Armenia Experiences Record First-Half Growth Amid Paradoxical Economic Conditions

Government statistics show that Armenia's GDP rose at a 14.8 percent rate during the first half of 2003, giving the country one of the fastest growing economies in the world. At the same time, wealth is unevenly distributed, with at least half of Armenia's population still living at or below the poverty line.

The first-half GDP increase comes on the back of an equally strong macroeconomic performance in 2002 and 2001 that saw growth rates of 12.9 percent and 9.6 percent respectively. Overall, GDP has risen steadily over the last seven years. Yet in 2002, GDP stood at about $2.4 billion – a relatively modest figure for a country of 3 million.

The practical impact of Armenia's current boom is especially visible in the capital Yerevan: more cars, glitzy shops, restaurants and other small businesses. In addition, real estate values in the capital have shot up by 50 percent over the past year. Beyond Yerevan, however, many areas have hardly seen any development since Armenia regained independence in 1991.

In addition to widespread poverty, unemployment remains a chronic problem. According to unofficial estimates, the unemployment rate may reach as high as 40 percent. The lack of jobs has forced hundreds of thousands of people to leave the country over the past decade in search of work. [For background see the Eurasia Insight archive].

History helps explain Armenia's economic dichotomy. During the early 1990's the economy contracted by roughly half, hit by the depression brought on by the collapse of the Soviet system, and further stressed by the Nagorno-Karabakh war. Given the country's low starting point, Yerevan needs to maintain steady growth for many more years in order to raise living standards to a more comfortable level for most Armenians.

The country's economic statistics themselves are a matter of domestic political debate. Opposition leaders maintain that government data is grossly inflated. But Independent analysts and global financial institutions, including the World Bank and the International Monetary Fund, have tended to accept Armenia's existing economic data as credible. "There may be some deficiencies in the process of data collection, but I don't think that they are so great as to change what is basically a very strong economic performance," says Roger Robinson, the World Bank representative in Armenia. "So the economic direction and the trend are accurately captured."

Johannes Linn, a World Bank vice-president, characterized Armenia's economic growth as an "economic paradox" when he visited Yerevan two years ago. His description reflected a widespread belief that only the small wealthiest segment of the population has really benefited from the growth. The unfair distribution of national income stems from widespread tax evasion and the huge shadow economy. That, in turn, means weak tax revenues and meager government spending on social programs, education and health care.

According to some analysts, however, the benefits of growth are at last beginning to trickle down. "Although the rise in living standards lags behind our economic growth rates, I have no doubts that the entire population is now reaping their fruits," says Tigran Jrbashian, director of the Sed Marsed consulting firm.

"I really believe that poverty is going down," agrees Robinson.

Just how serious that improvement is remains an open question. There are no universally recognized mechanisms in Armenia for gauging household incomes. Private employers widely underreport workers' wages to tax authorities, rendering government income data (the average salary being estimated at $50 per month) unreliable. A large part of the population is employed in the informal sector of the economy and does not report income at all. Official statistics do a poor job of measuring the impact of the millions of dollars in cash remittances regularly sent home by scores of Armenians working abroad, mainly in Russia and in the United States.

What drives the Armenian economy, hamstrung by the Azerbaijani and Turkish blockades, remains a matter of debate. Its latest performance owes a lot to an apparent construction boom. Much of that has been made possible by Armenian-American billionaire Kirk Kerkorian, whose Lincy Foundation has spent over $60 million on infrastructure projects in Armenia over the past year.

Also, a considerable amount of money is thought to be channeled into the country by wealthy Russia-based Armenians who have cashed in on Russia's economic recovery in recent years. As one Western diplomat in Yerevan put it: "I sometimes think that the donor community's interventions make less difference to the lives of people here than do conditions in the Russian economy."

All of which raises the question of the sustainability of current growth trends. In Jrbashian's words, rapid economic growth, especially in the manufacturing sector, has so far amounted to import substitution, and can only be export-oriented in the long run. "Promoting exports should be the key aim of our economic strategy," he says.

Armenian exports, though modest in absolute terms, soared by nearly 50 percent to $507.2 million in 2002 and are maintaining a steady growth rate this year. This, according to the World Bank's Robinson, is particularly encouraging. Also important, he says, is the growing diversity of the exported products.