Friday, November 23, 2007

Armenia's Competitiveness

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.

9 comments:

Ara said...

According to Dornbusch-Fisher-Samuelson model (see the reference below*), comparative advantage of an economic sector or the ability of a country to export the products produced in an economic sector, depends on relative productivities, relative wages and the exchange rates.

Given the exchange rates, if a country would like to raise the real wages/standard living of the employees of a sector and at the same time be able to export the product produced in that sector, then it is essential to increase the productivity of that sector. The goal in Armenia should be to raise the real wages and still be able to compete in the world market. This is possible if productivity in Armenia is improved. Productivity of labor could be improved, for example, by allocating more funds for education, and health care and by improving the infrastructure of the country such as telecommunication and transportation and by developing legal and financial institutions. Improving productivity should be the focus of policy makers and analysts because the best method of increasing production of economic sectors and increasing the standard of living in Armenia is to improve productivity.

As a first step, in order to analyze productivity and generate research in this area, it is essential to have aggregate and disaggregate reliable data on productivity of labor. The National Statistical Services of RA should regularly and consistently publish productivity measures at national level and at individual sector level.

*Dornbusch, Rudiger, Stanley Fischer and Paul A. Samuelson, 1977. “Comparative advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods.” American Economic Review 67, no. 5 (December) pp. 823-39.

David said...

Ara,
While I think Shushan's piece addresses the economy in general, rather than just trade, I could not agree more with the points in your comment. In particular, very little is invested in education, and the quality of higher ed is very lacking. The country has not produced skilled managers, financial experts, actuaries, economists, ... You could not even find textbooks on many of these subjects. International donors pay little attention to training in higher ed, and the population at large seems to be more pre-occupied with politics. Without a skilled labor force, the Armenian economy cannot compete.

Shushan said...

DFS model is very simplistic and its underlying assumptions (discussed below) are hardly applicable to Armenia's economy.
(1) DFS assumes zero intraindustry trade and 100% interindustry trade, i.e. if Armenia exports wine due to its comparative advantage in producing wine, it cannot import it. Clearly, it is not the case.
(2) DFS assumes balanced trade, i.e. the value of exports equals the value of imports. We all know that Armenia has a growing trade deficit.
(3) DFS assumes perfect competition, therefore zero profits. Most industries in Armenia are either monopolised or oligopolistic.

However, I totally agree that one of the reasons that countries trade is their comparative advantage, namely relatively higher productivity, relatively cheaper labor force, etc. Of course, there are other reasons for countries to trade (economies of scale, imperfect competition), but at this stage of Armenia's development, we should mainly focus on comparative advantages Armenia has.

nazarian said...

ara, I don't know if one can have faith in the NSS statistics. There are a lot of accusations that it itself generates the numbers. I don't know if it's true but there have been allegations.

Ara said...

I think we all agree that improving productivity is very important to raise the standard living of a country. In order to analyze and do research in topics where productivity is involved we need reliable data on productivity both at the aggregate/national economy level and at disaggregate/sector level. Unfortunately in the case of Armenia there are no official data on productivity. I mentioned NSS, because it publishes the official statistics on national income and product accounts. If NSS statistics are not reliable, then we are in trouble, because without adequate data we couldn’t generate reliable research and analysis. Our country needs an institution which provides reliable statistics on our economy including on productivity. Therefore we should put pressure on the NSS administrators to improve the quality of all statistics published by them and at the same time we should request that they start publishing data on productivity.
Meanwhile, I am aware that researchers at the CBA are calculating unofficial labor productivity numbers at the aggregate/national economy level. Maybe CBA might fill the void and start publishing data on productivity. I don’t think it matters which institution is publishing the data, as long as we have reliable numbers.
I am not familiar how the NSS operates. If anyone has information about it and has recommendations on what should be done in order to improve the quality of the statistics that they publish, then it would be helpful if s/he could share them with us. Those of us, who are involved with research, should make an effort to make sure that an institution, such as NSS, generates reliable and comprehensive statistics, including statistics on productivity.

nazarian said...

Today I saw a Mittal ad in Fortune, and since I have been pondering about the competitiveness of Armenia in the global marketplace, I remembered the incidents involved foreign investors, including Mittal, who were kicked out of the country and forced to lose their investments.

That type of an attitude is a major hindrance to improving Armenia's competitiveness. While companies will put up with doing business 'the Russian way', or 'the Chinese way', they would not do business 'the Armenian way'. Even the Diasporans don't like putting up with such crap despite the patriotic motives.

nazarian said...

And don't forget the things that happen to Armenian owned businesses, for example the Sukiasian enterprises, the Royal Armenia case, etc.

At this point, as I see it, there are three fundamental issues that affect the competitiveness:

1. The absence of rule of law. The laws that are there are generally good. But the corrupt system of governance, both the executive and judicial branches of the government, make a mockery of them.

2. The de facto war involvement. This increases the perception of risk and prevents the flow of capital in the country. This is also the direct cause of high logistical costs of importing and exporting physical goods due to the blockade.

3. The absence of highly skilled labor. While Armenians claim that the labor in the country is highly skilled, it is not as widely available as claimed. Undoubtedly, there is a small pool of experts in their fields but overall, the labor market is in a sorry state because of the brain drain. And there is no pipeline of future experts as the education system and science are generally on the back burner for the government and the society at large.

David said...

The state of statistics is not bad at all. I suspect there are gaps in reporting, but todate I have not heard a single logical criticism of the data. Of course there are problems. For instance, I understand that when gdp is prepared, it is increased by 50 percent to account for unreported economic activity. So, is the shadow economy exactly one third of the national economy (or more/less)? And how do you allocate the estimate of the shadow economy among the various sectors? Of course, all countries go through a similar exercise.

As for the competitiveness question, I think education (item 3) is the most critical. Even in the presence of perfect governance and absence of war, we still will not have the skilled labor necessary to manage the public and private sectors.

Shushan said...

Just to add to what has already been said, the NSS collects a lot of data - good or bad. The problem as I see it is in presenting the data on their website in a user-freindly format.