An interview with former Minister of Finance and Economics of Armenia, Edward Sandoyan, currently Vice-Rector of the Russian-Armenian (Slavonic) State University LLC

In your opinion, are the economic reforms in Armenia today successful and heading in the right direction?

We haven't yet fully recognized all the challenges that are arising as a result of economic activity taking place around Armenia and in the world today. We haven't realized Armenia's role in this activity from the point of view of securing economic competitiveness for the country. And, most importantly, we have yet to realize what we have done and what we need to do for the institutional development of the economy and our strategy in this regard.

Our activity in the areas mentioned tends to be somewhat spontaneous and, because of this, certain questions are going to arise sometime in the future which are going to be difficult to answer.

The theory of governance states that we should choose objectives, strive to achieve them, and then implement constant monitoring to understand whether or not we have chosen the right direction and which elements need to be improved or revised. We do not have such a cultured, debated, and vetted system. The strategic documents that we do have concern the fight against poverty and the mid-term expenses of the Armenian government, and have been accepted only for show, because economic activity in reality circumvents the priorities and guidelines set by those documents.

What has brought this situation about? The problem is that in Armenia, as in many other countries with transitional economies, institutions that existed in the past have disappeared, but institutions characteristic of market economies have not been created. Many institutions have not been created at all, while others exist only formally, and so Armenia's economy remains very inefficient. Unfortunately, the political field encourages neither the institutional development of the economy, nor the concentration of human resources in structures that deal with economic policy.

How would you assess the macroeconomic situation in Armenia today and the business environment - what challenges do they face?

The indices for economic growth, inflation in stable economic conditions, GDP per capita, foreign investment volume, lowered unemployment, poverty, foreign debt and budget balance indicators, it would seem, are perfect, especially compared to other countries with transitional economies. All this should give us no reason to expect a recession in the near future. However, all this is not really so, because Armenia continues to remain a poor country; there is great polarization between the incomes of the rich and the poor (the Gini index) and it continues to grow. We have here one of the worst indicators among other countries with transitional economies. This suggests that economic growth is not bringing about any qualitative improvements in the economy.

Besides issues of economic competitiveness, Armenia today has problems with political competitiveness. The power of Azerbaijan's oil should not be fetishized in this regard, because Azerbaijan has a much more corrupt economy, and institutional systems that are more corrupt and much less efficient. Let me note, at the same time that, compared to Azerbaijan and Georgia, there has been much more positive economic institutional development in Armenia over the last few years.

Azerbaijan is using its oil resources for economic development, while Georgia is relying on its pipeline resources and transit infrastructure. Essentially, the economically active Diaspora is a resource for Armenia, which is currently blockaded. If we can create an economic development model that fully utilizes the Diaspora potential, then Armenia would be much more powerful and more competitive compared to other countries in the region. Besides this, Armenia should also not fall behind with regard to changing labor demands arising within the process of globalization, where primary importance is given to new products based on the development and application of high technology. In this sense, the quality of economic development cannot be deemed satisfactory, because if we were to analyze the import-export structure and dynamics over the past few years, we would see that there is no new economy in Armenia. Today, we need to set the foundation for a new economy that will yield rewards in the future. In particular, we should take the development of innovation activities very seriously, at least by getting involved in international programs for now, so that we preserve the scientific and human resources in this area. The current educational system is also incapable of satisfying the demands of a new economy - reform efforts have not led to any modernization in this system. For this reason, we could find ourselves in a situation where not only is there nobody in Armenia who can develop new technology locally, but there is also nobody capable of implementing new technology imported from abroad.

Regarding the business environment, I must say that Armenia proved incapable of quickly realizing a system for contract enforcement in economic market institutions and "written laws", which was done in the Baltic States. Armenia saw the creation of informal economic institutions, because the transactional expenses of businessmen are lower here in the informal field.

The formalization of informal institutions is currently underway, meaning that new introductions to the legal code are reinforcing informal relations. In particular, such reinforcement in agriculture has led not to cooperation in land resource utilization, but instead to concentration in land ownership, leading to neo-feudalism. This is more dangerous than industrial monopolization, because farmers are deprived of land, which worsens unemployment, income polarization, and social tension.

If the government were providing a competitive field, then imported goods should have grown cheaper as the dram gained in strength against the dollar. But that has not happened. There is no need for major pessimism in this regard, because economic monopolization and 'oligarchization' have occurred in all the countries where rapid and effective institutional reforms have not been implemented.

The dollar has depreciated in value by more than 20% against the dram in 2004. What positive or negative effect has that had on the Armenian economy?

65% of total deposits in the Armenian banking system and 85% of population savings deposits are in the form of dollar accounts, which have naturally suffered as a result. It is only over the last two years that the population dollar deposit has lowered from 87% to 85%. Exporting businesses suffered too, as did individuals who receive private transfers from abroad - such people make up 40-60% of the population, and the total transfers received from abroad exceeded one billion US dollars in 2005. On the other hand, the appreciation of the dram has kept away businessmen who intend to found businesses here based on export.

Nevertheless, I would not want to discuss details of the social or economic effects of the dram appreciation without speaking of the causes leading to this situation. I think that the appreciation has been a result of the large amounts of transfers from abroad, the activity of money exchange sites as well as speculative activities or expectations. The shadow economy in Armenia is large and one cannot rule out that foreign currency obtained illegally is entering the country. The value of this currency is decided on the streets, not on the currency market. This is why currency exchange enterprises should be contained within the banking system - banks should be allowed to open currency business and exchange offices. This is how it is in many foreign countries and this is the only way to make the currency market a transparent one.

Interview by S. Sargsyan