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16
ECONOMIC DEVELOPMENT OF COUNTRIES IN A STATE OF
ARMED CONFLICT: AN ARMENIAN CASE-STUDY
Ashot MARKOSIAN
D.Sc. (Econ.), Professor at the University of Architecture and Construction
(Erevan, Armenia)
Boris AVAKIAN
Ph.D. (Econ.), Deputy Director of the Territorial Administration of the Federal Agency for State Property Management (Rosimushchestvo) for the Leningrad Region (St. Petersburg, the Russian Federation)
Elianora MATEVOSIAN
Ph.D. (Econ.), Employee at the Center of Political Scientific, Legal, and Economic Research and Forecasting Noncommercial Organization (Erevan, Armenia)
ABSTRACT
This article takes a look at the current state and dynamics of Armenia's economy over the past few years; the authors have studied several budget expenditure items, and also carried out a comparative analysis of Armenia's external trade indices with the countries of the region.
Involvement in any conflict, particularly one that is unresolved, has an impact on the country's economy and makes it unattractive to investors, who do not like vagueness and avoid risks; commerce strives to minimize transactional outlays, while closed borders lead to enclave development. This is precisely how Armenia's economy has been developing over the past two decades.
This situation is making the country's economy dependent on particular players, different factors, and so on, and is leading to monopolization of its main branches and underdevelopment of sectors that in other conditions could become a catalyst for economic progress.
An analysis of the economic growth trends in the Republic of Armenia (RA) shows that this growth is still having little influence on the standard of living of the country's population, since government budget expenditures are mainly oriented toward defense. At the same time, the main source of personal monetary income comes from private remittances.
Investment flows and Armenia's reciprocal trade with neighboring countries are
going against the overall economic integration trends. This is causing countries that are already in a state of conflict to move increasingly away from each other.
The authors of this article think that economic cooperation among all the countries of the Southern Caucasus should become an alternative to the continuing conflict.
KEYWORDS: Armenia, GDP, an armed conflict, the trends toward economic growth, defense spending.
\ J
In Lieu of an Introduction. The Economic Environment and Standard of Living
In the 2000s, the trend toward sustainable economic growth continued in the Republic of Armenia. However, it stands to reason that the world crisis had an impact on the republic's economy. At its first stage, Armenia managed to prevent a severe market landslide: the republic's low external debt before the crisis, rise in savings, and balanced and non-risk fiscal policy created a kind of safety net. According to another viewpoint, the main reasons Armenia was able to more or less cope with the first wave of the slump were its low integration into the global economic environment and the large volume of remittances sent home from workers abroad.
Beginning in the 4th quarter of 2008, the drop in overall external demand and decrease in capital flows took their toll. The volume of investments shrank considerably, while housing construction felt the main brunt of the abrupt change in the economic environment. The 2009 indices provided graphic evidence of the profound economic slump: the size of real GDP (in drams) decreased by 14.1%. This was followed by a slow economic revival: GDP growth rates reached 2.2% in 2010, 4.7% in 2011, and 7.2% in 2012.
The precrisis economic growth indices reached during the past decade have permitted Armenia to debut in the group of middle-income countries. The precrisis economic growth allowed for stable employment, a rise in real wages, and an increase in consolidated government budget spending for social programs. All of these factors, as well as the higher volume of remittances, have made a considerable contribution to reducing poverty.
Between 2004 and 2008, there was an increase in average economic growth rates in almost all sectors of the economy, which amounted to 11.6% and led to significant structural changes in GDP. The highest rates were achieved in construction; in 2008 they ensured 39.1% of GDP growth. In so doing, the share of construction in the GDP structure rose to 24.1%.
However, in 2009, the real reduction in GDP, as mentioned above, amounted to 14.1%. It was a significant decrease in construction volumes that caused such a reduction. The construction slump continued in subsequent years, and the year 2012 saw negative shifts in this branch of the economy: there was a drop in construction rates compared to 2008 and 2009 (19.0% and 11.7%, respectively).
In 2010, economic growth of 9.2% was registered in industry (compared with the 6.9% drop in 2009), which promoted an increase in GDP by 1.2 percentage points.
A relatively favorable situation was seen in the agrarian sector in 2009, but in 2010 there was a 16.0% drop caused by unfavorable climatic conditions, which also had a negative effect on GDP growth (of 2.7 percentage points).
The Armenian government took steps aimed at stimulating the supply of agricultural commodities, attracting investments into industrial enterprises and branches, de-bureaucratizing tax policy and alleviating the tax burden, offering benefits on deferred value added tax payments, and so on.
These measures encouraged significant changes in 2011 in the republic's GDP structure. In particular, as the result of a 113.7% increase in agriculture and 113.5% in industry in 2010, the specific percentage of these sectors of the economy in GDP rose (from 17.1% to 20.2% in agriculture and from 15.4% to 16.3% in industry). As in previous years, there was a 12.5% slump in construction.
Along with the slump, an increase was seen in end consumption in the economy compared with the size of GDP. For example, in 2009-2011, the average final consumption level amounted to 95% (in 2012 to 101.4%), while in 2008, this index was equal to only 81.8% of GDP.
During 2005-2008, the national currency strengthened compared to the U.S. dollar and other foreign currencies. The reason for this was, first, the increase in inflow of foreign currency in the form of private remittances, government grants, and foreign direct investments. In 2009-2012, due to the decrease in volumes of private remittances (in 2009) and foreign direct investments (in 2009-2012), Armenia's currency became devaluated.
In 2011, average annual inflation amounted to 7.7%, while in 2012 it was at a level of 2.6%.
The main indices of Armenia's socioeconomic development (in dollar equivalent) are presented in Table 1.
It is difficult to give a positive assessment of the economy when the level of gross income per capita is extremely low (in 2012 it amounted to $3,290), import is almost three times as high as export (2012), a third of the population lives below the poverty line, and the level of unemployment is very high. Moreover, since the economy does not have the necessary resource base, its dependence on external remittances is rising. If we add monopolization and technological backwardness of industry to the above, as well as a high external state debt that reaches almost 40% of GDP, it can be concluded that this kind of economy is unlikely to comply with the goals and priorities the country must aim for in present-day conditions.
The level of poverty is the most important indicator for measuring and assessing the population's wellbeing. Poverty is manifested in different forms and affects such spheres of public life as consumption, food safety, health care, education, rights (including the right to vote), and the quality of life. In so doing, one of the most important ways to overcome poverty is to find a decent job.
It should be noted that, in contrast to the previous two years, the poverty level stopped rising in 2011, amounting to 35.0%, which is a little lower than the index for 2010 (35.8%).
In 2009-2010, the rise in poverty level in Armenia was mainly caused by the 14.1% economic slump of 2009. In 2010, compared with the previous year, Armenia's economy grew by only 2.2%. In 2011, economic growth amounted to 4.7%, while in 2012, it was 7.2%. But initially the slump was so profound that further economic growth can be said to have had no effect on the standard of living. Moreover, there are doubts about whether the economic growth factors are being correctly calculated.
In the end, the profound economic slump, which was accompanied by an increase in unequal levels of personal income, promoted a decrease in consumption volume. The results of an all-encompassing study of the standard of living of Armenian households for 2011 shows that real average monthly consumption of the entire population compared with 2008 decreased by 6.1%. In so doing, the decrease in consumption volume affected all strata of the population.
Experts calculated that in order to eliminate poverty in 2011, Armenia would have to spend 111.5 billion Armenian drams, or 3% of GDP, in addition to those funds that had already been allotted to finance social support programs.1 Moreover, social support must be properly targeted; otherwise financing meant for the poor strata of the population will be squandered on other needs and support of those who are not particularly in need of help.
1 See: Picture of Poverty and Social Situation of Armenia, Statistical Analytical Report, National Statistics Board of Armenia, Erevan, 2012, p. 46.
Armenia's Main Socioeconomic Indices in 2005-2012
^fl Indices 2005 2006 2007 2008 2009 2010 2011 2012
m 2 3 4 5 6 7 8 9 10 11 II
1. Average annual dram/dollar exchange rate 457.7 416.0 342.1 305.9 363.3 373.7 372.5 401.8 87.8
2. Average monthly nominal workers' wage, $ 113.7 149.7 216.9 285.7 264.3 274.7 290.2 302.1 265.7
3. GDP (market value), $bn 4.90 6.38 9.21 11.66 8.65 9.26 10.14 9.95 203.1
4. GDP per capita, $ 1,523 1 982 2 853 3 606 2 666 2 844 3 363 3 290 216.0
5. Final consumption expenditure, $bn 4.22 5.26 7.53 9.54 8.10 8.80 9.79 10.09 239.3
% of GDP 86.0 82.3 81.8 81.8 93.7 95.1 96.6 101.4 15.4 percentage points
6. Gross savings, $bn 1.49 1.57 3.48 4.77 3.00 3.04 2.83 2.37 159.1
% of GDP 30.4 24.6 37.8 40.9 34.7 32.8 27.9 23.8 -6.6 percentage points
7. Industrial production, $bn 1.42 1.55 2.09 2.42 1.84 2.21 2.68 2.79 196.5
% of GDP 29.0 24.3 22.7 20.8 21.3 23.9 26.4 28.0 -1.0 percentage points
8. Agricultural production, $bn 1.08 1.34 1.85 2.05 1.52 1.70 2.13 2.09 193.5 J
Table 1 (continued)
a 2 3 4 5 6 7 8 9 10 « B
% of GDP 22.0 21.0 20.1 17.6 17.6 18.4 21.0 21.0 -1.0 percentage points
9. Construction volume, $bn 0.95 1.55 1.96 2.81 1.60 1.58 1.36 1.17 123.2
% of GDP 19.4 24.2 21.3 24.1 18.5 17.0 13.4 11.7 -7.7 percentage points
10. Goods turnover, $bn 1.87 1.97 4.16 5.48 4.33 4.84 5.50 5.46 292.0
% of GDP 29.0 24.3 22.7 20.8 21.3 23.9 26.4 28.0 -1.0 percentage points
11. Volume of services, $bn 0.79 1.20 1.67 2.28 2.03 2.12 2.32 2.42 306.3
% of GDP 16.1 18.8 18.1 19.6 23.5 22.9 22.9 24.3 8.2 percentage points
12. Revenue of consolidated budget, $bn 0.98 1.28 2.04 2.62 1.96 2.15 2.43 2.43 248.0
% of GDP 20.0 20.1 22.2 22.5 22.7 23.2 24.0 24.4 4.4 percentage points
13. Consolidated budget expenditure, $bn 1.09 1.36 2.18 2.71 2.61 2.61 2.72 2.58 236.7
% of GDP 22.2 21.3 23.7 23.2 30.2 28.2 26.8 25.9 3.7 percentage points
14. Provision of crediting, $bn 0.42 0.57 1.23 2.05 2.00 2.39 3.36 3.96 942.9 -J)
■p» ho
Table 1 (continued)
External trade turnover, $m
2,775.6 3,176.7 4,420.1 5,483.3 4,031.3 4,790 5,479.6 5,694.9
205.2
15.
including: Export
including food products
973.9 985.1 1,152.3 1,057.2 7,10.2 1,041.1 1,334.3 1,428.1 — — — 199.7 134.8 170.15 237.1 323.2
146.6
Import
including food products
1,801.7 2,191.6 3,267.8
4,426.1 3,321.1 3,748.9 4,145.3 4,266.8 236.8 -760.7 -612.0 -673.5 -781.2 -812.5
16.
Consumer price index (compared to previous year, %)
100.6
102.9 104.4
109
103.4
108.2
107.7
102.6
102.0
Current account of balance of payments, $m
-51.7 -117.1 -589.3 -1,381.8 -1,368.9 -1,373.2 -1,108.2 -1,056.4
17.
2,043.3
■P»
CO
assets account
73.3
86.4 142.8
148.9
89.1
107.9
96.2
103.9
141.7
financial account
-25.3
46.5 448.7 1,220.4 1,260.4 1,247.8 1,041.3 842.8 -3,331.2
18.
External trade balance of food products, $m
-560.9
-477.2 -503.0
-544.1
-489.3
Deficit (-), 19. surplus of government budget, % of GDP
0.2
-1.7 -1.3 -1.5 -0.7 -7.7 -5.0 -2.8 -1.5 percentage
points
External public debt, $m
1,099.2 1,205.6 1,448.9 1,577.1 2,966.7 3,299.0 3,568.2 3,737.8
340.0
20.
% of GDP
22.4
18.9
15.7
13.5
34.3
35.6
35.2
37.7
15.3 percentage points
Sources: Statistical Yearbook of Armenia, 2010, National Statistics Board of Armenia, Erevan, 2010, pp. 15, 18; Statistical Yearbook of Armenia, 2012,
National Statistics Board of Armenia, Erevan, 2012, pp. 15, 18; Socioeconomic State of Armenia in January-December 2012, National Statistics Board of Armenia, Erevan, 2013, pp. 9, 78, 79, 127; Socioeconomic State of Armenia in January-February 2013, National Statistics Board of Armenia, Erevan, 2013, pp. 9-12.
Table 2 shows the expenditure items needed to eliminate poverty of the population. According to the calculations, 3.9 billion Armenian drams are needed in order to eliminate extreme poverty, or another 0.1% of GDP in addition to the funds already allotted to social support.
Table 2
Monetary Value of Poverty Elimination in Armenia in 2011
Extremely Poor Population I Poor ^ Population I
Average consumption of the poor population (drams, in the equivalent of one adult per month) 18,619 28,038
Poverty line (drams, in the equivalent of one adult per month) 21,306 36,158
Additional consumption required by the poor population (drams, in the equivalent of one adult per month) 2,687 8,120
Deficit—additional consumption required by the poor population compared with the poverty line (%) 12.6 22.5
GDP (billion drams) 3,776.4 3,776.4
Necessary budget (billion drams) 3.9* 111.5*
Necessary budget in relation to GDP (%) 0.1 3.0
^ * This index is calculated as the product of the average annual size of the permanent population, level^ of poverty and amount of additional annual consumption required by the poor population.
S o u r c e s: The table was compiled on the basis of the results of a universal study of the standard of living of households in Armenia for 2011, National Statistics Board of Armenia; Picture of Poverty and Social Situation of Armenia, Statistical Analytical Report, National Statistics Board, 1 Erevan, 2012, p. 47. J
International experience shows that it is extremely difficult and almost impossible to ensure 100% targeted social support. The practice of other countries also shows that sometimes the number of poor is artificially inflated by those who want to acquire this status to receive large subsidies and social benefits. In this respect, it cannot be said for sure that Armenia will be able to avoid a similar situation. Keeping this factor in mind, the amount of financial funds that will actually be allotted to fighting poverty will most likely be much higher than the calculations we made. In order to ensure a high level of targeting social aid, the human resources activated in the programs to overcome poverty must also be doubled.
Private noncommercial remittances from people working abroad, mainly from Russia and the U.S., are having a significant impact on the standard of living of the Armenian population (see Table 3).
It follows from the data of Table 3 that during 2005-2012 the inflow of private noncommercial remittances rose by 224.1%, including from Russia by 266.9%, and from the U.S. by 80.5%. The outflow of remittances amounted to 154.0%, 197.0%, and 84.6%, respectively. The ratio of outflow of private noncommercial remittances to inflow amounted to 25.2% in 2005, 21.7% in 2006, 19.8% in 2007, 14.8% in 2008, 17.3% in 2009, 17.1% in 2010, 17.1% in 2011, and 17.3% in 2012.
Meanwhile, the net inflow of private noncommercial remittances received from individuals abroad during 2005-2012 increased by 247.8%; including from Russia by 279.7% and from the U.S.
Private Noncommercial Remittances from Individuals Received from Abroad and Sent Abroad by Individuals through the Armenian Banking System (data for 2005-2012, $Thous)
Years M 2005 2006 2007 2008 2009 2010 2011 B)
Inflow IV 752,819 960,926 1,319,479 1,635,307 1,124,119 1,293,736 1,546,959 1,687,263 >
including
Russia 541,308 739,419 1,078,218 1,371,066 904,011 1,062,266 1,295,163 1,444,955
U.S. 82,628 94,491 76,571 60,958 59,288 67,789 74,380 66,554
r Outflow V 189,793 208,436 261,170 242,240 194,884 221,763 264,602 N 292,249 J
including
Russia 83,537 107,835 129,126 122,759 99,524 116,950 141,352 164,588
U.S. 30,671 13,295 23,764 32,110 23,332 24,554 27,331 25,936
f Net inflow 563,025 752,490 1,058,310 1,393,067 929,235 1,071,973 1,282,357 N 1,395,014 J
including
Russia 457,771 631,584 949,092 1,248,307 804,487 945,316 1,153,811 1,280,367
U.S. ^- 51,958 81,196 52,808 28,848 35,956 43,235 47,049 40,617 J
Ol
by 78.2%. In 2005, Russia's share in private noncommercial remittances amounted to 71.9%, while the U.S.'s was 11.0%. In 2006, these indices were equal to 76.9% and 9.8%, respectively, in 2007, 81.7% and 5.8%, in 2008, 83.8% and 3.7%, in 2009, 80.4% and 5.3%, in 2010, 82.1% and 5.2%, in 2011, 83.7% and 4.8%, and in 2012, 85.6% and 3.9%.
The above data show that in recent years, the share of Russia and the U.S. in the total amount of noncommercial private remittances reached around 90%. We hereby note that Russia's share increased and the U.S.'s, on the contrary, decreased.
We will note that whereas in 2008, the ratio of indices of Armenia's government budget expenditure ($2,649.2 million) to private remittances ($752.8 million) amounted to 1:0.62, in 2009, it was equal to 1:0.44, in 2010 to 1:0.51, in 2011 to 1:0.63, and in 2012 to 1:0.71. So after 2009, the share of private noncommercial remittances received from individuals living abroad rose by 0.27 percentage points, or by 38.0%. Calculations show that if we take Armenia's actual government budget expenditures as five units, during 2008-2012, private noncommercial remittances from abroad amounted to around three units; in natural terms, this number comprises a significant sum capable of boosting the prosperity of the Armenian population.
On the other hand, remittances are monetary resources that people earn abroad (since they cannot find a job in their homeland) and send to their family members.
The high percentage of private noncommercial remittances from individuals is one of the characteristic features of Armenia's development in 1990-the 2000s; most of them were sent to households. There is essentially no data about how much these monetary resources promoted savings, created other benefits, or boosted investment activity. The same situation has been continuing in the 2010s; in our opinion, this is one of those problems that requires more in-depth examination in terms of the impact remittances are having on the republic's economic development rate.
Budget Expenditures and Defense Spending
In 2008-2012, the amount of government budget resources spent on defense on average reached $384.12 million or 3.9% of GDP (or 15.3% of total budget expenditures). It is worth noting that in 2008-2012, expenditures (including reserve funds that do not relate to the main sections) on public order, security, judicial activity, economic development, housing construction, utilities, public health, recreation, culture, religion, and education dropped much more than spending on defense.
Moreover, whereas in 2012 compared to 2008 government budget expenditures decreased to 89.4%, with respect to spending on defense they only dropped to 96.1%.
It should be noted that defense expenditures are huge. For example, in 2012, almost as much was spent on defense ($380.5 million) as on public order, security, and judicial activity ($188.3 million), economic relations ($98.9 million), environmental protection ($9.5 million), housing construction and utilities ($15.3 million), and recreation, culture, and religion ($48.2 million) all together. To be more precise, $20.3 million more was spent on defense.
It follows from the above that the enormous expenditures on defense are allotted to the detriment of other items of the republic's government budget.
The data of Table 4 show that on average for 2008-2012, the amount of defense spending (15.3%) occupies second place after spending on social security of the population (27.3%).
Proceeding from the fact that countries do not always present complete data about spending on arms and defense, we made use of information from the World Bank that is published in the annual World Development Indicators reports and reflected in the data base on the organization's official
Table 4
Armenia's Government Budget Expenditures in Terms of Their Functional Classification
r 2012
Groups of Expenditures 9 2008 2009 2010 2011 2012 compared with 2008, %
c 1 2,649.2 2,557.6 2,554.0 2,455.7 2,368.9 89.4 ^
Expenditures 2 100.0 100.0 100.0 100.0 100.0 100.0
3 22.7 29.6 27.6 24.2 23.9 25.6* j
including:
1 342.6 311.1 383.5 408.2 392.4 114.5
Overall public services 2 12.9 12.2 15.0 16.6 16.6 14.7*
3 2.9 3.6 4.1 4.0 4.0 3.7*
1 396 358.4 394.9 390.8 380.5 96.1
Defense 2 14.9 14.0 15.5 15.9 16.1 15.3
3 3.4 4.1 4.3 3.9 3.8 3.9
1 201.7 191.2 180.5 188.7 188.3 93.4
Public order, security, and judicial activity 2 7.6 7.5 7.1 7.7 7.9 7.6
3 1.7 2.2 1.9 1.9 1.9 1.9
1 292.3 368.4 300.9 93.8 98.9 33.8
Economic relations 2 11.0 14.4 11.8 3.8 4.2 9.0
3 2.5 4.3 3.2 0.9 1.0 2.4
1 9.8 10.8 13.2 11.9 9.5 96.6
Environmental protection 2 0.4 0.4 0.5 0.5 0.4 0.4
3 0.1 0.1 0.1 0.1 0.1 0.1
1 45.9 58.1 114.6 85.3 15.3 33.4
Housing construction, utilities 2 1.7 2.3 4.5 3.5 0.6 2.5
3 0.4 0.7 1.2 0.8 0.2 0.7
1 163.3 154.6 150.2 164.2 154.1 94.3
Public health 2 6.2 6.0 5.9 6.7 6.5 6.3
3 1.4 1.8 1.6 1.6 1.6 1.6
1 52.4 44.9 43.1 47.3 48.2 92.1
Recreation, culture, and religion I 2 2.0 1.8 1.7 1.9 2.0 1.9
3 0.4 0.5 0.5 0.5 0.5 0.5 , -
Table 4 (continued)
Groups of Expenditures H 2008 2009 2010 2011 2012 compared 1 with 2008, 1
Education 1 338.4 296.0 261.7 279.3 251.2 74.2
2 12.8 11.6 10.2 11.4 10.6 11.3
3 2.9 3.4 2.8 2.8 2.5 2.9
Social security 1 694.7 670.7 653.5 687.5 726.2 104.5
2 26.2 26.2 25.6 28.0 30.7 27.3
3 6 7.8 7.1 6.8 7.3 7.0
Reserve funds that do not belong to the main items 1 112.1 93.4 57.9 98.8 104.4 93.1
2 4.2 3.7 2.3 4.0 4.4 3.7
3 1 1.1 0.6 1.0 1.1 0.9
R e f e r e n c e: exchange rate GDP, million drams 2008 2009 2010 2011 > 2012
305.97 363.28 373.66 372.50 401.76
3,568,228 3,141,651 3,460,203 3,776,443 3,981,506.5
D e s i g n a t i o n s: 1. $m; 2. % of total expenditures; 3. % of GDP
* On average in 2008-2012.
S o u r c e s: Socioeconomic State of the Republic of Armenia in January-December 2012, National Statistics Board of Armenia, Erevan, 2013, pp. 105-106; Statistical Yearbook of Armenia 2012, National Statistics Board of Armenia, Erevan, 2012, pp. 385-386; I National Accounts for 2012, National Statistics Board of Armenia, Erevan, 2012, p. 22. J
website. By way of comparison, we took the data on arms and defense spending in the South Caucasian countries involved in conflicts after the collapse of the Soviet Union, the Baltic states, which used to belong to the Soviet Union and had more or less the same economy as the South Caucasian states but were not involved in conflicts after the Union's collapse, and three European states (Austria, Switzerland, and the Czech Republic), which have not participated in any military action for at least the past 40 years.
Based on our own calculations, we compiled Table 5, the data of which show that both Armenia and Azerbaijan spend much more on arms than any of the other countries studied.
The data in Table 5 also make it possible to present the following generalizations:
> Between 1992 and 2010 Azerbaijan spent 326.4% more on military requirements than Armenia;
> In 1992-2010, the highest defense spending index among the listed countries (in percentage of GDP) was registered in Armenia, while the lowest was in Azerbaijan. In the South Caucasian republics, these indices were distributed as follows; in Georgia—4.5% (the highest index), in Armenia—3.4%, and in Azerbaijan—3.0%. It is worth noting that during these years, Azerbaijan's military spending was $1,645.5 million higher than Armenia's ($2,523.4 million) and Georgian ($4,067.3 million) all together, which amounted to a total of $6,590.7;
Table 5
Military Spending (Total for 1992-2010)
Country H GDP, $m Military Spending, $m Military Spending, % of GDP - Military Spending, % of Central Government Expenditures
Armenia 73,880.4 2,523.4 3.4 17.1*
Azerbaijan 276,865.4 8,236.1 3.0 1.2
Georgia 91,367.5 4,067.3 4.5 11.7
Estonia 192,784.1 3,329.7 1.7 4.4
Latvia 239,095.8 3,347.9 1.4 4.0
Lithuania 357,546.7 5,152.9 1.4 3.4
Austria 5,005,934.0 47,790.0 1.0 1.9
Switzerland 6,384,196.0 68,920.8 1.1 4.5
The Czech Republic 1,806,329.2 30,842.6 1.7 5.4
*Average statistics. >
Il S o u r c e: The table is calculated on the basis of website data [data.worldbank.org/indicator/_j, 2013-07-01. 1
> The ratio of military spending to GDP depends on the size of the latter. For example, between 1992-2010, Azerbaijan's GDP ($276.9 billion) was almost 1.7-fold higher than the total amount of Armenia's GDP ($73.9 billion) and Georgia's GDP ($91.4 billion); the matter concerns $165.3 billion;
> In the expenditures of the South Caucasian republic governments for 1992-2010, the percentage of military spending amounted to 1.2% in Azerbaijan, 11.7% in Georgia, and 17.1% in Armenia. In other words, all other things being equal (proceeding from the share of military spending in the structure of overall spending) during the entire period between 1992 and 2010, 14.25-fold (17.1:1.2) more was spent on military requirements in Armenia, and 9.75-fold (11.7:1.2) more in Georgia than in Azerbaijan;
> If we presume that the South Caucasian republics, following Austria's example (in this country the amount of military spending relative to GDP amounts to 1%), will reduce their military expenditures, Azerbaijan will be able to save $5.538 billion [$276.9 billion x (3.0% -1.0%)/100% = $5.538 billion], Georgia — $3.199 billion [$91.4 billion x (4.5% -1.0%)/100% = $3.199 billion], and Armenia — $1.774 billion [$73.9 billion x (3.4% -1.0%)/100% = $1.774 billion], which comprises a total of $10.511 billion.
This enormous sum could have been used to develop the national economies, establish interregional good-neighborly relations, and support the formation of a common South Caucasian market. Spending such large amounts of money in the "propef' spheres would undoubtedly produce the best effect.
Moreover, if we keep in mind that military spending in the direct sense is detrimental to the wealth created by the labor of the entire society, in the economic respect it can be easily compared with the losses that are incurred as a result of earthquakes, flooding, or other natural disasters, for example.
Engage in Trade or Take Up Arms
We would do well to remember the words of one of the founders of the liberal economy Frédéric Bastiat (1801-1849), who said that when goods do not cross borders, armies will.
The impenetrability of borders leads to a decrease in economic growth and territorial contradictions—to a rise in transaction outlays in commerce or, worse still, to its cessation. In conditions of contemporary globalization, openness of the economy becomes extremely important (there are no limitations for specialization, cooperation, development of all types of business activity, nor is there any monopoly). Despite the openness of the Armenian economy, the republic's low level of goods turnover with neighbors is becoming the reason for the hike in price.
The data on export and import volumes of the South Caucasian countries over the past three years and the reciprocal trade between them presented in Table 6 can serve as confirmation of the above. As can be seen from the calculations we present, the volumes of Armenia's export and import are not very high. For example, the largest amounts of export and import the republic could achieve amounted to 5.7% of GDP (in 2012) and 6% (in 2011), respectively; no comment, as they say.
Another extremely important source of economic growth is investments. In January-December 2012, the inflow of foreign investments into the Armenian economy (including from state management agencies and banks) amounted to $1,587.0 million, which is 8.6% lower than in 2011. In so doing, in 2012, the inflow of foreign direct investments amounted to $656.7 million; this amount is 27.5% lower than 2011.
Other investments accounted for $928.9 million (which is 12.0% more than the index for 2011), while portfolio investments accounted for $1.4 million.
Throughout 2012, the outflow of monetary resources (not counting accrued interest, dividends, and debt servicing) amounted to $19.7 million; I am talking about resources exported by legal resident entities in the form of investments (see Table 7).
In January-December 2012, the amount of foreign investment flows into the real sector of the Armenian economy (not counting from state management agencies and banks) was equal to $751.8 million, which is 7.9% less than in 2011. The inflow of foreign direct investments into the real sector of the economy compared with 2011 decreased by 10.1% and amounted to $567.4 million.
In January-December 2012, 37.6% of the total volume of foreign investments in the real sector and 49.82% of the volume of foreign direct investments went to telecommunications. In so doing, it should be noted that in 2011 the most attractive branch in terms of investments was the production of base metals, which received 23.69% of the total volume of foreign investments in the real sector and 21.47% of direct foreign investments.2
In 2012, 9.6% of direct investments went to performing real estate operations and 6.37% to plant cultivation, animal husbandry, and hunting (including rendering services to related branches). In 2011, 21.97% of the total amount of direct investments went to telecommunications and 15.45% to branches related to the production and distribution of electricity, gas, steam, and conditioned air.
In our opinion, the presence or absence of a relation between foreign trade and investment activity of particular countries (both those receiving investments, and those providing them) poses a certain amount of interest. Research of data over the past few years shows that there is no direct dependence between Armenia's foreign trade with a particular country and the amount of investments coming into the republic from that country (see Table 8).
For example, in 2008-2011, Germany ranked 6th, 4th, 5th, 12th, 4th, and 3rd in terms of total investments, respectively. However, export volumes from Armenia to Germany occupied the top
2 See: Socioeconomic State of the Republic of Armenia in January-February 2013, National Statistics Board of Armenia, Erevan, 2013, pp. 83-98.
Interregional Export and Import of the South Caucasian Countries
M Countries Export Import ■
Total, $177 Southern Caucasus Neighboring Countries Total, $177 Southern Caucasus Neighboring Countries
H $177 % of GDP $177 % of GDP $177 % of GDP $177 % of GDP HI
[ 20,0 J
Armenia 973.6 48.2 5.0 88.5 9.1 3,606.9 49.7 1.4 478.0 13.3
Georgia 1,278.0 176.8 13.8 414.8 32.5 4,747.1 568.2 12.0 1,746.2 36.8
Azerbaijan 20,765.3 411.0 2.0 1,480.4 7.1 6,092.0 50.4 0.8 2,085.1 34.2
Iran 25,418.3 562.6 2.2 8,774.4 34.5 53,328.5 184.5 0.3 3,197.0 6.0
Turkey 109,670.1 2,320.7 2.1 13,365.1 12.2 185,523.7 1,158.3 0.6 15,205.4 8.2
И 158,105.3 3,519.3 5.92 24,123.2 15.3 253,298.2 2,011.1 0.79 22,711.7 »
I 2011 J
Армения 1,334.3 61.9 4.6 169.2 12.7 4,145.3 247.0 6.0 680.7 16.4
Грузия 1,990.8 282.0 14.2 533.3 26.8 6,389.0 711.0 11.1 2,306.8 36.1
Азербайджан 26,480.2 535.3 2.0 2,323.3 8.8 9,732.9 89.5 0.9 3,193.5 32.8 J
Ol
Table 6 (continued)
r Countries Export Import
Total, $177 Southern Caucasus Neighboring Countries Total, $177 Southern Caucasus Neighboring Countries
S $177 % of GDP $177 % of GDP $177 % of GDP $177 % of GDP WL
Iran 112,645.6 440.9 0.4 13,142.8 11.7 5,9421.6 255.0 0.4 3,982.1 6.7
Turkey 134,915.3 3,156.8 2.3 19,845.9 14.7 240,838.9 576.7 0.2 18,505.6 7.7
Flotal 277,366.2 4,476.9 1.6 36,014.5 13.0 320,527.7 1,879.2 0.6 28,668.7
[ 2012 ]
Armenia 1,428.1 81.6 5.7 180.3 12.6 4,266.8 49.1 1.1 482.5 11.3
Georgia 1,674.4 310.1 18.5 466.2 27.8 7,184.8 741.8 10.3 2,511.4 35.0
Azerbaijan 23,827.2 570.7 2.4 2,217.9 9.3 9,641.7 129.9 1.3 3,205.2 33.2
Iran — — — — — — — — — —
Turkey 152,560.8 3,841.7 2.5 28,182.1 18.5 236,536.9 520.2 0.2 18,995.4 8.0
H Total S 179 490.5 4,804.1 2.7 31,046.5 17.3 257,630.2 1,441.0 0.6 25,194.5
r \ Note: Iran's neighboring countries: Azerbaijan, Afghanistan, Turkey, Turkmenistan, Iraq, Pakistan, Syria, Armenia, and Kuwait; Turkey's neighboring countries: Azerbaijan, Bulgaria, Iran, Cyprus, Armenia, Greece, Saudi Arabia, Syria, and Georgia; Georgia's neighboring countries: the Russian Federation, Azerbaijan, Armenia, and Turkey; Azerbaijan's neighboring countries: the Russian Federation, Georgia, Armenia, Turkey, and Iran.
Source: Table compiled and calculated on the basis of data from the following websites: [www.intracen.org], [www.armstat.am] and [www.trademap.org], I 2013-07-01.
Ol ho
Flows of Foreign Investments into Armenia in 2009-2012 by Type ($m)
Total investments
Investments in Armenia (liabilities)
01
l=s as
О «см |см
ñ = n °
<u — о
о
-148.9
2,555.4 1,555.8 1,735.9 1,587.0
Investments from Armenia in Other Countries (assets)
■u
tlN «г-
=s as
re см S-CM
с = о о о 2 о
-95.6
91.4 193.7 94.6
115.3 19.7
17.1
Direct investments
906.2
706.9
906.3
656.7
-249.6
72.5
52.7
8.3
78.0 15.8
-62.2
20.3
Portfolio investments
11.0
12.23
1.4
— 10.6
1.5
— 1.1
Other investments*
1,638.2 836.7
829.6
928.9
99.3
112.0 130.4 84.8
37.3
3.3
-34.0
8.8
Commercial loans
49.9
26.6
39.5
84.4
44.9
213.7
8.8 12.5
16.0
0.1
-15.9
0.6
Oi
со
Short-term
31.2
5.9
4.2
4.4
0.2
104.8
8.8 12.5
16.0
0.1
-15.9
0.6
Long-term
18.7
20.7
35.3
80.0
44.7
2.3 раза
Loans
1,588.3
810.1
790.1
844.5
54.4
106.9 121.6 72.3
21.3
1.7
-19.6
8.0
Short-term
— 49.4
106.4
— 120.0 62.6
Long-term
1,588.3 760.7
683.7
844.5
160.8
123.5
1.6 9.7
21.3 1.7
-19.6
8.0
Monetary regulation bodies
337.4
100.0
91.1
99.5
8.4
109.2 — —
State management bodies
1,065.0
313.7
284.0
348.7
64.7
122.8 — —
Banks
150.3
227.0
319.2
92.2
140.6 —
7.9
19.1
1.6
-17.5
8.4
Other sectors
186.2
196.6
81.6
77.1
-4.5
94.5
1.6
2.0
2.2
0.1
-2.1
4.5
Without calculating cash monetary resources, deposits, and other liabilities (assets).
Sources: Socioeconomic State of the Republic of Armenia in January-February 2011, National Statistics Board of Armenia, Erevan, 2011, p. 70;
Socioeconomic State of the Republic of Armenia in January-February 2012, National Statistics Board of Armenia, Erevan, 2012, p. 85; Socioeconomic State of the Republic of Armenia in January-February 2013, National Statistics Board of Armenia, Erevan, 2013, p. 83
V
JJ
Rankings of Armenia's Main Partner Countries in Terms of Foreign Trade and Investments
in 2006-2011
Russian Federation
1 1
1 1
1 1
11111
Germany
12
8 4 5
Ol ■p»
U.S.
6 6 5
Bulgaria
31 8
16 14 12 11 8 10
The Netherlands
28 27 31 25 29 24 15 13 14
15 18 16 10 12 9 15
Belgium
11 14 15 14 16 22 27 17 20 15 24 17 19 11 14 16 17
Georgia
8 10 18 17 17 19 17 18 — 21 12 16
Canada
14 21 12 8 10 9 29 35 26 30 30 26 9 — — — 10
Italy
10 10 9 15 20 23 11 12 10
25 — — 7 16 20 21 21 — 4 11 13
Switzerland
13 10 11 11 23 25 35
15 13 18 15 15 14 13 11 19 15 9 10 7 11
Iran
9 10 10
6 — 26 16 19 18 25 — — 9 — 15 —
China
V
41 17 31 11
13
21 — — — — — 16 — — — — —
JJ
Table 8 (continued) 1 0 2 1
Ukraine 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 D
12 9 11 12 13 15 2 2 3 3 3 5 14 19 — 11 — — 10 11 — 7 —
Austria 20 22 19 13 23 29 15 10 9 16 16 21 17 22 13 15 — 22 — 18 14 — — — (/> 5 S
Spain 11 14 14 14 12 7 30 28 24 29 28 23 24 — — — — — — — — — — —
France 18 15 15 17 16 18 13 6 11 13 12 12 8 8 2 2 2 2 8 5 3 2 2 2 0 1
UAE 17 20 16 18 15 17 22 29 25 22 23 20 — — — — — — — — — — — — m 2 c 2
United Kingdom 16 27 8 27 46 50 21 18 19 23 22 22 14 3 3 8 11 4 12 10 12 — 14 9
Republic of Korea 37 45 41 16 25 14 20 16 15 10 13 19 — — — — — — — — — — — — (o
Thailand 28 29 22 22 28 25 36 33 33 31 32 34 — — — — — — — — — — — — <
India 40 24 28 24 18 27 19 25 18 18 20 15 — — — — — — — — — — — —
Kazakhstan 19 18 25 25 26 24 3 33 36 50 37 31 2 7 8 10 12 14 — 11 11 — — —
Moldova 34 32 32 31 36 48 — — — — — — — — — — — — — — — — — —
Belarus 22 31 27 20 22 20 24 24 29 28 24 28 — — — — — — — — — — — — £ 3 CD
Turkmenistan 27 30 21 23 14 22 27 40 22 33 27 30 — — — — — — — — — — — —
Uzbekistan 33 37 24 28 31 33 54 36 40 51 50 63 — — — — — — — — — — — — 5T </)
The Czech Republic 46 33 34 29 35 31 33 32 32 32 31 33 27 — 21 — — — — — — — — — £ CD CO ho o CO
Sweden ^- 49 50 39 30 41 38 37 22 20 27 21 35 — — — — — — — — — — —
Greece
Table 8 (continued) ■
8 9 I 10 I 11 I 12 I 13 I 14 I 15 I 16 I 17 I 18 I 19 I 20 I 21 I 22 I 23 I 24
IB
14 19 21 21 19 17
25 13 — 22 17
Denmark
48 54 51 43 48 48 — — — — 20 — — — — — — 19
Slovenia
40 45 44 39 45 45
Brazil
26 20 16 17 18 11
Indonesia
26 30 23 26 26 27
Malaysia
32 39 38 36 34 36
Argentina
12
4 10
Australia
10 20 — — — —
Ol
The Cayman Islands
23 16 — — 19 18 20 20 — — 13 —
Lebanon
10 17
Lichtenstein
28 17 11 18 23 16 — — — 13 14 —
The Virgin Islands (U.S.)
Syria
20
18 — — 23 — — — — — 14
Panama
12
The Bahamas _ _ _ _ _ _ _ _ _ _ _ _ 26 _ _ _ _ _ _ _ _ _ _ _
UAR
21
Source: The table was compiled on the basis of data from the Statistical Yearbook of Armenia, 2010, National Statistics Board of the Republic of Armenia, Erevan, 2010, pp. 482-488 and Statistical Yearbook of Armenia, 2012, National Statistics Board of the Republic of Armenia, Erevan, 2012, pp. 471 -474.
three positions on the list of other countries. We can look at another example: UAE did not invest in the Armenian economy in 2006-2011, but in terms of export from Armenia this country ranked 17th, 20th, 16th, 1st, 15th, and 17th, respectively. As for Armenia's import indices, the UAE ranked 22nd, 29th, 25th, 22nd, 23rd, and 20th.
In Table 8, we present the ranking of Armenia's main partner countries in foreign trade and in terms of investment volumes for 2008 through 2011. The data on export, import, and investment volumes for the countries occupying the first three positions (the Russian Federation, Germany, and the U.S.) demonstrate, if not a direct, at least a very obvious interdependence.
It can be concluded in this context that when a country opens up to foreign trade, it becomes more attractive and transparent for investors.
Conclusion
The interstate conflicts in the Southern Caucasus are hindering the development of the transition economies of the region's countries. As a result of the government budget deficit and underdevelop-ment of market institutions (including social security mechanisms), they cannot fully carry out economic and social policy, nor are they in a state to permit themselves to spend large amounts on arms.
Cooperation among the regional states can be activated, primarily by means of economic reconciliation of the sides. If we proceed from this position, we can also examine the question of creating free economic areas with special features in the region.
For example, we can discuss a 10-year program of joint economic development of the region still in the grips of unsettled conflicts. In so doing, particular attention should be given to how much investment will be made over the entire planned period, as well as to maintaining parity (we will call this "parity of investments") in those branches of the economy they go to. The aim of this proposal is to observe the interests of economic activity agents, which will help to prevent an exodus of capital.
Launching economic cooperation and trade among the South Caucasian countries could help to open up new prospects for their interaction both in terms of ensuring peace in the region, and in terms of establishing mutually beneficial business relations.
