Interview with ex-Prime Minister Republic of Armenia Hrant Bagratyan

Mr. Bagratyan, in mid-July the government applied to the Armenian citizens through mass media. A public poll about the program was organized. Your observations, comments and proposals, in essence, represent a new program. Is it an alternative to the government program?

Not at all. Of course, I don\’t have an alternative social-economic program for today\’s authorities, and it is not a secret. I should also say that it is alternative in its full sense. There are many programs, but, in my view, these are not social-economic ones. Rather, they are populistic promises where there is no trade-off between opportunities and promises. The authorities themselves are mainly socialists. It is true that in the economic policy they do certain “trade-offs” for liberalism taking into account the factor of international economic structures. Thus, the problem of social-economic life is middle-of-the-road liberalism. The opposition, both the one represented and not represented in the Parliament, is more populistic and therefore, more half-and-half. In this regard, the purpose of presented recommendations, in my view, is to attract the government\’s attention to deficient approaches, apparent mistakes, excessive populism, etc. At the same time I hope that being in opposition means not only to be against the ones that are on powers, but also against their ideas and approaches. In this regard I will be satisfied if this paper is somehow useful also for them.

What is your assessment of the government program?

One should treat this paper with reservations before the presidential elections. Nevertheless, some points are obvious. First of all, an attempt is made to remain within a liberal economy, ensure developments. This, of course, is praiseworthy. Secondly, the situation analysis, straightforwardness are lacking in terms of finding solutions to the existing problems. Thirdly, the government does not have a full picture of the real situation in the economy. In particular, it is bound to official statistics which does not correspond to the reality. My detailed viewpoint is presented in the document.

You mentioned about inadequate statistics. What does it mean?

I have noted more than once that over the past 7-8 years the figures of economic growth disclosed by the statistics service and the Central Bank often deviate from the reality. Apparently, these bodies are instructed by their management not to show an economic growth which is below a two-digit level. Moreover, they are masterly distorting the peculiarities of economic developments in the post-Soviet territories abusing the trust of international economic structures and insufficient consistency in actions among these organizations.

Why is it so?

It is necessary for justifying the fact of under-collection of taxes, concealing the fact of tax avoidance by oligarchs who stand close to the authorities, demonstrating intra-political dictatorship, propaganda, falsification of historical facts. The point is that they take the actual percentage of economic growth and multiply it. (It should be noted that during those years a serious economic growth was observed, other than in 1999 and 2000 when the growth was insignificant.) In the comments about the program it is clearly explained how figures are “generated” for the agriculture sector, services, construction, etc. It should be noted that the statistical bodies have become so good at this, that even some naive persons were convinced in the existence of a Caucasus Tiger.

Can you give examples of falsification of economic data, of course, apart from the concrete cases which, for instance, are mentioned for agriculture?

Naturally, I can\’t tell you the exact figures. To do so, I will need a statistics service which now operates within the government structure. However, I can show you what the consequences of these systematic overstatements are and give estimates.

Example:
According to statistical data, in 2006 the GDP was 134% compared to 1990. The population number decreased from 3.8 million to 3.0 million (at this moment I am citing only the official statistical figures). This means that the GDP per capital has increased 1.7 times. However, according to the same official data, in 2006 the real incomes of the population were 16 percent of the same indicator for 1990. Compared to 1990, the GDP was 134%, and services accounted for 60 percent. However, in the meantime the percentage of services in the GDP increased from 34.4% to 35.2% which is not possible. On the other hand, retail was only 69% compared to 1990.

Maybe there were export operations?

On the contrary. Firstly, it is said that the BOP is negative. For example, in 2005 our exports amounted to US$ 1323 million while imported goods and services accounted for US$ 1962 million. This means that the retail reserves even increased in the background of external economic activity.

Could it be a mistake or misunderstanding?

I wish it were, but I am afraid that we deal with an organized statistical lie. The traces of intricate and sometimes cynical lie are everywhere. But lie has short life. When you go further, everything becomes clear. For instance, it is said that in 2005 the export volumes increased 4.47 times compared to 1996 totaling US$ 1323 million. In reality things are different. First of all, a comparative analysis shows that during this period the export price index was 2.21 times. After dividing we arrive on US$ 598 million. Now let\’s adjust this figure, taking into account the dollar depreciation over the 10-year period, i.e., 47%. We come up with US$ 406 million. This means that the growth could be at the maximum 137% instead of 447. Hence, during 10 years the export volumes increased only by 3% annually. For example, in 1994-1996 the GDP grew by 16%, and export doubled (the annual growth was 26%). Experience shows that if there is qualitative increase, then 1% of GDP growth should be accompanied by 2-5% of export growth.

Do you have other evidences of inaccurate statistics?

I can bring the figures of physical production volumes. When we take production volumes in pieces, tons, kilos, meters, square meters, we see that the absolute indicators for 2005 are significantly lower compared to 2006 for most products.

?

Yes. I don\’t want to overwhelm you with figures but I can\’t do without them. In 2005, 92 metal cutting machines were produced in the sub-sectors of heavy industry, machine construction, chemical and light (former) industry, in 1996 the number of produced metal cutting machines was 459. Furthermore, relays (accordingly 313410 and 459600), cable (115 and 142 km), lamps (3.3 and 16.0 million pieces), low capacity electric engines (1097 and 5545), power transformers (15 and 211), electric engines of alternate current with rotation axis at 63-355mm height (87 and 19081), pumps ( 403 and 16231), generators of alternate current (4 and 570), cotton material (143 and 984 thousand square meter), stockings (443 and 7075 thousand pairs). The production volume increased for very few products: sodium hydrate, tires, batteries. Of course, superfluous ad hoc analysis will not be comprehensive. For example, in 2005 items were produced (computers, water meters, calculators) which were no longer manufactured in 1996. However, they involved insignificant quantities, and some of the products which were produced in 1996, fully or nearly fully stopped in 2005. These included mobile electric stations, cars, elevators, auto lifters, footwear, chemical thread and fabric, alternate current generators, etc. Maybe it is inappropriate to discuss the dynamics of physical volumes of these products, since they are no longer characteristic of the Armenian economy. However, these products are included in the list maintained by the RA statistics Service.
It should be noted that in practice machine construction no longer exists while in any country its presence witnesses the level of organization of the national economy. Thus, modern machine construction involves 13-20 technological processes. It assumes intra-country and regional production concept. Naturally, machine construction is developed in countries where people are highly organized (Anglo-Saxes, Germans, French, Japanese, etc.).

What is the situation in the food and construction industry?

In food industry growths and declines interchange. Compared with 1996, the production volumes for cheese, canned food, confectionary, pastry, vodka, cognac, beer, cigarettes have increased. Although significant decline is observed for some products (dairy, cereals, wine, salt, fishing, etc.). It is hard to give an overall assessment, but, I my view, there is growth in food industry which is mainly connected with natural progress in replacement of imported goods with domestically produced ones. Unfortunately, an economic policy as such is lacking. For example, Armenia\’s relative advantage is in the production of grapes, wine and cognac, but the existing tax policy ensures relative advantage in the production of vodka (see also our comments regarding the government program). In 1996-2005 the volume of vodka production nearly doubled, and the production of wines decreased 3.5 times. Many bright heads argue that we are a vodka consuming society. In response, we should say that by its nature the problem is, first of all, economic. As opposed to wine, vodka production and sale in terms of cycle duration, is more beneficial (even from the perspective of excise tax). Can the situation be changed? Of course, no. Firstly, all our vodka producers (nine in number) also produce wine. Secondly, they all (nine individuals) are Parliament members. Why can then the law on excise tax be amended?
Production on construction materials: growth is recorded for a significant portion of indicators (commodity concrete, tiles, non-mineral ores, cement, etc.). Some indicators have improved or remained at the same level. It is amazing that in 1996-2005, according to statistical data, the physical volumes of capital construction increased 5.63 times, reaching AMD 426 billion from AMD 48 billion. During this period, however, the construction of similar number of apartments was completed, but the production of cement and plaster increased only 2-2.5 times. How can it happen? Either the growth is overstated or the newly erected buildings do not contain any cement and will soon collapse. Currently monolith buildings are being constructed (which, undoubtedly, is the right thing to do) where the relative consumption of concrete and cement increases. It is clear that, on the one hand, there is manipulation of figures, and on the other hand, by overstating the value of construction, people launder their monies. I raise this issue again and again: guys, now more construction activities are carried out by the private sector. Why is construction not taxed? Or, adequate to the tax, why part of the being constructed apartments (up to 50%, if the building is being erected in the center of Yerevan, 30% adjacent to the center of Yerevan, and 0% in other towns of Armenia) is not handed over to the State? Because the highest rank officials, including parliament members, ministers, prosecutors, judges, are engaged in construction. Who should change the law?

What are the consequences of such a situation?

At macroeconomic level all this leads to serious imbalance in the balance of payments. First of all, there is difference between the GDP calculated through the production or income (as well as consumption) methods. If there is growth, all these methods should produce the same result. In other words, the amount of delivery of goods and services (less intermediate consumption) should equal to the amount of expenses related to final consumption of goods and services (plus gross accumulations and net export).
This is where the “wizard sticks” were invented, one of them being the systematic overstatement of remittances. The CBA and NSS voluntarily interpret their amount (by increasing it more than twice), thus arriving at an overstated amount of US$ 07-08 billion (this type of overstatements are attributed to the last 2 or 3 years).
Another wizard stick is the transfers made by national oligarchs to oversees (they know better than us how reliable the RA civil authorities are). As a rule, these transfers are understated or ignored. Here again the CBA and NSS gain additional US$ 180-200 million.
Besides, statistical manipulation is evident in the calculation of dynamics of physical volumes and inflation. Thus, the CBA masterly decreases the inflation rate by deferring the calculation of new goods and services (for example, tariffs on internet services were included only recently) in the basket. Parallel to it, the goods and services which are no longer circulated continue to remain in the structure of CPI, even if hey don\’t have any weight or role (for example, trams). With the help of this “stick”, as a rule, the economic growth is overstated by 1.5-3 percent annually.
Finally, statistical manipulations are done on the part of investments: sale and resale of sites, particularly in view of foreign investors. This allows to play games with the GDP. The effect of this “stick” depends on the volume of business sales among foreign and other investors.

Isn\’t the economic growth reflected in the budget growth?

At first sight it may seem that the budget has grown abruptly, but it appears to be euphoria. Thus, in 1996-2005 the tax revenues in the budget increased from AMD 73 billion to AMD 304 billion but the cumulative increase for this period is 47%. This means that AMD 206.8 billion should be compared to AMD 73 billion (the budget surplus for 10 years is 180%).
As a matter of fact, we take the official inflation rate, which, like other statistics produced by the CBA, is “edited”. Today the GDP and taxes grow at the same rate. For example, in 2001-2005 the GDP grew by 90%, and taxes grew by 96 percent. This means that the one percent increase in GDP was accompanied by 1 percent increase in taxes. In 1994-1996 the GDP growth was 16% while for taxes an increase of 196% was recorded. Experience shows that the 1 percent of GDP growth should go hand-in-hand with 1.7-2 percent of increase in taxes. It should be noted that despite the nominal growth of taxes, over the last 10 years the ratio of collected taxes to the GDP remained 14-15%, and even tended to decrease (particularly over the last 4-5 years).
If we consider the ratio of current budget revenues to the GDP, the increased shadow economy and corruption it obvious. Thus, it appears that in Armenia the said indicator was 19.9% in 1995. At that time it was the highest in the Transcaucasus (in Azerbaijan and Georgia it was 17.6 and 11.1 accordingly) and was somehow lower compared to Iran and Turkey (23.2% and 21.6% accordingly). According to the 2005 results, Armenia was the only country in the region which experienced recession. This indicator decreased to the level of 16.1 percent while in other countries major progress was recorded: for Georgia – 19.7%, Azerbaijan – 21.6%, Iran – 37.1% and Turkey – 41.5%).

But our “growth” is noted by international experts. There are talks about the Caucasus Tiger. Day by day we hear about an established state.
My advice is not to focus on it much. The same experts tell one thing to the authorities and another thing to us. I have nothing to add. We should appreciate the work of all those who come to this country and have their contribution. However, recently the number of non-professionals has increased. Or this could be explained by a lower interest in Armenia.
What position do we hold in the region? Often they say that we are the best-organized country. Nonetheless, in terms of figures we are the last or the last but one in the region by the most important indicators. Thus, in terms of per capita GDP (US$5880 – calculated parity of purchasing power) we hold the second last position (Turkey – US$ 9060, Iran – US$ 8480, Azerbaijan – US$ 5960).
These indicators are the lowest in the region. The volume of Armenian experts is only 27% of current GDP, and for high technology products it is 0.7%. For comparison we can state that the export of high technology products and services is: for Georgia 22.6%, Iran – 1.9%, Turkey – 1.5% and Azerbaijan – 0.8%. Our external debt (37% of GDP) is one of the lowest (after Turkey where the said indicator is 47%). Armenia has the most concentrated economy in the regionЈ the living standards for the 10% of the richest are 26 times higher than for the 10% of the poorest; one family holds 8 percent, and10 families hold 16 percent of the economy. Often we are supplied with the comparison of 20% of the richest with 20% of the poorest. Yes, by this indicator (7.6%) we are the best in the region (almost in all countries the indicator is the same, i.e., from 5.1% to 7.6%). But let\’s not forget that this indicator is not intended for us. Our authorities and the rich (who are equivalent to each other) simply prevent further increase in percents in the 10% reflecting the rich. In this country the concentration of the economy is 3-6 times higher compared to Turkey and Iran, and it is twice higher than in Georgia and Azerbaijan.
We often hear from official sources that in Azerbaijan the situation is worse: it has only oil which is owned by the Azeri president. Definitely, it is not true. Definitely, it is a corrupt country, but we are no better than Azerbaijan. As a distinguishing feature, I should mention that the Azeri president has not privatized any major sector (he considers himself to be the owner of the entire country, rather than individual sectors). In particular, a government stabilizing fund is created based on funds raised from the sale of oil where already US$ 1.5 billion is pooled. This money is used for social and public needs.

Don\’t we have the best banking system?

Now let\’s discuss the so-called “established” banking system. It is the worst in the region. By the size of bank assets per capita (US$ 433) Armenia is the last in the region. Moreover, total bank assets to GDP (19%) is one of the lowest indicators in the world. These indicators are so crucial and comprehensive that I don\’t even want to refer to others: the situation is either the same or worse. In response to these comments, we often hear the CBA stating that instead the assets of domestic banks (loans extended to businesses) are of good quality. However, when we review the structure of banks\’ credit portfolio, we notice that credits for replenishment of operating capital and retail credits prevail. Banks nearly don\’t engage in development of the economy, financing of investments. This means that under quality the authorities and the CBA understand the collectability of credits rather than their structure. It is clear that they use powerful repressive methods. At first sight, the CBA runs a policy of super-liquidity aimed to ensure the reliability of the country\’s financial system. The normative and reserve requirements are such that, for example, the minimal profitability of investments in exports should be 47%, and for business in the domestic market it should be 32%. How can businesses develop in such an environment? The Central Bank, to be more precise, its Governor, uses the laws passed by the National Assembly (of course, all these laws are passed with the acknowledgement of the country\’s leadership) and may consider any loan at any moment as a loss or doubtful, make provisioning and reserves for these loans, punish the bank, its manager and borrower. This has become a political, rather than economic tool. It allows to “control” politically all cash flows. Please, note that this powers is prescribed by law.
The CBA tells stories about the inevitability of appreciation of the Armenian dram and the problem of remittances. This approach was severely criticized by me (see “Haykakan Zhamanak”, March 24, 2005, April 6, 2005; 168 Hours, September 15 and 17, 2006). The dram is appreciating, and the CBA is selling securities in drams or gold (whose prices are increasing) and purchases foreign currency (which is depreciating).
Business is most disorganized in Armenia. The market capitalization is only 0.9%. For comparison, in Turkey it is 44.6%, in Iran – 20.4%, in Georgia – 5.5%. Even Russia for whom we seem to be a strategic ally, has reached 72% of market capitalization. Among 208 countries and territories Armenia is behind Bangladesh, Botswana, Ghana, and – you can\’t believe it – Gaza. Among the CIS countries, only Tajikistan, Turkmenistan and Uzbekistan are in a worse stance compared to Armenia. What does this mean? It seldom happens when using the leverages of power, the country leader, government and parliament members hold the economic monopolies in their hands (cars and mobile phones, telephones, fuel, sugar and other imports, mining, production of beverages, banking, construction, communications, transport). It seldom happens when they act both as law-makers and executors. We are facing a situation where in practice no one is able to buy a single stock of these companies. It means that these companies can be managed by anyone. Often some skinhead acts in such a role. In fact, is there the question of effective management of these companies? The market is segmented. There is no capitalization. It appears that using the political powers not only various businesses are taken under control, but also ensured their ever-lasting nature. Savings originating among some groups of population are obliged to be satisfied in the form of bank deposits. A curious situation exists here: banks pay 4-9 percent of interest against foreign currency deposits when the depreciation of foreign currency is 12-16%, plus inflation. After all this, is it possible for a working person or highly successful businessman to improve his social status? Please note that the CBA is responsible for issues related to the stock exchange.
You don\’t know whether to cry or laugh at this greenhorn who called the country a Caucasus Tiger.

Mr. Bagratyan, maybe our relative advantage is in information technologies, modern telecommunication, education?

It seems that Armenia should be in the avant-garde in these areas. On the contrary, it is the last according to almost all indicators. Thus, the number of landline and mobile phones per 1000 residents is 260, in Turkey the same indicator is 868, in Iran – 384, Georgia – 337, Azerbaijan – 397. In Armenia only 53 people out of 1000 have internet access, and 66 have PCs. Now let\’s show the figures for our neighbors: Turkey – 222 and 52, Iran – 103 and 109, Georgia – 39 and 42, Azerbaijan – 81 and 23. So that we should forget about the stories about a second silicon valley, repetition of the Indian miracle. We saw how Armentel was privatized to the Greek company (more importantly, a state-owned Greek company), then how it was resold to Russians. The fact of resale is already indicative of ineffectiveness of the first deal (1998). Finally, over the past 9 years this sector has appeared in the hands of an abuser which itself expected technological assistance from the West. It should be added that these sales and re-sales are executed along with granting significant monopolistic privileges.
About education: Armenia holds the last position in the region.

How can it be so?

Yes, yes. My statement is based on official government data. So, in Armenia the level of school education is 78.8% while in Turkey it is 89.3%, in Iran – 95.2%, Georgia – 86.7% and Azerbaijan – 84.5%. What is the reason? It\’s been 10 years that the current regime is on power, and it\’s been 10 years that instead of reforms we hear mere promises. The point is that the contemporary secondary school should consist of three levels. Armenia is just starting to migrate to such a system. Why? Because the authorities spend some 10 years on criticizing their predecessors which delayed the school reforms for some 10 years and only now they attempt to push these reforms by calling it the Bologna process.

Isn\’t there something positive? Aren\’t the figures cited by you pessimistic?

Of course, there are some figures reflecting the index of economic freedom but here we deal with a methodology problem. For example, the Armenian customs code is the most liberal one. Anyone can bring a car into the country. The customs service enjoys only one right, but what a right it is! The customs are allowed to set the import price. In Turkey, for instance, not every person may engage in import operations. A license, payment of respective fee are necessary, i.e., legally there is an initial selection in place. However, as opposed to Armenia, here the son of the country leader does not enjoy any privilege among the selected importers by receiving the “mild” attitude of the customs authorities. Today the situation is such that the Heritage is more interested in the principal side of the problem. Moreover, in terms of economic freedom Armenia continues reaping the results of one of its best reforms not only regionally, but also internationally which were implemented in the 1990s\’.
Or let\’s take the energy sector. Armenia ensures 5.6 unit of GDP per unit of fuel. Only Turkey is in a better stance (6.2). Moreover, this figure stands very close to the Western indicator and it is the best among the CIS countries. This was achieved thanks to the energy reforms in 1993-1995. In this country people have not even realized it. Otherwise, we would avoid the “case” of fuel oil, and the ones who initiated it, should have been in jail. Then, if you recall, the system was sold to some Midland Resource offshore company which resold it at speculative price. Eventually, the reformed sector appeared in the hands of unreformed operators who demonstrated more ineffective indicators.
However, the government should first of all possess accurate information and clearly identify the problems in order to choose the best steps for its program.

What can you say about the privatization policy conducted during the said period?
Initially much ado was raised about the incorrectness of the previously run privatization policy, the so-called robbery. Using this disturbance, the previously existing privatization institutions were eliminated: from 1999 the enterprises that “please” the senior political circles are privatized at a price and in the manner that suits them. I can definitely state that the privatization concealed by promises of making investments was an excuse for privatizing at more uncontrollable, speculative and cheaper prices. Moreover, it should be noted that not a single “illegal” privatization deal was revised. In this way industrial enterprises (previously only 15 percent of industrial enterprises was privatized), production infrastructures (it was then called optimization) were privatized. We let discuss the concrete process of privatization and its subjective aspects and facts separately.

What conclusions can be drawn?

Analysis shows that the economic growth propagated over the last 8-9 years is significantly a game. Thus, according to official statistics, in 1999-2006 the GDP grew 2.1 times reaching US$ 6.4 billion, and the average annual growth was 11.5%. Review shows that when using correct mathematics, the average GDP growth could not exceed 6.4 percent when taking into account remittances and cash outflows effected by oligarchs. This indicator is achieved in a situation when we fully accept all official data on inflation and economic growth. Taking into account the “stick”, the real figure of economic growth was 4.4-4.9%. This means that in reality Armenia has experienced a certain economic growth but we are significantly behind our neighbors. This is the challenge of history. In the 1990s\’, despite the widespread economic difficulties, Armenia was ahead of its neighbors thanks to its favorable economic policy. In essence, the country is experiencing a relative regress over the last 10 years while challenges become more severe.
The 2007 parliamentary elections are now in the past, and in 2008 the presidential elections will take place. These should not result in mere replacement of individuals. I think that fair and sober-minded persons should come to power. Any replacement of the President will allow to hope that someone with sober judgment about the reality will come to power. Someone, anyone, presumably other than the Arab butcher, will come and understand that straightforward, crucial, unpopular and radical reforms are necessary.