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.