Libertarian analysis on PFA’s “Averting an Economic Catastrophe” Report

This blog post was originally written at the request of the German-Armenian Journal Armenisch-Deutsche Korrespondenz, and is part of a series of previously unpublished blog posts and articles which will be pressed in the coming days…

article below…

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PFA report’s cover

The findings in Policy Forum Armenia’s (FPA) February 2012 report caused quite a stir in Armenia. The document claims that the Armenian authorities have failed to implement a comprehensive policy shift in the wake of the 2008 economic crisis, and also that the country is likely to face a similar crisis in the future if appropriate action is not taken. This caused urgent concern for some, while being dismissed as alarmist by others. However, it is important to properly contextualise this report as well as the implications it puts forward. This being said, regardless of the accuracy of the report’s timeframe, the concerns highlighted by the FPA remain valid, and should immediately be addressed by the Armenian government, or lobbied for by local and international Armenian groups in order to ensure Armenia’s future prosperity and sustainability.

More recent reports by the World Bank and the International Monetary Fund (IMF) have put forward scenarios that somewhat contradict some of the bleaker predictions advocated by the FPA report. This does not mean, however, that the concerns and proposed recommendations of the report should be ignored. On the contrary, they should be taken all the more seriously, given Armenia’s already precarious geopolitical positionand the lack of space for mistakes in policy making.

Although Armenia may not necessarily be heading for a crisis as described in the FPA’s  3rd drastic currency depreciation scenario, many factors still hamper real and sustained economic growth – factors which in effect would only require willpower on the part of government authorities to solve.  The solution ultimately revolves around a simple formula of a low, comprehensible and flat taxation system coupled with a sustained desire to tackle corruption at all levels, and finally, access to proper continuing education for Armenia’s citizens.

Interestingly, the report also reserves a role for the Armenian Diaspora in the pressure for, and implementation of, new and comprehensive pro-growth policies in the Republic of Armenia (RA).

 Inflation and Debt Management: 

Inflation and debt management are generally considered to be high priority concerns to ensure the macroeconomic stability of the country. The FPA thus rightly points out some of the dangerous flaws in the RA’s debt management policy, stating, for instance, that Armenia’s debt percentage has reached critical levels for a developing economy at 40% (p.4), while pointing out that Armenia is due to repay its foreign loans between 2013-2014 (most of which is owed to the World Bank). Such a process could potentially undermine Armenia’s foreign exchange reserves for a long time to come.

Though this is not entirely incorrect, it is well within the norms of sustainability when compared to other European states, which are running much larger debt margins. Furthermore, a recent agreement between Armenia and the World Bank intends to facilitate the repayment with minimal disturbance to Armenia’s foreign exchange reserves.

It should be noted that sustained external debt does not automatically spell disaster for an economy, but on the contrary, and somewhat paradoxically, could be seen as a sign of healthy economic growth. If creditors continue to approve loans to a country, it displays a certain trust in its economy, thus fostering a better investment climate.  This is further supported by the report released by Fitch Ratings, which gave Armenia a BB- credit rating, while predicting a stable economic outlook for the country. The report states: “The rating affirmation reflects the fact that Armenia is gradually reducing its fiscal and external imbalances. The government narrowed the fiscal deficit to 2.8% of GDP in 2011 from 5% of GDP in 2010, through tax collection improvements, revenue surprises and spending restraint”. (Reuters, August 2012)

Furthermore, a recent IMF report released after a September 2012 working visit to Armenia found that Armenia’s debt and inflation management was quite sound, stating that “the programme is broadly on track, with most quantitative targets met and structural benchmarks implemented. Fiscal consolidation is moving forward, ensuring that public debt remains sustainable.” (IMF country report, Armenia October 2012) Furthermore, it praised the Central Bank of Armenia (CBA) for its close monitoring of the situation.

The IMF report also states that the banking sector remains solid and well-capitalised. However, the findings concur with the FPA report in warning that continued foreign currency lending continues to grow rapidly, exposing banks to indirect credit risks.  These concerns, however, are factored into the Fund’s technical assistance programme to Armenia, which includes plans for supporting strong growth and poverty reduction, reduction of the fiscal deficit by over 6% of GDP (while trying to preserve key social expenditures), implementing reforms to improve the tax system, ensuring greater exchange rate flexibility, strengthening the financial sector, and more importantly, improving the business environment.

To sum, though the FPA does fear that Armenia’s external debt might be quite critical, it remains quite manageable, according to international financial organisations, which are closely monitoring it, and working along side the CBA to reduce it.

Corruption and Economic Growth

The FPA report is evidently correct in highlighting the negative effect of corruption for the state revenue collection system, as well as for economic growth. In recent years, the government has taken a number of steps to greatly reduce petty corruption, but have categorically failed, or proved unwilling to fight it on a large-scale.

This is highly critical because, even with a 20% corporate profit tax, as well as newer systems implemented to impede tax evasion in small and medium enterprises, tax revenue has only slightly risen, and still only constitutes some 16% of Armenia’s GDP (compared to 25% in neighbouring Georgia. This is largely due to an entrenched system of corruption in the higher echelons of power, where big businesses are intrinsically connected to people in government who often receive kickbacks in exchange for large-scale tax evasion by some of Armenia’s largest corporations.  Such practices deprive the government of a large amount of funds which could be used for social or infrastructure programmes, and instead, constrains the government into taking out loans to balance the budget. The problem is further compounded by the fact that many of these government-connected oligarchs enjoy de facto monopolies on commodities imports (often while circumventing the tax system) and go so far as to use the aforementioned connections to threaten foreign investors (and as such, real sources of tax revenue) from establishing themselves in Armenia. Corruption in the government business environments pose a long-term vital threat to the survival of Armenia as a functioning state because it discourages foreign investment and repatriation from the Diaspora. Recent rumours of Republican MP Samvel Aleksanyan’s attempts to fend off french conglomerate “Carrefour”s establishment in Armenia due to fears of competition with his own chain of “City” hypermarkets paint a good picture of how such practices are negative for the country’s development.

In the last couple of years, the government, under pressure from the World Bank, has seemingly taken steps to fight corruption with some success. New regulations make it harder for business transactions to go unregistered, and the tax service has become more transparent. However some would argue that the state’s supposed commitment to fighting corruption is also being used as a way to apply selective justice to enemies of the regime, exemplified by the National Security Services (NSS)’s highly publicised investigation into alleged money laundering by prominent opposition MP Vartan Oskanian.

Role for the Diaspora:

Diaspora investors have had a number of experiences while investing in Armenia. Though many have done well, there are many horror stories now circulating in diaspora circles, causing many to think twice before investing in their home country.

There are two sides to this issue. The first obviously involves government connected personalities taking advantage of a situation where good-hearted yet somewhat naive Diaspora Armenians would often be induced into giving kick-backs and other forms of corruption, or signing legally dubious contracts only to find their assets at the mercy of corrupt judges.

On the other hand, many Diaspora investors were seemingly unaware that, though Armenia is indeed their homeland, it is still a transitional post-Soviet state, and Rule of Law is a new, and ill-understood concept. Thus, smart investors should put aside the emotional bonds of kinship and apply the same risk calculations as they would in any other developing state.

Either way, this creates a vicious circle where government-connected oligarchs receive positive stimulation from continuing the Soviet legacy leeching off of foreign grants, donations and investments, who inevitably end up biting the hand that feeds them, so to speak.

Armenia has been independent for over two decades now, and both the Armenians in Armenia and those of the Diaspora have now passed the episodes of early culture-shock and should now reevaluate their symbiotic relationship. The Armenian diaspora should still invest in Armenia, but not as naively as before, and should not be afraid to demand real change from authorities.

Furthermore, the State would learn that it is in its benefit to take real steps to facilitate and encourage foreign investments, as it offers the prospects of long term growth and wealth than sheer theft would ever account for.

Conclusions:

Though the PFA report does indeed seem to be alarmist, it does point out some glaring and easily amendable inefficiencies in Armenia’s reform programme. Though Armenia’s economic recovery is still quite fragile, It seems unlikely that Armenia would go bankrupt anytime soon, but fear of financial meltdown should not be the driving force behind comprehensive financial and socioeconomic reform.

The Diaspora does have a great role to play in Armenia’s economic recovery and further development which does not involve charity or Genocide lobbying. It involves a combination of smart investment, collective lobbying for REAL justice system reform to protect said investment, and finally, repatriation.

Repatriation is eventually the most important because it would force the local authorities to face citizens who grew up in societies where rule of law is prevalent, and individuals are taught to demand their rights. Such values which would be transmittable to the local population as well.

The government, on its hand, should learn that, though Armenia’s geopolitical situation is not ideal, facilitating investments by lowering corporate and income taxes, creating a strong banking system, aggressive democratisation and committing to free-trade agreements could only result in stronger and more viable state, which in turn would encourage repatriation of a highly skilled and wealthy workforce to the country, thus securing a future for the Armenian nation.

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Why Serzh Cannot fulfill his electoral promises

On April 9th, as tens of thousands of victims of the present regime gathered at Liberty Square to express their discontent, Serj Sargsyan, was controversially sworn in for a second term at Yerevan’s Hamalir. His inauguration speech (which, given the location he had picked, reminded one of a Communist party Congress) was as fascinating as it was absurd. After placing his hand on a 7th century Bible, Sargsyan swore to uphold the constitution, and outlined his strategy for the next 5 years. He went on to reassure the people that their concern for the state of the country is well understood; citing corruption, poverty and emigration as the main focus of his 2nd term ‘plan’.

Before we go on to explain how this is nothing short of ludicrous, and simply impossible; let’s take the time to explore the last 5 years of Sargsyan’s presidency. It should be noted, in fairness, that Sargsyan was handed a country on the brink of recession by a former president, who hid Armenia’s real economic development numbers under a veil of construction-fuelled ”prosperity”. Sargsyan did preside over a period of modest growth, with most indicators showing a moderately positive trend, the 2013 EU progress report noted some promising reforms in the fields of transport, energy, environment, information technology, research and development, people-to-people contacts, education and health.

Armenia has made a notable leap in press freedom, jumping from 102nd, when Sargsyan took office in 2008, to 74th place this year according to reporters without borders. Armenia also ranks 32nd in the world for ease of doing business, according to the World Bank.

Sargsyan did oversee some relatively bold foreign policy firsts, such as the highly controversial protocols and football diplomacy between Armenia and Turkey; he has so far managed to tactfully circumvent Moscow’s pressure to join the Russia-led “Eurasian Union” in favour of further integration into the European geo-political structure; signing the Deep and Comprehensive Free Trade Agreement (DCFTA), and visa facilitation with the EU this year.

Thus, under Sargsyan’s presidency, Armenia did indeed become a better place than it was in 2008; it managed to pull itself out of a World Recession, it restructured its finance apparatus, allowed for a more tolerant political sphere, and has developed a more dynamic business environment; at least on paper. However, several questions remain unanswered; how much of this redressing can be credited to Sargsyan? Did he lead toward socio-economic recovery or merely hinder inevitable progress? If so, who really reaped the fruits of this progress?

Despite the modest improvement of Armenia’s socio-political situation during Sargsyan’s first presidency, the President simply cannot solve the main threats to Armenia’s long-term security; threats which took him 5 years to identify: corruption, poverty and emigration.

In the year leading up to the latest round of elections (parliamentary, presidential, municipal) Sargsyan has begun to denounce malfeasance within the government, but this turned out to be no more than theatrics rather than an honest show of will. Short of making Tigran Sargsyan cry on state television, little has been done to fight corruption. Both Sargsyans have pledged to fight corruption, yet so far, their efforts have only lead to the elimination of some sacrificial lambs, with no concrete results.

He cannot solve the problems which plague Armenia because…He is at the center of the problem. The simple reason as to why he has not been able to make any significant progress in solving those problems so far has nothing to do with the country’s geopolitical, or economic situation, but everything to do with him. His political dinosaur-dominated government has inherited the soviet tradition of making grand, vague, and ultimately groundless promises of self-improvement. As Sargsyan stood on stage denouncing the lack of good governance by the cabinet which (as he apparently forgot) HE appointed, and is most likely planning to reappoint (with almost no changes), one could not help but make comparisons to similar complaints and promises uttered by Soviet president Mikhael Gorbatchev, some 30 years before, in similar circumstances. As history taught us about the USSR, large, bureaucratic and obsolete organisations are simply unable to self-medicate.

How could Sargsyan effectively fight corruption when the head of the country’s main anti-corruption body, the aptly named “Anti-Corruption Council” is headed by a man (not just any man, but Armenia’s supposedly technocratic Prime Minister Tigran Sargisyan) whose central role in a money laundering scheme has recently been revealed? How will he fight against the economic inequalities created by the existence of commodity-based cartels, when the ringleaders sit next to him in the National Assembly? How can he ask the criminal justice system to prosecute the oligarchs, which have been ravaging the country, when the judges themselves are appointed by these same people? How can he make Armenia a more attractive place for international and diaspora investments when he himself has taken kick-backs? How could he preside over rapid economic growth when that would mean giving up his preferential economic status, and breaking up the cartels of his closest backers?

He cannot solve the emigration issue because people leave due to the fact that they cannot find a place in a country where the private businesses of the president’s wife, daughter, or cat get priority over their own prosperity; because they do not have access to infrastructure since funds are diverted to private accounts, and so on.

When PM Sargsyan toured the United States several months ago, begging for renewed Diaspora investments , he was unable to explain how he was to go about restoring investors trust in Armenia. The easy answer would have been to simplify the tax code (impossible when you consider that the head of the Tax authority of Armenia is an Oligarch himself) and strengthen Rule of Law. Thus we see a paradox where the Government claims it wants to safeguard economic growth in Armenia, just not at the cost of losing some of its own privileges..

Corruption, lack of good governance & Rule of Law, as well as widespread poverty, are not problems that can be individually dealt with; they are symptomatic of a bigger cancer; a cancer which has already consumed the present ruling apparatus, and needs to be cleansed.

The Republican Party (which The Economist magazine has described as a “typical post-Soviet ‘party of power’ mainly comprising senior government officials, civil servants, and wealthy business people dependent on government connections”) is more and more aware of the criticisms, but is still too delusional to cope with the reality that they have placed their compatriots in. This is evident by their hilariously oxymoronic campaign slogans such as “հավատանք որ փոխենք” lets believe to change (considering the Republicans were already in power at the time, this is probably the first time one could think of where a party actually ran against itself), or “դեպի ապահով Հայաստան” Towards a Safer Armenia (evident by this awful soviet throw-back campaign video, which clearly shows that the Republicans do not believe the Armenian people are capable of critical thinking) and the mayoral slogan “ավելի լաւ Երեւան” (for a better Yerevan). Does the government think that the populace will believe empty promises forever?

Once more, the reflections of soviet-era propaganda are difficult not to recognise, but are emblematic of the RPA’s inability to deal with the modern realities and challenges with a soviet-era modus operant.

The RPA’s foundations are thoroughly rotten, and can no longer be replaced. The cycle of corruption runs so deeply within the corridors of power that the only way for Sargsyan to truly stop such an infestation would require the dismissal, and imprisonment of such a large part of the government apparatus that the regime would collapse. Even putting aside the genuine lack of effective policy-making, it is the Symbol of a state run by greed, nepotism, profiteering, unscrupulousness and extorsion that has failed the electorate; when rising in the bureaucratic ranks is often accompanied by increased condescendance, more grotesque shows of wealth, and impunity towards the law, instead of increased sense of duty.

Thus, if Sargsyan truly cares for the wellbeing of his people, and the sustainable future of his country, he would understand that the only way for the fight against corruption, poverty and emigration to be undertaken seriously would require him, and his cabinet to resign. Unfortunately, no one expects him to have that kind of political will.

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.

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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.