UCLA Conference in Honor of Professor Armen Alchian May 6, 2006 Growth and Poverty Reduction in Armenia: Achievements and Challenges Enrique Gelbard, International Monetary Fund
Mar 27, 2015
UCLA Conference in Honor of Professor Armen Alchian
May 6, 2006
Growth and Poverty Reduction in Armenia: Achievements and ChallengesEnrique Gelbard, International
Monetary Fund
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
0.0
1.0
2.0
3.0
4.0
5.0Privatization
Enterprise restructuring
Price and foreign exchangemarket liberalization
Competition policyBanking system and securities
markets
Infrastructure reform
Overall index
Armenia
CIS excludingArmenia
Degree of progress is measured on a 0 to 5 scale
Economic indicators But tax revenues remained low
0
10
20
30
40
Former Soviet Union Countries: General Government Tax Revenue, 1999–2003
(Annual Average In percent of GDP)
Economic indicators Closing the gap with the Baltics
Index of Real GDP in CIS Countries (1990=100)
30
40
50
60
70
80
90
100
110
120
90 92 94 96 98 00 02 04 06
Av. Estonia Latvia LithuaniaArmeniaRussiaCIS6 average 1/
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)
0
5
10
15
1998-99 2000-01 2002-03 2004-05
0
5
10
15
Quasi-fiscal 1/
General government
Economic indicators And prudent debt management
External Debt to Exports Ratio
0
40
80
120
160
1999 2000 2001 2002 2003 2004 2005
0
40
80
120
160
Economic indicators Leading to subdued inflation
-200
20406080
100120140
160180
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-200
20406080
100120140
160180
Broad moneyInflation
Monetary Growth and Inflation(12-month percentage change)
Economic indicators And enabling strong economic growth
-20
-15
-10
-5
0
5
10
15
1991–94 1995–98 1999-01 2002–05-20
-15
-10
-5
0
5
10
15
ArmeniaCIS average
Annual Average Real GDP Growth in Armenia and Other CIS Countries1
Economic indicators Poverty and inequality fell by about one-third
1996 2001 2004
Overall poverty rate 56.7 47.0 34.6Rural poverty 49.0 46.0 31.7Extreme poverty 27.7 16.2 6.4Gini coefficient (income)1 0.6 0.54 0.40Gini coefficient (consumption)1 0.4 0.38 0.26
Source: Based on Household Surveys.1Ranges from 0 (perfect equality) to 1 (total inequality).
Poverty and Inequality in Armenia
(Percent of total population, unless otherwise noted)
Main lessons1. 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
UCLA Conference in Honor of Professor Armen Alchian
May 6, 2006
Growth and Poverty Reduction in Armenia: Achievements and Challenges