Statements and messages of the President of RA
Remarks by RA President Serzh Sargsyan at the 7th Convention of the Union of Manufacturers and Businessmen (Employers) of Armenia
Dear businessmen, invitees and guests,
I welcome all of you to the 7th Convention of the Union of Manufacturers and Businessmen of Armenia and express the hope that today’s discussions will contribute to our common goal and to choosing effective methods of developing our economy and making use of the current opportunities.
I have broken my speech up into three parts. In the first part, I will talk about Armenia’s economic development processes up to now and will draw parallels between the current and past periods of our economic development path. In the next section, I will reflect upon the present economic challenges and the objective reality in which Armenia has found itself, also considering the global economic trends. In the last place, I will speak about future prospects and tasks.
So, what kind of developments has our country undergone and where is it today? In this context, two groups of indicators are worth mentioning: the first group embraces economic development indicators, while the second one includes social-economic indicators of the quality of life.
Let’s start with economic development. It is not a secret that throughout its development history each country passes through various stages of economic transformation. According to the experts of the World Economic Forum, world counties are classified into five categories based their stage of development, out of which three are considered to be main, while two of them ensure transition from one permanent stage to the other. The primary main stage of economic development is rooted in cheap resources and is characterized by creation of an end product with the help of cheap and low-quality labor force. In the international market, such countries are competitive mainly for the export of raw materials. This kind of decrepit economies put up little resistance to external shocks because of low productivity of general resources and high dependency on fluctuations of international prices of raw materials.
The economies which make progress in effective use of production resources reach the next main stage of economic development. Because of their more diversified economy and exports, relatively higher productivity of production factors and their effective use, as well as their low dependency on fluctuations of international prices of raw materials, such countries are characterized by showing relatively high resistance to external shocks.
The last stage of economic development, for which all developing countries, including Armenia, strive, is the knowledge-based economies making progress through innovation. These are characterized by high international competitiveness, a strong economic base and high productivity of production factors. The global experience shows that every country must inevitably pass through all the stages, and it is not possible to jump at once from the first stage to the third one or from the second stage to the fourth one. However, it is feasible to pass through these stages rapidly if the country defines clear targets for its economic policy, chooses relevant strategy and implements aggressive reforms aimed at reaching them. This is the correct formula to ensure economic development and this is chosen to be the cornerstone of our economic policy.
Our economy has also moved through inevitable economic transformations. In its 2014 report, the Global Competiveness Forum states that Armenia has already overcome the first two stages of economic development and has entered the ranks of the countries with economies based on effective use of production resources. That means that in terms of conquering new international markets, Armenia is already going to compete with more productive and competitive countries of this group. Of course, this is an important assessment of Armenia’s economy which elevates us to a qualitatively new level of economic development. However, on the other hand, it is compelling because in order to be competitive and sustain economic growth in the future, Armenia should rest upon organization of more productive production processes and production of goods with higher quality. I think that understanding this is important not only for the global business community, but also for the people who are in charge of implementing economic policies in the sense that they should ensure a favorable business environment to create incentives for businessmen to make new investments regularly and upgrade production capacity. Businessmen need that not only to respond to foreign competitors effectively, but also to conquer new markets or reinforce their positions in the given markets.
Armenia’s stage by stage economic development can also be explained by numbers some of which I will reflect upon now. During the post war period, Armenia’s economy was in the first stage of development. The economy was characterized by a low level of salaries which is, by the way, reflected the low level of labor productivity, production of simple goods and, consequently, little ability to conquer foreign markets, high specific weight of imports in the GDP and small export volumes. In 1995, the average salary of the economy comprised only 1.7 dollars. The same year, we could export goods and services worth about 303.6 million dollars. The current account deficit made up 17.2 percent of the GDP, continuing to grow in the next few years which meant that we satisfied our demand mainly at the expense of foreign savings. We could collect taxes as much as 8.2 percent of the GDP and Armenia’s state budget amounted to around 270 million US dollars. The financial sector could supply the economy with a limited number of services proved by the 6.1 percent monetization level etc.
Since the beginning of the millennium, the Republic of Armenia has entered the second transitive stage of economic development. In an environment of high global economic growth, the inflows of foreign direct investments, the exports based on increased international prices of mining products and the growing volumes of monetary transfers made by our compatriots living and working abroad were the factors which ensured our country’s double-digit economic growth. In those circumstances, Armenia’s state budget for 2005 when the tax-to-GDP ratio was about 17.0 percent already amounted to one billion US dollars. Nevertheless, the role of the non-exportable segment in the economic structure seemed to increase which continued in the following years. Later on, for example, the specific weight of construction in the GDP reached up to 25.3 percent. In such a condition of affairs, the already low specific weight of exports in the GDP which amounted to 15.1 percent was a signal that Armenia’s economy needed to undergo radical structural changes and build capacity to respond to external shocks more effectively.
The 2009 economic crisis highlighted the need of more diversified economic structures, stimulating agricultural and industrial growth and achieving export-led economic growth. It could reduce our economy’s vulnerability to global economic shocks, elevating it to a qualitatively new stage of economic development. This principle became the cornerstone of the government’s short-term and long-term programs, while the improvement of business climate and the increase of state competitiveness served as the means to achieve our goals.
Today, if we analyze the trends of structural indicators of economy, we should state that industry and agriculture, accompanied by steady growth of exportable services, have gradually been regaining their positions in the structure of the economy. This year’s results will also demonstrate that the observed trends continue: it is estimated that the general weight of agriculture and industry in the GDP will comprise 37.0 percent, while that of non-tradable services will make up the 32.0 percent of the GDP, thus stating that the driving force of economic growth is gradually moving to the more productive and exportable sector. Simultaneously, the financial system has expanded the volume of the services offered to the economy, a circumstance which has helped to double the economy’s monetization level which, according to the 2014 assessment, has increased by about 38.0 percent.
As a result, in 2014, the Republic of Armenia is already capable of collecting taxes that comprise 23 percent of the GDP, while its budget is close to the threshold of 3 billion US dollars.
Of course, the current level of achievement is not yet high enough to talk about having a completely resistant economy, but the further continuance of these trends is vital.
Throughout the aforementioned stages of Armenia’s economic development, we have also been witnessing positive changes in the country’s social-economic life. In this regard, one of the indicators of Armenia’s progress is the GDP per capita adjusted for purchasing power parity which is a more correct and fair indicator than the GDP per capita at nominal dollar value, as its also takes into account the difference between the level of inflation in our country and its peers. According to the IMF World Economic Outlook database, Armenia’s GDP per capita adjusted for purchasing power parity accounted for 1,391 dollars in 1995, 4,417.3 dollars in 2005 and 7,034 dollars in 2013. The real average salaries of our economy also demonstrate more or less the same dynamics: it is estimated that at the end of 2014, the economy’s real average salaries will going to grow 5.6 times, compared to that of the 1995 indicators and by about 55.0 percent, compared to that of 2005. Another indicator which clearly characterizes the stage by stage development of countries is unemployment. It is common for all countries to have high unemployment rates during the first stages of economic development, because workers with low productivity find it difficult to get a job, and the branches of the economy which do not require high-quality labor force are overloaded. In parallel with stage by stage transformations of the economy this has also appeared to be a trend in our economy: at the beginning of the millennium, unemployment accounted for 38.2 percent, in 2005, it was 31.2 percent, and it is expected to be about 16.0 percent in 2014.
To sum up the first part, our country’s economy managed to overcome the two very important stages of development and now it has elevated to a qualitatively new level, facing, however, challenges that it should tackle through creating a more effective economic base and more competitive enterprises.
Today, the global economy has undergone radical changes: the strengthening of the US dollar conditioned by relatively positive developments in the US economy compared to that of other superpowers, further intensification of political conflicts and mutually imposed economic sanctions which result in severe economic consequences. At the same time, we can witness the slow recovery rates of the global economy in the post-crisis era and yet unresolved structural problems within the economies of some superpowers. With its liberal economy, Armenia can’t fully isolate itself from the global economic processes, and talking about Armenia’s economy without considering the current global economic reality is not right. This year we can witness economic deterioration in Russia, large trade partner of our economy. Apart from decreased economic activity, this has led to increase in the level of inflation by up to 8.8 percent, capital outflow of 90 billion dollars and devaluation of the Russian ruble against the US dollar by more than 40 percent. The US dollar continues to reinforce its positions in the global economy against other world currencies. For example, compared to December last year, the US dollar has been evaluated against euro by 10.2, against the Swiss franc by 8 percent, against the British pound by 3.4 percent and against the Japanese yen by 12.2 percent. During the previous two years, the EU economy recorded -0.7 and -0.4 percent recession, and this year does not promise essential recovery either. It is obvious that Armenia can’t swim against the stream, and what is happening in the global economy will also have an impact on our country and our economic indicators. Nevertheless, the Armenian government and the Central Bank should exert more efforts to mitigate the negative external effect on our economy and make the necessary adjustments smoothly.
In the present circumstances of uncertainty in the global economy, the vital challenge facing Armenia remains to be the creation of conditions for long-term and steady economic development. The only way to decrease unemployment and poverty rates is the increase of economic growth under the conditions of stable inflation rates. In this regard, the primary task of the RA economy is to encourage new investments, thereby increasing its production potential. However, it is not a secret that investments tend to flow into economically profitable places with a favorable and safe investment climate. In terms of economic profitableness, at present, our country’s small economy presents an objective limitation, but I am confident that by joining the EEU, this problem becomes solvable, as Armenia will make up the part of the EEU economic area which will give investors a fresh impetus to make investments in our country. The World Bank’s Doing Business index shows that in terms of improving the investment climate, Armenia has indeed make progress, ranking 45th among 189 countries and neighboring the Czech Republic. This, however, is not sufficient to attract new investments and we should strive to do better. With regard to security concerns, Armenia’s current economic system fully guarantees the safety of investments, but we should not forget about maintaining regional peace at the promotion of which we have exerted and will continue to exert our efforts, including covering the relevant defense costs. For the sake of comparison, in 1995, we spent 19.1 billion drams for defensive purposes, in 2005 they accounted for 64.4 billion drams and in the 2014 budget, it is planned to allocate 194.0 billion drams.
I welcome you once again. I want to assure you that during our joint work, at least for our part, there will be no lack of vigor and compassion, and I express the hope all your future undertakings and your optimism will open up new opportunities for our country to successfully implement its economic policies.