists, there is very little research visible. In addition, we know very little about the progress in economics training.

Hope you are interested in contributing. All work is voluntary, and the only compensation is the knowledge that you are helping a student or a researcher, or at the very least improving our understanding of economic activity in the country.

Please email me or just comment (not for print).

More on the Dram

2009-04-03T08:08:00.009+05:00

This is a follow up to my March 4 post. The share of Dram denominated bank deposits dropped from 63 percent of total deposits at the end of November to 39 percent in February. Other than the fear of the uncertainties of the global financial crises, and the related flight to quality, it is not clear what else explains this trend. What is certain however is that so much Drams cannot be dumped without depressing its value. The CBA could not defend the Dram at 305 units to the USD, and perhaps should not have intervened. In early March it gave up and stopped its intervention and the value of the Dram dropped to about 365 units per USD.

Two questions: What would have happened had the CBA not intervened? The chart below may tell one story, but that is too simplistic. Second, why do econometric models of exchange rates ignore the composition of deposits and its information content?

Jan 1995-Feb 2009: Drams per USD (red) and share of Dram deposits (blue, right axis); Rsq = 0.81
Source: CBA

Remittances through January

2009-03-10T11:40:00.000+04:00

Remittances, as measured by the inflow of noncommercial transfers to individuals through commercial banks, maintained a robust pattern of growth through December of 2008. This is truly impressive given all the shocks that the country experienced. January is a different story where transfers slowed down by some 25 percent year over year. Two questions: why did remittances continue to grow through December, and, two, what does January foretell about the future?

Inflow: USD millions transferred monthly through commercial banks
Source: CBA

A similar pattern is observed for outflows. These are usually smaller, but as with inflows, these transfers also declined in January.

Outflow: USD millions transferred monthlythrough commercial banks
Source: CBA

Pressure on the Dram

2009-03-04T20:24:00.014+04:00

For much of the past two years, deposits in Armenia's banks grew an average of 30 percent per annum. From November 2008 onward, however, the growth shrunk to about 8 percent. This is still a healthy growth but quite telling of the flow of capital into the country.

Bank Deposits, annual percent change

What is equally interesting is that depositors seem to have developed a preference for foreign exchange and shifted away from the Dram. In January, demand deposits denominated in Drams fell by 26 percent. In contrast, foreign exchange (FX) denominated deposits grew by 34 percent.

Demand Deposits, annual percent change

Similar to demand deposits, Dram denominated time deposits fell by one percent while FX denominated deposits grew by 64 percent in January.

Time Deposits, annual percent change

The move away from the Dram seems to have elicited a response from the Central Bank (CBA). For much of 2007, CBA has pursued foreign exchange intervention policies that could be interpreted as aimed at weakening the Dram. The most dramatic of these is the acquisition of some $173 million in November of that year. But the intervention in the past few months, particularly in light of the above shift in deposits, moved CBA in the opposite direction with the sale of $185 in December 2008 and $149 million last January.

Foreign Exchange Intervention

Of course there is a limit to how much CBA can intervene. Dipping into foreign exchange reserves may not be sustainable if cash inflows continue to decline and the flight to stronger currencies expands. It is a matter of supply and demand, and there is little that the CBA can do about it. The CBA announcement yesterday that it would not a pursue a "managed float" exchange rate policy was unavoidable. The backing of the IMF and the WorldBank is critical at this stage, but the question remains whether the public will stomach the inevitable short run inflation.

Foreign Exchange Reserves

Good sources of data on exchange rates and financial indicators include CBA and IMF (above) and both provide a statement on the shift in the Dram policy. Vahe Heboyan has a very nice paper on the value of the Dram, and a recent IMF study (page 20) extends the analysis to foreign exchange intervention.

Added March 10: Reserves dropped to $1141 million in February from 1585.3 at the end of September, and from 1259.5 in January. Source: CBA

April 28: February intervention was $251.5 million. Total intervention Oct-Feb of $691 million, and Dec-Feb of $586 million. Source: IMF

Is it time to accelerate MCA programs?

2009-02-04T09:53:00.001+04:00

Through the MCA compact signed in 2006, the US is committed to spend $236 million to alleviate rural poverty. These funds are to be allocated through 2011. One major limitation of the compact is that the funding is not adjusted for the growth in global construction costs which has led to a reduction in the size and scope of the MCA program. The construction/infrastructure phase just begun (see here). With the collapse in global commodity (and capital equipment) prices, this might be a good time to accelerate the various projects taking advantage of current global conditions as well as providing extra stimulus to the rural sector. This will not present extra cost to the donor, but might go a long way in tackling rural poverty.

Shocks in 2008 and the real estate market

2009-01-19T08:42:00.009+04:00

The country was subjected to 3 shocks in 2008. One of its own creation in March, and two external and beyond its control. I have written about the first, the post election violence of March, and the second, the war between Georgia and Russia in early August. The third, the financial meltdown in the US and the evolving global crisis and their ramifications for the country have yet to be fully explored.

This post addresses the impact of these shocks through the prism of the real estate market in Armenia. Obviously any observation made has to be subject to several caveats as a complete model is necessary to evaluate the various factors that drive the real estate market.

Prices have been increasing at a rate of 30 percent per year since 2001. Prices reported by the Cadastre committee for November suggest a growth close to 10 percent (actually 299400 vs 279900 Drams per sqm for same month). This could be good news or bad news depending on one's perspective on the counterfactual. But the trend gleaned from the number of transactions is much clearer.

Compared to 2007, sales dipped by 5 percent in March following the disturbances in Yerevan on the first of the month. In early August, war broke out between Georgia and Russia which in effect cut off Armenia's links to most of its trading partners. Real estate transactions dropped by 22 percent in that month compared to sales in August of 2007. And it has been on the decline ever since, with sales lower than the comparable figures for 2007 by 35 percent in November. Obviously instability in Georgia does not bode well for Armenia. It is not clear whether the global financial crisis has hit Armenia as of yet, and very difficult to glean its impact through the real estate market with the information at hand.

There is an obvious need for greater research on real estate and the housing market in Armenia. It would be good to hear who else is working in this area.

Percent change in volume of real estate sales: 2008 vs. 2007.
Source: computed from Cadastre data

Note: I have posted prices through 2006 on the data pages of aea.am. I have yet to update the information through 2008.

Acemoglu on the 2008 Crisis

2009-01-16T10:33:00.002+04:00

Daron Acemoglu wrote a recent essay on the economic crisis that you may find interesting. Daron makes the case, among others, that the assumption that rich countries had good institutions which would prevent abuse and not endanger social systems was incorrect.

This is a must read for those who are interested in how economic models and our thinking of institutions need to be revisited.

Daron is an economics professor at the Massachusetts Institute of Technology, an Armenian originally of Istanbul.

Government policies

2009-01-14T23:57:00.001+04:00

The IMF released two reports last month, one written by the government and the other reflecting comments from IMF and WorldBank economists.

The government's 300 page Poverty Reduction Strategy Paper released by the IMF provides an exhaustive non-technical review of its policies and plans, as well as includes a treasure trove of figures and statistics. In an IMF/WorldBank joint Advisory Note on the paper (11 pages), the second document critiques the government's proposals highlighting its failures (and praising its successes) as well as advances the staff's own recommendations.

Given the various shocks the country was exposed to in 2008, these make for very timely and informative reading.

What is the outlook for the economy?

2009-01-11T23:19:00.001+04:00

Much has been written lately in the press on how the global financial crisis will impact Armenia's economy. Some express concern over how remittances may be affected if the economies of the host countries for local migrants were to slow down, and others on how the market for the few goods that the country exports might contract.

This global crisis was triggered by the financial meltdown and recession in the US. The business cycle is a fact of life, which may, with various degress of severity, hit the US economy every seven years or so. In all likelihood, the US will recover by 2010. There is little that a country the size of Armenia can do about these (external) cycles. The government's talking up the economy and expressing a sense of optimism, a cheerleader of sorts, is all that it could do in the immediate run. In the long run policies to streamline the economy are critical. Here the government is aided by economists at the IMF and the World Bank in shaping its macro stance and long term outlook (see an excellent IMF report on economic policy in Armenia released in December).

This crisis may have adverse impacts on the country. In addition to the above, fewer tourists may visit the country and less FDI may take place. But there is also an upside to the current situation. There will be tremendous reduction in the cost of energy imports; over $600 million was imported in 2008. In addition, the price of raw materials and of capital goods have also declined, in the presence of a stable currency.

The economy was subjected to a number of shocks in 2008. The fact that the economy has grown about 7 percent is nothing short of a miracle. But the uncertainty generated by these shocks does not bode well for the short term performance of the economy. Market psychology is critical but it is also very difficult to gauge. Would foreignors continue to invest? Will the Diaspora keep coming and building? Would Armenian consumers switch from imports to locally produced goods? Would the growing number of Armenians vacationing abroad now stay home? Also, how effective will be the World Bank, IMF, and EBRD programs? Equally important is how vigorously the new government will pursue the reforms it announced.

Following news coverage of the discussions on the US economy at the American Economic Association annual meetings in San Francisco last week, I wondered why this environment cannot be transplanted to Yerevan and have researchers discuss their findings on the economy of Armenia. The reality is that there is no visible independent research on the economy of Armenia with competing views presented and debated.

Open Skies agreements

2008-12-19T22:31:00.004+04:00

Over the past couple of weeks, Armenia signed two agreements related to air transportation with the EU and the US that could set the stage for a revolution in this mode of transportation. In particular, the agreement with the US (see here for official text), has the potential for improving the logistics of shipping and travel between Yerevan and Los Angeles, the city with the largest population of Armenians second to Yerevan. In all likelihood this will connect to New York on the east coast of the US, facilitating travel from cities such as Boston, Philadelphia, and Washington among others.

In the week of September 3-9, there were 62 Yerevan-Moscow flights, and another 34 flights to cities in Europe (see here for earlier and much more detailed flights patterns, and here for an earlier post). It should be clear that many of these flights do not carry their passengers to their ultimate destinations, but such statistics do not exist. Obviously, many of the travelers from the US, Canada, and Latin America, connect through these cities on their way to Yerevan. This also applies to much of the cargo, both trade and humanitarian aid related.

These agreements may go a long way in improving transport logistics to and from Yerevan. Much credit should go to the young minister of the economy who has contributed considerably during his short tenure of slightly over a year. But the nagging question remains of why it has taken so long to get the country to this point.

Do we know of any relevant research in the area of transportation?

The return to education

2008-12-07T20:39:00.001+04:00

Education is often what separates the rich from the poor. But a question of interest is how this road to prosperity varies with the level of education. To be more specific, how would an individual's income change if she earns an additional degree or simply spends an additional year in school.

Within the Armenian context, as in many countries, it is not always clear that the most educated are always the most compensated; the return to educationn is an open empirical question.

I am working on a project that examines how wages vary by educational attainment using survey data for 5 years. Below I report summary statistics from one of the cross sections. As we can see the average monthly salary generally rises with education. But given the size of the standard deviations, the differences in mean salaries are not always statistically significant.

2003 Monthly Salary by Education Level (in Drams)
.......Education ... Obs. Mean StdDev
---------------------------------------
............. primary 17 26471 15322
.incomplete secondary 94 23796 20580
.. general secondary 729 29898 24669
...secondary special 892 26183 24119
... incomplete higher 25 37953 28577
..... high education 869 35374 92064
---------------------------------------
Note: limited to ages 25-60 and to those who report monthly compensation only; excludes one outlier with general secondary education.

Next I report OLS estimates and control for age, in quadratic form, and gender. Again, there is little statistical difference in the compensation of individuals with different education levels. Other than the finding that women get paid much less than men, by some 22,000 drams, there is nothing remarkable in the estimates reported below.

OLS Estimates of Monthly Salary
...... Variable .... Coefficient Std. Err.
------------------------------------------
incomplete secondary -2747.38 14631.88
.. general secondary 3624.517 13629.23
...secondary special 3284.955 13604.52
.. incomplete higher 14444.31 17463.65
..... high education 12284.46 13610.02
................ age 2604.828 1144.01
............ age sq. -30.4604 13.67846
............. female -21897.6 2192.599
........... constant -18805.9 26665.94

The above findings, of course, require some serious work to correct for occupational choice (eg, construction workers make more than teachers), private/public sector employment, among others. But for now it would be good to know if any one else is doing work in this area.

Defense Spending

2008-11-01T10:03:00.010+04:00

Armenia (population 3 million) faces tremendous pressure to increase its military budget. However, given the size of its economy, it is not in a position to engage in an arms race with its neighbors. Turkey's (population 71 million) military budget exceeds the country's entire GDP. As for Azerbaijan (population 8 million), the other Turkic state, its defense expenditures are as large as the government's entire budget.

The country maintains close ties with both Russia and the US. A small contingent of Russian troops guards its border with Turkey and Iran, and Armenian troops serve with NATO in Kosovo, and until recently in Iraq under Polish command before Poland withdrew its troops. In addition, the US has provided some $1.5 billion in economic aid over the past 15 years or so; the US is the only foreign donor to the Armenian enclave of Karabakh. Relying on others for its security and economic well being may not be a source of pride. But the government's role is to provide for the wellbeing of the people, and one hopes that the officials swallow their pride. Rather than expanding the defense budget, a more effective approach would be to spend more on education and health care. In the long run, it is likely that an expansion in investment in human capital could be far more effective in contributing to Armenia's security and prosperity than anything else the government can do.

State Budget, 2007 (in USD millions)
Defense ............................... 280.0 15.1%
Education and Science ................. 278.0 15.0%
Social Insurance and Social Security .. 184.4 9.9%
Public Services ....................... 181.8 9.8%
Public Order and Security ............. 152.0 8.2%
Transport and Communication ........... 140.3 7.6%
Public Health ......................... 137.1 7.4%
Fuel and Energy ....................... 85.9 4.6%
Agriculture, Forestry, Fishing ........ 80.7 4.3%
Housing ............................... 64.0 3.5%
Culture, Sport ........................ 48.8 2.6%
Industry, Construction, Nature ........ 22.8 1.2%
Other Expenditures ................... 199.4 10.7%
Total Expenditures .................. 1855.3 100.0%

Turkey: military spending was $11,066 million in 2007 (www.turkishdailynews.com, Jun 11, 2008)
Azerbaijan: military spending was $1.3 billion in 2007 and expected to rise to $2 billion in 2008.

Added Jan 18, 2009: Azerbaijan announces rise in military spending for 2009 to $2.3 billion (Yeni Azarbaycan, Azerbaijan, Jan 17 2009).

US Elections and the Bradley Effect

2008-10-20T23:53:00.003+05:00

The Bradley effect is a proposition advanced to explain the "discrepancy" between opinion polls and the outcome of California's gubernatorial elections in 1982. Tom Bradley, an African-American, lost the race to George Deukmejian, an Armenian American, despite being ahead in some polls. The story here is that some voters may have told pollsters that they will vote for the black candidate, but on election day, in the privacy of the voting booth, voted for his "white" opponent.

With Barak Obama (African father, white mother) being ahead in the polls in the US, there are repeated references to the Bradley effect in the media. Because those polled may have lied, the argument made is that Obama may not be ahead, or at least not ahead enough to overcome the Bradley effect.

As Armenians we may see things a bit differently, and that the Bradlee effect may take on a totally different meaning. Indeed, the 1982 race was between a non-white man and a white man who belonged to an ethnic group that once was legally considered non-white in the US. It was not until Halladjian vs. the United States on December 24, 1909, that Armenians were classified as white and eligible for citizenship. However, varying judicial interpretations remained an obstacle for many would be citizens. Indeed, the United States government challenged the citizenship of one Tatos Cartozian in 1924. The government's prosecuting attorney argued that “It is the contention of the government that it makes no difference whether a man is a Caucasian or not or what the racial and language history of his people may be if the man on the street does not recognize him as white.” The case was dismissed in favor of Cartozian.

In many ways the legal environment, with its racial overtones, may explain the very low immigration of Armenians to the US pre and post the genocide of 1915 and during the earlier massacres and pogroms. In any event, I usually like to stick to economics, but I couldn't resist the relevance of the news to the historical formation of the Diaspora and its spreading across the globe.

Right time for tight monetray policy?

2008-09-05T00:08:00.002+05:00

The central bank just raised the refinancing (repo) interest rate by another 0.25 points to 7.75. This follows a series of rate hikes all designed to keep inflation in check; 0.25 points in each of August, July, June, May, and April. At the same time, CBA has also intervened in the exchange market to support the value of the Dram in March and to a lesser extent in April, thereby restricting the supply of money.

The major fear is that higher import prices, and reflecting on the supply shock that recent events in neighboring Georgia had brought about, would give rise to higher inflation rates. I wonder whether this is the time for a tight monetary policy. Can the CBA really keep prices in check? and at what cost to economic activity, if successful at all?

Foreign exchange intervention ($millions)

Transit fee for Russian gas

2008-08-17T22:34:00.008+05:00

Local media has reported up to 30 percent reduction in the volume of Russian natural gas piped through Georgia beginning on August 7th (ArmInfo, 2008-08-11 15:37:00), with full service seeming to have been restored by August 13th. Regardless of the reasons why Georgia reduced the volume of gas transmitted, what I learned from the recent news is that Armenia pays 10 percent of the gas it receives as a transit fee; Georgia is not an importer of Russian gas.

This transit fee paid by Armenia, particularly given the relatively short length of the pipeline, is likely to be the highest price paid by any country. For a direct local comparison, Azerbaijan pays only 5 percent of the gas it transmits through Georgia to Turkey as a transit fee.

It is obvious why Armenia pays this high price. The country would otherwise freeze and much of the economic activity would come to a screeching halt; 30 percent of the cars run on natural gas.

Armenia is surrounded by big and little bullies. That it cannot help. But nevertheless, it should work hard to diversify its energy sources.

Georgia and Russia at war

2008-08-10T11:12:00.005+05:00

I wrote back in October of 2006 on the potential economic implications of the tension between Georgia and Russia. But not in my wildest dream I expected the tension to escalate to this degree. This is nothing short of insane!

While landlocked Armenia imports little from Georgia, about 95 of its trade transit through it, making it effectively the country's most important trading partner; it is blockaded to the west by Turkey and to the east by Azerbaijan, and carries little trade with Iran. See imports and exports.

Much of the country's exports are destined west, and much of its imports, other than Russian natural gas which is piped through Georgia, are also from the west. The infrastructure that makes these transactions possible is Georgia's, which by extension is Armenia's. Unfortunately, this infrastructure is getting degraded with the escalation in hostilities.

From an economic perspective, there will be no winners, and Armenia will be a casualty of this war. There is nothing that the government can do to alter the status quo. But there are a number of steps that it should take immediately. These include (1) maintain contacts with its main benefactor, the United States, to ensure the continuous flow of aid, (2) review the adequacy and the appropriateness of the funded programs given the changing environment, (3) accelerate reforms in the custom's agency, liberalise air transport, and remove any obstacles to trade and commerce. The country is de facto blockaded on all sides, by (1) instability to the north, (2) Azerbaijan to the east, Iran (the terrain and distance) to the south, and (4) Turkey to the west. Unless wisdom prevails, this winter can be very cold!

August 17. ARKA news agency (2008-08-16) reported that the destruction of the bridge linking Gori to Tbilisi by rail has interrupted the shipment of goods to Armenia.

September 4. I should have accounted for the imports/exports of diamonds which don't need to be shipped over Georgian territory. Rough diamonds are imported to the country, polished, and then exported.

Government funding of faculty housing

2008-07-25T22:37:00.001+05:00

The government recently announced that it is building flats to house university faculty. Scheduled for completion in 2009, these units will likely convey a subsidy of about 17 million Drams, or slightly over $50,000, per 100 sqm to each recipient.

One can only applaud this action by the government, as education and educators have long been overlooked by policymakers. But one wonders whether this is the best approach to rectifying the past and enhancing the role of educators in the society. How does one decide how to equitably allocate these housing units? Should these reflect seniority of faculty members, publication records, excellence in teaching, among other factors? Equally important, who gets to evaluate the merits of recipients? I just can't see a good way of spreading the benefit from this gesture by the government.

As an alternative why not auction off the building under construction, and with the proceeds simply increase faculty pay across the board. Obviously, one would hope that some merit pay mechanism is instituted to govern future pay raises as well.

Funding graduate studies

2008-06-30T23:43:00.009+05:00

The prime minister recently announced that the government will fund the education of a number of students in foreign countries. Undoubtedly this is a confirmation of the country’s dramatic need for capacity building, as well as a reflection of the slow progress in advancing the state of graduate education in the country.

In a world of unlimited resources, one would applaud the visionary outlook of the PM. But given the funding constraints that are undoubtedly at play, and the urgency of catching up with the rest of the world, one wonders if this is the best strategy for the government to pursue. Consider the following:

1. The strategy would provide training for a limited number of students, as dictated by funding limits. It may cost anywhere from $30,000 per year to cover the tuition and living expenses.
2. It takes a number of years to complete graduate degrees; 2 years for masters and an average of 5-6 years for the doctoral degrees.
3. Add to the above the time it takes to gain experience and develop the professional maturity for independent work.
4. Considerable effort is needed to build conditions (and institutions) on the ground to make it attractive for prospective grantees to return to the home country.

I would very much hope the government reconsiders its options. The limited resources should instead be employed in attracting educators to the country. Here, a much larger pool of students would get training. More importantly, current faculty would also get training, and upgrade their academic skills. Add to this the prospect of having private/public sector personnel also attending these courses, and this alternative strategy could be a win-win all around. Of course, familiarizing these professionals with local conditions may have positive spillovers in terms of shaping curricula, research and study focus, among others.

For the doctoral program in economics, Yerevan State University, for instance, could host visiting economists to provide training in advanced economic theory, and econometrics, among others. [Note that YSU training in economic theory is superior to that received by Muskie students studying in the US, where the latter government spends some $40,000 annually on their training.] This is important as advanced training, say the equivalent to that of at least second year graduate PhD programs in the US, does not exist in the country. Similarly, the American University may host visiting professors in finance. Other institutions of higher learning could play similar roles.

At the end of the day, it is the academic institutions in the country that need to be shored up. Otherwise, capacity building will continue to be a long slow process.

Armenia-Iran trade relations

2008-05-12T10:33:00.008+05:00

The US State Department recently released its 2007 Country Reports on Terrorism. The Armenia section states that:

Armenia’s warming relations with neighboring Iran continued, with Armenia hosting official visits by Iranian President ... In addition to fostering closer diplomatic ties, these visits served to solidify previous bilateral commitments to develop joint energy and transportation projects ...

This is odd. Armenia imported only $133 million in goods from its large southern neighbor Iran in 2006, or 6 percent of its total imports. Combined with exports of $29 million, Iran accounts for 5 percent of Armenia's total trade. Obviously the country has weak economic relations with Iran, and the latter accounts for little of its imports and trade relations.

Even if trade relations were to increase as the report suggests, these would be small and most likely would be energy related and displace imports from Russia. In any event, the country not only imports little but there has been little growth over the past 10 years where they grew from $89 million in 1997 to $133 million in 2006. Interestingly, Turkey imported $4.5 billion of goods from Iran, up from $600 million in 1997. I wonder where State gets its data. I would very much hope that they do not rely on the incompetent reporters at rfe/rl. I have written on the subject last year (see here)!

Why so little foreign investment?

2008-03-14T10:15:00.001+04:00

In 2006, foreigners invested about $1 billion in Georgia, $3.7 billion in Azerbaijan, and $20 billion in Turkey. In contrast only $450 million was invested in Armenia. Obviously this represents a tremendous growth, about 100 percent, when compared to the invetsments in 2004 and 2005. But it is low in comparison to the neighboring countries, and very low relative to the country's needs.

For 2007 the final figure may be well over $500 million (350 over the first three quarters). Nevertheless, this is still very low. Obviously, we have come a long way, but don't seem to have gone far enough.

Quarterly FDI figures for 1993-2006 are posted on aea .am

April 1, 2008: Armstat reports FDI of $670 million for 2007.

Interest rate hikes and prices

2008-03-13T22:07:00.011+04:00

Last week, the central bank raised interest rates by 25 basis points to 6.25 percent. The CBA stated that continued growth in private consumption and an expansionary fiscal policy will exert upward pressure on prices. It further stated that to the extent that inflationary pressures eminate from external factors, it is impossible to offset them through monetary instruments. The tightening of the monetary policy is intended to moderate the impact of domestic growth in consumption and government spending.

The higher interest rates will boost or at least shore up the value of the Dram. But other than that I am not sure how effective this monetary policy will be.

It is true that government spending is slated to increase, but is it
deficit financed?

As the CBA stated, much of the pressure is from external sources (energy and food I presume). These will have a large impact on prices, and there is nothing that the CBA can do. Rather, the government, by implementing policies that reduce transaction costs and improve competition, and international donors have a much stronger role to play. First and foremost, the government should reform the customs agency and improve governance. Sacking its senior officals would be a good start. Second, there is little if any logistics expertise in the country. Clearly training and education should be a high priority, and funding is an issue. Third, diluting market concentration and monopolistic practices should be a priority for the government. Again training is also critical here; there are no visible IO economists in the country. Obviouly, these changes may not be large enough to offset the increases in import prices, but are nevertheless necessary for the efficient functioning of a market economy.

It is true that the economy has been growing at double digit rates for the past five years, and this may have led to further expectations of growth. But the post presidential election events will very likely result in slower growth. The country may face both higher prices (import driven) and increasing unemployment. I am not sure if there is anything that the CBA can do here.

The economic fallout

2008-03-11T10:38:00.004+04:00

The mass violence, the destruction, and the looting that we witnessed on March 1, 2008, in Yerevan, may have serious repercussions for Armenia's once vibrant yet fragile economy. In general it is difficult to gauge the impact of such shocks, and extrapolating from the experience of other countries can be tricky. Fortunately as economists, and unfortunately as Armenians, all that we need is to go to the distant past, some 11 years ago, to be able to speculate on what may lay ahead.

Dram share in bank deposits (see data page of aea .am)

On September 22, 1996, President Ter-Petrosyan sent the tanks to suppress protests by the opposition against the rigged presidential elections, which was followed by arrests and major restrictions on civil liberties. Almost immediately, one could notice a steady drift away from the Dram. Indeed, its share of the residents' deposits in banks sank from about 50 percent in September of 1996, to the mid 30s within a year (dollarization). This slide continued in favor of holding foreign exchange, and the trend only began to reverse itself in early 2002. It was not until the year 2007 that the share reverted to its 1996 level, well almost.

Drams per USD (see data page of aea .am)

Soon after, the next shoe dropped. The flight from the Dram, and the lack of trust in the country's institutions, reflected negatively on the exchange rate. It dropped from about 415 Drams per USD in September of 1996, and peaked at about 590 in mid 2003. It was not until the second half of 2006 that the 1996 levels were revisited.

The impact of the 2008 debacle is likely to be much more pronounced as the financial sector is more developed and the country's economy is more integrated with that of the rest of the world.

Indeed, the Dram already seems to have depreciated by some 5 percent relative to the Euro; it stood at 476 on March 10 compared t0 455 on February 18, and to 450 before February 12). Of course we would have to wait a bit longer to confirm any permanent realignment as was the case in 1996. Further depreciation of the Dram, which is inevitable, may lead to higher prices of imported food and commodities. For those interested in studying future trends in the Dram, the archive page of the central bank is a good source of daily exchanges rates as far back as 1999, and I have placed the daily rates for the years 1995 through 2006 on the data page of the aea .am.

If there is a flight from the Dram, then this can have serious implications for the economy if it turns into a run on the banks, extremely unlikely for the time being. But it will very likely impact the balance sheets of the banking sector in particular if the economy is severely impacted. In 1996, few loans were provided by banks. In contrast, 239 billion Drams were issued in loans by banks in 2006 which jumped to 423 billion in 2007.

Tourism and agriculture are two examples of the economic havoc this political instability may create. Tourism is one of the major sources of revenues to the economy. In 2007, some half a million visited the country, up from 32000 in 1998 and much fewer in 1996. There has been some cancellations already which does not bode well for the upcoming tourist season.

The economy has been growing at double digit rates and the construction sector is the primary source of this growth. But this trend cannot continue with the country's political stability in doubt. An apartment in downtown Yerevan costs about USD 150000. In 1996, it would have cost much less than 10000. Within the Armenian context this is a sizable sum of money. I can't see how these investors, locals or from the Diaspora, will undertake such investments in this risky environment.

It took much effort to get Armenia out of the economic abyss of the 1990s. Of course progress on the economic front without matching progress in governance is not very satisfying. But it is incredibly difficult to be poor and not be corrupt. With this as background, it is amazing that Ter-Petrosyan and his supporters continued with their demonstrations despite the warnings and being keenly aware of the outcome; he once ruled over the same security forces and is responsible for the tenure of the president and the president-elect. In addition he lacks the support of international human rights organizations and the West. So what was his vision for this entire affair, and what did he plan to realistically achieve?

One would hope that reason and common sense will prevail and that the authorities and the opposition will find common ground before the economy takes a major hit.

Income mobility in Armenia, 1989-2006

2008-02-27T10:37:00.012+04:00

The contrast of the society's well being today to that of the country's pre-independence is a recurring theme. Were people better off during the pre-independence years? Did the transition years make their lot worse? Have successive governments addressed the transition pains adequately? Equally relevant, at least during this political season, is how the evolving well being of the electorate translates into votes for incumbents and competing candidates.

To address this question, I took a look at the EBRD 2006 Life in Transition Survey to study perceptions of well being now and that enjoyed in 1989. The survey asks participants to rank themselves on where they fall in the income distribution in 1989 and 2006, from the poorest 10 percent of the population to the richest 10 percent. I converted these deciles into quintiles (20 percent) and reported the resulting mobility table below (observations with missing values are dropped -- about 4 percent).

Subjective ranking: income mobility between 1989 and 2006
..1989........... 2006 Quintiles .......
Quintiles ....1.. ..2.. ..3.. ..4.. ..5. All. Households
poorest 20% 26,7% 53,0% 16,9% .1,3% 2,1% 100% 267362
next ...20% .8,8% 27,7% 58,1% .5,4% 0,0% 100% 320140
next ...20% 10,5% 34,0% 44,0% 10,3% 1,2% 100% 506791
next ...20% 11,5% 42,3% 41,0% .5,2% 0,0% 100% 720929
richest 20% 18,5% 30,0% 36,6% 10,6% 4,3% 100% 229474
.... All... 13,6% 38,0% 40,8% .6,6% 1,1% 100% 2044696
Computed from the 2006 LiTS household survey (see data page of aea.am to download)

A striking finding is that the majority of the poorest 20 percent in 1989, the first quintile, consider themselves to be much better off in 2006. Of these 267362 households, 53 percent moved to the next quintile; 2.1 percent moved all the way up to the top quintile, the richest 20 percent. At the other extreme, of those who considered themselves the richest 20 percent in 1989, 229474 households, 95.7 percent of them became poorer by 2006; 13.6 percent moved to the bottom quintile, the poorest 20 percent.

In short, the mobility picture that emerges from above is that those who considered themselves to be the richest in 1989 are now poor, while the lot of the poor has improved considerably. I have studied income mobility using panel data for countries other than Armenia (panel data don't exist for Armenia), but I have never witnessed such (1) "rank" reversal between the poor and the rich in the income distribution and (2) mobility (only 21 percent, the sum of the diagonal, did not change rank). Of course we don't observe income, and survey participants may not correctly rank themselves (otherwise we would have about 400000 households or 20 percent in each row, for a total of 2044696 households in the last column). But nevertheless, perceptions of well being are important and should not be overlooked.

Armenia Exit Polls 2008

2008-02-23T20:51:00.006+04:00

The press reports that the British pollster Populus exit polls showed that 57.1 percent of the Armenian voters chose Serzh Sargsian, followed by Levon Ter-Petrosian (17.4 percent), Arthur Baghdasarian (14.6 percent), and Vahan Hovhannissian (5.98 percent); the remaining candidates received 1.6 percent. The interviews were conducted in 126 polling stations (clusters) in Armenia. These are fairly close, and within the poll's margin of error, to the official results where Sargsyan was declared the winner with 52.86% (863,000 votes).

It has been some time since I taught statistics and designed samples (not for polling), but the process of polling and extrapolating to the voting population is conceptually straight forward. First you design/select a sample with some criteria in mind to minimize sampling errors, and next apply appropriate weights to scale up the choice of those interviewed after they have voted to the size and demographics of precincts.

There are a number of problems with exit polls. For instance, the active partisan supporters of one candidate may be more likely than the supporters of other candidates to participate in exit poll interviews (selection bias). In addition, the young are more likely to participate in interviews. Furthermore, the age of the interviewers may matter as younger interviewers do not get high response rates from older voters. Of course, some of those interviewed may lie about the choice they have made (response bias).

Once the interview process is over, the next step is to weigh the sample to the size of the precincts and adjust for the non-responses say based on age and sex. One may rely here on the demographics of voters from previous elections in each precinct. While the size and demographics of the population are pretty well known (with few year lags), that of the voters is more problematic.

Exit polls are powerful indicators of corrupted elections. But without adjustments for sample selection and demographics, the results can be biased and at best meaningless. Consider the hypothetical case where most of those interviewed are old in precincts where the majority are young!

With the above in mind I was surprised to read the exit poll results from what ArmInfo reports as that conducted by the Alliance civil initiative, which I believe is organized by a large number of NGOs. Here is the full article:

Exit poll by Alliance civil initiative gives victory to Levon Ter-Petrossyan
2008-02-19 20:54:00
ArmInfo. Alliance civil initiative has conducted an exit poll at 100 polling stations. They have questioned 4,406 people. 3,550 of them (66%) agreed to answer.

The vice chairman of Alliance Gevork Melikyan says that ...
474 people (15.5%) voted for Artur Bagdassaryan,
40 (1.3%) for Artashes Gegamyan,
38 (1.2%) for Tigran Karapetyan,
8 (0.2%) for Aram Haroutyunyan,
195 (6.4%) for Vahan Hovhannissyan,
90 (2.9%) for Vazgen Manukyan,
9 (0.2%) for Arman Melikyan,
1084 (35.4%) for Serzh Sargsyan,
1152 (37.7%) for Levon Ter-Petrossyan.

Melikyan says that it was an independent survey. They planned to question 0.2% of all voters - 2,300 people.

This is strange. The sample design and selection seem odd. And what are we to make of the sample sizes of 2300, 4400, 3550, and the 3090 (sum of the people voting for individual candidates). Why are the sample estimates (1152, 1084, ...) reported without any adjustment for the size of the voting population (precincts), and seemingly not any of the demographics? What do the above figures tell us about the likely winner of the elections? Clearly, and unless ArmInfo got it wrong somehow, at best this is sloppy work. None of the foreign news services, except for Radio Free Europe (RFE/RL), reported its findings. Instead, they reported those of the reputable Populus.

Remittances and education

2008-02-18T08:43:00.002+04:00

Sometime in October of 2007 I read the job market paper of a PhD student from UC Santa Cruz, Migrants' Remittances and Investments in Children's Human Capital: The Role of Asymmetric Preferences in Mexico, which addresses how remittances affects spending on education by the recipients. Using household survey data for Mexico, matched to migrants in the US, the paper finds that the impact of remittances depends largely on the gender of the household head, and they are most likely invested in education particularly if they are sent by migrant fathers to mothers.

Last month the IMF released a new working paper entitled "Microeconomic Implications of Remittances in an Overlapping Generations Model with Altruism and Self-Interest" which addresses the impact of remittances on education expenditures, as well as on labor supply, saving, and borrowing from banks in Armenia. It is authored by two US trained PhDs originally from Armenia but residing in the US. Using the 2004 Integrated Living Standards Measurement Survey conducted by the National Statistical Service of Armenia (Armstat), and in contrast to the study using Mexican data, the authors report that in Armenia "remittance-receiving households ... spend less on the education of their children."

Unlike the Mexican migration data (download from here), the Armenian household survey data is not publicly available. And unfortunately, the IMF authors do not provide any summary statistics on the separate attributes of households with and without remittances. Other than the reported econometric estimates, there is no way to verify or question the validity of the findings. Indeed, it is very difficult to evaluate the intertemporal effects of remittances using cross sectional data, add to this the endogeneity of much that is observed in the data (e.g. housing quality which authors use as proxy for wealth). Also on practical grounds, and in the Armenian context, what does it mean to say that remittance recipients spend less on educating their children? Primary and secondary education is compulsory, private elementary and secondary schools don't exist for the most part, and ... So how are they reducing spending on education (never mind the cross sectional nature of the data and the econometric problems this creates).

As an alternative, I resort to the EBRD Transition in Life Survey (LiTS) 2006 survey data which contains some 1000 Armenian households (check www.aea.am data page to download). Unlike the 2004 household survey, the LiTS 2006 survey identifies the recipients of remittances but not the size of the transfers. Below are sample statistics on each group, restricted to households with children age 6 through 21 -- variable names age3-age12 in the data.

Households with remittances seem to spend more on education; an average of USD 200 per year more than the households not receiving remittances (389 vs 184). They are more likely to be headed by a woman (45 vs 39 percent), more likely to have a college degree, less likely to receive social benefits from the government, and more likely to receive gifts and transfers from others in the country.

I also estimated an OLS regression of the determinants of education expenditures. Consistent with the basic statistics above, households receiving remittances (dummy), spend USD 243 more on education. However, when remittances are the most important source of income, households spend only an additional USD 88 (i.e. 243 - 155). The qualitative results don't change when the observations are weighted, estimated for those reporting education expenditures only, and/or for the entire sample of 1000 observations without age restrictions. Of course this analysis is very simplistic in that it does not control for the endogeneity of remittances or migration, and is plagued with LiTS data limitations. Nevertheless, it would be useful for the IMF study, when revised in the future, to report basic statistics on the households in the 2004 sample and inform the rest of us on the various attributes of households in Armenia.

If you are interested in studying the attributes and behavior of Armenian households, whether you are an economist, a social scientist, and/or a political junkie, you will find the LiT survey very interesting -- in one example it allows you to compare 2006 to 1989. It also allows you to compare households in Armenia to others in all transition economies. Best of all, it is free. But please do keep the pressure on governmental agencies and NGOs to make their survey data available. CRRC is a good role model here.

Is this the best way to provide technical assistance?

2008-02-15T10:29:00.004+04:00

I have been concerned for some time about the lasting effects of technical assistance. USAID, EBRD, among many others provide funding for training in many aspects of governance as well as the transition of the country to a market economy. These agencies, and the donor countries in general, have been quite generous. However, a common feature of most of these programs is that universities are by-passed in this process, both in terms of training faculty as well as funding that is devoted to set up new bureaucracies where the training is to take place.

Take the recent announcement for actuarial training to commence in April. There are no actuaries to speak of in the country. And so it is difficult to imagine how the insurance industry will take off without the skilled labor. As such the country is truly lucky to have USAID fund a new program to train actuaries in the country. Granted that this will be the first time such training is made available, but this begs the question of why this is not taking place in the mathematics, statistics, or even the business schools at the various universities in Yerevan who are desperate for training and funding? What happens when the funding is over? Who trains the next generation? Who undertakes research on future developments in the various underlying markets? Who will write the future textbooks?

Faculty salaries are low by any measure, and textbooks in various subjects of actuarial and management sciences, finance, and economics, among many others, do not exist for the most part. Donors have been very generous, but one would hope that they would take steps to more aggressively engage academia, that is if they wish to leave a lasting legacy.

The Armenian Railway Deal -- more is needed

2008-02-02T23:24:00.000+04:00

Recently a Russian firm acquired the rights to manage the Armenian railroad system. The Railway Gazette provides a good summary of the background leading to this transaction, with more detail on the Armenia Rail Concession web site. The system has experienced serious reduction in service and is in desperate need of funding.

Cargo and passenger travel, in millions

In general, and for a variety of reasons, the government and the public seem uncomfortable with privatizing publicly owned assets. At the same time, the public enterprises seem unable to raise capital. The public-private partnership model, where ownership remains with the government but management is delegated to a second party, is perhaps a good compromise. In addition to the railways, other examples include Zvartnots airport (Argentina) and the water system (France), among others.

It is wonderful to see the government go through the railways deal. But this raises the question of why it is taking so long for the government to embark on such transactions. The slow privatization process since 1991 has run many productive assets to the ground, and landed others in the hand of oligarchs. Add to this the fact that foreign investments in the form of FDI are small relative to the country's needs as well as to that taking place in the neighboring countries. And so let's hope more such transactions take place.

Where are the survey data?

2008-01-15T23:48:00.000+04:00

Almost every study which explores the behavior or attributes of households and businesses in Armenia employs survey data. Virtually all have been funded by international donors. These surveys may provide a window into the preferences of those surveyed with detailed information on the sources of income, expenditures, and demographics in case of households or employment and business activities in case of firms. And if undertaken repeatedly, they may provide a glimpse into how behavior changes over time or how it responds to changes in the economic environment and incentives.

It is important to replicate every study, and challenge every finding, particularly those that may influence policy. Yet researchers, be it in academia or otherwise, with few exceptions, do not have access to such data as most of these surveys are not made available to the public. Armstat has repeatedly refused to release the annual household survey data, and I have yet to see any of the surveys funded by USAID, UNDP, and others in the public domain. In contrast, the annual CPS household survey in the US has its own web page and anyone may download it free of charge. Similarly, household longitudinal panel data such as the PSID are also available. I am not sure that household panel data exist in Armenia!

I have provided a brief description and created links to the various surveys on Armenia on the data page of the Armenian Economic Association. Most are available in STATA format as well as CSV (easy to import into Excel). These include the Word Bank/EBRD survey of the business environment (BEEPS -- some 200 firms in Armenia), and the newly released EBRD household survey (Life in Transition survey for 2006 with 1000 Armenian households).

It is very important that researchers, academics, and the media among many others, be vocal in demanding access to the raw data behind many of the studies. It would be good to know whether anyone has compiled a list of the various surveys, and begin an effort to have them made available to the public.

Web domains registered through 2007

2008-01-11T00:31:00.000+04:00

Updating my post over a year ago, the number of domains registered in Armenia (amnic.net) increased almost by 45 percent in 2007. Granted the numbers are small, but one is hopeful that this healthy growth will continue and even accelerate. The issues and concerns I had raised previously may still apply.

Number of Domains
1999 650
2000 1600
2001 2500
2002 2800
2003 2900
2004 3400
2005 4200
2006 6094
2007 8776

I am not sure who or for what purpose these new domains are put to use. It would be good if any of you can shed light on this.

The Politics of the Dram

2007-12-19T11:33:00.000+04:00

The appreciation of the Dram continues to draw attention. Often this is peppered with accusations by critics of deliberate policy by the government to enrich importers. The fact is that there is little at this stage that the government, or the Central Bank (CBA) more correctly, is able to do to reverse this appreciation.

The central bank has been accumulating foreign exchange reserves, in part as a consequence of "de-dollarization" and in part by intervening (small scale) in the market and acquiring foreign currency (increasing the supply of Drams). Indeed, reserves increased by some USD 200 million in November alone. But at the same time, CBA raised interest rates to curb inflationary pressures a move that may have potentially offset the foreign exchange intervention.

International Reserves, in USD millions
Source: Central Bank

Currency appreciation may benefit consumers, but at the same time it may hurt exporters and endanger the country's competitiveness. Given that little can be done to tackle the currency appreciation, unless we stop the flow of foreign exchange to the country or undermine the confidence in the Dram, does not necessarily mean that we are helpless. Improvements in productivity is one way to tackle this, but this will not happen overnight. On the other hand, the government can improve matters by reforming the Customs agency and improving its governance. Certainly, this may go a long way in reducing the cost of trade. Also tackling market concentration and imperfections may enhance the benefits of a strong Dram to consumers. So why are government critics focusing on the Dram, where the government has little control, and not continuously hammering the regime on the other issues?

One would hope that the media will do a better job in covering matters related to finance and economics. On the other hand, the bloggers have been a major disappointment.

[Statistics on the Dram may be obtained from cba. am, edrc. am, and aea. am]

Real estate prices in 2007 through Q3

2007-12-03T20:20:00.000+04:00

Real estate developments and the pace of construction through 2006 reviewed in previous posts were the top content of interest to visitors to this blog in November. In response to this growing interest, along with that of a media outlet, I have updated the information on real estate prices, as reported through the third quarter of this year.

While prices are likely to continue rising for the rest of the year, the pace observed from transactions over the first nine months of this year again point to rapid appreciation that matches the gains experienced last year. In Yerevan, the price of a squared meter increased by 27 percent, to a weighted average of 249,700 Drams; close to 50 percent when stated in USD (to about $706). However, the appreciation experienced by the various districts is in many ways unlike that of last year. The largest appreciation is now observed in Erebouni which grew near 50 percent, where the price increased from 155,800 to 219,800 Drams per sq. meter. In contrast, prices in Kentron, the city center, grew by only 17 percent, from 377,600 to 440,700, compared to near 30 percent last year. Below is a summary of the prices in Yerevan districts observed over recent years, both in Drams and USD. While not reported here, prices also grew in all regions. But more on this in a future article and after I update the info on aea .am.

What do these numbers mean? Well if you wanted to buy an apartment of 100 sqm (about 1000 sqf), it would have costed you about 44 million Drams, or about USD 124,500 (143,000 at today's exchange rate) in Kentron. You are looking at close to half that in Malatia - Sebastia.

Average price per sq. meter, in Drams

Yerevan Districts.. 2002.. 2003.. 2004.. 2005.. 2006 2007Q1-Q3
Kentron.......... 187772 222765 246500 288900 377600 440700
Arabkir.......... 114670 161300 193900 235300 298200 354500
Kanaker-Zeitoun... 68802. 98158 119200 143700 186100 258200
Nor - Nork........ 57335. 78538 101700 135100 171100 222300
Avan.............. 61635. 76396. 97000 122800 156200 210700
Erebouni.......... 55902. 83920. 96500 118800 155800 219800
Shengavit......... 61635. 83052 110600 143900 182700 235000
Davidashen........ 63069. 97116 120900 147100 189400 241700
Ajapniak.......... 57335. 84557 109500 138400 171800 226900
Malatia-Sebastia.. 55902. 81779 108600 134500 166800 214400
Nubarashen........ 28668. 36693. 43000. 69600 108000 122300
Yerevan*................ 100415 122500 152500 196700 249700

Stated in USD
Yerevan Districts.. 2002 2003 2004 2005 2006 2007Q1-Q3
Kentron............. 328. 385. 462. 631. 908 1245
Arabkir............. 200. 279. 363. 514. 717 1002
Kanaker-Zeitoun..... 120. 170. 223. 314. 447. 730
Nor - Nork.......... 100. 136. 191. 295. 411. 628
Avan................ 108. 132. 182. 268. 375. 595
Erebouni............. 98. 145. 181. 260. 374. 621
Shengavit........... 108. 144. 207. 314. 439. 664
Davidashen.......... 110. 168. 227. 321. 455. 683
Ajapniak............ 100. 146. 205. 302. 413. 641
Malatia-Sebastia..... 98. 141. 204. 294. 401. 606
Nubarashen........... 50.. 63.. 81. 152. 260. 346
Yerevan*................. 174. 230. 333. 473. 706
* without New Marash

Drams per USD....... 573. 579. 533. 458. 416. 354

Source: Cadastre Commission with some adjustments as reported on aea and my own.

One final word. I am very impressed by the timeliness and quantity of information (prices and number of transactions) reported by the Cadastre Commission on its updated website. It is worth a visit -- you need Armenian fonts (with few exceptions). As in my previous postings, it would be good to see more research in this area.

Armenia's Competitiveness

2007-11-23T23:02:00.000+04:00

Competitiveness is not necessarily an indicator for wealth, power and/or economic performance. There is much more to it. In addition to macro-economic evaluation of the domestic economy it also involves things like government efficiency (extent to which government policies are conducive to competitiveness), business efficiency (extent to which enterprises are performing in an innovative, profitable and reasonable manner) and infrastructure (extent to which basic, technological, scientific and human resources meet the needs of business). Basically, competitiveness is the ability of a nation to create and maintain an environment which sustains the competitiveness of enterprises.

Let's start with a glance at economic performance of Armenia. Given the size of the economy and the economic blockade by two neighbors, Armenia has been performing very well in terms of economic growth. But where did this growth come from? It was not a result of export-led competitiveness, as the exports (excluding raw commodities) have been stagnant for several years now. There is not much competition in the domestic economy to be translated to competitiveness of domestic firms on the world markets. And given that the international investments flow to the areas where economic resources are used more efficiently, and Armenia hasn't seen much of it, we can safely assume that Armenia has failed to use its resources (physical, human or any other) efficiently.

Let's now turn to government and business efficiency. Apart from creating competitive environment for enterprises, government intervention in business activities should be minimal. Is that true in Armenia? Of course, not. Many government officials have a direct interest in the business activities of enterprises owned by them. On the other hand, this also hinders efficiency and flexibility (ability to adapt to changes in competitive environment) of the enterprises, as managerial attributes of CEOs, together with the attitude of the workforce, are crucial for the competitiveness of the enterprise. Efficiency of the enterprises is also enhanced by a well-developed and internationally integrated financial sector, as well as a skilled labor force (do Armenian universities prepare qualified specialists that are actually in great demand in the labor market?).

More questions arise in the last category - infrastructure efficiency. Is there a well-developed scientific and technological infrastructure? In other words, do businesses invest in innovative technologies and do scientific inventions find applications in business environment? Do we have an adequate and accessible educational resources that help develop a knowledge-driven economy?

There are many unanswered questions when one tries to analyze the overall competitiveness of Armenia's economy. I am curious to hear your views and of any ongoing research.

Efficiency and competitiveness of banking system

2007-11-21T22:20:00.000+04:00

A recent working paper by two IMF economists concludes "that there is a large potential to increase cost efficiency and competition in the banking system."

The paper highlights that Armenia has lagged in financial intermediation and that interest rate spreads (i.e. what banks charge borrowers and what they pay depositors) have remained high compared to other transition economies. It employs quarterly panel data obtained from the financial reports of the 21 banks of Armenia for the period 2002-2006Q3 to explore the determinants of interest rate spreads and margins.

The authors also report other findings on the effects of bank size, market concentration, and foreign ownership among others. Equally important, they provide a good overview of the state of banking in the country.

It would be good to see others replicate this study with more recent data, perhaps using annual rather than the quarterly data employed by the authors, as well as extend the analyses to address the causes of the retardation of financial intermediation.

The Turkish Inquisition, 2007

2007-11-12T21:47:00.000+04:00

Almost 65 years to the date, on November 11, 1942, Turkey enacted the most draconian tax ever envisaged. The Varlik Vergisi, the wealth tax, which in effect confiscated the wealth of Jews and Christian Armenians, Assyrians, and Greeks primarily in Istanbul, and sent many male members of these minorities to labor camps in the east of the country. Figuring the religious and ethnic origin of this group was not always a simple task as all citizens were forced to adopt Turkish-sounding surnames in 1935 and because Turks have come to resemble more the Caucasians they conquered and less their Asiatic ancestors from central Asia.

Faik Okte, the administrator of this tax at the Turkish Ministry of Finance wrote a book on the subject documenting all of its features and naming its victims. The book has been translated from the Turkish "Varlik Vergisi Faciasi" into English and is entitled "The Tragedy of the Turkish Capital Tax," by Geoffrey Cox, Croom Helm, 1987.

Exactly 65 years later, history repeats itself with the inquisition extending its reach beyond the borders of Turkey, and that of its citizens. This time the government of Turkey seems to trace the ethnic origin of a partner in a Kazakhstan-based consortium planning to invest $2.1 billion in a privatization project in Turkey, and may have rejected its bid because of the partner's Armenian roots; it accepts a lower bid of $2.04 billion for a loss of $60 million to the taxpayers of Turkey.

As reported to the United States Securities and Exchange Commission on September 6, 2007, Form 424B5 page S-17, the government of Turkey announced "that the consortium of TransCentralAsia Petrochemical Holding made the highest bid of $2.1 billion for 51% of the shares of Petkim." For some unknown reason, the recent press reports a figure of $2.05 billion! On November 12, 2007, the anniversary when the Varlik Vergisi went into effect, the New Anatolian reported that "Turkey's Competition Board has approved the sale of state-run petrochemicals company Petkim to the second highest bidder ... to consortium of the Azerbaijani oil company Socar, Turkey's Turcas and Saudi-based Injaz Projects..." There were 18 prequalifying bids, including European petrochemicals producers INEOS and Basell.

Here is the way information is reported and analyzed by a source in Azerbaijan, the other Turkic state:

The first bidder Kazakh-based Transcentral Asia Petrochemical Holding is reported to be owned by Kazakh national Alexander Matskevich who chairs Eurasian Jews Confederation. He sits in the Forbes List of World’s Richest People.
In the bidding he had been bankrolled by Troika Dialog (commonly referred to as “Troika”), one of the largest investment groups in Russia.
Troika is controlled by Armenian national Ruben Vardanian who owns a 65% stake...

Why the interest in the Jewish or Armenian roots, or that of any other group? Should Israel not allow the imports of Ford Motor products because its former CEO, Nasser of Australia, has Arab roots? Should Arab countries not deal with Citibank because its Chairman of the Board is Robert Rubin, a Jewish American? Indeed, the largest shareholder of Citibank, Prince Alwaleed of Saudi Arabia, a country with no relations with Israel, expressed his trust in the leadership of Rubin and others at Citibank earlier this month. Is it possible that Turkey, with its values and business practices, is perhaps not much more worthy of NATO membership and joining the EU than is Saudi Arabia?

It has been well over five centuries since the Spanish Inquisition. One would think we have come a long way since.

Trade logistics

2007-11-07T11:11:00.000+04:00

The Trade Logistics and Facilitation department of the World Bank recently released a new index designed to measure the logistics performance of 150 countries. This measure, the Logistics Performance Index (LPI), consists of 7 key dimensions, and allows for the ranking of countries.

Here is how Armenia is ranked:
1. Efficiency and effectiveness of the clearance process by Customs and other border control agencies – Rank: 118
2. Quality of Transport and IT infrastructure for logistics – Rank: 143
3. Ease and affordability of arranging shipments – Rank: 140
4. Competence in the local logistics industry (e.g., transport operators, customs brokers) – Rank: 121
5. Ability to track and trace shipments – Rank: 113
6. Domestic logistics costs (e.g., local transportation, terminal handling, warehousing) – Rank: 8
7. Timeliness of shipments in reaching destination – Rank: 122
Overall rank: 131

The index reflects the perception of trading partners as well as the logistics environment in the country, and as such should provide a reliable picture of the situation in Armenia. Other than the domestic logistics cost, the country ranks way at the bottom. The performance of Customs is not surprising, but much of the rest was unexpected. While it is easy to quibble over the accuracy of the index (e.g. item related to infrastructure can’t be right), it suggests that much work lay ahead. For the curious reader, the overall rank for war torn Liberia is 105, Zimbabwe 114, Somalia 127, and 130 for Nepal. Belarus is ranked 74, Iran 78, Russia 99, and Azerbaijan 111. Georgia is not ranked, and, again, Armenia is ranked 131.

Trade relations

2007-10-21T07:48:00.001+05:00

I have repeatedly read over and over that Armenia has close economic ties with Russia. Yet upon close examination of trends in the pattern of trade, I find the actual volume of trade to be unimpressive, and particularly unremarkable in the case of exports where Germany and the Netherlands are actually the largest trading partners of Armenia (see export and import statistics).

Armenia's imports from Russia were $268.5 and 364.8 million in 2005 and 2006, respectively. These are well below Azerbaijan's imports of $717.2 and 1,181.6 million over the two years; Georgia's imports from Russia were $383.4 million in 2005.

More remarkably, Armenia's imports are a mere fraction of Turkey's imports from Russia; $13.9 billion was reported for 2006, or about 38 times that of Armenia. Equally impressive is the rapid growth in Turkey's imports over the past decade when it was about $2 billion in 1997 (oecd.org), making Russia Turkey's largest trading partner.

As with Russia, Armenia imports "little" from Iran; a total of $133 million is reported for 2006. In contrast, Turkey imported $4.5 billion from Iran, or about 34 times that of Armenia. Also, and unlike that of the latter, Turkey's imports have grown rapidly over the past decade (oecd.org).

Armenia's trade with Russia, as well as Iran, pales in comparison to that of its neighbors. It is not clear why so many hold the opposite view. But more importantly, why trade with Russia (and Iran) is so anemic and remains stagnant particularly in the case of Iran?

--------

November 6, 2008 -- I should have added the following to further illustrate the weak trade links with Russia whereby its share of Armenia's trade turnover declined from 33 percent in the early 1990s down to 15 percent.

Recent changes in taxing business profits

2007-10-18T23:21:00.000+05:00

Last week, the parliament tackled a number of proposed tax law changes including a provision related to Armenian firms incorporated in tax havens. The proposed amendments are briefly "described" in the parliament briefing on October 1, but the text is not very helpful. I was not able to locate any of the specific details on the various proposals presented and discussed at the parliament, which eventually adopted the proposed changes on October 11. In addition, I could not find anything on the ministry of finance and tax services websites. Also, the information reported in the press is very confusing and provides little meaningful information, which, unless I read incorrectly, suggest that the profit of Armenian firms incorporated offshore will be taxed at 10 percent as of July 2008; the general profit tax rate is 20 percent.

Governments levy taxes to fund their expenditures. In general, their goal is to ensure that taxpayers comply with the tax laws of the land and pay their assessed tax liabilities. At times, they extend preferential treatment to particular groups or specific industries to encourage an expansion in economic activities. Taxpayers, of course, are not passive economic agents. Putting aside tax cheats, they are able and willing to legally exploit tax provisions to minimize their tax bills. While each tax law provision may have a specific predictable consequence, when combined they may have unintended consequences that may work to the advantage of taxpayers.

Consider the case of foreign businesses investing in Armenia. They are accorded tax holidays whereby firms investing a minimum of 500 million Drams (1 USD=333 Drams) benefit from 100 percent forgiveness from the profit tax in 2008 and 2009; 2007 is the last year when new investments qualify for tax holidays in Armenia. The benefit of the tax holiday is not available to domestic firms. But this does not mean that a local firm cannot avail itself to this benefit. A start up firm may incorporate itself in a tax haven country where no or very low taxes prevail, and taxpayers' privacy is respected, and invest in Armenia as a foreign entity. With some planning, an existing firm may reincorporate itself as well. I believe, there are no tax consequences to this reincorporation (zero capital gains taxes). Once incorporated offshore, and in addition to the tax holiday on investments in Armenia, the parent company may be able to exploit other provisions in the tax laws. An example is the case of interest allocations whereby the local firm is able to claim interest expenses on loans from the parent company (not sure what type if any earnings stripping rules apply); before incorporating, such deductions may not exist as there would be one local company (inter-company loans).

Such tax motivated incorporations and inversions have been around for some time. Again, and as eluded to above, in an inversion, a firm reincorporates itself outside its home country, typically in a country with low or no taxes. The reincorporation, notwithstanding its tax implications, has little effect on how the firm is operated. (see here for a description and tax implications of inversions).

I continue to be amazed at the swiftness with which proposed changes to tax laws get adopted. Little information about the revenue effect and the distributional implications of the changes or on the number of affected taxpayers are provided. Also, there is a general lack of public discussions which may help flush out problems in the proposed legislation.

Anyway, returning to the inversion issue, taxing capital in a global setting is very difficult, and requires considerable expertise and careful design. From the little I have read, it is not clear how the inversion problem will be solved. And, perhaps more importantly, the adopted changes may have the reverse effect in that they may encourage inversions where the profits of firms incorporated offshore will be subject to a tax rate of 10 rather than 20 percent.

Again, it is not clear what if any effect the proposed changes will have. But I really wish for the process to be slowed down a bit and modified so as to allow for greater discussion and feedback from the public. I am confident that every foreign firm operating in Armenia with shares traded on a stock exchange in the west carries a warning on its financial reports related to taxation contingencies. HSBC bank, for instance, reports in its 2006 financial statement (arm p. 40, eng p.34) that "The taxation system in the Republic of Armenia is relatively immature and is characterised by numerous taxes and frequently changing legislation which is often unclear, contradictory, and subject to interpretation. Often, differing interpretations exist among numerous taxation authorities. ..."

I am not sure if anyone is writing on this subject, and so your comments and corrections are welcome.

Rising food prices

2007-10-06T04:51:00.000+05:00

The complaints against the recent rise in food prices don't seem to go away. Often these are peppered with accusations of improper behavior by government officials or collusion among producers and suppliers.

What the media seems to overlook is that the increase in food prices is a global phenomenon. There is an unprecedented increase in demand fueled by increased production of biofuels as well as the rising prosperity of China. Add to this the higher oil price, which drive up production cost, as well bad weather in places like Australia and China.

For example, wheat prices have nearly doubled over the past year. According to the US Department of the Agriculture, US farmers received about USD 7.16 per bushel in September 2007 compared to 3.52 at the beginning of 2006 (36.743 bushels make one metric ton). Add to this the cost of placing the grain at the loading spout, and the price may go up to USD 9 and 10 per bushel before including the buyers ocean freight cost (see US Wheat Associates).

Indeed, referring to the poor nations, Alexander Sarris, director, commodities and trade, of the Rome-based Food and Agriculture Organization (FAO), as a keynote speaker on October 4, 2007, at the Commodities Week Europe 2007 conference in London, said "We are squeezed between increasing oil prices and food price hikes". The government in the short run protected (subsidized) its citizens from higher prices of imported Russian natural gas. But within a year, and depending on the value of the Dram, the people may be faced with the prospect of both higher food and energy prices.

While the finger pointing at government officials by the media may not be totally appropriate given the global nature of the price trend, the implications of this trend particularly on the poor are critically important and should be highlighted. Is anyone studying the impact of this on household budgets? What are its inflationary implications, and would the central bank raise interest rates and dampen economic activity? Also, how much of the appreciation of the Dram has softened the impact of higher global food prices?

[Note: The pattern of retail prices from 2002 through 2007Q2 is not bad at all. But data for the recent quarter are not available yet. See here]

Is the trade deficit overstated?

2007-09-03T12:35:00.000+05:00

Armenia's trade deficit is reported to widen over the past few years. For January through July of 2007, the volume of exports and imports stood at USD 631.1 and 1631.8 million, respectively, for a deficit of one billion.

Reported imports have consistently exceeded exports. This should not be surprising given the stage of development of the country and the heavy reliance on imported raw materials and intermediate goods. Reported exports typically include diamonds, metals and mining products, food, and alcoholic beverages.

Perhaps it should not be surprising that the country experiences trade deficits. However, this is not to say that the reported volume of exports and the concomitant trade deficit figures should be accepted at face value. In particular one needs to address how consumption by non-residents visiting the country is treated. Exports are generally defined as purchases of domestic goods by foreigners. It should not matter whether these goods are shipped outside the country or foreigners acquire them while visiting Armenia. With the increasing number of tourists visiting the country -- some 400,000 lately -- this treatment takes on an increasing importance. Think of the hotels, transportation, and the rest of the hospitality industry among other services!

If my thinking is correct, consumption by non-residents is treated as part of total private consumption of residents and is not reflected in the export figures. Of course, the computation of GDP is not affected regardless which treatment is applied. But if this treatment is correct, which I assume is the convention employed currently, then the trade deficit figures are overstated. If true, and besides getting the figures straightened out, this can have interesting implications. For instance, could this be another reason why the Dram continues its upward march? Is the appreciating Dram hurting the country's competitiveness, or is it just the outcome of this additional source of exports?

It will be good to hear your thoughts on this. Also, further confirmation of the treatment of purchases by foreigners would be appreciated. I understand the difficulty of quantifying the volume of purchases by non-residents.

Why so few study abroad?

2007-04-15T23:05:00.000+05:00

With looming application deadlines, and admission decisions in some countries, one wonders how many college or graduate school bound students have applied to study abroad. This has implications for capacity building in the country, but perhaps even more important to the individual applicant is the prospect of tremendous personal gain from earning a foreign degree.

The number of Armenian students studying abroad has been growing over the years but remains well under 3000. According to statistics reported by UNESCO, 2762 students were enrolled in foreign institutions of higher learning in 2004. Of these 1239 were hosted by Russia, 412 by the US, 371 by Germany, 290 by France, and the remaining students by mostly European countries. Depending on the data source, this represents about 3-6 percent of enrollments in the country. Of the 412 enrollments in the US, 112 were at the undergraduate level (US Institute of Higher Education). Given the fact that education, in particular graduate education, is mostly free, why don't we see more enrollments in the west? What explains this trend?

A similar pattern is also observed in Georgia, except for the larger number of enrollments in Germany, and in Azerbaijan, except for the enrollments in Turkey. So there is some sort of a regional pattern, but what is driving this pattern of behavior? Language skills should be ruled out given the dominance of Chinese students; they score high in math but do not perform as well in English. Students from Turkey are quite visible as well. Could it be lack of information? I kind of doubt this as well.

..................... Country of Origin, 2004 ....................
Host Country Armenia Azerbaijan Georgia China Israel Turkey Albania
Russia...... ...1239 ..... 1027 ...1357 ...na ....na ....na .....na
US ......... ....412 .......238 ....373 87943 ..3474 .11398 ....916
Germany .... ....371 .......311 ...3000 25284 ..1116 .27582 ....625
France ..... ....290 .......171 ....275 11514 ...343 ..2273 ....369
Belgium .... .....42 .........8 .....22 .1496 ....56 ...292 .....68
Italy ...... .....38 .........7 .....26 ..276 ...923 ...182 ...8494
Turkey...... ....... ......1428 ....143 ..107 ....21 ...... ....591
UK ......... .....36 ........87 .....80 47738 ..1300 ..1960 ....188

It will be good to hear your views on why enrollments continue to be so low, and why so many opportunities are overlooked.

[I have posted the number of the enrollments in Armenia on aea.am. But these are quite different from those reported by armstat. Any help in reconciling the two sets of data is greatly appreciated.]

The Growing Cash in Circulation

2007-04-04T01:01:00.000+05:00

The amount of Drams in circulation in Armenia grew by some 46 percent in 2006, from 155 to 227 billion, repeating the growth pace of 2005 (also see my October 2006 post). Most noteworthy, the 50000 Dram note (about USD 125) experienced the fastest growth. It is almost ten times the amount in circulation in 2005, and grew from about one percent of the Drams in circulation to 7 percent.

Millions of Drams outside the Central Bank
Nomination.. 2001 .2002 .2003 ..2004 ..2005 ..2006
10000 drams...... ..... .7295 .25221 .42980 .79443
20000 drams 12351 24155 23042 .21017 .40196 .55515
50000 drams.. 780 .1607 .1386 ...945 ..1612 .15717
......total 66693 92089 96838 105534 155275 226841

Drams per USD 555 ..573 ..579 ...533 ...458 ...416

The back to back growth in currency in circulation is phenomenal and may have significant implications for economic activity and its measurement. I am also very intrigued by the spike in the circulation of the 50000 Dram note. Do we know of any on going research on the causes and consequences of the observed trend?

Travel Patterns

2007-03-29T22:31:00.000+05:00

2006 is the first year since the country's independence when more people arrived by air than departed. More specifically, 586,800 individuals arrived in 2006, compared to 585,300 that left, as reported by the Migration Agency. In contrast, 636,900 arrived in 1992, which is 228,600 short of the number of those who left.

Number of individuals arriving by air (in black)
and the difference between arrivals and departures (in red), 1989-2006.

Travel by land also exhibited a similar positive reversal in the trend of arrivals and departures. In 2000, departures exceeded arrivals by some 19,000. By 2006, this was reversed, and arrivals exceeded departures by about 21,000. Most if not all of this takes place through Georgia to the north. A number of factors may explain this emerging pattern. One of the more interesting potential causes of this surge is that perhaps Georgia is being rewarded for abolishing its corrupt traffic police. It is well known that more and more Armenian tourists travel to vacation in Georgia, an unlikely fete before the crackdown on corruption in that country. The travel numbers in 2005 and 2006 are quite telling!

Arrivals and Departures by Land
Year Arrived Left Difference
2000 100805 119331 -18526
2001 120750 138891 -18141
2002 143997 136458.. 7539
2003 147244 132488. 14756
2004 169432 155565. 13867
2005 257652 236261. 21391
2006 375124 354405. 20719

For a population of 3 million, the number of arrivals and departures to the country is quite sizable and may have significant implications for the economy. Is anyone studying the trends in travel and recent migration patterns? What kind of infrastructure is being put in place to accommodate the surge in travel? Is out migration reversed? I am sure there are many other questions.

Real Estate, Up Again in 2006

2007-03-26T03:34:00.001+05:00

I reported in my last post on the rapid growth in construction activity which stood at 584.6 billion Drams in 2006, or 35 percent higher than the 435.1 billion level in 2005. Stated in USD, activity grew from 0.95 to 1.41 billion, or an impressive 47 percent.

2006 was also a banner year for the related real estate market. Real estate prices, as reported on sales transactions by the Cadastre commission, increased throughout Yerevan over the past five years. In Kentron, the city center, apartment prices almost doubled from 187772 Drams per square meter in 2002 to 377600 in 2006. With the appreciating Dram, the increase is more impressive when stated in US dollars as the re-stated price almost tripled from USD 328 to 908 in 2006. The greatest appreciation rate was observed in Nubarashen where the price jumped from 28668 to 108000, or USD 50 to 260.

In 2006, prices appreciated by about 30 percent in the most districts of Yerevan. An exception is the Nubarashen district where prices increased by 55 percent. Stated in USD, prices appreciated by an average of 40 percent; 70 percent in Nubarashen.

Average price per sq. meter, in Drams
Yerevan Districts.. 2002.. 2003.. 2004.. 2005.. 2006
Kentron.......... 187772 222765 246500 288900 377600
Arabkir.......... 114670 161300 193900 235300 298200
Kanaker-Zeitoun... 68802. 98158 119200 143700 186100
Nor - Nork........ 57335. 78538 101700 135100 171100
Avan.............. 61635. 76396. 97000 122800 156200
Erebouni.......... 55902. 83920. 96500 118800 155800
Shengavit......... 61635. 83052 110600 143900 182700
Davidashen........ 63069. 97116 120900 147100 189400
Ajapniak.......... 57335. 84557 109500 138400 171800
Malatia-Sebastia.. 55902. 81779 108600 134500 166800
Nubarashen........ 28668. 36693. 43000. 69600 108000

Drams per USD.... 573.35 578.76 533.45 457.70 416.05

Prices increased in all the regions as well. Transactions in the city of Abovian, in the Kotayk region, fetched the highest price of 98100 (USD 236) per sqm, and the city of Shamlugh, in the region of Lori, fetched the lowest of 2800 Drams (USD 7).

What explains this price appreciation? Demographics may explain some of the increase in demand for housing. With children reaching adulthood, combined with the growing prosperity in recent years, they may seek their own housing arrangements. Also, the trend in the net outflow of the population has reversed itself, and now the number of arrivals in the country exceeds that of departures, but only by about 20,000. Some in the country may acquire second residences, again reflecting the growing prosperity. Also I am sure that there are a number of speculators as well.

So, who is buying all these properties? Equally important, who is selling them? Do we know of any ongoing research on the housing market? Also the price appreciation must have dramatically increased the equity in the homes of most households. Are we seeing any traces of this wealth effect in the economy?

Construction activity and future growth

2007-03-14T13:33:00.000+04:00

Armenia's economy has grown at double digit rates over the past five years. Construction activity accounted for much of the recent growth in the economy (see recent post). Changes in the underlying trend in construction activity and its composition over the past decade, however, may foretell further growth and expansion in the economy.

Construction activity grew from 33 billion Drams in 1995 to 585 billion in 2006, or from USD 60 million to about 1.4 billion. Activity in the manufacturing and electric and gas utilities grew from 4.6 billion Drams to 92 billion in 2006. Even more impressive, activity in the transportation and communication sectors grew from a mere one billion (i.e. USD 2 million) to 63 billion.

..1995 ...2000 ...2006
32,829 100,990 584,608 Total Construction, in millions of Drams
.4,646 .10,488 .92,147 Manufacturing & Utilities
.1,091 .36,606 .63,392 Transportation & Communications
14,780 .21,098 306,030 Housing/Real Estate

Impressive gains are also observed in the housing and commercial real estate sectors. Construction activity grew from 15 billion in 1995 to 306 billion in 2006. These figures in part may reflect a wealth effect as more and more new and expansive buildings are built and older homes are renovated. Also these activities expand the volume of rental property and office space available in the market place.

Gone are the days when humanitarian aid accounted for 10 to almost 20 percent of construction activity. Indeed, such source of funding accounted for less than 1 percent of the total in 2006, down from close to 20 percent (45 billion Drams or slightly less than USD 100 million) in 2003. Also, it is gratifying to see an expanded construction activity in the education sector, which increased from a mere 360 million Drams (less than USD one million) in 1995 to 10.7 billion (about USD 25 million) in 2006.

These activities are bound to expand the country's productive capacity and add to future growth and expanded employment opportunities. Do we know of any studies on how labor markets are impacted by this? Also, has anyone explored the effects on future growth?

[March 15 -- I have had some difficulty in posting the detailed construction data for 1995-2006 on the aea.am site. Perhaps I'll be able to do so within the next day or two, and the link above will be more useful then]

The Changing Face of Agriculture

2007-03-05T11:22:00.000+04:00

There are about 320,000 farms in Armenia, a number that has remained roughly steady over the past decade. Given a population of about 3 million, this is quite sizable and reflects the privatization policy of the early 1990s whereby farms were distributed to the workers and members of the various state cooperatives and collective farms.

The agricultural sector has made significant gains in output over the past decade, virtually in all sub sectors (see here). Grain output as well as that of fruits, vegetables, and eggs grew by over 50 percent between 1995 and 2005. A similar pattern is also observed for available poultry and pigs. Notwithstanding the advances made, the agricultural sector is undergoing serious changes in organizational (or rather ownership) structure.

Local businesses have been making steady inroads into this sector, as suggested by the statistics reported in the various publications of Armstat. For the most part, these commercial enterprises account for less than 5 percent of the output. But they do account for 12 percent of the potato and 20 percent of the grain output. In the case of poultry, however, they account for about 40 percent of the 5 million chicken available to be brought to market. Similarly, they account for about 45 percent of the eggs produced.

The share of Commercial Organizations in Poultry Output

Undoubtedly the commercialization of the agriculture sector has great benefits. [Not sure how many commercial entities are engaged in this sector, but I assume ownership is highly concentrated.] It is potentially more efficient and cost effective to cultivate the land by commercial entities than by the farmers and villagers each with their own small plots. But is there a risk that the latter will be (are already) displaced, thereby exacerbating rural poverty? Are the commercial entities truly more productive? Is anyone writing on the subject?

[March 10: Graph is replaced -- it disappeared again]

On Dual Citizenship

2007-03-01T08:40:00.000+04:00

On the 26th of February, 2007, the Parliament approved the bill on dual citizenship. This belated legislation is some 15 years in the making since Armenia’s independence in late 1991, and long overdue. This change, of course, is not enacted without any opposition. Indeed, opponents of this legislation in the ruling coalition and some in the opposition have argued that granting dual citizenship to the Diaspora would increase corruption [sic], and lead to a loss in the country's sovereignty [sic]. These are virtually the very same arguments underlying the policy advanced in the early 1990s, one that is in many ways responsible for preempting the integration of the Diaspora into the fabric of Armenian society.

Contrast this with the Israeli experience. Under the Law of Return, Jews are granted immediate citizenship in Israel. Often they are provided with subsidized housing, language training, and many other benefits upon their arrival. On the eve of its independence in 1948, its population stood at 805,000. This increased to 2.15 million by 1960. Approximately 65 percent of the increase in the population during this period can be attributed to the in migration of 869,400 newcomers (mostly from middle eastern countries). After the breakup of the Soviet Union, about a million arrived on its shores. Few if any spoke Hebrew and, as Soviets, had little exposure to Israel's western ways of business and commerce. Yet, they were all welcome and fully absorbed.

Israeli Population and Immigration (in 1000s)
Source: here, Table 2; also a good summary of Israel's economic history.

Returning to Armenia, what I find truly sad is not the restrictions on voting as much as those related to the economics. Almost immediately after its independence, the government made the integration of the Diaspora into Armenia’s economy an impossible task. Diaspora Armenians, for instance, were prohibited from land ownership, a prohibition that continues to date (the introduction of a special 10-year passport relaxes this constraint). They were also discouraged by sheer intimidation. A member of the Diaspora, and a "supporter" of the then ruling regime, wrote in 1993 that "… Diaspora Armenians who (motivated by patriotism or profit) have tried to start businesses or engage in joint ventures have soon found out that they are being ripped off. But the saddest realization comes when they learn that their corrupt partners enjoy protection from higher echelons in the government ..." (see here, page 38)

In the name of national security and sovereignty, policymakers have inflicted serious damage to the country and exacerbated the pains of its transition to a market economy. As explained in a recent article in the Armenian Law Review, it takes little effort to make the legislative changes necessary to make dual citizenship a reality. However, the final chapter may not be written yet, as little is known how the enacted changes (once signed by the President) will be actually administered.

More on the economic effects in a future posting. These would have been much larger if we were able to turn the clock back to 1991 with the country's institutions of higher education and productive capacity intact. In the mean time, does any one know of a link to the legislative bill that the parliament passed (I checked the parliament's website)? What I read in the press is confusing!

[March 2 -- Table is replaced. I'll replace with plain text if it disappears again.]

Baku, February 19, 1905

2007-02-19T20:27:00.001+04:00

Entrepreneurs are often valued for their creativity and contribution to economic growth and prosperity. But at times, and in some countries, minority entrepreneurs pay a very high price for their success. Examples of this include the attacks on Chinese owned shops and businesses in Indonesia , the fire bombings of fishing boats and homes of Vietnamese refugees in Texas, and the treatment of Jews throughout the middle ages.

The contribution of Armenians to the economic development of Baku well over a century ago is another build-and-destroy chapter in history, albeit perhaps an extreme example, where economic success is met with a massive violent reaction. As told by Luigi Villari, an Italian historian and diplomat, who travelled throughout the Caucasus region in 1905 (Fire and Sword in the Caucasus, London, T. F. Unwin, 1906), "... To the Armenians above all is the development of Baku due, for they were the first to work the oil-fields on a large scale and on modern lines; they perform a large part of the skilled labour, and among them most of the managers, engineers, as well as many capitalists, are to be found." (page 187).

The Armenians began to arrive in Baku in the late 18th century as their ancestral lands were being divided between the Persian and Ottoman Empires. Their numbers increased with the rush to develop the oil industry after the control of Baku changed hands from Persia to Tsarist Russia. The first refinery was founded by Melikoff (Melikian) in 1863. Notable Armenian firms included Mantasheff, the Caspian Co., the Moscow and Caucasian Co., and Aramazd who competed head on with the Nobel Brothers and the Rothschild's, as well as Russian, British, and Dutch firms. (page 185-6)

By 1905 Armenians accounted for about a third of the the oil industry. They also accounted for 25,000 of the population; there were 74,000 Russians, 56,000 Tartars (this is what today's Azerbaijanis were called then), 18,000 Persians, plus about 20,000 other nationalities. (page 186) Many of the buildings they commissioned are present in today's Baku, with the church on the fashionable Fountain Square being the most visible.

February 19, 1905, was the date that much of the tremendous wealth and infrastructure that the Armenian community had contributed to Baku came under severe attack by the Tartars (Azerbaijanis). The oil facilities were set ablaze along with homes in the Armenian quarter, as well as a number of the wealthiest Armenians were killed (e.g., Adamoff, Lalaieff -- page 195).

With impunity, the Tartars committed other pogroms in Nakhichevan, Shusha (Shushi), Elizavetpol (Ganja), among others. How were the Tartars able to commit these pogroms and not risk the intervention of the Russian military or incur the wrath of the Cossacks?

Tsarist Russia's policy towards Armenians may explain quite a bit. In the 1880's the Russians suppressed all 500 Armenian schools in the Caucasus. (page 152-3). In an another example, in 1894, Russia protected Turkey from western interference during the Hamidian massacres where over 100,000 Armenians were killed. It feared an autonomous Armenia in Turkey would lead to similar outcome in Russian or Eastern Armenia (page 154). Indeed, and according to Villari (page 154) Prince Lobanoff is reported to have said, "Nous voulons l’Arménie sans les Arméniens," i.e. Russia desires Armenia without the Armenians.

The Russian government weeded out Armenians from public service (page 155). In addition, in 1903, all Armenian church property was confiscated, including Etchmiadzin the seat of the Holy See -- the Armenian Pope (page 156). Prince Golytzin is reported to have said "In a short time there will be no Armenians left in the Caucasus, save a few specimens for the museum." (page (157) It should come as no surprise that the Governor of Baku, Georgian Prince Nakashidze, was seen "openly encouraging the Tartars" (page 195). Indeed, Russia favored the Tartars (Azerbaijanis) who represented the only element that could be relied upon in the Caucasus (pages 170 and 158).

In Villari's words “... In the Caucasus it is popularly said that it takes ten Jews to cheat an Armenian, just as in England it is said that it takes many Jews to cheat a Scotsman.” (page 163) Other authors have used the less loaded term "outwit." I suspect these racial overtones have set deep roots in the Caucasus and the region!

Villari's book is an excellent source on the economic contribution of Armenians to Baku and Tiflis (Tbilisi). It contains beautiful pictures of Georgia, the destruction in Baku, and very sad and disturbing pictures taken in Nakhichevan.

Armenian church in Baku -- picture (L) taken in 1988. More recent picture (R) showing crosses above front door and on top of steeple missing.

Why So Little Economics Research?

2007-02-15T03:23:00.000+04:00

Browsing through Econlit in EBSCO Host databases, I could not find a single article written by an author affiliated with an Armenian Institution and published in the top 159 economics journals ranked in a study funded by the European Economic Association.

How do we explain this (other than the pains of transition)? How much of this can be explained by the lack of training, adequate tools (software and hardware), and access to data and research materials? Are there any institutional impediments to doing research? And most importantly, how do we reverse it. It will be good to hear from those of you in the field and face similar experiences.

This is not a trivial matter. Publications are critical in ranking institutions, and by proxy the quality of education. These send critical signals to potential employers and grants makers. In addition, research and publications play an important role in improving the quality of debate and discourse on public policy matters. These potentially have a civilizing effect that is sorely missed in the society.

Of course there are signs of life. For example, I was able to identify 9 papers published in recent years in journals that are unranked or weakly related to economics.

Four were written by authors affiliated with the central bank (3) and UNDP (1) and published in a special issue:

Impact of Regulated Price Adjustments on Price Variability in a Very Low Inflation Transition Economy: Case of Armenia, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 17-39.
The Measurement of Co-circulation of Currencies and Dollarization in the Republic of Armenia, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 41-65.
The Evolution of Competition in Banking in a Transition Economy: An Application of the Panzar-Rosse Model to Armenia, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 67-82.
Core Inflation in a Small Transition Country: Choice of Optimal Measures, European Journal of Comparative Economics, Spring 2005, v. 2, iss. 1, pp. 83-110

Three were written by authors affiliated with the American University (2 non-Armenian):

Completing Post-earthquake Replacement Housing in Rural Armenia: Did It Induce Further Investment? Housing Studies, January 2006, v. 21, iss. 1, pp. 97-112.
Voucher-Financed Privatization: Lessons from the Armenian Experience, Global Business and Economics Review, December 2004, v. 6, iss. 2, pp. 280-302.
Viticulture, Wine Production, and Agriculture in Armenia: Economic Sectors in Transition, Journal of Applied Business Research, Fall 2002, v. 18, iss. 4, pp. 13-23.

And one was written by authors from the State Engineering University:

A Dynamical Model of Water Recycling in a Mine-Processing Enterprise, Central European Journal of Operations Research, February 2006, v. 14, iss. 1, pp. 45-57.

When I further searched by "Geographic Descriptors" rather than "Author Affiliation," I located two more papers written by authors affiliated with the Russian-Armenian (Slavonic) University:

Tax Reforms as Capital Market Development Factor, Transition Studies Review, 2006, v. 13, iss. 1, pp. 131-41.
Rating System as a Banking Performance Regulator in the Conditions of Transition Economy, Transition Studies Review, 2005, v. 12, iss. 2, pp. 222-30.

Some progress, but much more is needed. Once again, it will be good to hear the views of others on this important subject.

Preferences for a family size

2007-02-12T22:02:00.000+04:00

During the Soviet era, a typical Armenian family had two-three children. One-child families were rare. The current fertility rates (the average number of children born to a woman over her lifetime) are down to 1.3 in 2005 (down from 2.8 in late 1980s). What are the reasons for such abruptly declining fertility rates?

Changes in preferences for a family size might have been motivated by several reasons. First of all, the socio-economic conditions in the country induced families to cut back on the size. Second, the Armenian women, especially in urban areas, became more independent and career-oriented, thus private incentives have undergone major changes. Third, the government does not exhibit pro-natalist sentiments. The child allowance program in Armenia is minuscule: only 0.35 percent of the state budget was spent on child allowance program in 2005. The program itself envisions a lump-sum allowance of 35,000 AMD at childbirth (raised from 5,900 AMD in 2003) and a monthly allowance of 3,000 AMD for children of age two and younger (if the mother is employed, the family gets only 50% of the monthly allowance).

From the 2003 Household Survey, one can identify 86 households (out of 1396 surveyed households having a female married member between ages 18 and 35) who welcomed a newborn to their household in 2003. Unfortunately, none of the households reported to receive a lump-sum child allowance. Could it be that the survey questions were poorly designed and didn’t make it clear that child allowance is one of the income categories the household receives? Or in fact the households didn’t claim their right to receive the allowance in time, therefore losing the privilege? One way or another, after examining total household income per month it becomes clear that the child allowance of even as little as 35,000 AMD could have made a big difference in the lives of many households. The household income varies from 5,000 AMD to 965,000 AMD per month with a mean of 90,315 AMD and a standard deviation of 124,541 AMD. As seen from the graph below, the distribution of household income per month is highly right-skewed (the histogram excludes two outliers with 591,000 and 965,000 AMD monthly income, respectively).

One thing I wish for is better designed surveys that will make it easy to evaluate the link between the social policies and fertility rates in the country.

Banks and Armenia's Economy

2007-02-10T02:52:00.000+04:00

Over the past couple of years, the banking sector in Armenia witnessed a rapid transformation and a string of mergers and acquisitions that may lay the ground for further expansion in Armenia's economy. With western ownership of HSBC, Cascade, Converse, and ACBA Credit Agricole Bank, and Russian (Vneshtorgbank) ownership of VTB-Armenia Bank, the landscape has been radically altered.

The maturity and depth of the financial sector is often what separate the wealthy developed economies from the poor developing countries. It is these institutions that regulate the saving/investment process and the relations between lenders (or savers) and borrowers. This financial intermediation is critical to the development of an economy; it is difficult to imagine what form savings may take place and how this can be tapped by businesses to finance their capital expenditures. It is also difficult to imagine how trade, international as well as domestic, is facilitated in the presence of a weak financial system.

Consider some of the many business services that banks may provide:

A. Credit Facilities for Capital Finance,
B. Bank Guarantees such as (1) Advance Payment Guarantees, (2) Tender Bonds, (3) Performance Bonds and others, and (4) Stand-by Letters of Credit,
C. Trade Services in the case of imports such as (1) Bills for Collection and (2) Post-Import Finance, or in case of exports such as (1) Documentary Credits, (2) Bills for Collection, and (3) Pre and Post Shipment Finance.

It is hard to imagine how trade and investments can take place in the absence of such services. However, it is equally difficult to imagine how the financial sector can grow and prosper in the absence of good governance, regulatory institutions, and most importantly trust. If we were to examine total bank deposits, Armenia would have the profile of a poor developing country when expressed relative to GDP. These deposits are about 10 percent of GDP; much smaller when we examine time deposits and other measures of intermediation relative to GDP. But this is much better than the 3 percent observed a decade ago, despite the rapid growth of its economy.

Indeed, the financial sector, and for a number of years, may have had a depressing effect on economic activity. Poor governance and weak institutions may have caused significant damage to the economy. Consider the following excerpt from the financial statement of Hellenic OTE, until recently the parent company of Armentel:

During 2001, an Armenian bank, Haycap Bank, with which ArmenTel had deposited US$4.8 millions, was placed under a conservatorship program. It is uncertain whether ArmenTel’s funds will be recovered. This amount has been fully provided for in our consolidated financial statements. Nevertheless, in order to recover its funds, ArmenTel has initiated a series of actions, including discussions with Haycap Bank’s creditors and legal measures intended to help secure ArmenTel’s position within the framework of Haycap Bank’s conservatorship program proceedings. In 2002, Haycap Bank initiated legal proceedings before Armenian courts against Armentel requesting compensation for losses and damages allegedly incurred as a result of the actions of Armentel. On February 18, 2005, the Armenian Economic Court ruled that Armentel should provide to Haycap compensation in the amount of US$ 5.2 million. On May 31, 2005, ArmenTel appealed against this decision before the Armenian Supreme Court.
Source: US Securities and Exchange Commission Form 20-F, pages 87-88

Not only Armentel may have lost $4.8 million in deposits, but it may have risked losing another $5.2 million in its zeal to recover its losses. Notwithstanding the black eye that Armenia gets for this, poor corporate governance impedes economic activity, and a weak judiciary is not very helpful. So it is gratifying to witness the recent arrival of "giants" at the scene who may contribute to the prosperity of Armenia, and challenge the system if need be. Their presence is bound to improve corporate governance, and deepen financial intermediation.

Armenia's banks today, in particular the foreign owned, are likely to be well governed and "strong." Equally important, they have introduced considerable innovations such as in business services, e-banking, credits cards, money transfers, among many others.

A recent paper provides a nice primer on the many obstacles that Armenia's financial system faces. It will be good to see empirical research in this area.

The Largest Taxpayers

2007-02-08T21:19:00.000+04:00

For the past couple of years the State Tax Services agency has published a listing of the largest taxpayers in Armenia, along with the amount of taxes they had paid. In the most recent release on taxes paid in 2006 (in Armenian), the agency reports the total amount paid by the largest 1000 taxpayers and breaks it down by type. The latter include custom duties, direct taxes (profit and personal income), and VAT among others.

The agency should be applauded for making the tax system more transparent, as well as making such data available to analysts and researchers. Further expansion of the reported information may enhance its usefulness. Two suggestions:

1. Is the reported information on a gross or net basis. In other words, is the reported information net of any refunds? It would be good to clarify this. As an example, the German owned Zangezur Copper Molybdenum Combine firm is listed as the largest taxpayer with total payments of about 33 billion Drams (USD 79 million), including VAT payments of 12 billion Dram (VAT tax rate is 20 percent). But because the bulk of the copper and molybdenum output is most likely exported, and as such is exempt from the VAT, (unless I am mistaken) much of the reported VAT tax should be refunded resulting in a near zero liability. Thus, it appears that it is the gross value that is reported. I think the net liability is critical.

2. The reported direct taxes (column 8 of the list), though not clear, seem to reflect business and personal taxes. More specifically, it appears to combine taxes on business profits (including repatriated income of foreign firms) and those on employee wages withheld by the firm. If true, it is not an easy task to untangle these two pieces with publicly available data. For the income tax, one needs information on total wages and its size distribution before the tax rate schedule is applied. Also, the presence of tax holidays for foreign investors complicates matters and makes it difficult to gauge how much of the reported direct taxes are on profits.

Again, the reporting of the tax information represents a major milestone. But it would be good if the reported information were further expanded. The media and analysts also have a responsibility for accurate and objective analysis of the reported information. Many are correct in highlighting the low taxes paid by some local businesses. Others, and despite of the best of intentions, have drawn some outlandish inferences from the tax figures reported over time; it is difficult to draw inferences on the underlying profitability of each firm in the published list.

It would be good to see more research done on the various aspects of the tax system in Armenia. Do we know of any ongoing research?

[Feb 11 -- you may download an xls file of the taxpayer data from here; you need Armenian fonts and can be slow to download. This data as well as data for prior periods is available in pdf format from here.]

Investor Nationality and Rule of Law

2007-01-27T23:54:00.000+04:00

On January 8, and pursuant to complaints from Armentel's new owner, Vimpelcom (see earlier post), the Public Services Regulation Commission of Armenia approved the request to disconnect some 300 entities "illegally" providing IP-Telephony services effective January 25, 2007.

Since License no. 60 provides that Armentel is legally the sole provider of telecom services, the Commission's decision is an affirmation of the rule of law and respect for property rights. This is not to say that monopoly is something to admire or protect, but Vimpelcom, and previously Hellenic OTE, have paid for these rights. Indeed, the Armenian government granted itself these rights in 1995 and expanded them in 1997 prior to its sale to OTE.

What is remarkable about the recent decision is its swiftness. The Commission approved the acquisition on November 14, 2006, and the purchase of Armentel was completed on November 20, 2006 (see here). And in less then 40 days, a decision was made to shut down all entities encroaching on Armentel's rights. While the timely decision and respect of property rights should be applauded, the previous owner OTE had failed to garner such support from the Commission and the government despite numerous attempts over the past couple of years.

Is the lesson here that Russian ownership is good for Armenia in that it will improve governance and rule of law? Perhaps the question is bigger than that. The French Pernod Ricard, which acquired the Ararat cognac producer (renamed Yerevan Brandy Company) successfully fought to keep other cognac producers from using the Ararat label, in Armenia as well as in Russia, with the government's backing at each step.

Is it Russia or is it country size? It strikes me that country size is perhaps the critical element at play. I wonder if anyone has written on the subject? Do we have any direct evidence on how firms fare under the law depending on their size and FDI origin? Is their any research on how corporate governance varies by nationality as well as size?

[Perhaps the 2005 World Bank and EBRD survey of business environment BEEPS, when it becomes available, can be useful but only in addressing the question on firm size. The 2002 survey can be downloaded from here; I can email you an extract of the raw data limited to Armenia or with fewer variables if you're unable to download the Excel or Stata files]

Rail Transportation

2007-01-26T23:46:00.000+04:00

Rail links continue to be a topic of great interest. Rail transportation shrunk significantly over the past 16 years. On the eve of its independence in 1991, Armenia's railroads handled 12 million tons of freight (see here which also includes similar information on road and air transportation). In 2005, the last year for which data is available, it had dropped to about 2.6 million tons, with more than half of it foreign trade related. Similarly, the number of passengers traveling dropped from 3.5 million to 700,000.

Some of the above steep decline can be explained by the dissolution of the Soviet Union and the traditional markets and trading partners that Armenia had enjoyed. Some can be attributed to the instability in Georgia, particularly in its northern regions. But much should be attributed to the blockade by Turkey.

Indeed, the economic hardship could have been averted by employing rail lines (and roadways) heading west rather than north had it not been for the blockade by Turkey. This is not a trivial matter as the bulk of Armenia's trade is with the west, and not its immediate neighbors to the north and east. In 2005, less than 19 percent of its exports of USD 950 million were destined to Georgia, Russia, Ukraine, and the remaining former Soviet republics to its north and east. Similarly, about 21 percent of its imports of USD 1768 million originated from these countries.

If west is the way to go, then connecting to Kars in Eastern Turkey should be quite cost effective. As the map in my previous post shows, Kars is a stone's throw away from the Armenian border and already has rail links in place connecting the two countries. Open borders and trade are beneficial to Armenia. Undoubtedly, they are also beneficial to Turkey. Obviously economics has little to do with the decision to impose a blockade, which must have cost Armenia billions of dollars in lost economic activity over the past decade.

[March 10: Graph is replaced -- it disappeared again]

Fallout from the Slaying of Hrant Dink

2007-01-24T01:43:00.001+04:00

The slaying of Hrant Dink is yet another sad chapter in the history of the ruling regimes in Turkey and the pain they keep inflicting upon Armenians. The continuing destruction of ancient Armenian churches and historical monuments, the confiscation of church properties (Christian foundations), the conversion of ancient Armenian churches to mosques, the prohibitions on the teaching of the Armenian language and training of clergy, the absence from educational textbooks any reference to the 3000 year old Armenian roots of more than half of the country, and instilling an environment of intolerance towards Armenians, have taken their toll.

Not only successive governments have inflicted pain upon Armenians within Turkey's own borders, but they have imposed a crippling blockade on the newly independent and tiny landlocked Armenia. This blockade has caused tremendous suffering and contributed to widespread poverty and unemployment.

In one of his last writings, Hrant asked that the Diaspora turn its energies to the newly independent state of Armenia. The government of Turkey has a tremendous role to play here. This blockade, the ultimate symbol of intolerance towards Armenians, should be lifted immediately and unconditionally.

However, lifting the blockade is not only a political decision. Without dealing with the environment of intolerance towards Armenians, open borders don't mean anything. Would any shopkeeper in Turkey dare to promote or showcase a product with the label Made in Armenia today? Would Armenians feel safe and free to move around?

Recent news from Turkey, and in particular the reaction from the media, are very encouraging. Indeed, I could not believe the 21 January, 2007, statement in the daily Sabah (Morning in Turkish) by an advisor to the prime minister of Turkey, that Hrant Dink "was not entrusted to us as an Armenian; rather he was the real host of this country." This is the closest to an official acknowledgement that Armenians are natives and the original inhabitants of much of the land that is called Turkey today.

The words that I read from the press in Turkey are very encouraging. But actions speak louder. For starters, when will the government of Turkey lift its blockade of Armenia? When will it stop adding fuel and start putting out the flames of intolerance towards Armenians? How many more Hrants have to be sacrificed before the decent citizens of Turkey make their government do the right thing?

[March 13, Map restored, pictures removed. Hope it'll not disappear again.]

Tax Holidays

2007-01-08T21:26:00.000+04:00

2007 is the last year when new investments by foreign firms qualify for tax holidays in Armenia. Firms investing a minimum of 500 million Drams (1 USD=365 Drams) benefit from 100 percent forgiveness from the profit tax in 2008 and 2009.

Profits in Armenia are taxed at a flat tax rate of 20 percent, except for firms engaged in agriculture which are exempt. Generous depreciation allowances further reduce the effective tax rate that businesses face. Hotels, for instance, are depreciated over 10 years; 20 years for other buildings. Computers are expensed, and so are investments in structures in the earthquake zone, as well as all investments in Gyumri, Armenia's second largest city and also in the earthquake zone (see here and here for depreciation rates). These allowances have the effect of reducing the effective tax rate on normal profits to zero in Gyumri, and generally to much less than 20 percent for the rest of the country.

Source: Taxes, Investment Incentives, and the Cost of Capital in Armenia

Tax rates, both statutory and effective, are quite low. Even if these low rates are not sufficient incentives, the current tax holiday strikes me as too expensive a tool for a small and impoverished country like Armenia. Consider the case of Armentel, the second largest taxpayer in Armenia (I am not picking on this firm -- it just turns out that it is the most transparent firm operating in Armenia with readily available financial statistics). In 2005, this firm earned pre-tax profits of Euro 49.9 million off gross revenues of Euro 119.1 million. It booked an income tax of Euro 4.9 million, or 10 (and not 20) percent of its taxable profits (see here). Surely this highly profitable firm is able to pay more.

Not only one would object to this tax break on grounds of equity and fiscal soundness, but also object to it on the grounds that it is not directly related to the marginal investment put in place. Consider the case of a firm with pre-tax profits of Euro 10 million. By investing slightly over one Euro million, this firm is able to slash its tax bill by 2 Euro million. The government has cut back in the past on this form of subsidy. Firms with investments put in place in 2002, for instance, were accorded 100 percent exemption in 2003-2004, and 50 percent for tax on 2005 and 2006 profits (see here).

The existing accelerated depreciation provisions act as investment tax credits (they are equivalent), and already provide for targeted investment incentives. Would Armenia be better off with the tax holidays extended?

Are there any statistics on the amount of revenue loss to the government? This has to be in the tens of USD millions. Also, do we know who benefits from this tax break? Is anyone writing on the subject?

Hidden Output

2006-12-22T23:42:00.000+04:00

Tax evasion and the size of the underground economy continue to be topics of interest to many students of transition economies. These have implications for governance, fiscal capacity, and the prospects of economic growth among others. Data limitations, however, make it very difficult to explore the experience of various nations and regimes.

The BEEPS survey data prepared by the World Bank and EBRD is one potential source of data on transition economies. This business environment survey data provides information on the behavior and attributes of enterprises as well as select indicators of governance. The World Bank provides summary tabulations as well as makes the raw data available for research (see here for the BEEPS data).

Using data for 2002, the latest year where raw data is available (only tabulations of data for the 2005 survey are currently available), and discarding public enterprises, we find that Armenian firms hide 9 percent of their sales or output. This is far less than the experience of many other transition economies surveyed. Correcting for the dispersion around this mean (large standard deviations), the differences might be smaller.

Country %Mean Std. Dev.
Albania 0.25 0.23
Armenia 0.09 0.17
Azerbaijan 0.15 0.25
Belarus 0.10 0.18
Bosnia 0.34 0.34
Bulgaria 0.17 0.23
Croatia 0.13 0.18
Czech Rep 0.11 0.17
Estonia 0.08 0.13
Macedonia 0.37 0.30
Georgia 0.39 0.28
Hungary 0.12 0.20
Kazakhstan 0.17 0.26
Kyrgyzstan 0.26 0.29
Latvia 0.14 0.22
Lithuania 0.16 0.25
Moldova 0.23 0.25
Poland 0.11 0.18
Romania 0.15 0.20
Russia 0.19 0.25
Slovakia 0.14 0.19
Slovenia 0.19 0.29
Tajikistan 0.29 0.30
Turkey 0.17 0.21
Ukraine 0.16 0.27
Uzbekistan 0.10 0.21
Yugoslavia 0.26 0.30

Should we believe the BEEPS data? One way to explore the quality of the data is to examine how the size of hidden output varies by say the frequency of bribes to tax officials. Here we find that more of the sales of a firm are understated when bribes are more common. Indeed, they tend to increase with the frequency of bribes. Firms that report bribes to Never take place report 12 percent of sales to be hidden. In contrast, 31 percent of sales are reported to be hidden when bribes to tax officials Always take place.

BribeFrequency %Mean StdDev
Never 0.12 0.21
Seldom 0.21 0.25
Sometimes 0.21 0.24
Frequently 0.28 0.27
Usually 0.31 0.27
Always 0.31 0.28

The same tendencies are observed when the unreported fraction of sales are regressed on the frequency of bribes, with corrections for censoring (not every firm cheats) and sample selection (some firms refuse to participate in the survey).

BribeFrequency Coeff StdErr
Seldom 0.2174 0.0205
Sometimes 0.2282 0.0218
Frequently 0.3230 0.0254
Usually 0.3650 0.0360
Always 0.3615 0.0413

The extent of the share of sales hidden in the survey data is ascertained by the following question:

... what per cent of total annual sales would you estimate the
typical firm in your area of business reports for tax purposes?

Some may view this as a potential weakness in that we are not told of the amount under reported by the firm. Others may view this as its strength in that firms don't have to lie about their behavior. In any event, the above findings are extensively discussed in my recent paper (click here). When I limited the econometric work to Armenia instead of the cross section of transition economies, all the results fell apart. Obviously there is more to the hidden economy and its determinants than my work suggests. I would very much like to hear about the experience of others on this subject.

*****

With the holidays and other commitments, I may not be able to contribute to this blog between now and January 7. This being the season of giving, please consider sponsoring a student, a teacher, or, if it is within your means, a school in Armenia.

Happy New Year and Merry Christmas

Շնորհավոր Նոր Տարի եւ Սուրբ Ծնունդ

End of Year Pattern in Flights

2006-12-20T01:21:00.000+04:00

Over the last three years, I have been watching this end-of-the-year spike in the number of flights from certain destinations. This year's numbers are at a record high. Armavia doubled its weekly flights to Moscow's Domodedovo airport in mid-November making the total weekly number of flights to Moscow 47 - the highest since June 2005. Over the past month or so, Armavia also added some new CIS destinations (Minsk, Tbilisi, Ashgabat) and doubled the number of flights to Aktau. In addition, the regular weekly flights from Sochi, Rostov, Samara, Saratov, Volgograd, St. Petersburg, Stavropol, Yekaterinburg are expected to double and even triple during the last two weeks of this year (Sochi-Yerevan 2 flights per week is to be replaced by 9 flights during the last week of December, Rostov-Yerevan 6 instead of 4 flights per week, etc.). Plus, there are some one-time flights that open up around the Christmas/New Year, like Sharm el Sheikh and Vladikavkaz.

Most likely this spike is demand-driven. I think it indicates three things: (1) where the new Armenian diaspora centers are located; (2) what the main destinations for Armenian labor migrants are; and finally (3) which business destinations actively work. We know the aggregate number of travelers at a given point in time (see here), but are there any data or statistics on the passengers for each of these three groups? Any survey results?

Why So Few Web Domains?

2006-12-19T01:15:00.000+04:00

Today, there are only 6065 web domains registered in Armenia. While it is true that this number has been growing rapidly over the past few years (see here), it remains too small to be of much economic value.

Registering a domain in Armenia requires little effort (https://www.amnic.net/). The annual cost is USD 50 for foreigners, and 13200 Drams for residents (about 370 per USD). It takes a couple of days for billing and credit card payments to go through. Getting a web hosted can be more difficult from outside Armenia (annual cost about USD 100-150), particularly with the smaller ISPs who are unable to handle credit card billing. Hosting may take place on servers inside and outside Armenia (e.g. US).

For a landlocked country, whose access to the West is further restricted by the blockade by Turkey, one would have expected a greater degree of utilization of the virtual world. What explains this very low penetration, and what are its economic consequences? How much of this trend is explained by telecom problems? Or by the quality of web hosting services and service providers? Is the market too inward looking? In short, are we looking at supply or demand driven constraints? Is anyone doing research in this area?

[Added Feb 5, 2007 -- In his keynote address to the Government Leaders Forum Europe 2007, Bill Gates stated that:

... I was meeting with leaders from Armenia, and we were talking about their borders, and we were realizing that the Internet connection is the thing that allows them to reach out and really not have geographical issues or border issues be as limiting as they would have been in the past.

Too Many Lotteries

2006-12-16T06:39:00.000+04:00

I was flabbergasted when I read in a recent report that there are 56 lotteries and 61 casinos in tiny Armenia (see here). Many societies shun casinos and typically view lotteries as being regressive and particularly burdensome to the poor. Often lottery proceeds are used to fund education and similar public services. In other words, a "bad" is employed in the provision of a public "good."

Lotteries may be viewed as casinos on wheels where gambling opportunities are made available to virtually every household (see here). The poor generally spend disproportionately more on lotteries, and as such many view the latter as the equivalent of a regressive tax on such households. Societies tolerate the sale of lotteries because governments or nonprofits use the proceeds to subsidize many programs, education in particular. Unless I am mistaken, the 56 lotteries in Armenia are sold by the private sector and for private gain. If true, then this is no more than preying on the poor and economically most vulnerable members of the society (see here).

How are lotteries regulated in Armenia? Do we know how much in lotteries are sold annually? What are the attributes of households that purchase them (income, demographics, ...)? I checked the expenditure data in the Armenian Household Survey of 2003 (and earlier), but couldn't find any information. Is anyone doing any research on the subject?

Money Outflows from Armenia

2006-12-12T02:44:00.000+04:00

Much attention is often paid to foreign investments or FDI (see here, line 22 of xls file), or to remittances by those working outside Armenia (see line 12) and gifts and transfers (see line 15). Obviously, Foreign investment is critical to Armenia's growth, and remittances and transfers from the outside are what insulate many from abject poverty.

While the above inflows are undoubtedly important, outflows are ignored for the most part. These typically take the form of compensation paid to foreigners (i.e. remittances in reverse), interest, and dividends from profits on foreign investments (FDI and portfolio) in Armenia. In the Balance of Payments Accounts these are generally reported as "Income: Debit". In 2005, such income paid to foreigners (labor and capital) stood at USD 321 million, up from only 51 million in 2000 (see line 13).

Don't know how much is paid to foreigners working in Armenia. Not sure how many work in the country or how they are compensated. But could they explain any sizable fraction of these earnings? The second potential explanation, in addition to the foreign labor, is that these may reflect interest payments on past borrowings. If so, why then the sudden jump in 2004? A third possible explanation is that profits of foreign firms may account for much of this. If so, one would have hoped that these would be reinvested in the Armenian economy and not be repatriated to the home country of the business. The sudden jump in income in 2004 may reflect the increasing profitability of investing in the Armenian economy. It may in part be explained by the appreciation of the Dram. But not sure.

It is important to identify the recipients of these earnings. The information reported on the AEA website is obtained from the IMF's International Financial Statistics which does not break down the data. Is anyone familiar with finer data?

These foreign earnings are quite large given the size of the economy. Is there any reason to be concerned?

Trade and Labor Mobility

2006-12-11T02:30:00.000+04:00

Classical trade models suggest that trade and international labor mobility are substitutes, while other (more modern) models predict that the pressures to migrate increase with freer trade. In the recent economic research, there has been a stronger emphasis on such complementarity rather than substitutability.

I would argue that substitutability between trade and labor mobility dominates in the Armenian economy. Armenia's trade capacity is far from being fully utilized, therefore in the last decade we have observed a steady outflow of labor migrants, both high-skilled and low-skilled.

This question is partially addressed in the forthcoming World Bank publication Migration and Remittances in Eastern Europe and the former Soviet Union. However, empirical studies trying to quantify this link between labor migration and trade flows in our region are non-existent.

VimpelCom’s Acquisition of Armentel

2006-12-03T10:24:00.000+04:00

The recent takeover of Armentel by VimpelCom promises to open a new and exciting chapter in Armenia’s telecom prospects. VimpelCom, with its presence in Russia, Ukraine, Central Asia, and more recently in Georgia (July 2006), is perhaps better suited to serve the Armenian market than the Hellenic Telecom OTE, the current owner, with operations throughout the Balkans.

VimpelCom is a publicly traded company (NYSE symbol VIP), with the Russian Alfa Group controlling 32 percent and the Norwegian telecom Telenor controlling 27 percent of voting stock -- Alfa Group also owns 13.2 percent of Turkcell (NSE symbol TKC) which owns 41 percent of Fintur which owns 65 percent of Azercell (see here page 115). As for OTE, which is also publicly traded (NYSE symbol OTE), the Greek government controls about 39 percent of it but is planning to sell its stake in June 2007. VIP and OTE, on a pro-forma basis, were very profitable last year and during the first nine months of this year, and both have a market capitalization of about USD 16 billion.

This transaction is bound to have implications for commerce, consumer welfare, and tax revenues among others. Unfortunately, such analysis is not reported in the press, nor undertaken by academic circles and think-tanks in Armenia. What is even more sad is that western-funded organizations and analysts have also failed to provide meaningful analyses as well (see the back-to-back articles by Emil Danielyan and Vladimir Socor writing for the Jamestown Foundation). Of course, telecom and finance related outfits around the world have provided ample coverage on the transaction, as both OTE and VimpelCom disclose much of their activities to the US Securities and Exchange Commission (see here) as well as on their websites (www.ote.gr and www.vimpelcom.com). [See here for a detailed description of Armentel’s finances in Armenia.]

I am not an expert on IT, telecom, or the tax ramifications of this transaction. But I am hoping to jump start some discussion of its effects. For starters, fixed lines account for 34 percent of Armentel’s earnings (about 600,000 subscribers). Would VimpelCom continue to provide fixed telephony services or would it divest given its lack of experience? And if it divests, what would this mean for competition and pricing?

About 26 percent of revenue is derived from international calls. Surely VimpelCom would benefit from this stream of revenues, but one wonders how the recent acquisition of Callnet (75 percent stake) by the Russian Comstar-UTS (USD 2.6 billion market capitalization) could affect the market (see here). Callnet earned USD 4.3 in revenues in 2005, so it is very small. But given that it holds an ILD license for international calls, the prospects of real competition might be pretty good with this takeover. Also, its subsidiary Cornet is a sole provider of WiMax services in Armenia. Comstar-UTS (LSE symbol CMST), which made recent acquisitions in Ukraine, is controlled by AFK Sistema which also controls 53 percent of MTS, Russia’s largest mobile company which lost the bid for Armentel. (See here, page 14, for a list of the bidders for Armentel).

Mobile telephony accounts for a third of the revenues of Armentel, which has grown in importance over the years. The number of its subscribers in Q3’06 was 441,716, up 46 percent from the same period in 2005. The entry of VimpelCom, with its presence in neighboring Georgia, Ukraine, Russia, and Central Asia, could stiffen competition in this rapidly expanding market -- the Lebanese owned VivaCell is believed to control 60 percent of the market (this number is commonly used but strikes me as way too high -- can anyone confirm?). Also wireless internet may receive a significant boost.

OTE expects the sale of Armentel to generate a pre-tax gain of 292.9 millions euros (see here page 11, and here page 25). The amount reported for tax purposes could be different depending on the book-tax conventions employed by OTE. I know that Armentel's tax rate is only 10 percent (half the 20 percent profit tax rate -- due to tax incentives). Not sure if this tax rate or a withholding tax rate on repatriated gains would apply. Hopefully the tax authorities will not repeat past mistakes. [In 1998, OTE bought 90 percent stake in Armentel which was jointly owned by Trans-World Telecom (TWT), registered in Guernsey, and the Armenian government. In 2000, the government imposed tax and penalties of about USD 12 million on OTE for gains accrued by TWT. The treatment of OTE was inept and very unprofessional. Let’s hope this time they tax the entity that accrued the gain, i.e. OTE and not VimpelCom. On a related subject, has anyone done any research on whether it was a mistake for the Armenian government, which owned 51 percent of Armentel, to hold on to 10 percent of the shares and dilute its majority interest at the time of its sale in 1998?]

I know I have way too many questions. But it will be good to hear any opinions out there.

Istanbul, November 12, 1942

2006-11-12T13:35:00.000+04:00

While much of the recent news in the media have addressed current events or events that took place during a period leading to the First World War, we should not forget that today is the 64th anniversary of a horrible event that struck Armenians, entrepreneurs in particular, in Istanbul. Indeed, I would be remiss if I did not say a word or two on the treatment of Armenian and other minority (jewish, greek, and assyrian) businessmen in Turkey during the Second World War.

On the morning of November 12, 1942, the citizens of Turkey woke up to the most draconian wealth tax ever envisaged. While the tax in theory applied to the entire predominantly Muslim nation, in practice much of its burden rested with the minority Christian and Jewish communities who primarily resided in Istanbul, formerly known as Constantinople. Neither the rate of taxation nor the taxable base and its derivation were made public. Tax assessments were arrived at in secret, and individuals were directed to settle their government assessed liabilities within two weeks, without any appeal provisions in place. The penalty for Christians and Jews who failed to do so within a month was deportation to forced labor camps in eastern Turkey in addition to having their property confiscated.

Faik Okte, the administrator of this tax at the Turkish Ministry of Finance wrote a book on the subject documenting all of its features and naming its victims. The book has been translated from the Turkish "Varlik Vergisi Faciasi" into English and is entitled "The Tragedy of the Turkish Capital Tax," by Geoffrey Cox, Croom Helm, 1987.

Because the tax was at best arbitrary, the effective tax rates that businesses had to pay fluctuated widely. The assessed tax often exceeded the entire wealth of business owners which inevitably led to their deportation to labor camps in addition to the confiscation of their properties. C.L. Sulzberger, writing for the New York Times, documented how burdensome this tax was, and in particular the pain it inflicted on the Armenians. See below:

Effective Tax Rates by Religious and Ethnic Affiliation
Merchants by Affiliation ...... Tax Rates (%)
Muslim Merchants ..................... 4.94
Greek Orthodox Merchants...... 156.00
Jewish Merchants.................... 179.00
Christian Armenian Merchants 232.00

Source: C.L. Sulzberger, “Turkish Tax Kills Foreign Business,” New York Times, September 11, 1943.

Economic Development in Artsakh

2006-11-09T11:31:00.000+04:00

The President of NKR, Arkady Ghoukasian, is on his way to the US to participate in the upcoming Armenia Fund 9th annual telethon in Los Angeles scheduled for November 23rd. Proceeds from this Telethon are to benefit the region of Hadrut in Artsakh. Projects include the construction of a hospital, schools, water pipelines, as well as drawing a regional development plan. The plan is similar to that of the Martakert Regional Development plan currently underway. Examples of the latter include the reconstruction in Shushi (see here) or Martakert Hospital (see here).

Last year’s Telethon raised USD 7.7 million in funds. These funds go a long way in helping the local economy and its infrastructure. The country also benefits from a number of foreign investments in its economy and growing tourism. GDP grew by 15 percent in 2005, but off a very small base. Indeed, GDP more than doubled between 2001 and 2005, from USD 53 million to 114 million. Construction grew by some 38 percent in 2005 (see here).

Obviously it goes without saying that Karabakh, with a per capita GDP of under USD 1,000, needs to grow faster and undoubtedly can use more assistance. My major interest rests with what is happening on the education front, higher education in particular. For Artsakh, as in the case of Armenia or any other country, aid is not a sure way to prosperity. Aid goes a long way, but it is the stock of human capital that is key to growth and expanding economic development and opportunities – making the desert bloom so to speak. But this takes more than just funding. Do we know much about Artsakh State University in Stepanakert? What fields do they teach? Where do their graduates go?

Privatizing the New Gas Pipeline

2006-11-04T03:44:00.000+04:00

Recent news have nearly confirmed that a firm in Armenia, partly owned by Russians, is about to acquire the Armenia-Iran gas pipeline under construction (see here). I know that a lot of people have complained that another vital industry is being taken over by the Russians. But this outcome is in many ways inevitable in the marketplace for energy related resources in that region, particularly as the acquiring firm is also the owner of the gas distribution network and a number of thermal power stations.

The government is ill suited to manage the energy resources of the country, both in generation and distribution. So privatization is the only way to go. However, is all this secrecy and behind the door negotiations leading to the transfer of these assets necessary? Why not simply have an open bidding process. Granted that the very same firm will most likely win the bid, and take over these assets, but at least the process will be transparent. This will likely help facilitate similar future transactions (reputation effect), as well as potentially yield a higher price for tendering these assets as more firms bid for them.

Many were critical of a similar process by which the electricity distribution network was privatized only a few years ago. A major critic of the transaction at the time was the World Bank. Yet in recent analysis, the Bank has reported to be very pleased with the outcome if not the process of the privatization (see here).

Again, I think the focus should be on the process and not the acquirers of the privatized assets. However, equally if not more important is the effect of this and similar transactions on market concentration and the creation of a vertically integrated monopoly in Armenia.

Rapid but Unbalanced Growth

2006-10-25T07:27:00.000+05:00

Armenia's GDP grew by 12.5 percent in the first nine months of 2006, in what promises to be the fifth year of the country's stunning annual double digit growth rate. The largest growth was experienced in construction which grew by 40 percent over the same period in the previous year. This sector accounted for one fifth of the GDP in 2005, and seems to be the only sector that experienced any significant growth.

The pattern of economic activity is a bit odd in that the country is experiencing a tremendous growth in construction yet very little of that has translated into robust growth in other sectors of the economy. One would expect construction growth to translate into greater demand for manufactured goods such as metal works and wiring, furniture, draperies, and carpets, faucets and plumbing supplies, appliances and so forth. I suspect that much of this demand is met by imports rather than domestic production. Indeed, imports grew by 19.4 percent in the first nine months through September, to USD 1,508 billion, while exports were USD 700 million, or about one percent down. One is tempted to blame this on the appreciating Dram. But perhaps there is something more structural at play. Looking at exports and imports in 2005 (see below and here and here) one cannot help but notice the lack of diversity in Armenia’s exports in contrast to that of its imports.

2005 Export (USD millions)
Foodstuffs 97
Ores and minerals 79
Textiles 37
Precious and semiprecious stones, metals 336
Non-precious metals 315
Other 86
Total 950

2005 Imports (USD millions)
Live animals and animal produce 43
Vegetable produce 97
Foodstuffs 144
Ores and minerals 295
Chemical products 115
Plastic and plastic products 47
Textiles 45
Precious and semiprecious stones, metals 348
Non-precious metals 92
Machinery and equipment 227
Transportation 146
Other 170
Total 1768

In addition, there is also the nagging question of the ability of Armenian businesses to compete and market their products globally. A 2004 study commissioned by USAID provides good examples of this (see here).

Obviously the rising value of the Dram is not helpful, but more needs to be done to explore the underlying causes of the developing structure of Armenia’s economy.

Soaring Real Estate Prices

2006-10-12T03:14:00.000+05:00

Real estate values keep up their upward march. Prices have more than doubled, tripled in some cases, over the past three or four years (see here excel file, also see cadastre.am in Armenian). In central Yerevan, the price per square meter was US 631 in 2005 compared to 328 in 2002. However, the price in the Nubarashen district of Yerevan was only USD 152 in 2005, but also grew rapidly up from 50 in 2002. [A square meter is 10.76 square feet]

In contrast to the capital, prices in the regions or marzes remain low but otherwise exhibit similar growth. In Dilijan, for instance, the price increased from USD 26 per square meter in 2002 to 64 in 2005. Similarly, the price in Sevan increased from USD 24 to 54 over the period 2002 and 2005.

The overall number of transactions nearly tripled from 44792 in 2001 to 122545 in 2005.

It should not be surprising that prices are much higher in Yerevan, particularly given the pace of construction with much of it taking place in the capital (see here, also see armstat.am for more recent and location specific activity). But how long will this price appreciation continue, and what is driving it? Is there any evidence of local speculators? Who is building (and profiting from) the new construction? Are there any distributional issues we should worry about as the poor are frozen out of the market (as in the example in here)? Are we approaching a bubble of sorts, and are mortgages outstanding large enough to be an issue?

How much of what we see is driven by Diaspora purchases of apartments in Yerevan, and how would prices in the capital and more importantly the regions change once the Diaspora is allowed to buy land? How much the prohibition on Diaspora land purchases distorts real estate activity (and prices)?

[Please email me if interested in contributing]

Georgia, Russia, and Armenia’s Economy

2006-10-06T14:36:00.000+05:00

The rising tensions between Georgia and Russia, and the severing of land and air links between the two neighboring countries, may have serious implications for the economy of landlocked Armenia.

Russia is the leading source of imports by Armenia (see AEA – excel file). It imported USD 260 million from Russia, or some 15 percent of its total imports of USD 1768 million in 2005. Much of this is in the form of critical energy, raw materials, and other intermediate goods. Imports of uncut diamonds, given their weight and volume, may not be impacted by the trade “embargoes,” and the pipeline shipments of natural gas are not yet slated to be cut. But the imports of many other products will be severely impacted. As an example, in 2005, Russia accounted for 84 percent of Armenia’s imports of cereals valued at USD 45.1 million and weighing 301,942 tons (see here – in Armenian and can be very slow). It also accounted for over one third of Armenia’s imports of vehicles and heavy machinery (USD 50 million), and about 10 percent of many other products.

The following is a breakdown of imports by country (diamonds feature prominently in the trade with Belgium and Israel):

Total imports 1767.9 USD millions
Russia 259.5
Belgium 162.4
USA 116.0
Germany 114.0
Israel 102.5
Iran 102.0
Other 911.5

Exports are much smaller but relatively no less important, given the country’s GDP of less than USD 5 billion. Armenia exported USD 119 million to Russia in 2005, or some 20 percent of the total exports of 950 million, making the latter the fourth largest importer of Armenian goods, after Germany, The Netherlands, and Belgium (see AEA). Beverages and spirits represent much of what Armenia exports to Russia, valued at USD 71.3 million and weighing 23,258 tons (see here – in Armenian and can be very slow). Indeed, this represents about 85 percent of all Armenian beverage exports in 2005.

The following is a breakdown of exports by country (diamonds feature prominently in the trade with Belgium and Israel):

Total exports (USD millions) 950.4
Germany 147.2
Netherlands 130.1
Belgium 124.6
Russia 119.1
Israel 112.2
USA 62.1
Other 255.0

Regardless of the trading partners, much of Armenia’s imports and exports pass through Georgia and its ports on the black sea. As such, the stability and prosperity of Georgia are critical as well.

Airline traffic will also be affected. There are about 80 weekly flights from Yerevan to destinations all over Russia (see AEA, the overall number may vary with season). Half of these are served by Russian airlines which will not fly over Georgia. The necessary detours will most likely add to the duration of the flights and to the cost of air travel.

One hopes wisdom prevails as Georgia and Russia settle their differences. In the meantime do we know of any ongoing research on shipping costs to and from Armenia on various modes of transportation? There are considerable amounts of statistics on the volume and how goods are shipped (see AEA), but little is reported on costs.

Trends in Dram Circulation

2006-10-04T02:27:00.000+05:00

While reviewing the data on currency circulation recently posted on the website of the Armenian Economic Association, I was intrigued by the pattern of Drams held outside the Central Bank. The volume of Drams in circulation grew by some 47 percent in 2005, to 155 billion [see here, column N]. Of course this is not the first time that such rapid growth was experienced. The growth rate in 2002, for instance, was 38 percent. Indeed, Drams in circulation ranged from 26 billion Drams in 1995 to 155 billion in 2005.

It may be useful to explore the underlying trend of the various Dram denominations and examine where much of the growth is coming from. The 20000 note, with 40.2 billion Drams in circulation in 2005, has experienced the fastest growth since it was first issued in 1999 (see here). Similarly, the 10000 note grew rapidly since it was first issued in November of 2003, as well as the 50000 notes since it was first issued in June of 2001.

Here is the trend in circulation of the largest denominations (in billion Drams):

Denomination 2001 2002 2003 2004 2005
5000 drams 32.58 40.41 44.94 37.82 48.84
10000 drams 0.00 0.00 7.30 25.22 42.98
20000 drams 12.35 24.16 23.04 21.02 40.20
50000 drams 0.78 1.61 1.39 0.95 1.61

This trend is in many ways fascinating. But what explains it? What does it tell us about economic growth? About the shadow economy? About errors in measuring the true growth of the Armenian economy? Also, are there studies of the demand for the various denominations?

Air Transportation

2006-09-26T11:07:00.000+05:00

The opening of the new arrival wing of the Zvartnots airport, designed to handle 2 million passengers annually, represents the culmination of a dazzling growth and expansion in air transportation in Armenia.

Indeed, the number of passengers arriving in Armenia nearly doubled to 575,000 in 2005 up from 293,000 in 2000 (see below and check here and here for more details).

2000 292,800
2001 375,900
2002 434,000
2003 458,500
2004 559,100
2005 574,700

Similarly, the number of foreign airlines carrying passengers to and from Yerevan has expanded dramatically as well. In 1994, an Air France weekly charter flight was the only hope for a westerner of making it to the country. Today, there are daily flights that connect passengers from four corners of the world to Armenia. Passengers have the choice of Air France, Austrian Airlines, British Airways (Med), Czech Airlines, Lufthansa, and Aeroflot, in addition to Armavia (armenian airlines), that make it possible to fly into Yerevan on any day of the week. Amsterdam, Frankfurt, London, Moscow, Munich, and Paris, among others, provide travelers to and from Armenia access to the world’s premier airlines and destinations.

The changing face of air traffic is impressive, particularly when compared to that a decade ago. The flight patterns show a marked orientation to the west. But they also reflect Armenia’s sprawling Diaspora (see here). Destinations to various cities in Russia and other parts of the former Soviet Union, as well as those to the Middle East, in many ways highlight the ties that keeps Armenians connected.

Notwithstanding the experience in passenger traffic, air cargo shipments have yet to take off. For the years 1999 through 2004, for instance, exports and imports tonnage totaled (check here): 13.5, 13.8, 11.4, 8.4, 8.7, and 9.2 only. (please help update this and other data sources). Is this a resource waiting to be tapped? Clearly, the composition of exports today makes very little demands on the airline industry (see here). But shouldn’t this composition itself evolve to reflect the availability of air transport?

Also, the seat factor is increasing but was about 68 percent in 2003 (see here). Recent figures may be higher. Nevertheless, it looks like planes are flying 30 percent empty. There are also significant flight delays – more than a third of all flights (see here).

Has anyone undertaken a study of the airline industry? This is an industry highly critical to the prosperity of the Armenian economy.

[Please write me if interested in contributing]

Market Concentration

2006-09-24T03:53:00.000+05:00

A recent report by RFE quotes an Armenian businessman and a member of the parliament complaining about the lack of "free enterprise and fair competition in the country." This is despite the fact that Armenia is ranked as the 27th, far ahead of many countries, by the Heritage Foundation and the Wall Street Journal index of economic freedom.

The big question is how much market concentration is there in Armenia. This is important as it reflects on the degree of competition (and monopoly power) in the economy. Do we see this in the data? Has anyone done any comprehensive study, sector by sector, on how many firms there are in each sector, and their market share? I know that some are concerned about the extent of ownership and control by certain government officials, but that is a secondary question. It is more critical to explore whether the existing market structure hinders economic growth and hurts consumers.

The clearest signal of lack of competition, albeit not always perfect, is the price wedge between similar Armenian and foreign goods and services. Armentel might be a good case in point, but at least it paid in advance for this monopoly right. Another example is the government's favoring Armenian over foreign airliners (e.g., much better hours of arrival and departure). Of course, legal monopolies and the protection of domestic industries have their costs, regardless of the motivation and transparency. But other more egregious forms of market control can be far more damaging to the economy and prosperity of the country. One example is the rumored shortage of jet fuel which has allegedly caused delays and cancellations of flights earlier in the year.

So, again, the question is whether we know of any studies on market concentration. If not, is anyone out there aware of any data sources that could be explored to undertake such study?

Economics and Finance Education

2006-09-19T00:21:00.000+05:00

Reading the plan for the construction of the new Moscow School of Management with a price tag of USD 70 million in today’s Financial Times, brought to mind the dire situation Armenia finds itself in. In particular, the statement that “While Russian universities have a powerful academic reputation in the sciences, they have no history in teaching western-style management” hits home. More to the point, there is no history of teaching economics and finance in Armenia, and no one seems to be aggressively promoting academic excellence there.

Last October, when I taught economics in Yerevan, I was struck by the lack of textbooks in most if not all areas of economics, finance, business, actuarial sciences, among others. Textbooks didn’t really exist at both undergraduate and graduate levels. For the graduate level, and for those with advanced training in math and are fluent in English, students may tap into online lecture notes and textbooks available from the servers of a number of universities around the world (check AEA). Software such as Matlab and Mathematica commonly used in the teaching of advanced economics simply do not exist. At the undergraduate level, only a couple of textbooks have been translated into Armenian. Not only students are handicapped by the lack of textbooks and training materials, but the situation is further aggravated with official faculty salaries well below USD 200 per month.

It is not that funding is lacking, but that these funds are seldom diverted to improve the educational standing of academia. Tens of $millions have been spent on tax reform and tax administration projects. Yet there is not a single public finance textbook in the country. Millions are poured into the banking/financial sector, yet finance/corporate finance textbooks don’t exist. Similarly, no textbooks are available in the actuarial sciences despite the ongoing pension reforms. For those undergraduates with the means and fluency in English, getting over the lack of textbooks may not be an insurmountable task. But what are the majority remaining students, and their faculty, supposed to do. For those graduating undergraduates interested in an MBA, the American University of Armenia is perhaps the way to go. But otherwise, there is much to be done to raise the quality of training and funding of faculty and academia in all the remaining fields (see assessment).

Today’s students are the future leaders in commerce and finance of Armenia. One would hope that those present at the ongoing Armenia-Diaspora Conference are paying attention.

Foreign Investments in Armenia

2006-09-15T06:37:00.000+05:00

Foreign direct investments (FDI) in Armenia has been steadily growing over the years, except for the spike in 1998 when the national telephone company (Armentel) was acquired by the Hellenic OTE firm. These tend to be relatively small, but have shown a very healthy growth pattern. In 2005, FDI stood at USD 258 million and made up about 7 percent of GDP (click here for a trend).

The Armenian statistical agency (armstat.am), in a recent release, reported FDI for the first half of the year to total USD 86.3 million, or 9.3 percent higher than that for the same period in 2005. Interestingly, more than 40 percent of the FDI took place in the telecom and air transport sectors which should go a long way in relaxing some of the constraints imposed by the land-locked geography of Armenia.

FDI by sector in 2006H1
Telecom 33.1%
Mining 14.3%
Air Transport 9.4%
Other 43.2%

The total foreign investment for the first half of the year was actually USD 178.5 million (27.9 percent growth over same period in 2005), of which 86.3 million is FDI. I guess the difference is dividend investment. But what is it invested in? How much of it is debt purchase, minority ownership in a corporation, and so on? The breakdown of this foreign investment is interesting. Lebanese investors, with about USD 50 million, lead the way. They are closely followed by Greece, and from a distance by Russia, Argentina, the US, and Germany.

Total Foreign Investment in 2006H1 (USD million)
Lebanon 49.6
Greece 37.9
Russia 19.2
Argentina 17.3
US 14.9
Germany 12.1
Other 27.5
Total 178.5
FDI 86.3

It is not clear how the recent destruction of its economy by Israel will affect future investments from Lebanon. Greece continues to play a critical role by its steady and sizeable investments in Armenia. Russia’s investments seem to be too low by any yardstick. Argentina has been on the radar screen for a number of years by its investment in the Zvartnots airport in Yerevan. US investors do not seem to have much of a presence particularly given the size of their economy. However, Germany has made its presence felt, particularly as it represented the largest export market for Armenian goods in 2005 (click here).

Does anyone have a time series of the FDI data by source (country) and sector? It will be good if this can be posted on the AEA website, unless available online elsewhere, so that it will be accessible to researchers. The Economy and Values Research Center in Yerevan has done some work on the role of the Diaspora. But besides that, is there any research done on their economic impact as well as the rate of return on such investments? Equally important, has any research been done, other than that by the World Bank, on impediments to such investments?