Since independence, successive administrations in Armenia have deliberately kept society in an illusion of economic growth, sometimes in collusion with international financial organizations, while lives of ordinary citizens have not significantly improved. Moreover, a large proportion of the state budget has been spent to serve foreign debts, as the state budget has always been in deficit. To compensate, debts from external sources were constantly needed while only pennies have been earned from the resource exploitation caused by international corporations.
Following the Velvet Revolution, Prime Minister Nikol Pashinyan has been speaking extensively about his future plans for major changes in all areas of life, especially in the economy, stating that the first step will be the “economic revolution.” The post-revolutionary government’s first policy program immediately targeted the previous governments’ constant claims and excuses that the primary cause of all socio-economic failures were related to the geographical position of the country, closed borders with two neighbors, the absence of effective land communication with the rest of the world and external geoeconomic realities. Instead, the new government argued that the fundamental reasons of economic stagnation in Armenia were the deficit of competition, equal economic opportunities and justice.
Later, in a speech marking his first 100 days in office, in front of a hundred thousand people in Yerevan’s Republic Square, Pashinyan declared that Armenia is entering the era of economic victories: “[…] we are going to replace the old economic model with an inclusive economic system meaning that all the citizens of the Republic of Armenia will have equal opportunities, accessibilities, liberties to carry out economic activities and be equal in the eyes of the law and tax services.”
At a special session of the Armenian government on February 8, Prime Minister Pashinyan announced the start of the economic revolution. About a week later, after several days of tense debates, the National Assembly approved the five-year government program. The program became subject of harsh criticism by the opposition parties and experts for not being detailed, lacking concrete socioeconomic targets and timeframes with measurable performance indicators, as well as mechanisms for implementation. The statements projected in the Action Plan were thus accused of being too vague, making it difficult to hold the government accountable for unkept promises.
The authorities of the day seem to be genuinely disposed to finding and bringing what was stolen back to the state… The question is, will a plan generous with words be sufficient to satisfy people’s high expectations from the revolutionary government?
However, the program had few specific targets. It pledged 5 percent GDP annual growth which will allow the creation of at least 17 to 18 thousand jobs annually, significant reduction of the poverty rate (30 percent) by 12 points by 2022 and increase of exports’ share to GDP by 2024 from 38 percent to 43-45 percent. An increase in net investment in fixed assets is expected to reach 23-25 percent of GDP from 18-19 percent by 2023. Meanwhile, 10 percent of the total energy consumption will be provided by solar energy. More indicators were promised to be reflected in the programs of each sectors.
In response to critics, Pashinyan claimed that the numerical indicators will depend on how many citizens will hear his call to turn into ‘economic activists’ and how many of them will tackle opportunities granted by the revolutionary government. According to the Prime Minister, poverty is in our minds and that no economic revolution can take place unless Armenian citizens change their economic behaviors.
The 70-page government plan promises to build a competitive and inclusive economy based on export-orientated, high-tech industries and high environmental standards. It commits to gradually change the structure of the GDP making the technological innovations as the engine of the economy. The program also promises significant improvement of the business environment, attracting more investments.
The authorities of the day seem genuinely disposed to finding and bringing what was stolen back to the state, ensuring a transparent and competitive environment. The question is, will a plan generous with words be sufficient to satisfy people’s high expectations from the revolutionary government?
De-coding Armenia’s Promised Economic Revolution
The choice of neoliberal principles projected in his government’s program and public statements that openly advocate very limited intervention in economic affairs, pushing deregulation, privatization and liberalization agendas, Pashinyan is going to face the neoliberal dilemma: How to pay off the approximately $7 billion foreign debt trap (which makes almost 60 percent of Armenia’s GDP) and, at the same time, ensure rapid economic development․
It seems like the current government has been desperately relying on a conviction that the latest revolution would inevitably attract and accelerate foreign investments. Their stance towards the Amulsar gold mine case has demonstrated that interests of foreign investors and corporations over the environment as well as the health and well-being of Armenian citizens continue to dominate the policy thinking.
Moreover, while presenting the five-year government program at the National Assembly, the Prime Minister publicly called for optimization and increase in efficiency and productivity of labor, claiming that poverty is a state of mind and citizens have to have a revolution of minds first, start to work, get rich and enrich. Thus, by this typically liberal statement he has put the responsibility of achieving the economic revolution mainly on average citizens.
Factors including the new, liberal tax code, prompts that urgent, tangible steps need to be taken, especially when a new wave of disappointments and emigration is already expected in the spring conditioned by layoffs of the state workforce, including 30 percent reduction of staff at regional governments, the shutdown of Alaverdi copper smelter with its 650 employees, the new increase in prices and a non-revolutionary government program.
The current government has not reevaluated the working mechanisms with international financial institutions and donors either. Even though Pashinyan claimed that he did not see any tangible changes in the latter’s politics toward post-revolutionary Armenia, nevertheless, his accusations have not gone beyond the words. Therefore, significant changes in the approach with this matter will not ease the enormous economic burden caused by the previous neoliberal frameworks.
These factors, including the new, liberal tax code, prompts that urgent, tangible steps need to be taken, especially when a new wave of disappointments and emigration is already expected in the spring conditioned by layoffs of the state workforce, including 30 percent reduction of staff at regional governments, the shutdown of Alaverdi copper smelter with its 650 employees, the new increase in prices and a non-revolutionary government program.
A Slight Look Back…
Historically, all countries that have witnessed fast modernization, technological and industrial growth, were built upon key factors that enabled those achievements. In the 17th century, the Dutch economic miracle, or the ‘‘Dutch Golden Age’’ succeeded due to a combination of several components: Migration of skilled workforce, Protestant work ethic, invention of cheap energy sources, sephardic Jewish- and Venetian capital inflow, favorable geographic location, monopoly trade with Japan, shift in national consciousness and role of women. This all made the Netherlands transform a country suffering from infinite wars to a flourishing, highly advanced country in trade, industry, science, military and art.
Leading a concerted war against systematic corruption is only a drop of water in an ocean of actions that should be taken. Geo-economics and geopolitics are highly complex, unpredictable organic processes. Therefore making statements on the ‘‘invisible hand’’ regulating all market disbalances is an old school, life-proven myth.
Economic miracles of Western European countries included ‘‘Trente Glorieuse’’ in France, ‘’Record Years’’ in Sweden, ‘’Miracle on the Rhine’’ in West Germany that were largely conditioned by the Marshall Plan that laid foundations of Modern Europe’s economic prosperity, highly productive industries and developed Welfare States.
In the far east, the economic miracle of the ‘‘Four Asian Tigers’’ was based on identifying and focusing on key sectors providing global competitive advantages. Taiwan and South Korea turned into giants in electronics manufacturing, being welcomed into the elite club of top tier high-tech industrialized countries, whereas Hong Kong and Singapore became international financial centers. Their development model later served as a blueprint for Indonesia, Malaysia, Philippines, Thailand and Vietnam.
This list of miracles could easily be continued by other examples, but let’s get back to the article’s core questions: Do we have critical factors that can lay the ground for an economic miracle in Armenia? Which model of governance and development should we adopt to get out of this swamp? Should we mirror existing models or design our own recipe of unique solutions?
Country of Innovations and Non-standard Solutions
The Third Republic inherited us with a mass exodus of Armenia’s ‘brainpower’ and workforce. The country found itself in a completely new reality of wild privatization, robbed factories, economic slavery, hopelessness, no clear vision about the future and demoralized generations. The political landscape was completely degraded, the intellectual elite was neglected and socioeconomic relations became entirely superficial and dishonest.
Revolution of Minds
The biggest achievement of the Velvet Revolution was the shift in public consciousness, a fertile soil for further success. People refused the typical and ingrained victim-mentality of Armenians claiming a new Armenian archetype. The ‘‘proud Armenian’’ destroyed the plutocratic system of oligarchs, proving that there is no chosen social class or an elite, instead, there is an Armenian nation that can achieve unimaginable heights. This has also led to the risky phenomena: Populism and Euphoria. These short-term benefits can easily bring mass disappointment and disobedience. Therefore, the next step will be combating populism and turn euphoria into rational political compassion.
Leading a concerted war against systematic corruption is only a drop of water in an ocean of actions that should be taken. Geo-economics and geopolitics are highly complex, unpredictable organic processes. Therefore making statements on the ‘‘invisible hand’’ regulating all market disbalances is an old school, life-proven myth. There is a societal need to get more sober and stop the newly re-trended growth fetish, turning us from humans into homoeconomicus. Economic growth can never be an objective in itself, rather it should be considered a tool bringing happiness to society. Today people are not happier than 50 years ago, even if their personal wealth has increased significantly. Three percent of average growth rate in the U.S. over the last 60 years, did not pull 39,7 million Americans out of poverty, while the median income and wages of people remained nearly unchanged since Reagan. In 2017, while summarizing the socio-economic results of the Armenian economy, former President Serzh Sargsyan stated that common citizens did not feel the 7.5 percent of economic growth. The current government’s economic ambitions are restricted by 5 percent…
The world is shifting towards adopting more holistic and just indicators rather than the GDP to measure development. Policymakers have started to focus on new indicators of progress that measure standards of living based on factors such as general well-being, life satisfaction, happiness and anxiety levels, health of the environment etc. It has been a while that Bhutan implements “Gross National Happiness” index, which has inspired other cities and governments to follow similar measurement policies. Meanwhile, El Salvador has banned all metal mining activities, demonstrating that we can have one, two or ten big investments, but instead suffer from tremendous ecological consequences, erosion of democracy and changes in societal values. Moreover, Ecuador has adopted the ‘Right of Nature’ in its Constitution, Finland implemented universal basic income and Europe has been moving towards concepts of social economy and sustainopreneurship.
Whether we acknowledge it or not, the world is going to become more globalized, digitized and automized. People will be controlling processes and equipment while main tasks will be performed by robots. Emerging technologies such as nanotechnologies, biotechnologies, genome engineering, AI, geoengineering, robotics will be extensively implemented in all areas of life. Considering our cultural and intellectual heritage gained from thousands of years of scientific excellence, we have all the fundamentals to compete and become trendsetters in innovations and non-standard solutions. Through decades, this little country has presented to the world hundreds of disruptive innovations and once was considered as the Silicon valley of the Soviet Union. Being only 1.5 percent of the Soviet population, Armenians managed to produce one third of the Soviet Union’s innovative military equipment, solving complex problems from designing computer systems to space ships to manufacturing electronics for submarines. Several thousands of specialists were employed in developing computer technologies. Nowadays, after a long breakup, a big number of tech startups are growing every year at colossal speed, including worldwide known successful companies.
Scientific and Technological Hub
To turn into a trendsetter Armenia must become an oasis of science in the region. Long-term educational reforms are critical to enable society to solve complex problems. Current public offerings are not corresponding to our national strategic interests. Courses and contents are obsolete, education is not practical. To fill this gap, experimental labs of engineering, biology, chemistry, physics, robotics, programming should be founded in all regions. Alternative educational models, such as Armat, Real School, Tumo and COAF Smart Center, have already emerged and act as solid examples of vocational education and training. Considering our limited labor resources we cannot afford people working in inefficient structures. Through requalification we can re-allocate these people to work in sectors of demand.
High-end Value Products
Investing in low value sectors like textile, agriculture and tourism can only be considered as complementary. Our strategies cannot be based on hopes that one day foreign investors or unprecedented number of tourists will come and revolutionize our economy. Instead we must enable thousands of small businesses in each region to solve complex technical problems in programming, agriculture, energy, medicine, material sciences, mechanics, electronics and other sectors. The engines of the U.S. economy are not companies such as Apple or Oracle, but thousands of industrial SMEs. Since we are a country in an ongoing war, the achievements in the military sector can be transferred to civil industries and act as a catalyzer to boost other sectors.
Break the National Proverb ‘We Have no Money’
The development of our economy can partially be financed by internal sources. Money is there but the lack of trust towards businesses and the lack of a ‘responsible and smart’ saving and spending culture restricts the availability of those funds. Instead of investing in cemeteries and weddings, Armenians from around the world can tap into a secondary digital market of equities to buy shares and invest in Armenian startups and companies in need of scaling.
Officially one-third of Armenians live below the poverty line while another 30 percent are one medical check away from poverty. In such conditions the newly proposed flat tax framework is an act of suicide. Married people, sole financial providers of households and villagers cannot be taxed the same way as single people living in the capital city.
We should bear in mind that the tax administration does not have sole aim of raising funds for government expenditures. It has a fundamental role in setting rules and conditions to achieve our national and societal goals. It should help us allocate all of our resources efficiently, change people’s behaviour, ensure fairness and keep state stability.
First step to achieve these goals is creation of a sustainable tax administration technology by digitizing interaction with taxpayers. Digital transformation will grant the government invaluable access to data. Further classification of taxpayers through advanced analytics will simplify tax compliances, optimize operations, modernize services, deliver rapid refunds, decrease costs, improve risk management and audit. Current technologies such as AI, Big Data, IoT, machine learning and cloud computing can significantly increase taxpayers satisfaction and voluntary compliance through visually-supported data and transparency.
Taxpayer-oriented solutions based on citizens’ active engagement, will make the government to more deeply understand their needs and provide personalized, simple and real-time tax administration services. Meanwhile, data-driven decisions and automated processes will promote growth and improve the tax administration reputation as a transparent and accountable structure.
The second phase will be transferring into a progressive consumption tax system: taxing consumption instead of income. Consumption is a more valid base of measuring the ability to pay than income as income tax taxes both consumption and savings, while consumption tax stimulates work, savings and investment.The taxpayers who spend above an exemption amount will be taxed based on a marginal rates. An already digitized tax system will let effectively collect progressive consumption tax.
Comeback of the State
To become a country of high culture, with a science-based industrial economy, a country of creators, writers and philosophers where humans and the environment are at the center of economic policy, state industrial policy and total industrialization are inevitable. The old neoliberal claims that governments must be kept away from economic processes is a bedtime story as history has not seen any major economic miracles without active state participation.
To efficiently lead the industrialization and modernization processes toward an economic miracle, an independent body or council reporting directly to the Prime Minister should be created. This body could be composed of intellectuals, visionaries, analysts, industry heads, military representatives, policymakers, business minds and tech people with the purpose of designing developments strategies and programs.