26.12.2013
Armenia Economic Report 2013

EDRC introduces annual publication of "Armenia Economic Report 2013. The general theme of the AER 2013 is Human Capital and Growth Perspectives.

The Report presents thought-provoking analyses of demographic developments in Armenia, addresses the distribution and allocation of workforce, productivity, human capital development and growth perspective of the country.

The electronic Armenian and English versions of AERs are available here.

Executive summary of the report is presented below.


 Armenia Economic Report 2013: Human Capital and Growth Perspectives

Executive Summary

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SECTION 1. ECONOMIC DEVELOPMENT TRENDS

SECTION 2. HUMAN CAPITAL AND ECONOMIC GROWTH

 

SECTION 1. ECONOMIC DEVELOPMENT TRENDS

  • The global economy grew by 3.2% in 2012 and, so exceeded its pre-crisis level by 12.2%. The global economic recovery continues primarily due to Asian developing countries. Growth in developed countries tends to slow down and is relatively small.
  • Global trade in 2012 increased by 2.5%. Export growth rates in developed countries continue to remain higher than import rates, while in developing countries the situation is the opposite.
  • Prices for major metal commodities decreased in 2012. Prices for gold on the other hand continued to grow, although at lower rates. Oil prices went up by 1% in contrast to the drastic growth in 2010-2011. As a consequence, oil and gold prices in 2012 reached their peaks for the last 3 decades.
  • Prices for consumer goods grew by 3.9% in 2012, following the 4.9% increase recorded in 2011. Slowdown in growth rate of prices is especially visible in CIS countries. Inflation in developed countries is slower. Average consumer price inflation in 2012 totaled to 2.6%: 3.2% - compared to the beginning of the year. Food prices after the crisis increased by 20.4% (December 2012 compared to January 2010), non-food prices – by 15.2%, while tariffs for services - by 9.8%.
  • The economic growth average of southern Caucasus countries was 3.6% in 2012, notably, the highest growth rate was recorded in Armenia (7.2%), followed by Georgia (6.5%). Growth in Azerbaijan equaled to 2.2%.
  • Economic growth in Armenia in 2012 is relatively high as compared to 4.7% in 2011. Agriculture had a significant contribution of 1.9 percentage points to the 7.2% growth. The next largest contributions came from finance and insurance sector (0.9 percentage points), trade (0.7 percentage points) and transport and communications sector (0.6 percentage points).
  • As a result real GDP which grow continuously since the recent crisis, almost reached its prior maximum (2008) level. Nevertheless, GDP in dollar terms remained considerably below its 2008 level.
  • The structural changes in the Armenian economy are considerable and are mainly due to the construction sector. Although some minor sectors grow fast, yet these did not have a very large impact. If construction was the largest sector of the economy several years ago (about one quarter), agriculture is currently the largest sector with 19% of the GDP, followed by trade (13% of the GDP). Construction currently is equivalent to 12% of GDP, yet, it is still larger than manufacturing (10%). 
  • After the sharp shrink in 2009, the decline in construction continues. During 2010-2012, this sector on average shrank by 2.1%. As a consequence, construction sector in 2012 is equivalent to 5% of its 2008 level. 
  • Manufacturing in 2012 grew by 3.1% which is lower than previous two years. Manufacturing takes about 60% of the total industrial output for its account. About 60% of manufacturing is produced by the 10 largest sub-sectors, with bread-making as the largest sub sector. 
  • The 65% growth of the tobacco industry served as the largest factor beyond the growth of the  manufacturing sector in 2012, followed by cognac production (21% growth) and copper, aluminum, cast iron and steel production (8-6% growth).
  • Unemployment rate in Armenia reached 17.3% in 2012 which records some improvement since previous year. Industrial employment increased by 0.3%, covering 83.4 thousand employees.
  • As of end-2012, expenditures on final consumption exceeded the gross income generated in the domestic economy by 1.8%. Private consumption in real terms increased and reached 88.8% of GDP. Public/Government consumption decreased and totaled to 13.0% of GDP.
  • Real volumes of investments in the economy continued to decline by 7.7% in 2012 and 4.7% - in 2011. Expenditure breakdown of GDP, in particular, declines of state intervention as well as fast drop of gross capital formation do not contribute to the sustainability of the economic growth.
  • Total budget expenditures in 2012 increased at modest rate – about 2% compared to 2011. This implies that public expenditures declined in real terms in 2012 (if inflation impact is neutralized). In 2012, budget revenues exceeded their pre-crisis level by 20% which is mostly explained by increased tax revenues in almost the same amount.
  • External public debt of Armenia reached 37.9% of GDP in 2012 or USD 3,738 mln. The main creditor of Armenia is the World Bank of which the provided liabilities form 40% Armenia’s external debt. Liabilities to the International Monetary Fund constitute 21% of total external debt. Major bilateral creditors are Russia and Japan.
  • External balance improved: net exports reduced by 17% in 2012. Current account balance improvement was also supported by increased transfers from abroad. The amount of remittances/transfers through banking sector in 2012 exceeded their pre-crisis level due to increased transfers from Russia.
  • Majority of exports in 2012 went to EU member countries (37%), followed by CIS (24%), Asian countries (19%) and Americas (14%). Overall, Armenian products were exported to more than 100 countries. The largest partner is Russia where about one fifth of Armenian exports were sent. The second largest partner is Bulgaria, followed by Belgium, Iran, Germany and US.
  • Similar to previous years, the export items with the largest share of total exports are copper ore and concentrate, followed by alcoholic beverages. Around 50% of exports to Russia involve alcoholic beverages and products followed by diamonds (8.6%), fresh fish (4.6%), apricots (4.5%), fresh and dried grapes (3.55).
  • Imports in 2012 came from more than 150 countries: again, the largest partner is Russia. Russia provides for about a quarter of Armenian imports, mostly with natural gas (41.5%), wheat and maslin (11.3%). Imports of natural gas and oil products together constitute 21% of total imports.
  • According to IMF, ADB, as well as Armenian Government’s projections, economic growth in the coming years is expected to stabilize in Armenia with medium growth rates which will provide for the recovery of pre-crisis economic level, price stabilization, higher growth rates of exports over imports and improvement of current account of the external balance.
  • The Government of Armenia anticipates higher growth rates in industry and service in 2013-2015, 9.3% and 6.1% respectively. 4.5% growth is anticipated in agriculture. External-debt-to-GDP ratio will continue to remain high, although with gradual declining trend.

 

SECTION 2. HUMAN CAPITAL AND ECONOMIC GROWTH

  • During the 20th century, active demographic developments were recorded in the Southern Caucasus and Armenia, in particular. Population in all 3 southern Caucasian countries increased drastically. The highest population growth rate is recorded in Armenia, the lowest – in Georgia.
  • Since Sovietization, population of Armenia grew by more than 3 times. In 1979, it exceeded 3 mln, while in 1991 it reached its maximum of 3.6 mln.
  • Increase in population of Armenia took place largely due to increase in urban population: rural population grew by 48% during 1926-1991, while urban population – more than 12 times. 
  • Since independence, population in Armenian and Georgia decreased sharply; meanwhile population in Azerbaijan continues to grow with fast rates.
  • As a consequence of emigration of Armenians and high population growth rate of Azeris, the role and share of ethnic Armenians decreases in the Southern Caucasus. 22.7% of the population in Southern Caucasus in 1926 was Armenian, while they constituted 26% in 1979. By 2001, their share was slightly below its 1926 level (22.4%). 
  • Population of Armenia reduced by 420 thousands during 1991-2001, followed by reduction of another 194 thousands during 2001-2011. As a consequence, population decreased in total by 614 thousands or 16.9%. 65% of total population decrease took place at the expense of population in towns and cities outside Yerevan.
  • The reason for reduction in population is continuous emigration. Calculations based on the Census data show that 964 thousand people emigrated from Armenia during 1991-2012. Statistics on passenger turnover matches these data.
  • Population numbers decreased in all Marzes as a consequence of emigration. The highest decline is recorded in Lori (38%), Shirak (27%) and Kotayq (18%). Population in Yerevan decreased by 15.5%. Urban population in Lori Marz decreased almost by half and by 39% in Shirak.
  • Urban population of Armenia lives in 48 cities and towns that vary in terms of size. Population of the largest 10 cities constitutes more than half of total urban population (56%), while the largest 20 cities and towns – 78% (excluding Yerevan). Population in Gyumri accounts for 14-15% of urban population and equals the population in 23 small towns of Armenia. The next largest cities are Vanadzor and Vagharshapat. 
  • Rural population of Armenia is also distributed disproportionally. Population in 50 largest villages equals to the population in the smallest 500 villages.
  • There are many small and very small villages in Armenia. In 493 villages or in more than half of rural communities of Armenia, population is below 1000 people. Notably, population of 194 communities is below 300 people and 70 households. The number of villages with more than 3000 population is 78 which is about one third of the rural population of Armenia.
  • Population of Armenia currently is close to the level of late-1970s. I. e. currently the population of Armenia is approximately the same as it was 30-35 years ago. However, there are significant structural shifts and differences. Today, Yerevan is larger from 1979 level by 4.6%, meanwhile cities and towns in Marzes are smaller by 12.6%. Rural population in 2012 exceeds its 1979 level by 6.8%. Under the similar population numbers, birth rates are significantly lower today, while death rates are higher than in 1979.
  • Thus, Armenia is facing a demographic retreat. During the past 30-35 years, the population has not grown, while the level of urbanization has increased. The capital city expanded, meanwhile the role of small and medium towns decreased. Population birth and death rates worsened.
  • The largest sector providing employment is agriculture (37% of total employment). The largest non-agricultural sector providing employment is trade, followed by the education sector. Currently education employs more people than manufacturing.
  • Labor productivity and average salaries are the highest in the financial sector. With respect to productivity, financial sector is followed by mining, construction and energy sectors.
  • Salaries of 62% of employed are between AMD 32,500-97,500. Only for 11% of employed, salaries exceed AMD 195,000. The lowest salaries are recorded in education, social services, culture, trade and agriculture sectors. The longest working hours are recorded in trade sector: 52 hours per week.
  • Thus, economic activity and employment levels are low in Armenia. Unemployment is among the highest in the world. Employees are mostly engaged in sectors with low productivity and low salaries. The role of agricultural employment is very high. Sectors with high productivity and high salaries are small (the role of competitive private business is small).
  • Human capital is a concept that characterizes the level of ability of labor force in a society to participate in the process of generation of economic values, as well as development of a set of physical, mental, social and cultural skills and specifics of human beings. It is determined by efficient public and private investments which contribute to transformation of human resources into human capital generating values.
  • For the assessment of human capital in a given country band cross-country comparisons, Human Development Index (HDI) calculated by the UN and Human Capital Index (HCI) calculated by the WEF can be used. Armenia is on the 87th place among 187 countries for HDI, while for HCI – it is the 73rd among 122 countries.
  • In cross-country comparisons Armenia has a middling position; however it is significantly below Eastern European and some CIS countries. For both indicators, Armenia is considerably far from Russia. Meanwhile, Armenia, Georgia and Azerbaijan are very close.
  • For Health pillar of HCI, Armenia is the 71st among 122 countries. In terms of healthcare quality and affordability Armenia is below the average global level. Life expectancy indicator is especially low: 82nd in the world, while for the survival gender gap, Armenia is the 113th among 122 countries.
  • For workforce and employment pillar, Armenia’s position is quite low: 113th among 122. Country capacity to retain talent, capacity for innovation, etc. is very low. Training services indicator is especially low.
  • In terms of Enabling Environment, Armenia’s position is relatively favorable namely the 64th global wide. This is also conditioned by the WB Doing business indicator which is an underlying component for respective evaluations.
  • In terms of Education, Armenia has the 60th position globally. Access to education and size of gender gap in education in Armenia are quite favorable. Meanwhile, education quality and management indicators are much lower than in many other countries. In line with this, Armenia is positioned 103rd amongst 122 countries in terms of the quality of business and management universities.
  • Interest towards higher (graduate) education in Armenia continues to remain high. As a consequence, the number of universities is very high, along with the very high numbers of graduates from these universities. However, the number of graduates does not effectively correspond to the current or perspective development needs of the economy.
  • Vocational education system (primary and secondary professional education) is very small and is not capable of meeting the requirements of the economy and market. This type of educations continues to remain less desired or preferred by the society. Meanwhile, a significant share of the labor force active in various sectors of the economy does not have adequate formal education in the field of their employment.
  • Consequently, one of the major factors constraining the development perspective of Armenia is human capital. Development of human capital is not only crucial from the perspective of developing a competitive, highly productive economy and welfare improvement, but also from the perspective of national security.
  • Efficient formation of human capital and human development is the overarching task of socio-economic policies. It implies drafting and implementation of a number of policy programs and measures. Nevertheless, the most urgent issue is to restrain emigration to a certain extent for which simple and feasible measures exist. In particular as a preliminary measure a large-scale anti-migration advocacy campaign is necessary.