Pension Wars

Image

Armenia has been experiencing a rise in political activity in the last few years. The most recent of which has been the wide scale public outcry over the government’s new pension reform plan, embodied by the ‘dem em’ (we oppose) movement. Over the past several months, thousands of Armenians, mostly young professionals, some of whom are from the IT sector, have been staging routine mass protests against the USAID-backed reforms which went into effect on the 1st of January 2014 as part of legislation enacted in 2010. Under this new pension reform law, all employed persons born after 1973 would be required to pay an extra five to ten percent of their salaries to a government-approved selection of private fund management firms. The government argues that this is a necessary measure due to the need to reduce government expenditures as the country struggles with the impending budgetary burden of population aging amongst other constraints. With the impending economic slowdown over the next two years, the government has understood the necessity of being careful with budgetary funds and the previous entirely public pension system would be too costly.  The opposition to this reform may seem perplexing to outside observers, as pension privatisation has been hailed as a successful policy for dealing with similar budgetary problems that governments have in the developed world. The blog, “the Armenian Economist” notes that countries with similar pension packages include Australia, Chile, Denmark, Estonia, Finland, Hungary, Iceland, Israel, Mexico, Netherlands, Norway, Poland, Slovakia, Sweden, and Switzerland.

Despite enjoying the backing for the reform of a number of economists, and the overt support of the US ambassador John Heffern, opponents, discontent over the mandatory element of the reform, have been suspicious of the package. They argue that the unconstitutional measure would be seen as an extra form of taxation on a labour force which is already underpaid, and over taxed, and would ultimately lead to an increase in emigration particularly within the IT sector, which is dominated by highly paid (by armenian standards), highly skilled young professionals who would be tempted to pursue careers elsewhere.

Since the reforms have been hailed as both necessary and competent, why have they generated so much controversy? There are a few things that are worth noting:

It’s about being overtaxed:

Currently, roughly 26% of an Armenian worker’s salary goes to paying various taxes, including their public pension funds. In a country where the average income is less than 250 EUR a month, this means that workers are left with just over 180 EUR to cover monthly expenses. Removing another 5 to 10% of their salaries would leave them with just 170 EUR per month. This in a city where the recommended minimum monthly expenses for one person is roughly 400 EUR.

Its about freedom of choice:

One of the biggest issues of contention here is that the new pension plans are mandatory, and citizens are unable to choose how it is managed. The government has responded to concerns by pointing out that they cannot expect the population to manage their own pensions as they would be left with nothing after retirement, and tried to comfort opponents by mentioning that the  private pension funds will be managed by French “Amundi” and German “Talanx” companies. The Constitutional Court, however, has sided with the protesters on the matter.  It should be noted, however, that even in pension systems which are said to not be mandatory, the actual amount of choice is quite trivial anyway.

It’s about mistrust for the State:

Many Armenians can still recall how much of the life savings which they had collected over many years vanished overnight with the collapse of the USSR, and again a few years later, when the government illegally dipped into the nation’s pension funds to finance new projects. Furthermore, armenians have grown increasingly cynical of incessant government promesses with seemingly more sinister intentions, such as the recent speeding cameras, bus fare increases, city centre parking system, etc. The government, in response has done very little to show genuine will to help foster better dialogue with civil society over such issues, conducting closed-door meetings, and so on.

It’s a vote of non-confidence in the Government:

One aspect of this movement which could puzzle outside observers is the lack of actual criticism of the reform itself. A recent study conducted by masters students at the American University of Armenia’s School of Humanities revealed that many of those frustrated were ready to accept the reform’s implementation if it had been proposed by any government other than the present one. In this sense, the current protests are part of a wider wave of protest against the Republican government by an increasingly vocal, and competent opposition movement.

As Initial discontent has since grown into a fully fledged movement, it has noticably attracted and united all four non-governmental parties: the opposition the Heritage party, Armenian National Congress, ARF- Dashnaksutyun and the non-ruling Prosperous Armenia Party towards the cause. Initially unorganised and chaotic discontent eventually transformed into a clear list of demands. The protesters claimed that they would not back down until the reform package was submitted to the constitutional court for evaluation, repeal said laws, and for the prime minister, Tigran Sargsyan to resign.

Amid the backdrop of almost daily protests (which include a rap song)  the Constitutional Court declared, on April 2nd, that certain elements of the reform package were indeed anti-constitutional, and ordered the parliament to reconsider it. Despite this, mandatory inputs into the new pension plans, which had automatically started on January 1st continued, prompting a continuation of public protests.

Since then, the Prime Minister Tigran Sargsyan has resigned, replaced by notorious oligarch Hovik Abrahamyan (known colloquially as ‘mook’), who has declared his intention to work with the professionals to reform the package. At the time of writing, the National Assembly has approved a new bill on pension reform, after the Court gave them until the end of september to bring it into conformity with the constitution. The new prime minister, Hovik Abrahamyan, has publicly stated that the changes to the reform will make it optional to subscribers. In the meantime, employers are still asked to continue taking 5% of worker’s salaries. Meanwhile, the protests are growing in size and frequency…

The Cost of the Diaspora’s aid: Why the Diaspora should push for free-markets, not Charity as a generator of development in Armenia

This article was originally presented to the first annual convention for “Armenian Students for Liberty” September 2013

With independence, Armenia found itself inheriting a vast amount of socio-economic problems stemming from the collapse of the Soviet collectivist economy. These problems were further exasperated by the 1988 Spitak Earthquake, the war with neighbouring Azerbaijan over the Karabakh enclave as well hyperinflation of the newly introduced Dram. These alarming conditions lead a concerned Armenian Diaspora to pool its collective economic strength together in order to  set up a series of badly-needed emergency funds. This was the birth of the Diaspora-sponsored charity campaign; exemplified by organisations like the “Hayastan” All-Armenia Fund.

The purpose of this paper is to demonstrate how the now wide-spread practice of fundraising and donation-based foreign aid by the Armenian Diaspora, though initially helpful in the early years of Armenian independence, is harming healthy development more than it is helping. Furthermore, It should be argued that a much better approach at promoting financial prosperity and development by the Diaspora would be to invest politically and financially into the institutions of free-markets, and rule of law.

Since Independence, the “Hayastan” All-Armenia Fund alone has collected over a quarter of a billion dollars in direct aid to Armenian infrastructure reconstruction projects.    Added to that are the billions of dollars collected by a myriad of charitable organisations, including roughly two billion USD in aid and development assistance by the American Government.

Diaspora generously gives back to to the Fatherland

Economists agree that this sort of “development” aid has been largely wasteful and ineffective in achieving the desired effect. Christopher Coyne, professor of economics at George Mason University argues that: “Those Involved in humanitarian efforts are unable to promote societal economic progress because they suffer from the “planner’s problem,” meaning they are unable to access the relevant knowledge to best allocate resources in the face of a variety of competing, feasible alternative uses.”

Negative socio-economic impact of Aid

The negative consequences of development aid include a deligitmisation of the National Government, perpetuates the sense of learned-helplessness amongst the population, and abets corruption by officials. Since the primary role of Government in Armenia is to preserve the rules of the game by enforcing contracts, preventing coercion, and keeping markets free, yet as the same time the government budget sets aside funds for the construction and rehabilitation of state infrastructure; Diaspora-funded project only serve to remove the responsibility that  elected government officials should have vis-à-vis their electorate in regards to the spending of their tax money. This, in turns, allows for irresponsible spending by both the Diaspora organizations, and the government.

The politics of Foreign Aid also has a direct negative impact on the communities they are trying to help by disrupting the organic development of civil society when dealing with issues. Thus, instead of communities forming committees to deal with problems that affect them all on a grass-roots level, they are instead encouraged to simply wait for help from the diaspora.

Foreign aid encourages corruption in Armenia. Diaspora donors act in a very peculiar way when donating to such charities. They essentially allow themselves to contribute to the tax revenues of a country of which they are not a citizen of, and with no say on how the money should be spent; which is ironically the exact same confrontation on which the United States of America was founded (“No taxation without representation”). They do not, in anyway demand accountability, or transparency from the local contractors when funding projects. This has lead to widely publicised scandals where Armenian government officials used a system of kick-backs, bribery and fraud in order to augment their income. Because most development projects usually require cooperation with the local government. This increased exposure amplifies the opportunities for fraud and corruption.

Causations of Diaspora Behaviour

The Diaspora’s Foreign Aid mentality has been shaped by the image of a far-away, desperate Armenia of the 1988 earthquake, as well as five decades of post-colonialist, and structuralist views towards the benefits of Marshal-era Aid policies. The sense of duty towards a homeland, the naiveté of donors towards the on-site partners, as well as the self-gratification when doing good generally has the effect of obscuring the real needs of the target beneficiaries. In many cases, projects can fall pray to corruption, mismanagement  and failure to achieve longterm sustainability.

Solutions:

Aside from small-scale, and pinpointed projects, large-scale aid and development projects are simply obsolete. The only true path to sustainable economic development for Armenia, as well as all nations, is good governance. In their book, “Why Nations Fail” (2013) Daron Acemoglu and James Robinson conclusively show that it is man-made political and economic institutions that underlie economic success (or the lack of it). For Acemoglu and Robinson, nations that progress socially and economically usually have states which: “Secure property rights, the law, public services, and the freedom to contract and exchange all rely on the state, the institution with the coercive capacity to impose order, prevent theft and fraud, and enforce contracts between private parties.”

Thus, the Armenian Diaspora needs to shift its focus from providing relief aid, and large-scale infrastructure development aid, to ensuring the development of healthy, transparent, and inclusive institutions. This would mean pushing for a government which secures basic individual liberties, does not obstruct the free exchange of goods, services and ideas.

 This can be done in the following ways: 

 Diaspora aid organisations could change their focus from donations to venture capital management. They could contribute rationally to sustainable development by promoting good business practices in Armenia, and to finance the Armenian private sector in the country. Such groups could hire on-site risk management professionals who could analyse the business plans for local entrepreneurs, while helping those who’s ideas need to be further cultivated with sound business consulting.

Furthermore, in order to protect the interest of Diaspora, repatriate, as well as foreig ninvestors who could potentially breath fresh air into the the country’s business sector, against government provocation, harassment, nepotism and kickbacks. they can also engage in reverse-lobbying in Armenia. In other words, as Armenian Diaspora organisations revamp themselves as investment groups, they can threaten to withhold funds from the cash-strapped government until it submits to a number of legislative changes which would help create a link between : These would include abolishing the customs agency, reducing personal income and corporate taxes to a 15% flat tax rate, create tax-free zones in the provinces to encourage foreign direct investment, to form an independent judiciary branch, and to severely cut down the size of government.

This would protect the interest of Diaspora or repatriate, as well as foreign investors who could potentially breath fresh air into the the country’s business sector, against government provocation, harassment, nepotism and kickbacks.

Such emphasis on laissez-faire policies would allow the armenian economy to shed its soviet legacy of inefficiency, while kickstarting a vibrant and competitive economic presence on  the world market. With such policies,  Armenia  would become a very attractive place for investors, and could find its competitive advantage, while building a niche for export products and services.

source: https://i1.wp.com/farm3.staticflickr.com/2607/3934658340_35216ae67b_z.jpg

Armenia should be encouraging high-skilled, high-income repatriation

The Armenian Diaspora could also pressure the Armenian government to greatly simplify the repatriation process, especially for investors, by allowing for alternate military service, tax breaks for certain types of professionals, and so on. 

For the Diaspora organisations adamant on preserving the Benevolent/development-oriented nature of their organisations, it is also possible to transform the organisation into a sort of independent (form the RoA government) development foundation, providing grants and real support to social-business start ups and so on; following a structure similar to the US-Government-funded “Enterprise Development & Market Competitiveness Project”

Conclusions

Since funding massive aid projects is an obsolete way of solving Armenia’s problems with economic stagnation, oligarchy, corruption and emigration, the main goal that the Armenian Diaspora should be more invested in implementing the right conditions for long-term, and sustainable socio-economic growth in Armenia, by lobbying for what Coyne describes as “The conditions underpinning economic freedom—protection of property rights, private means of production, and free trade in labor and goods—provide an environment free of coercion in which people can engage in the process of discovery and experimentation necessary for economic development. This process is messy and will often appear misguided to outsiders, but it is the only way to achieve society-wide development.”

Works Cited:

 “”HAYASTAN” ALL ARMENIAN FUND | Www.himnadram.org| Rural and Infrastructure Development Projects in Armenia and Artsakh. Schools, Hospitals, Roads. Charity. Donate Now.” “HAYASTAN” ALL ARMENIAN FUND | Www.himnadram.org| Rural and Infrastructure Development Projects in Armenia and Artsakh. Schools, Hospitals, Roads. Charity. Donate Now. N.p., n.d. Web. 25 Aug. 2013.

2 “From Relief to Development.” USAID / Armenia :. N.p., n.d. Web. 25 Aug. 2013.

3  Coyne, Christopher J. Doing Bad by Doing Good: Why Humanitarian Action Fails. May 2013 Print.

4 “The Role of Government in Education,” by Milton Friedman. From Economics and the Public Interest, ed. Robert A. Solo, copyright 1955 by the Trustees of Rutgers College in New Jersey. Reprinted by permission of Rutgers University Press.

5 Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown, 2012. Print.

6 “EDMC.” www.EDMC.am Web. 25 Aug. 2013.

7 Coyne, Christopher J. Doing Bad by Doing Good: Why Humanitarian Action Fails. May 2013 Print.

Mshak: expressing Armenian Libertarian thought since 1872

In 1872, the prominent Armenian political philosopher and economist, Grigor Artsruni, became the primary founder of the first liberal newspaper for Armenians around the world in Mshak (AImagermenian:Մշակ meaning “The Toiler”). Along with the help of co-founders Aleksandr and Levon Kalantar,Arakel Babekhanian, Hambardzum Arakelian, and Hakob Melik Hakobyan (penname “Raffi”), the newspaper soon grew to become one of the largest and most prominent voices of Armenian people in the Russian and Ottoman empires. It advocated firmly for the respect of individual freedom and for free market-oriented economic reforms in the Russian empire. In addition, it first published the works of many famous authors and intellectuals, most notably the nationalist liberal author Raffi’s famous novella,Khente (Armenian: խենթը meaning “The Fool”). In keeping with such themes, Mshak also called for the creation of a unified Armenian nation-state until it was shut down in 1921 by the Bolshevist occupation of Georgia.

—————————————————————

This modern publication aims to preserve the original spirit of Mshak in a contemporary context. Our goal is to contribute to the maturation of the political and economic discourse in Armenia by analyzing government policies in the country and the Transcaucasus region, and making recommendations from a classical-liberal and paleo-conservative perspective.

Mshak is a non-governmental organisation, and is not affiliated with any political party, whether it be in the Armenian National Assembly or in the Opposition.

This publication advocates the ten fundamental principles:

  • Armenians all across the world form a single nation;
  • Armenians residing within the Republic of Armenia “should be assured an undoubted security of life and an absolutely unmolested opportunity of autonomous development,” as per  President Woodrow Wilson’s Fourteen Points;
  • Society within the Republic should be structured around the respect of the unalienable natural rights of man, bound through social contract and freedom to pursue “life, liberty, and property”;
  • Respect for Rule of Law within the Republic;
  • Universal equality through the justice system of the Republic
  • Increased governmental transparency and accountability within the Republic;
  • A small, transparent, streamlined, and highly efficient government bureaucracy within the Republic;
  • A thorough and complete transition to a free market economy within the Republic;
  • An imposition of a minimal flat tax on business within the Republic;
  • The immediate creation of tax-free zones in the bordering provinces of the Republic;
  • Armenia, as an integral member of the European Continuum, should pursue a more aggressive European integration policy.