Sunday, November 12, 2006

Istanbul, November 12, 1942

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.

Thursday, November 09, 2006

Economic Development in Artsakh

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?

Saturday, November 04, 2006

Privatizing the New Gas Pipeline

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.