WORLD BANK ARMENIA

Essay Competition

“ARMENIA-EFFECTIVE ROAD TO RECOVERY”

Armine Babakhanyan

Evelina Beknazaryan

Venera Martirosyan

American University of Armenia

2nd year, Business Administration

Yerevan 2011

Year 2016. World Economic Forum. The “Annual Meeting of the New Champions” takes

place in China. One of the “champions” of the year is Armenia, a small country that recorded

the most effective and shortest path to recovery from 2008 financial crisis. The Armenian

President will give a speech on how once a “Ba2” rating country could, in a five-year time,

slide to an “A” rating country according to Moody’s rating agency. A country where roughly

every fourth person was considered to be poor (23.5% poor of which 3.1% extremely poor)

as of 20081 and where the GDP (PPP) per capita was estimated $5,200 according to UN data,

2 steps up on the global arena with a new Armenian Economic Miracle.

Let’s hear Mr. President’s speech.

“Ladies and gentlemen, it is my honor to be here today and also to be given the opportunity to

share Armenia’s experience in overcoming the biggest crisis of the last decade. I think I will

start my speech with a little arithmetical equation. What is one plus one? In school we were

taught that one plus one is always two. What happens in our practice is not exactly the same.

During the crisis the number of resources did not change- we neither worked less, nor had we

depleted all the resources, but the truth of the school arithmetic did not simply work. As our

economy demonstrated, one plus one may at times be even less than two. The ineffective use

of resources brings to crisis, but the effectively used resources- to the development. This idea

should underlie any actions for prosperity, development and peace. In the face of the crisis, I

assembled all the bright minds of my country and challenged them with one simple question:

how can we use our resources effectively? We singled out the following key questions the

answer to which would assist us in elaboration of development strategy:

What are our competitive advantages and how can we make use of them;

In which ways can these advantages contribute to business development, and

1 http://www.armstat.am/file/doc/99461558.pdf

2 http://data.un.org/CountryProfile.aspx?crName=ARMENIA

What hinders the effective use of resources in business development

All the countries prioritize finding their own competitive advantages. Armenia has come to

the conclusion that its biggest resource is the human capital. Being a mountainous country

and having few natural resources, Armenia has to rely on its human capital for development.

It was characteristic of Armenian nation to strive to be educated, but the education

Armenians were receiving was not always competitive. The lack of modern and high quality

education programs and personnel on the one hand, and corrupted educational system on the

other hand, simply held back Armenian emergence as an international educational hub. As

clear as it is, a lot needed to be done. The first step that we took to develop our competitive

advantage was to combat corruption in the educational establishments. One could hardly

qualify my administration’s actions towards eradication of corrupted personnel from

educational system as being democratic. Second, each and every department was advised by

international experts who were authorized to come up with recommendations to the boards of

the educational institutions, lay off unskilled and corrupted department staff members and

even close down a department if redundant or impossible to improve. This experts group

brought in their expertise in the field and gradually updated the respective educational

programs. Creative, well-trained and skilled teaching personnel replaced the outdated staff.

Third, special funds were directed towards establishment of student clubs where students

were encouraged to come up with innovative and creative ideas (by the way, some of these

bright minds are currently employed in my administration). The other most important step in

making Armenia an educational center was the opening of the well-known international

university branches to attract international students and professors from all over the world.

The second competitive advantage that we singled out and directed our efforts to its

development was the tourism sector. Tourism sector was developed by putting emphasis on

the infrastructure, by raising public awareness on Armenia and by stressing the importance of

good quality service. We successfully made use of Armenia’s natural and historical heritage.

The third by not the least important competitive advantage, that we singled out, was and is

the Diaspora. Being a world-wide scattered nation, we made use of our ties correctly. Taking

the role of leadership in that network, we created in Armenia the right climate and

transparency where the bright ideas were welcomed, introduced and implemented by people

with different opportunities and backgrounds. Thus, for example, in 2011 after having

analyzed our economy’s new and promising sectors, we found out that the field of asset-

backed securities was developing in Armenia but there was a strong lack of respective

specialists which would present an obstacle in the future development of the field. Diaspora

network came to help and respective specialists from the developed countries volunteered to

help.

This is how the effective use of our competitive advantages brought to the development.

All these actions towards revealing our competitive advantages were conducive to the

development of our country’s economy. And because one of the key foundations of the

economy is the business, the latter greatly benefited from our country’s competitive

advantages. During the crisis of 2008 businesses suffered greatly. The government came up

with reforms which were addressed to reviving businesses through elaborating tax policies,

and thus created favorable conditions for investments and creation of new businesses. Here

are the main reforms that we undertook:

We lessened the tax burden by reducing the rate of the Value Added Tax, which

boosted the consumption and thus drove up the Gross Domestic Product. The budget

did not suffer very much since the gap caused by reduced VAT was filled after having

uncovered the shadow economy, which increased the budget revenue with the tax

payments from those companies.

Under the new system, the investors were allowed to expense the whole amount of the

newly purchased equipment rather than depreciating it over time. This action

contributed to more investments in the economy.

Certain sectors of the economy were totally exempt from taxes. Information

Technology sector was one of them. We created a free economic zone for IT industry

which would cover the whole territory of the country.

We directed our efforts towards simplifying the bureaucracy in dealing with tax

authorities and other governmental institutions. According to International Finance

Corporation estimates, in 2011 it took 581 hours yearly for a businessman to deal

with tax authorities, a number that was 2.5 times more than that of a country from our

peer group, Romania. We made it even better reaching the number to 100 hours

yearly and we are still working on it.

We educated our citizens about taxation in general, tax policies that directly applied

and affected them and made the system more available and transparent for them.

New investors were exempt from profit tax for the first two years, which again came

to boost investment.

Investment in R&D was exempt from profit tax for five consecutive years. Compared

to VAT, profit tax is not the major component of the state budget income, so the

budget did not suffer greatly but, on the other hand investors greatly benefited from

this privilege.

Our previous tax policy did not allow us to use our resources effectively. Moreover, they

were making our businesses look for shelter in other countries, like Georgia. With the help of

these tax reforms we stopped the business outflow and inserted stability in the system and

trust towards our authorities.

Though we settled many strategic issues such as finding ways to boost the economy and

introducing tax reforms, we were facing a lot of on-going concerns. As of 2008, 23.5% of the

Armenian population was considered to be poor. The poverty situation was much more

severe in rural areas, where agriculture was still suffering from a crucial lack of the

information, tools and institutions and where farmers strongly needed to operate efficiently in

a market-oriented rural economy. Farmers were also adversely affected by a lack of strong

and consistent government policy, regulations and coordination. For the purpose of

stimulating the agriculture we did not exempt the farmers from paying taxes neither did we

lower the taxes, but rather changed the tax payment structure. Namely, instead of having one

property tax which included VAT and income tax, which the farmer must have paid

irrespective of his crop for the year, we introduced a new type of tax for farmers. The new tax

included the VAT and income tax but was not based on the size of the land plot, but rather on

the income received from the sale of the crop for the year. We also created regional market

infrastructure so that farmers with low output volume did not have to worry about marketing

and transportation costs, but could sell their products in the regional market intermediaries

which also performed the function of tax agents for the farmers.

Though we had identified our resources and found creative ways for their effective use, we

still were facing regular “systematic” failures, and again, the truth of the school arithmetic did

not work. The failures were caused by high level of corruption in the system. Fighting

corruption was and is a long and on-going process, which needs all-round attention and

consistency. As our neighbour Georgia’s president will confirm, they started a whole process

of combating corruption early in 2009. Georgia served as an example for Armenia. Armenia

started its anti-corruption campaign from the very top- government authorities. We fought

against not only people’s inclination to be involved in corruption, but rather found the law

gaps that allowed and made possible the corruption itself.

I hope the success story of my country, Armenia, will serve as an example for many

developing countries and, though all our reforms are country specific, every country present

today will definitely have something to take home. There is one universal truth: every

country can succeed if it understands its resources and uses them effectively. This process is

uninterrupted and continuous, and requires perseverance and will power.

Dear colleagues, thank you for your attention and let us hope that during our next meeting in

Davos we will hear and be inspired by some other country success story”.