Seeking Solutions Within

by Vartan Oskanian
Thursday, 26 February 2009 17:25

The official statistics released in February simply reiterate the inarguable truth: Armenia is
heading towards a recession.

Although these facts are not being hidden, they are not being explained either. The government
continues to believe (and rightfully so) in the importance of confidence as a key factor of
economic stability and is therefore trying to inspire trust and faith. But it is doing so without
basing its oratory and encouragement on economic realities, or without actions which assure
the population that steps are being taken to ameliorate the situation.

These are unconventional times and require unconventional remedies, including some outside
the IMF-World Bank prescription box, not unlike those to which the major economies of the
world have already resorted.

I believe that several steps, taken together, can minimize the economic decline.

First, there is a need for open, courageous and sustained public dialogue which is missing, and
which would go a long way to inspire confidence and faith in the steps being taken to improve
the financial situation. Consumer confidence regarding the government’s economic policies are
equally critical in this formula. Some of the government’s actions raised doubts in the public’s
mind about the government’s ability to respond to this crisis. First, there were the early
pronouncements about this global crisis circumventing Armenia, which raised questions about
the government’s sincerity and did nothing to meet the government’s concern about not creating
a panic. Earlier, the government insisted on passing a budget based on a high 9 percent growth
even as the government’s own numbers were already indicating that this is not a realistic goal.
They preferred the politically desirable picture but instead got an economically unrealistic
scenario, counting as they said they were, on a quick global rebound. As a result, the compact
between business and government remains broken. The confidence-inspiring rhetoric was not
able to transform reality.

Second, it is important that the government discuss the Russian Federation $500 million loan
with the public and engage it in a conversation about its efficient use. There is no doubt that
Armenia clearly needs this money to mitigate the impact of the crisis. The challenge is that it be
used to ensure economic growth. Does the Armenian government intend to use the funds to
meet its current budgetary obligations? Will it loan at least part of the funds to local banks? Or
will it invest the funds in competitive sectors, such as agriculture and mining which have growth
potential and local social and economic significance? In other words, shall Armenia use the
crisis to solve existential issues and address the short-term challenge of restraining social
disenchantment, or should it think about sustainable development?

Third, new money alone will not solve the economic woes either. A step the government must
take, and is already late in taking, is to let the Dram find its normal market exchange rate.
Already, since early 2008, over $440 million of Armenia’s reserves has been spent to maintain
this stability. This spending is nearly equal to the $500 million we are going to owe the
Russians. This is not sustainable. Sooner or later, the government will be forced to adopt a

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Seeking Solutions Within

by Vartan Oskanian
Thursday, 26 February 2009 17:25

more flexible exchange rate policy. In fact a depreciated Dram and more realistic Dram rate will
boost the value of foreign capital, will enhance the purchasing power of the many who rely still
on foreign remittances, will stimulate exports and will promote tourism, which have already
suffered as a result of the high Dram value.

Fourth, a government committed to tax reforms must judge correctly not just the nature of the
reform but also its timing. While taking the crucial step of modifying the tax structure to help
small and medium enterprises, the government is at the same time placing the heaviest burden
on the smallest taxpayer by insisting on cash registers for the tiniest individual entrepreneurs,
thus driving many out of business. This step could have been delayed. Taxes on the little guy
can and should be assessed, but only after the real bottlenecks in our economy are lifted.
Monopolies and non-competitive systems are the real causes constricting our economy.

Fifth, the time is right to allow for a larger budget deficit. In an economy where inflationary
pressures are low, when credit is tight, when there is a clear economic slowdown, enlarging the
budget deficit is not only acceptable but necessary. Armenia’s deficit has been well within the
internationally advocated three percent of GDP. Under today’s unusual circumstances, the
budget deficit can be allowed to grow to even six percent of our GDP. That additional emission
of money can fund public works, thus creating jobs, improving infrastructure and stimulating the
economy.

Sixth, this is indeed the time to bring back the best of government intervention on the basis of
public-private partnership. It was a laissez-faire, non-regulated market that led to this global
crisis. Depending on more of the same unrestricted market developments now means tolerating
the excesses of capitalism instead of reining them in. That is what the world has learned. In
Armenia, if we were hoping that at the end of this transition, the pendulum that swung from
abject communism to extreme capitalism was to come to rest somewhere in the middle between
unrestricted competition and total dependency, this crisis allows, indeed forces the government
to take on greater responsibility for wise engagement in the economy and at the same time take
practical steps to address social problems and ameliorate the conditions of the most vulnerable
in society.

Finally, there is a seventh area of action that cannot be avoided or ignored any longer and that
is our political reality. The economy rests firmly on politics and law, on predictability and
consistency, on transparency and equality. The political situation that exists around us today
does not provide space for our economic dreams. It is not just the polarization, it is not just the
cynicism, it is not just the lack of trust. It is also the insufficient respect for property rights, it is
the sense of impunity on the part of those on whom we depend to reinforce the rule of law, it is
the inarguable monopolies at the basis of so much of our trade. The government’s responsibility
is to secure our economy and our security. Both require a healthy domestic situation. The
government may not be solely responsible for today’s mess, but it has the sole capacity to bring
the country out of this mess. There is no way to withstand today’s economic crisis without
addressing and resolving today’s political crisis. This crisis is economic and domestic, but it will
inevitably affect our foreign relations and thus can affect our security.

In other words, the global economic crisis may have exacerbated the weaknesses of our own

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Seeking Solutions Within

by Vartan Oskanian
Thursday, 26 February 2009 17:25

economy. The domestic political crisis may have come about as a result of bad judgments on
the part of all political actors. But the solution must be sought from within. Not from the
Diaspora, which is living its own economic crisis. Not from Russia and China, where money and
political expectations come together. But from our own small economy whose problems we see,
whose solutions are within reach.

This is the time for responsive governance, for a demonstrated willingness to share the burden
for the well-being of all citizens. This is also the time to rally the brainpower and good intentions
of those in and out of government, the experience of those in and out of business, the insights
of civil society, to make the right decisions.

Capital Daily,  Yerevan

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