-Interview Freynkman -

  Question: Mr. Freinkman, new independent states in the former USSR area have entered into a new stage of their economic development. What's your assessment of the economic situation in Armenia? What is the most typical for economic development of our country?

  Answer: If one has to give the most general assessment, one should recognize a considerable improvement of economic dynamics during the last two-two and a half years. Armenia demonstrates one of the highest rates of economic growth in CIS. Growth of GDP (gross domestic product) reached 9.6 % in 2001 and in the first six months of 2002 -10.1 %. This growth occurs in the environment of low inflation, stable rate exchange and improving trends in both the structure and level of the external debt. Improvements in structural characteristics of the growth are also of importance. The contribution to the economic growth that comes from manufacturing and, what is especially pleasant, from manufacturing export has increased considerably. The volume of manufacturing exports has doubled in the last 3 years (2000-2002). At the same time, growth of import slowed down, which led to a drastic decline in the deficit of balance of payments -- from 27% of GDP in 1998 to 14% in 2001. It will reach 13% of GDP during this year.
   Another highly important positive change relates to the growth in the officially reported wage. Average monthly wage in the private sector increased from 24 dollars in 1997 to 43.6 in the first half of 2002. This indicates certain improvements in the labor market trends as well as a reduction of shadow economy - a larger part of actual wages has been reflected in statistical reports.
   It's obvious that all this should not give cause for exultation. Current improvements have been occurring against a background of exclusively painful reduction in overall production and real incomes that took place at the beginning of 90s. The Armenian economy is growing from the very low base. For example, total export of goods and services, in spite of quite impressive recent growth, still constitutes less than 600 mln dollars, i.e. a little more than a quarter of GDP. It's inadmissibly little and reflects fundamental problems with quality of management at Armenian enterprises, including large and medium ones.
   Though tax collection has increased by twenty percent, the level of tax revenues is still lower than 20% of GDP, which is among the lowest in the region. The volumes of smuggling and tax evasion are still substantial, which is possible only under apparent support (and with hidden participation) of country's political elite. Because of low tax collection the state isn't able to provide an adequate level of social benefits and pensions. As a result, it is estimated that income differentiation in Armenia is the highest in CIS. Doubtful leadership.

  Question: Which is the principal conclusion to be drawn from the given assessment?

  Answer: Armenia was able to overcome serious development constraints, associated with the transport and political blockade, to assure a positive economic and social dynamics, accelerate restructuring in the economy as a whole as well as in industry. The country discovered new export markets and has been gradually expanding its presence there. Armenia showed that under modern conditions of international political and financial-economic integration the "blockade" as such proved to be far less productive than one could expect originally.
   Successful export of copper from Armenia to Germany is one of the most impressive pieces of evidences that today's blockade is "full of holes." It's indeed a significant outcome. Many people still remember how one tried to convince the country at the most serious level that Armenia's economic development is impossible without solving the Karabakh conflict and removing the blockade. In fact, by now many Armenian entrepreneurs suffer not from the blockade but from a lack of information on foreign markets and from still a high (though declining) administrative burden on private businesses. I'm personally convinced that the remaining references to "tough external conditions " rather serve as a justification for those who can't or don't want to solve more concrete, quite prosaic problems, which their business and/or the entire economy face.

  Question: In your opinion, has a clear long-run economic strategy for Armenia been formulated by now?

  Answer: I cannot say that an economic strategy has been already formulated. There are many interesting ideas, projects, but in the whole the Government continues to be excessively concentrated on short-term problems and objectives---- - to fulfill a quarterly tax collection plan and receive the next scheduled tranche from the World Bank. A longer term strategic effort is quite limited. Moreover, there are practically no efforts to start an important dialogue with serious representatives of the private sector on joint development and implementation of series of strategic projects, which will constitute a skeleton for the future economic growth in Armenia. These projects are not necessarily to be expensive. The potential of their medium-term expansion, possible linkages between such individual interventions and other sectors of the economy are much more important.
   It's clear that to get such projects designed right, one should ensure a strong participation of representatives from the private sector. However, the quality of today's communications between the Government and potential investors is still of concern. As a result, there is underutilization of private sector and especially Diaspora's potential. Diaspora's importance for Armenia is not just possibilities related to attracting additional financing, but it is also a preferential access to necessary knowledge, skills and contacts. It seems that the Government should make additional steps to shape a strategic partnership with the private sector leaders from the Diaspora. Joint design and implementation of several projects within the framework of such partnership could become a core of the next stage of recovery of the Armenian economy. On the other hand, if it doesn't happen, there will be new repetitions of the Lincy Foundation's experience - using a strategic resource to repair pavements.

  Question: That is to say you come out in favor of active combination of market and administrative methods in economic policy, don't you?

  Answer: I'm trying to avoid the term "administrative methods." But overall I don't think it's a problem that during the transition the Government must be an active participant of economic processes. In such country as Armenia I don't see an alternative to an active industrial policy and active partnership between the Government and private sector. At that, one needn`t identify an industrial policy with government subsidies. The most important task of the Government is lobbying interests of national economy abroad, establishment of favorable conditions for investments and creation of necessary indirect guarantees for investors. In the economy where there are still very few large firms that are capable of entering into strategic cooperation with foreign partners and to make their ways to foreign markets, the Government could and should render certain assistance to potential exporters.

  Question: How can you explain relative inactivity of the Diaspora, first of all of the USA Armenians, in investing in Armenia and what can the Government do in this area?

  Answer: As usual, there are several historical, psychological and pure economic reasons here. For too many potential investors, their "wounds", caused by their failed attempts to invest in Armenia in the middle of 90s, still hurt. One needs to realize that there are influential people in the world who still think that they were greatly offended at that time and weren't begged pardon yet.
   I also want to point to another reason, which becomes more and more important. It's lack of adequate information on those positive changes occurring in Armenia for the last 2-3 years. In spite of various and often quite deserved criticism of the Government, the real situation in Armenia has improved at least in three principle directions. First, population's purchasing power sharply increased, which create more possibilities for businesses oriented towards the internal market, including those in trade and nonmaterial. Yerevan at last stopped to be looking like a capital of the humanitarian crisis zone. Second, investment climate has improved. Changes have occurred, as they say, along the entire front - from a decrease in number of various inspections to the reduction in transportation tariffs for freight to the Georgian ports. Third, today the Government shows much more desire and ability to solve concrete problems of concrete investors by means of a direct dialogue. New, more civilized mechanisms of communication between the business community and authority have been emerging.
   However, an average investor that leaves somewhere in Glendale or Buenos Ayres has no practical opportunity to estimate a real scale and speed of these changes. There is a large potential for the Government to improve its outreach activity. It's necessary to improve economic propaganda; to divert the conversation with the Diaspora from traditional "Give us money!" into a formation of positive image of the country as a place where smart and enterprising people have been earning money for some time. Real stories about concrete successful businesses established by the Armenians from Diaspora in Armenia must serve a fertile ground for such propaganda. For attracting new investors it's necessary to use help of entrepreneurs that have already accustomed themselves to Armenia.

  Question: How do you see a future "ideal" economic structure of Armenia? What are the long-term factors that will help to sustain high growth rates?

  Answer: It seems that we have no sufficient knowledge yet to respond to this question with a proper degree of certainty. Unlike Azerbaijan where oil and gas will inevitably remain a skeleton of the economy, in Armenia quite different scenarios of future structural transformation are still possible. In this respect, the process of transition in Armenia is far from being complete yet: there is quite a number of development options in the today's economy, which are rather different regarding their structural characteristics. And the final result will arise, firstly, under influence of several early large-scale projects mentioned above. These projects, if they are successful, will transform, adapt other parts of economy according to their inner dynamics.
   So regarding the future economic structure I can make only some very general statements. First, this structure is likely to differ greatly from the original "soviet" economic structure. It seems that everybody must realize this fact as soon as possible and put up with it. And stop grieving over the lost industrious grandeur of Soviet Armenia. Today's task is not to restore the economy of the past, economy of the middle of 80s, but to identify sources of financing for reindustrialization, i.e. for shaping quite a different economy of 21st century, and for linking this economy with a new international division of labor.
   Second, today's long-termed trends seem to be highly favorable for "dreaming" about a possibility of the Armenian economic miracle. The role of traditional factors of growth such as natural resources and location decreases very fast. Simultaneously, the factors related to knowledge - ability to learn and be re-trained, ability to use international experience, ability to build up strategic partnership with global leaders in particular fields - become of special significance. Looking into the Armenian history of the last few thousands years, it would be difficult to deny that it'll be easier for Armenians to compete in this new situation than e.g. 40 years ago when economic development depended much more on oil supplies and remoteness from London.
   Third, the Armenian economy has a perfect chance to turn into a center of "technologies exchange" between the West (first of all, Northern America) and the East (former USSR). I mean Armenia has an opportunity to become a platform for promoting movements of technologies in both directions - from West to East and vice-versa. This chance relates to a favorable combination of two unique factors - communities, located in the most important world technological centers, and high level of labor skills in Armenia herself.
   Fourth, in the near-term outlook the Armenian economy will remain "two-layer", i.e. there will coexist modern high technological firms of the "new" economy and traditional enterprises in light industry, food industry, building materials production etc, working exclusively for the domestic market, as it was under the Soviet Union. It's not bad per se, economies of all developing countries, including, for instance, Turkey and not long ago Greece and Portugal, are structured in the same way. The key point is how fast and how successful these two sectors will start interacting. There was hardly any interaction of the kind in the Soviet period - the two sectors were integrated in the all-union market but had minimum direct ties. I'd like that a future Armenian economy will not repeat this experience. In an ideal scenario, technological achievements of a new economy should have opportunities for spillover and be widely used in the traditional sector. This will be a basis of which the difference between sectors will gradually disappear. Eventually, the share of modern sectors in the economy as well as speed of its expansion will determine a general rate of economic modernization of the country. At that, I will repeat myself, either successful scenarios (Israel, Greece) or highly unsuccessful ones (among the most infamous -- Zambia and Uruguay) are possible.