Economic Challenges Faced by the New Armenian State

Demokratizatsiya, Spring 2006 by Sarian, Armand

Abstract:

In the past fifteen years Armenia has experienced profound economic changes. This article will trace the economic development of Armenia, from the collapse of the Soviet Union until now, and make recommendations on the reforms that need to be implemented if Armenia is to continue developing.

Key words: economic transition, international financial institutions, macroeconomic stabilization

The process of the political and economic transition of Armenia toward independence has similarities with the other republics of the former Soviet Union. Contextual specificities, on the other hand, are less known, because they are largely determined by an individual republic's transition toward civil society and a market-based economy.

In the case of Armenia, this contextual specifity is Nagorno-Karabakh, which was, as of March 1988, at the center of a political movement initiated by a group of intellectuals meeting within the Karabakh Committee. In the context of perestroika and glasnost, these intellectuals supported the efforts of their Karabakh compatriots to correct the injustice committed by Stalin in 1922 that consigned the Armenian area of Nagorno-Karabakh to Azerbaijan.

This ended on September 21, 1991, with the proclamation of Armenia's independence based on a general referendum. The new leaders were not members of the old nomenklatura, and they quickly appeared to be proponents of democracy and a market-based economy. Independence, and the hope it inspired, made people optimistic that a new class of leaders would arise from the groups of intellectuals and former dissidents. The euphoria that gripped Armenia was reminiscent of what was happening in Central Europe, Poland, Czechoslovakia, and Lithuania.

Harsh economic realities that threatened the sovereignty of the young republic quickly constrained political independence. The country had to contend with the problem of how to make itself economically viable. The still-significant consequences of the earthquake in December 1988 and the economic blockade by Azerbaijan and Turkey exacerbated economic difficulties. This new political reality, which also applied to the other republics in the region, shed a new light on the geopolitical, economic, and strategic realities. It was under these conditions that Armenia began its difficult transition to a market-based economy.

Armenia's Metamorphosis

During the Soviet period, Armenia acquired the enviable reputation of being a successful, industrial republic with a diversified economy that specialized in technological research, especially research related to the military-industrial complex. In the 1980s, the number of graduates from higher learning institutions was one of the highest in the Soviet Union. Despite being deprived of natural resources, save for important copper, bauxite, molybdenum, and some gold deposits, the country succeeded in becoming a manufacturing and technological center. The manufacturing material arrived from outside Armenia and the products were then shipped to central planning bodies in charge of distribution. Given the significant contribution of industry to the net material product,! and an economy highly integrated into the Soviet system of production distribution, economic interdependence became excessive. This helps explain the domino effect that took place after the collapse of the Soviet Union.

Industrial development in Armenia dates back to the second half of the nineteenth century, with the construction of three Transcaucasian railways: BakuTbilisi (1883), Tbilisi-Aleksandrapol (Leninakan during the Soviet period, currently named Gyumri, 1902), and Aleksandrapol-Yerevan (1902). The tsar was interested in exploiting three principal resources in the region: oil in Baku, manganese in Tchiatourinski (Georgia), and copper in Zangezur (Armenia). Because of the Russian Empire's financial situation, foreign capital was needed to exploit these resources. The French took over the copper mines. French and Russian companies controlled the production of wine and cognac.

The first phase of Armenia's development took place from 1920 to 1940, with the nationalization of companies and resources under the Soviet regime, "the electrification of the Russias," and the development of infrastructures, primarily transportation and, finally, heavy industry. After World War II, from 1946 to 1960, the machine-tool industry was introduced; it developed three times faster than the other industrial branches. Diversification continued with the development of the chemical, mechanical, and electro-technical industries, as well as the development of light industry (textiles, shoes, and leather). The period from 1960 to 1970 was marked by the emergence of consumer goods industries.

Between 1960 and 1980, as the share of industry moved from 66.9 percent to 71.6 percent, the economic and sociological profile of Armenia became that of a welfare state, which relied on the rest of the Soviet Union to sustain its economy. As a result, in 1989, 50.8 percent of the total volume of industrial production and 71.9 percent of industrial credits were dependent on Soviet subsidies. In comparison, the figures were 28 percent and 59 percent for Estonia, 28.9 percent and 72.4 percent for Tajikistan, 28.4 percent and 48.2 percent for Moldova, and 31.4 percent and 66.9 percent for Georgia. These are important figures because they show vulnerable Armenia's industrial production was to the collapse of the Soviet Union.