Wednesday, October 25, 2006

Rapid but Unbalanced Growth

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.

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