IWPR 1997

Armenia: The Economics of Isolation

“Armenia and its people have turned to various strategies to survive economic disaster”

By Suren Karapetian in Yerevan

The 1980s were Armenia's golden age. Thanks to the centralised planning system, the goods and services it produced ($11.5 billion worth at current rates in 1987) found outlets on Soviet territory without regard to quality or demand. Sixty-seven per cent per cent of Armenia's national production found its way to the USSR's external markets, and the republic imported 72 per cent of the raw materials used.

Armenia enjoyed the advantage of having processing industries. In the Soviet price system, raw materials were relatively cheap and processed goods relatively expensive. For example, the computer factory in Yerevan produced computers costing 1.5 million roubles each, while the cost of a tonne of oil was 27 roubles: in other words for one computer, Armenia received 55,000 tonnes of oil. If the factory was still operational today (it seized production in 1992), one computer could now buy only 30 tonnes of oil.

In addition to this, Armenia's domestic consumption was greater than its production. And thanks to the inequality in terms of trade between Armenia and the centre, and subsidies from the latter for construction and other purposes, Armenia received some $4-4.5 billion a year. According to the estimates of some experts, Armenia received up to 10 per cent of all the subsidies Moscow handed out by to the union republics.

As a result, living standards were high. Armenia's Gross Domestic Product (GDP) per capita was $3,333 (1987) while consumption per head stood at $4,637, a figure comparable to the indexes of such countries as Portugal, Ireland or Israel. Life expectancy, at 73 years, trailed that of the US by only three years and Japan's by only six.

The Post-Soviet Disaster.

In 1991 came independence and the subsequent events—war and blockade—brought economic ruin. Industrial production fell to a tenth of its annual output in the 1980s. The main reasons were the loss of markets, a steep rise in prices for raw materials and outdated technology which made the cost of manufacture exceed the value of production—a phenomenon common to all the former Soviet Union. As a result, annual production of goods and services has fallen to one quarter of its level in the 1980s, unemployment has tripled and personal incomes have declined sharply.

Investment in infrastructure has fallen from $600-700 million a year in 1985-87 to a total of $80 million for the four years 1992-96. This was because Russian subsidies ceased and the Transcaucasus region, perceived as a high investment risk, failed to attract private capital. Thus the resource-base of industry, transport, construction, communications and so on has been completely degraded.

The combined total volume of exports and imports feel sharply (to almost a tenth), from 23 million tonnes a year in 1985-87 to 2.5 million tonnes a year in 1995. The communications blockade has exacerbated this situation, but is not its primary cause. The main cause is rather the fall in production, reduction in domestic consumption and the difficulties of transporting goods to external markets. This has exacerbated the long-term decline in production, forced the population to tighten their belts, and reduced further the profitability of all kinds of economic activity.

The energy crisis is similarly severe: the annual consumption of oil products has fallen in volume over ten years from 2.1 million tonnes in 1986 to 250,000 tonnes in 1996; consumption of gas has fallen from 6.5 billion to 1.5 billion cubic metres over the same period. Meanwhile, production of electricity by Armenia's nuclear power station (formerly 5.2 billion kilowatt-hours a year) had come to a complete halt and was resumed only at the end of 1995 with an annual production of 1.8 billion kilowatt hours. This can be explained by the incorrect decision to close the power station taken by the Soviet authorities, the inability to purchase fuel, and neglect of energy saving measures. As a result, the three dreadful winters of 1992-94 will linger in the memory of Armenians, who were effectively deprived of light, heat and fuel for cooking.

Consumption have changed drastically, in both amount and content. Ten years ago, the average personal income was twice the amount required for subsistence; today, up to 80 per cent of the average family's expenditure goes on food. This has been caused by the fall in production and incomes, rising unemployment and weakness in implementing economic reform. In consequence, nutrition standards have fallen, as has the general standard of living and health. The death rate has increased and emigration has risen.

The Struggle to Survive.

Any one of these problems could have brought about total collapse in Armenia, but the people and the state have resorted to various survival strategies. Of course, many Armenian—about half a million people in the total population of 3.7 million—continue to work in education or welfare institutions, in small businesses, in collective farms and in industry. But others have sought employment abroad. At the beginning of 1996, 670,000 Armenian citizens, or 18 per cent of the population, were working outside the country. These migrants were sending $200 million to Armenia annually. Thus the migrants are not only supporting themselves, but also some 400,000-500,000 of their relatives at home.

Another quarter of a million Armenians depend on humanitarian aid. Over the period 1993-96 the US supplied Armenia with 400,000 tonnes of kerosene and 300,000 tonnes of wheat and flour. Europe, Canada, international aid agencies and the Armenian diaspora also provided significant food supplies. The total quantity of aid which reached its intended destination is estimated at around $100-120 million a year.

One of the first steps the Armenian government took after independence was agrarian reform, as a result of which most state-owned land passed to private farmers. In this respect, Armenia remains unique among the former Soviet republics. This brave and timely action saved Armenian agriculture from ruin. New problems have appeared, however: it is impossible to exporting perishable goods to external markets, while processing industries and people cannot pay for the produce. To cope with this, prices for agricultural produce were fixed very low, to the detriment of farmers, but to the significant benefit of urban consumers. An estimated 1.3-1.4 million inhabitants of Armenia depend on agriculture for their living.

Another means of survival is trade with Iran. Over the past few years Iran has become Armenia’s most important trading partner: over 25 per cent of goods entering Armenia comesfrom there, and this channel for the influx of cheap goods has allowed prices in Armenia to remain 45-50 per cent lower than the average in Europe and 25-30 per cent lower than in Russia.

Thus in far from normal conditions the population of Armenia has ensured its survival through far from normal methods. New social groups of the poor and destitute have appeared, as have new social strata of “nouveaux riches”. The incomes and wealth enjoyed by the latter exceed those of the former by up to 35 times, but as yet this does not appear to be a source of social tension.

To achieve economic stability, it is vital that Armenia is integrated into the world economy (at least into the economic communities of the Middle East and the Commonwealth of Independent States) but this will take at least ten years. It will also require at least $200-300 million worth of western invesment a year. The economy may not be capable of sustaining the annual growth rates of 5-6 per cent recorded over the past two years.

Suren Karapetian works at the Institute for Economic Research of the Armenian Ministry for the Economy.