Growth and Poverty Reduction in Armenia Achievements and Challenges

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					Growth and Poverty Reduction in
Armenia: Achievements and Challenges
Enrique Gelbard, International Monetary Fund



               UCLA Conference in Honor of
                  Professor Armen Alchian
                              May 6, 2006
Outline


1.   Background
2.   Recent developments
3.   Main lessons
4.   Challenges to sustain growth
Background

   Motivation
   Early reforms
       Removal of subsidies and price controls
       Privatization of land and enterprises
       Trade and foreign exchange liberalization
        (removal of import and export barriers, setting up
        of simple and low tariff rates, no restrictions on
        payments for goods and services)
       Basic tax and banking legislation
Recent Developments

   Remaining imbalances in late 1990’s

       Poverty
       Weak fiscal position (large deficit and arrears)
       Corruption in state-owned utilities
       Banking sector crisis (8 banks in distress
        intervened by the central bank)
Recent Developments

   The 2001-04 Economic Program

       Boost growth through tax reforms

           Simplified and reduced corporate and income taxes
           Removal of exemptions
           Enhance tax legislation
           Disseminate laws and regulation
Recent Developments

   The 2001-04 Economic Program

       Restore confidence on fiscal management

           Clear domestic and external arrears
           Cut non-priority spending
           Increase public investment
Recent Developments

   The 2001-04 Economic Program

       Clean up the energy sector

           Privatization
           Deregulation
           New management structure in state companies
           Cut service to non-paying customers
Recent Developments

   The 2001-04 Economic Program

       Restructure the banking system

           Close or rehabilitate problem banks
           Bank bankruptcy law
           Stronger provisioning requirements
           Strengthen banking supervision
Recent Developments

   The 2001-04 Economic Program

       Improving the business climate

           Simplified licensing
           Sharing credit information
           Shortening time for enforcing court judgments
           New criminal code
Recent Developments
   Topped CIS countries in all reform dimensions

                               EBRD Transition Indicators, 2005                            Armenia
                                               Privatization                               CIS excluding
                                                 5.0
                                                                                           Armenia
                                                 4.0

                  Overall index                  3.0                    Enterprise restructuring

                                                 2.0

                                                 1.0

                                                 0.0

                                                                             Price and foreign exchange
      Infrastructure reform
                                                                                 market liberalization




         Banking system and securities
                                                                Competition policy
                   markets
                              Degree of progress is measured on a 0 to 5 scale
Economic indicators
   But tax revenues remained low
                     Former Soviet Union Countries: General Government
                                  Tax Revenue, 1999 –2003
                                (Annual Average In percent of GDP)

    40

    30

    20

    10

     0




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Economic indicators
     Closing the gap with the Baltics

               Index of Real GDP in CIS Countries (1990=100)

 120
 110                           Av. Estonia Latvia Lithuania
 100                           Armenia
    90                         Russia
    80                         CIS6 average 1/
    70
    60
    50
    40
    30
          90       92        94        96        98       00        02        04       06

    1/ CIS-6: Azerbaijan, Georgia, Moldova, Kyrgyz Rep., Tajikistan, and Uzbekistan.
    Economic indicators
   Key factors: fiscal and quasi-fiscal consolidation


                      Fiscal and Quasi-fiscal Deficits
                            (In percent of GDP)
     15                                                              15
                                            Quasi-fiscal 1/
     10                                     General government       10


      5                                                              5


      0                                                              0
           1998-99      2000-01            2002-03         2004-05
Economic indicators
   And prudent debt management

                    External Debt to Exports Ratio


    160                                                            160

    120                                                            120

     80                                                            80

     40                                                            40

     0                                                             0
          1999   2000    2001     2002     2003      2004   2005
Economic indicators
   Leading to subdued inflation
                                Monetary Growth and Inflation
                                       (12-month percentage change)


     180                                                                                   180
     160                                                                                   160
                                           Broad money
     140                                   Inflation                                       140
     120                                                                                   120
     100                                                                                   100
      80                                                                                   80
      60                                                                                   60
      40                                                                                   40
      20                                                                                   20
       0                                                                                   0
     -20                                                                                   -20
           1995

                  1996

                         1997

                                1998

                                        1999

                                                2000

                                                       2001

                                                              2002

                                                                      2003

                                                                             2004

                                                                                    2005
Economic indicators
   And enabling strong economic growth
                                                                            1
        Annual Average Real GDP Growth in Armenia and Other CIS Countries
       15                                                                   15

       10                                                                   10

       5                                                                    5

       0                                                                    0

       -5                                                                   -5

      -10                                                                   -10
                                                       Armenia
                                                       CIS average
      -15                                                                   -15

      -20                                                                   -20
              1991–94        1995–98         1999-01         2002–05
Economic indicators
   Poverty and inequality fell by about one-third
                              Poverty and Inequality in Armenia
                   (Percent of total population, unless otherwise noted)

                                                                    1996   2001   2004


      Overall poverty rate                                          56.7   47.0   34.6
      Rural poverty                                                 49.0   46.0   31.7
      Extreme poverty                                               27.7   16.2    6.4
      Gini coefficient (income)1                                     0.6   0.54   0.40
      Gini coefficient (consumption)1                                0.4   0.38   0.26

       Source: Based on Household Surveys.
       1Ranges from 0 (perfect equality) to 1 (total inequality).
Main lessons
1.   Policy package (well-sequenced reforms and right mix
     of policies)

2.   Commitment to reforms

3.   Minimal government intervention (low tax rates, no
     distortionary subsidies, limited assistance without
     guarantees)

4.   Higher public investment

5.   Role of the Diaspora (intermediation of
     investment, transfers, trade links)
Challenges ahead


   Income per capita still under US$1,000
   Growth was ignited making Armenia one
    of the fastest low-income countries since
    2001
   But sustaining long-term growth will be
    challenging
Challenges ahead


   Fiscal framework
   Banking system
   Institutions and anti-corruption policies
   Regional cooperation
Challenges ahead

       Fiscal framework

         Revamping tax and customs administration
          primarily through risk-based methods
         Efficient provision of public services and
          improvements in basic infrastructure
          (especially in rural areas)
         Save for decommissioning of the nuclear
          power plant and funding the pension system
Challenges ahead

       Banking system

        Transparent bank ownership
        Judiciary to enforce creditor rights and
         collateral recovery
Challenges ahead

       Closed borders

         Effect large, suggests open borders could
          increase trade by about 40 percent
         But this requires resolving disagreements
          with Turkey and Azerbaijan
         Improving customs administration will also
          help in the near term
Concluding comments


   Armenia has made impressive progress in
    recent years, but the reform agenda needs
    to be completed and economic institutions
    should function adequately
   Key element: a renewed dose of political
    resolve regarding policy implementation and
    fighting corruption
Growth and Poverty Reduction in
Armenia: Achievements and
Challenges

          UCLA Conference in Honor of
             Professor Armen Alchian
                         May 6, 2006