Vahan Zanoyan

Wake-Up Call Armenia: Rethinking the Economic and Business Models

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By Vahan Zanoyan

Much has been written about the conventional economic development challenges of Armenia: Infrastructure needs, energy security, export promotion, agricultural development, emphasis on specific sectors such as IT, direct foreign investment, more affordable credit for businesses, etc. While these issues remain important, there are deeper and less tangible challenges that often get neglected in the professional discourse — both in Armenian research efforts and in the publications of multilateral organizations, such as the World Bank and the International Monetary Fund (IMF).

Without minimizing the importance of the conventional topics, this paper will focus on some of the key intangibles.

Most of the intangible challenges are related to measures aimed at compensating for the small size of the Armenian economy relative to its trading partners. In small countries — say, with a population of under 10 million — like Armenia:

  • a poor economy and sub-standard education system cannot support a strong military,
  • a poor economy cannot support a strong education system,
  • lack of innovation and a poor education system cannot support a strong economy,
  • poor economic opportunities and slow growth cannot support growth in immigration,
  • slow growth (or decline) in population in turn stifles economic growth, starting a vicious cycle.

However, just because Armenia is a small country in a bad neighborhood does not mean that it has to remain economically weak. While small countries do not have the economies of scale enjoyed by larger ones, they can be much more agile, more adaptable, and suffer from fewer and more manageable social challenges. The proven way of compensating for small size is (1) high and increasing productivity of labor and capital; (2) synchronization of various economic spheres to create synergies and positive economic externalities; (3) technological innovation (a major catalyst for productivity gains) through dedicated R&D spending; (4) efficiencies built into the system of production and distribution of goods and services.

The rest of this article will be devoted to an exposition, in outline form rather than detailed analysis, of various intangible measures which, directly or indirectly, contribute to and promote the four measures listed above.

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Flexible and Fluid System

One of the intangibles which rarely gets discussed, but which is a pre-requisite for meeting measurable growth and development targets, is the need for a flexible and fluid system. To boost creativity and innovation, rigidities in structures, processes, and hierarchical relationships must be loosened. Ideas should flow freely across all ranks within organizations and across sectors. Every step of every process, whether in business, education, government, research, or military, should be a new learning experience and an opportunity to improve. In order to achieve this, “standardization” of systems, procedures and management practices, as well as inflexible routines, should generally be avoided and phased out, because standardization, by definition, leaves little room for review, critique and constant improvement.

In this context, entitlements are poison. They stifle the fluidity and dynamism on which a growth-oriented system thrives. Without the implied dynamism of a flexible and fluid system, small countries like Armenia cannot compete in any sphere, and especially in the economic and military spheres. And yet, this has been and still is one of Armenia’s most dilapidating problems, with only a few exceptions — i.e., rigid hierarchical systems, both in government and in the private sector, whereby decision making is centralized at the top, with virtually no flow of creative ideas, especially from lower ranks of young professionals.

Synergies

Limited human and natural resources can be compensated only by high efficiency, productivity, innovation and creativity. But even these characteristics, necessary though they are, are not sufficient to maximize the potential of a small economy. What is also needed is strong cross-sector synergies, whereby progress in one area naturally benefits other areas. For example, if a major advancement in technology remains isolated in its own sector, it will not contribute much to the rest of the economy; competitive efficiencies are created by a system that is conducive for technological advancement to translate into productivity gains in a variety of sectors and be a catalyst for startups, thus triggering stronger overall economic growth; it should also lead to more capital inflows, stronger trade, improved international image and brand for the country and consequently improved diplomatic relations and improved defense capabilities.

Small countries simply cannot afford multiple parallel efforts to meet different strategic needs; nor can they afford the luxury of extreme specialization. The creation of “islands of excellence,” while potentially useful as a starting point, will not lead to any consequential national advancement unless those islands are integrated into the broader economy with direct benefits and multiplier effects across other sectors. To facilitate the integration and synchronization described above, professionals in the private sector (and military officers) should be very good at many things, rather than extremely good at one thing; that’s what will enable them to recognize the applicability and value of a given technological innovation to their field of activity. Multi-disciplinary approaches and solutions become central to this process. This is the best way to ensure transferability of success from one sphere to the next, and thus to ensure that the whole is always larger than the sum of the parts.

One way of establishing cross-sector synergies is the development of interrelated economic hubs (business clusters). These must be studied carefully and adapted to the economic landscape of Armenia—obvious applications are: (1) agriculture + animal husbandry + production of processed foods + exports of processed and unprocessed agricultural products; (2) interrelated IT and tech activities—as in Silicon Valley; (3) various R&D-military-Civilian use hubs. (4) The full value chain of various mining projects; unfortunately, today, mining in Armenia is limited to extraction and export of minerals. That transfers considerable value to the refiners and processors of those minerals aboard. The full value chain of mining entails refining technologies and auxiliary services dedicated to the refining, distribution and marketing of finished products, all of which form another interrelated hub of economic activity. Such hubs not only have strong built-in synergies and efficiencies, but also create positive externalities in the form of applications of the experience gained in them (technical as well as marketing know-how) in other sectors.

Monopolies

Monopolies are another major impediment to flexibility, fluidity and growth. The post-Soviet Oligarchic system is founded on monopolies. The symbiotic relationship between the monopolies and the government, and often even between the monopolies and the general public who has grown used to the goods and services provided by the Oligarchic system, has rendered all efforts of reform stillborn. Monopolies do not fit in a dynamic, flexible, fluid, innovation-driven economy (which is why they will fight any attempt at reform). Low participation rates in the economy automatically restrict dynamism and creativity. Risks of low participation are more than income inequality — when a small percentage of the resources carries the entire burden of economic growth, something will break in the socio-economic structure. In the very least, monopolistic obstacles to new businesses and new companies must be removed. Established monopolies should not be allowed to dominate emerging sectors. A modern, innovation-driven economy should be allowed to flourish and speed past the traditional monopolistic sectors without any interference or hurdles. Aside from all the other benefits, this will make a significant contribution to job creation as well—in most economies, most new employment opportunities come from companies younger than 5 years.

Innovation

The main engine of wealth creation should be invention and innovation, and not just trade, finance and other service industries such as tourism, hotels and restaurants. The former has superior multiplier effects on the economy compared to the latter. To enable innovation and invention, dedicated R&D spending is a must. Successful small countries spend a disproportionately large share of their GDP on R&D, often exceeding 3% of GDP.

Commercializing success in R&D is another challenge. The government must devise a mechanism for funding early-stage, high-risk ventures. Grants for startups and mechanisms to encourage Venture Capital must be introduced. Efforts to lure foreign development funds into government-backed ventures must be initiated by the government, with the aim of commercializing academic and scientific inventions, and the transfer of military R&D to civilian use, and vice versa. The agriculture sector must thrive in this tech-driven economy. Small to medium family farms should be major beneficiaries of innovation and invention.

Needless to say, the education system should be integrated into, and geared to support, this process. But that’s the topic of another article.

A Niche in the Supply Chain

To punch more than its weight globally, Armenia needs to find a niche in the global supply chain to make itself indispensable for critical production lines. Supplying strategic minerals has provided a niche of some developing economies — e.g., oil and gas or rare metals. For Armenia, the niche has to come through technology and innovation — i.e., supplying technologically superior parts to crucial industries worldwide. This could be in the medical field, or in advanced robotics and communications, even in renewable energy production technologies. Professionals within the Armenian government responsible for economic and trade policy should join forces with the science and technology community in the private sector and guide this process. A key aspect here is to always stay ahead of the game, to constantly reinvent and innovate; Armenia should be the one that renders its own technological innovations obsolete by constantly improving them, before anyone else. That will secure its niche.

The Diaspora

The diaspora has been an underutilized resource since independence. A major charm offensive and confidence building campaign must be launched, especially now, after the demoralizing defeat and unfathomable losses of the last war. The brain drain should be turned into a two-way street. Those who leave, should have the incentive to come back, having acquired valuable experience and knowledge in scientific institutions and research centers abroad.

The government must launch an outreach program targeting Armenian professionals in companies like Microsoft, Google, Apple, Facebook, IBM, Intel, Oracle and many others also in Russia, Europe and Asia, and find meaningful ways to engage them in Armenia. Areas other than tech for talent search in the diaspora include: teachers, legal expertise, diplomatic skills, military R&D and intelligence (retired military officers), venture capitalists.

A two-way brain traffic should be a priority for the management of a tech-driven economy. For a natural-resource poor, landlocked, small country in a bad neighborhood, real value lies in intellectual talent, which, at a global level, the state of Armenia has wasted. Resettlement and repopulation should have been a focused government policy right after independence, but, instead, Armenia’s population declined in the last 30 years. The decline was caused by poor economic conditions and poorer opportunities, chronic corruption and social injustice, and sometimes even deliberate government encouragement, to reduce popular unrest—all direct consequences of the prevailing oligarchic system and lack of a sense and culture of statehood.

Demographics

One of the major failures of Armenia since independence and of Artsakh in the past 26 years was the drop in the population of Armenia and only marginal increase in that of Artsakh, in spite of huge dislocations in the Middle Eastern diaspora. Now, after the defeat, the challenge is much more difficult, but much more important at the same time. Both Armenia and Artsakh must now embrace a diligent repopulation strategy. Newcomers to Armenia, including non-Armenian family members, should be granted residency, citizenship, and, if needed, benefits as part of a campaign to populate Armenia and Artsakh. This is an integral part of nation-building and statehood. A wave of immigration would also contribute to and promote venture capital infusion into Armenia.

To save the state, the government of Armenia must embrace global Armenian resources, even if it means sharing power. Reluctance to share power has been a destructive, post-Soviet, oligarchical defensive mechanism, which cost the Armenian state dearly.

The Wolf in Sheep’s Clothing

Above all else, Armenia should avoid the mercantilist notion that opening borders, in and of itself, will cause an economic boost. The most vicious “wolf in sheep’s clothing” that we face today is the proposal to open borders with Turkey and Azerbaijan, unblock transportation routes, and liberalize trade and cross-investment, before any progress is made on more substantive political and strategic issues. This might create false economic hopes in some circles, but it will spell the end of the prospects for economic development and competitiveness in Armenia, especially if there are no protections for local producers from Turkish imports, and Turkish and Azerbaijani nationals are allowed to buy land in Armenia. In the best case, this policy will enrich a handful of monopolies who will import Turkish goods, while impoverishing and economically paralyzing the rest of the country.

But First, We Need a Government

If these intangibles are addressed and resolved in tandem with the host of conventional challenges listed in the first paragraph, the effectiveness of the latter will be far greater. Without fixing the intangibles, the conventional remedies, while useful each in its own way, will not result in a massive, nation-wide leap in the economic capabilities of Armenia, which is what is needed after the war.

Of course, the ultimate prerequisite to the above is an effective state. Scratch the surface of any global success story and you’ll find good government behind it — strong checks and balances, transparency, accountability, and the rule of law. On paper, Armenia has the key structures (legislative, executive and judicial branches), as well as most of the necessary laws and regulations, but in practice none of these work as they should. Weak checks and balances in government have been a key problem since independence. The judiciary was never truly independent. The average Armenian citizen does not stand a chance of winning a fair case against a politically more powerful or wealthy entity in an Armenian court. This has eroded public confidence in the system of governance. The powers of the presidency and later of the prime minister have been almost absolute, especially if the latter’s faction has parliamentary majority. That kind of executive power corrupts. Combined with lack of professionalism in governance, it becomes disastrous.

There is no alternative to a truly competent, dedicated government, one-hundred percent loyal to the Armenian state, which has the vision and determination to create a strong, defensible and globally competitive country and economy. Ironically, this is the least expensive and, at the same time, most difficult part of the challenge. It takes a handful of people, with a coherent sense of mission, to spearhead the effort, and ultimately secure buy-in from the population. Given the frustrations and disappointments of the Armenian public with past and present administrations, the time is right for a new voice and a new vision. It may be even right for a new social deal among the main constituents and political forces, who may finally realize that all prosper through a larger pie. If all political factions worked to enlarge the national pie, rather than their own slice of it, Armenia will be a materially different country. Only an effective state can guide this process, not only in the economic and business spheres, but also in critical requisite spheres like education and public health.

The political economy of Armenia must evolve into a post-oligarchic phase in such a way so as to fit into the country’s unique socioeconomic and political landscape, establishing a new dynamic between the private sector and the government. Existing models — whether a laissez faire system, or a centrally planned system, or even specific mixed systems adopted by some European and Asian countries — cannot necessarily be emulated, at least not in their entirety, without causing socioeconomic dislocations in Armenia. The government has to find the right role, based on the specific circumstances of Armenia, whereby it provides the necessary macroeconomic environment for the private sector to thrive, while at the same time safeguarding the unique public sector goods and services necessary for a fair, defensible and competitive state.

Longer-Term Goals

It is useful to have a few concrete objectives in mind while pondering the various policies outlined above. As a longer-term vision, Armenia should aim to: (1) be among the top 20 then top 10 economies of the world in terms of per capita income; (2) to have 10-20 Armenian companies listed on Nasdaq and the NYSE; (3) to be a major destination of foreign direct investment from around the world — US, China, India in addition to Russia —  including non-Armenian sources; (4) the Global Competitiveness Index produced by the World Economic Forum incorporates multiple macro- and micro-economic indicators and attempts to come up with an overall assessment of how much a country’s economic environment is conducive to providing prosperity to its citizens. In 2019, Armenia was number 69. By 2045, it should aim to be number 20. (5) By 2050, the Armenian transportation and heating sectors must be converted to electricity, reducing considerably dependence on imported fossil fuels, while keeping Armenia a net exporter of electricity through a second, state-of-the-art nuclear plant and a host of renewable energy projects, such as hydro-electric and solar power. The consequent vast improvement in the air quality in Yerevan would simply be an added bonus.

February 17, 2021

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