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Armenia: Western Financial Institutions Changing Policy Prescriptions

It's called an "economic paradox" when statistics indicate an economy is growing yet there's no commensurate improvement in the daily lives of citizens. Such is the case in the Caucasus nation of Armenia, where the economy has been growing for seven straight years but more than half the people still live below the World Bank poverty line of one U.S. dollar a day. RFE/RL Armenia correspondent Emil Danielyan reports Western governments and financial institutions are hoping to change this by shifting their focus away from improving macroeconomic indicators in favor of encouraging private investment.

Yerevan, 6 August 2001 (RFE/RL) -- Western governments and lending institutions appear to be shifting their policy prescriptions for Armenia away from a strict focus on macroeconomic stabilization in favor of establishing better conditions for foreign investors.

The earlier macro-level reforms supported by the West and institutions like the World Bank and International Monetary Fund led to seven consecutive years of economic growth, yet left the majority of Armenians mired in poverty.

Governments and donors are now acknowledging that macroeconomic stabilization alone is not enough to bring about a substantial betterment for most people.

John Odling-Smee, the director of the International Monetary Fund's Second European Department, signals the change in emphasis. He says creating a better investment climate is "the single most important thing" authorities can do to alleviate enormous hardships suffered by most Armenians. As he puts it:

"Everything possible must be done to create a healthy environment for private business, especially new business entities."

He continues:

"There is a need to push ahead as rapidly as possible with the elimination of unnecessary regulations and harassment of small private businesses and to implement other concrete measures designed to reduce the government in the economic life and the opportunities for corruption."

This emphasis away from macroeconomic stability -- in other words away from a fixation on indicators such as the inflation rate and the budget deficit -- illustrates how serious the problems are in Armenia.

In spite of the fact the economy has grown more than 5 percent a year since 1994 and inflation has been held to single digits the past three years, the World Bank says more than half the population (55 percent) still lives below the bank's standard poverty line of one U.S. dollar of income per day.

Independent estimates say the unemployment rate could be as high as 20 percent, although official figures put the figure closer to 11 percent.

World Bank Vice President Johannes Linn spelled out this "economic paradox" on a recent trip to Armenia. Linn told reporters in Yerevan:

"On the one hand, we see good growth and macroeconomic stability in Armenia. On the other hand, we still see a lot of poverty, limited domestic and foreign investment. We see a lot of progress in terms of policy reforms and improved legislation and regulations, but at the same time hear a lot of skepticism among investors and the population about whether or not there is real progress."

The World Bank's Country Assistance Strategy on Armenia, released in May, concludes that in spite of "strong macroeconomic performance, the country has not benefited from commensurate job creation or poverty reduction."

Donors and financial institutions are now hoping that a new emphasis on luring foreign investment can lead to a broader improvement.

Tom Samuelian is the president of the American Chamber of Commerce (AmCham) in Armenia. He says the government should start by changing Armenia's image as a typical ex-Soviet state run by a corrupt elite with no respect for the law.

"The perception is that there is something wrong, and that perception affects the overall impression of the country."

A recent study cited by AmCham says the average company manager in Armenia spends almost half of his day just dealing with the bureaucracy. This is three times the worldwide average. Samuelian says bureaucrats in Armenia simply assume that businessmen are guilty of some form of wrongdoing, like tax evasion, and therefore they increase the number of inspections.

"There is a sense of presumption of guilt in Armenia that people have but they are not used to in the West."

A pledge to improve the business environment and crack down on corruption is part of the government's three-year economic program approved by the executive boards of the IMF and the World Bank in May. The move paved the way for the release of a total of $140 million in fresh loans to Yerevan.

Release of the funds was also made possible by the government's improved fiscal performance in the past eight months, after last year's major shortfall in revenue. The budget deficit is on track to fall from last year's 7 percent of gross domestic product (GDP) to 4 percent this year. It is forecast to fall to 2.6 percent of GDP by the end of next year.

Reforming the business climate may even be seen as more important to the economy than resolving the conflict with Azerbaijan over Nagorno-Karabakh, which has shut down border trade with Azerbaijan and Turkey.

Government officials would seem to agree with this, and many now say they have to chance to prove it.