DEVELOPMENT CHALLENGES
Armenia has pursued market-oriented reforms and a macroeconomic stability framework after gaining independence in 1991. The country experienced rapid and steady growth during the 2000s, with an average annual GDP growth rate of 10%, the highest in the CIS region. Armenia’s per capita GNI in 2010 was at the “lower-middle” income level (US$3,090), and the Human Development Index (HDI) was valued at a “high” 0.716, placing the country in 86th position of 187 countries. However, Armenia was severely affected by the financial crisis, registering a sharp decline in GDP of 14.4%. Various development challenges affect the country.
Poverty and inequality
The proportion of the Armenian population living in poverty declined from 54.8% in 1999 to 23.5% in 2008, but again increased to 26.5% in 2009. While clear progress in reducing poverty has been achieved, major challenges remain, including spatial disparities. Some regions have more prevalence of poverty than others, and poverty in urban areas (except in Yerevan) is higher than in rural areas, where only 36% of the population lives.
High unemployment, labour migration, and heavy reliance on remittances
According to the World Bank, the unemployment rate has decreased over the period 1997-2008, from 36.4% to 28.6%. However, the rate is much higher for women than men (respectively 35.0% and 22.2% in 2008), and youth unemployment is 2.5 times higher than the national average. Migration has been a safety valve for joblessness, with large volumes of people leaving Armenia in the 1990s in search of better economic opportunities. Migrant workers’ remittances, a crucial source of income for many households, account for 20% of GDP by official estimates, but may actually reach up to 50% due to the use of informal transmission channels.
Weak public administration and a large informal sector
Armenia also has a weak public administration system. Despite efforts to decentralize decision-making powers, most administrative responsibilities are still exercised by the central authority. In addition, municipal fragmentation is high, and local administrations have limited capacities and financial resources, which hinders the delivery of social services. A reaction to the insufficient quality and quantity of public services has been the development of a large informal economy, which accounts for 41.1% of GDP (Andreas Bühn & Friedrich Schneider, 2011). However, by severely narrowing the tax base, the presence of an informal sector constrains budget revenues, further hampering the provision of social protection to the most vulnerable persons and, consequently, reinforcing inequalities.
Skills gap
Although Armenia has an adult literacy rate of nearly 99.5%, regional inequalities in access to education are a major concern. Enrolment rates are much lower in rural areas than in urban areas, and the rural population is 1.8 times less likely to attend tertiary education than the urban population. Armenia’s education system recently entered the Bologna Process of the European Commission, in an attempt to make education more widely available to the population. Nevertheless, the quality of education in Armenia has been worsening due to lack of investment, with state expenditures on education accounting for only 3.9% of GDP in 2009. As a result, there is a lack of modern equipment and a shortage of qualified staff. In addition, due to lack of collaboration between educational institutions and private businesses, linkages between the professional qualifications gained from education and the needs of the labour market are not ensured, resulting in a considerable skills gap.
KEY TRADE ISSUES
Export concentration, weak competitiveness, low productive capacity and trade deficit
Armenia’s export structure is concentrated on metals and a small number of low value-added products. In 2010, accounting for nearly 70% of total exports, the main goods exported by Armenia were ores, precious stones, iron and steel, beverages, and copper. The range of other internationally competitive products is small, and their value-added is low, due to the weak productive capacity of enterprises in other sectors. As a result, Armenia is dependent on imports of higher value-added products, such as machinery, electronic equipment and vehicles, which produces a wide and persistent trade deficit (imports are almost four times greater than exports).
Market concentration
Similarly, despite Armenia’s WTO membership since 2003, there is a high concentration of export destinations, with the top five markets (Russian Federation, Bulgaria, Germany, Netherlands, and United States) comprising 62.3% of total exports in 2010, thus making Armenia’s economy sensitive to economic, political and social shifts in those countries. Market diversification is further restricted by political problems with the nearest neighbours.
Limited access to finance
A major impediment to trade development for Armenia is the difficulty in accessing trade finance. Despite a number of measures undertaken by the Government to stimulate private sector investment, the lack of innovative financing mechanisms for start-up capital, high interest rates and collateral requirements, and inadequate guarantee schemes continue to hinder access to finance. Moreover, there are no public or private institutions, structures or systems that provide export finance, insurance or guarantees. Although the country’s investment environment is relatively open to foreign investors, foreign direct investment (FDI) inflows, which accounted for 6% of GDP in 2010, are directed at relatively few sectors, including transport (airport, railway), telecommunications, metals and mining, banking and construction.
Cumbersome regulatory and business environment
The excessive regulatory burden in Armenia, in particular in the areas of customs procedures and tax administration, poses a significant challenge for trade and export competitiveness. Slow and cumbersome border-crossing procedures, excessive bureaucracy, and various informal trade barriers increase transaction costs and cause delays in conducting foreign trade transactions. For its “ease of doing business”, Armenia ranks 55th of 183 countries according to the World Bank; however, Armenia drops to 104th position in terms of “trading across borders”.
Underdeveloped physical infrastructure
With a small domestic market and limited economies of scale, Armenia relies on foreign trade for economic growth. However, its landlocked situation, as well as blockades imposed by neighbouring Turkey and Azerbaijan, constrains the country’s access to foreign markets. Amplifying these limitations is an inadequate transport infrastructure.
Underdeveloped institutional and quality management infrastructure
There are few trade support institutions (TSIs), while services offered by existing TSIs do not match community needs. In particular, the country’s standardization bodies and laboratories lack the capacity, equipment and technology to competently analyze products and determine their conformity with international quality standards.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the United Nations Development Assistance Framework for Armenia 2010-2015; the 2008 Republic of Armenia Sustainable Development Programme; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2011 UNDP Aid for Trade Needs Assessment for Armenia: Trade and Human Development; and the 2011 OECD book on Development in Europe and South Caucasus: Armenia, Azerbaijan, Georgia, Republic of Moldova and Ukraine.