Season's Greetings

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

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

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

Armenian survey data

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

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 Harmonized 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

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

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

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

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

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

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

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

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

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?

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

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

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

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?

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.