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Notes on Armenia’s growth strategy

Notes on Armenia’s growth strategy. Dani Rodrik September 11, 2010. Armenia suffers both from under-utilization and mis-allocation of resources. Observe: 1. under-employment; 2. productivity gaps. Pre-crisis growth model. Expansion of construction and other services

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Notes on Armenia’s growth strategy

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  1. Notes on Armenia’s growth strategy Dani Rodrik September 11, 2010

  2. Armenia suffers both from under-utilization and mis-allocation of resources Observe: 1. under-employment; 2. productivity gaps

  3. Pre-crisis growth model • Expansion of construction and other services • Investment in housing went from 2% of GDP in 2001 to 15% in 2008 • Non-housing investment constant around 10% • Financed largely by external transfers • Significant real appreciation since mid-2000s • Decline of manufacturing • from 20% of GDP to 10%

  4. Construction has reached its limits (and probably has to shrink), while agriculture remains too large • Domestic stock adjustment • Diaspora demand both are one-time

  5. Need for a new growth model • Clear shift in policy mindset • Away from construction, externally-financed, demand-led growth • To a supply-side model, that relies on entrepreneurship and investment in new industries • Based on tradables • stuff that can be exported and is not constrained by home demand • Can IT play a leading role? • currently too small • even very rapid expansion will not add much to overall GDP • and cannot turn farmers into software engineers

  6. Even under the best of circumstances, IT cannot drive the Armenian economy A cumulative increase of only 9.5%

  7. Implications • Moving people from unemployment and agriculture into higher-productivity activities is key • Armenia’s growth strategy and industrial policies cannot rely on IT or high-tech sectors alone • Other tradable sectors will have to expand too • A wider spectrum of mid-range economic activities will need to emerge, and possibly be nurtured • This requires both an explicit industrial policy framework • Based on institutionalized, strategic cooperation with private sector • Efforts to date (construction, IT) seem ad hoc • And a wider range of policy supports than seem to be in place currently • More policy instruments • More sectors • It also requires background conditions that are more conducive to investments in tradables • A competitive currency • A pro-business environment that is not captured by “insiders” at the expense of potential entrants

  8. Manufactures and exports are quite sensitive to the exchange rate When the real exchange rate depreciated during 1999-2004… … manufactures and exports expanded quite rapidly.

  9. The cruel dilemma of policymaking in emergent economies • Competitive currencies and industrial policy are substitutes • The less you rely on one, the more you need to rely on the other • So if the currency is left to float freely, growth requires putting much greater emphasis on direct industrial supports • Which is hard to carry out in view of administrative and political realities

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