World Bank calls for a different growth model for job creation in Armenia

Solving the job creation challenge in Armenia requires a different growth model than the one followed before the global crisis. This is the central tenet o fa new World Bank report “Republic of Armenia: Accumulation, Competition, and Connectivity” launched today in Yerevan.

More than five years of economic boom before the global financial crisis failed to solve Armenia’s employment problem. The boom was based on a foreign financed expansion of construction, which left the economy vulnerable to external shocks.Unemployment soared in Armenia in the wake of the global financial crisis, and still affects 18 percent of the labor force, well above the regional average. The authors of “Republic of Armenia: Accumulation, Competition, and Connectivity” outline four areas that are crucial for sustainable growth and employment creation.

First, higher investment and better financial intermediation between savers and investors would boost growth. The report suggests building the capacity of SMEs to access credit, improving collateral registration, promoting expansion of microfinance, expanding services (i.e. hedging, factoring, leasing), and building awareness around these financial products.

Second, private sector-led job creation and improvement of workers’ skills are essential to boost employment. High unemployment and low labor force participation in Armenia combine to make the employment-to-population ratio lower than in most European countries. Allowing more productive firms to enter the market through reforms to the business environment and competition enforcement would create new, well-paid jobs. Improving the curricula of professional education by engaging the employers as part of strong quality assurance mechanisms would boost employment. Instituting strong on-the-job learning options would increase the adaptability of workers, adding to the vitality of the firms.

“Addressing low employment will require a multipronged approach,” says Jean-Michel Happi, World Bank Country Manager for Armenia. In addition, another way to overcome institutional bottlenecks and skill shortages is Armenia’s diaspora, as they are best placed to identify opportunities in Armenia with their combination of outside know-how and intimate knowledge of the home country.”

Third, stronger competitive pressures in the markets for goods and services would improve incentives for companies to innovate, adopt new technologies, and become more efficient. Competition is thus of crucial importance for the dynamism of the economy. Pro-competition reforms and effective implementation of antitrust rules can lead to significant productivity gains and consumer savings.

“The Armenian government could improve the selection criteria for state aid to support economic entities, analyzing impacts on competition,” says Ulrich Bartsch, World Bank Senior Country Economist and co-author of the report. “Barriers to competition exist in different sectors partly because of the characteristics of government contracts, discriminatory rules and inadequate regulations, and particular aspects of market structure.Competition principles need to be fully mainstreamed within broader government policies. Improvements to the antitrust and state aid framework would complement measures to reduce restrictive product market regulation”

Finally, the report calls for enhancing connections of the landlocked Armenian economy with world markets, including through land, air, and through internet and communication technologies, as that would contribute to efficiency gains and competitiveness. Despite the geopolitical challenges, more than 80 percent of goods exported from Armenia travel over land. In terms of air connectivity, higher prices and limited flexibility impose costs on air passengers and cargo, and on the economy through lost opportunities for connecting people and goods. That made Armenia “policy locked” through restrictive policies in aviation until the government’s recent announcement of “open skies” liberalization.While exports of goods are facing an uphill struggle against Armenia’s high transport costs, exports of services, especially those offered through ICT, have tremendous potential.

To improve Armenia’s competitiveness through better connectivity, the report recommends the government to:

  • Ratify all relevant international conventions that could increase Armenia’s leverage over transit partners and improves on the transit route through Georgia;
  • Liberalize aviation, as that would boost growth in air passenger and cargo traffic in Armenia, and boost economic growth;
  • Help the ICT sector to break into the league of leading global destinations. The strategies should address policies, processes and institutions, access to finance, infrastructure, and skills development.
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