Transcript Slide 1

Economy and Values Research Center
Manuk Hergnyan
Gagik Gabrielyan
Anna Makaryan
The Competitiveness of Armenia’s Private Sector:
Moving to the Next Stage
The presentation is based on the results of the first National
Competitiveness Report of Armenia
Washington, 2008
Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
The Report

For the third year Armenia is included in the Global Competitiveness
Report (GCR) of the World Economic Forum (WEF).

Economy and Values research center as the partner organization of the WEF
has initiated the preparation of the first National Competitiveness Report.

The first National Competitiveness Report of Armenia (ACR) analyses the
economic situation and performance of Armenia in the context of
competitiveness.

The Report will be launched in two weeks.
Goals and Objectives of the Report
The goal
Objectives
To develop a premium tool for analysing economic
competitiveness of Armenia.
• Evaluate competitiveness of Armenia’s economy;
• Identify challenges and priorities for Armenia;
• Identify competitive advantages of Armenia and opportunities for
improving competitiveness;
• Recommend strategic approaches and key levers for tackling challenges
and capturing opportunities.
Role
• High quality data and analysis for public and private sector leaders
• A helpful tool for a dialogue between the government and the private
sector;
• Ample material for university faculty members, students and
researchers;
• A message to the international community that Armenia is committed to
becoming an internationally competitive country.
Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
Importance of Competitiveness
• Competitiveness is based on the nation’s capabilities and
not its natural resources.
• Competitiveness is the source of prosperity for the citizens
of the country.
• Competitiveness is the outcome of innovation and
technological advancement and, at the same time, the
driving force behind them.
• Competitiveness ensures increasing productivity of the
companies in the country and their capability of
competing in the international market.
Definition of Competitiveness
• The definition of Scott and Lodge (1985) views
competitiveness as a capability of the nation to produce goods
and service and distribute internationally.
• Porter’s definition (1990) underscores the productivity with
which the nation utilizes its resources – focus on
microeconomic basis.
• Xavier Sala-i-Martin’s (2004) definition underscores
combination of macroeconomic and microeconomic factors
including policies and institutions that determine the level of
productivity and define the sustainable level of prosperity in
a mid-term.
• ACR draws on these three definitions of competitiveness.
Competitiveness Rankings
• Internationally recognized organizations that offer country competitiveness
rankings:
– The World Economic Forum (WEF),
– The Institute for Management Development ( IMD),
– The Institute for Industrial Policy Studies (IPS).
• WEF Global Competitiveness Report -GCR
– A leading and most comprehensive source for ranking country
competitiveness;
– uses both statistical data and “soft data” (executive opinion surveys).
• GCR has two measurement indexes:
– Business Competitiveness Index (BCI) that measures the quality of
business environment and the level of sophistication of company
strategies and operations.
– Global Competitiveness Index (GCI) which has a wider coverage and
includes macroeconomy, healthcare and education.
• Armenia is only covered by the WEF reports
Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
Armenia’s Ranking in the GCR: the 93rd among 131 Countries
• Armenia’s ranking has declined though its absolute scores have
slightly increased.
• Armenia’s ranking is relatively high in the macroeconomic,
healthcare and primary education areas.
• However, at the micro-level Armenia’s indicators are rather low.
With it Business Competitiveness Index Armenia is the 108th.
• Main problems are:
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Imperfectness of business environment;
Low level of business sophistication;
Unsatisfactory level of higher education and training;
Poor cooperation between businesses and supporting institutions;
Low level of innovation.
Global Competitiveness Index Composition
Armenia's Ranking in the GCR
On Basic Requirements Armenia’s Ranking is Relatively Favorable
Institutions - 96
Public institutions are better developed
than the private ones.
Public institutions - 77
 Relatively higher security level
 Lack of judiciary independence
 Protectionism in government decisions
 Low trust towards politicians
Private institutions - 102
 Poor ethics
 Low accountability
 Lack of protection of interests of
minority shareholders
 Low level of maintaining financial
audit and reporting standards
Infrastructure - 87
Poor indicators despite the
improvements in recent years.
 One of the major obstacles for the
private sector.
 The telecommunication is poorly
developed.
 Lack of a port considerably worsens
Armenia’s ranking.
Armenia's Ranking in the GCR
On Basic Requirements Armenia’s Ranking is Relatively Favorable
Macroeconomy - 57
Healthcare and primary education - 99
 High economic growth
 Decreasing infant mortality
 Low inflation
 The impact of tuberculosis, HIV/AIDS
and similar diseases on businesses is
not significant
 Improved national budget system
 Effective management of government
debt
 Low level of savings
 Large interest rate spreads
 Fluctuations of the exchange rate of dram
in the recent years
 Unequal regional development
 Unequal distribution of wealth
 Relatively high level of enrollment in
primary education
Armenia's Ranking in the GCR
On Basic Requirements Armenia’s Ranking is Relatively Favorable
Goods market efficiency - 104
Labor market efficiency - 40
 Liberal trade regime is not an obstacle for
efficiency of local market
 Flexibility in defining salaries and
wages
 Weak anti-monopolistic policy, limited
nature of competition in the local market
 Flexible relations between employers
and employees
 Lack of well-trained leaders
Financial market sophistication- 110
 Underdeveloped financial markets
 Difficulties to obtain loans (high interest
rates, excessive collateral requirements)
 Underdeveloped securities market
 Lack of venture market
Market size- 111
Limited domestic market size
Small-scale foreign market size
Armenia's Ranking in the GCR
Armenia’s Ranking in Efficiency Enhancers is Weak
Technological readiness - 104
Higher education and training - 95
Local companies have developed capacities
to absorb new technologies
 High level of enrollment in secondary
education
 Foreign direct investments are not the
major source for transferring new
technologies
 Continuous decline in number of people
with higher education
 Decreasing quality of education system
 Very low level of the quality of business
education
 Low quality of instruction in
mathematics and sciences
 Lack of specialized trainings, R & D
services
 Low spending of companies for training
 Imperfectness of the legislative framework
conducive to wide application of IT
Armenia's Ranking in the GCR
Armenia’s Ranking in Innovation is Weak
Business Sophistication - 111
 Lack of local specialized supplier and
their relatively low quality
 Production process based on intensive use
of labor force and old generation
technologies
 Application of the simplest forms of
marketing tools
 High level of centralization of
management decisions
 Competitive advantages driven by low
cost
 Simple value chains
Innovation - 94
 Relatively high number of patents
registered with the U.S. in comparison
with other countries
 Low level of quality of research
institutions
 Low spending on R&D by private
companies
 Weak cooperation between private sector
and universities
 Lack of state policy of procurement of
high technologies
 Weak IPR protection
 Not widespread practice of obtaining
new technologies by licensing or
copying.
Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
Competitiveness Ensures the Basis for Prosperity
Prosperity is a choice. It is a choice between the alternatives of
strategies and operations for efficient use of available resources and
knowledge.
Source: EV (2007) adapted from M. Porter (1998)
Three Sets of Countries are Selected for Benchmarking
CIS
Central, Eastern and
Southeastern Europe
Eurasian Crossroad
Rationale
Rationale
Rationale
Common historical context,
similar economic conditions,
close economic ties
Considerable successes in the
transition period. Perceived as
a region including Armenia.
Historic region
encompassing Armenia,
geographic crossroad on
important Eurasian trade
routes.
10 countries
15 countries
8 countries
Russia, Ukraine, Kazakhstan,
Moldova, Belarus, Georgia,
Azerbaijan, Uzbekistan,
Kirgizstan, Tajikistan
Latvia, Lithuania, Estonia,
Poland, Hungary, Czech
Republic, Slovenia, Slovakia,
Bulgaria, Romania, Bosnia,
Albania, Serbia, Croatia,
Macedonia
Turkey, Azerbaijan, Georgia,
Iran, Syria, Lebanon, Israel,
Jordan
PRODUCTIVITY
Armenia ranks low in terms of labor force participation and general
productivity of labor force and is behind the majority of comparator countries
Source: WB, WDI
* The small chart on the leftt hand corner compares Armenia’s performance (production per employee) with that of
Ireland (Ireland = 100).
PRODUCTIVITY
The situation is even worse in manufacturing.
Source: WB, WDI
INTERNATIONALIZATION
Armenia is in good position in terms of its export share growth in the global
exports, however, in absolute terms it is still behind most of the comparator
countries. Armenia’s share in global exports is less than its share in global GDP.
Source: WB, WDI, UNCTAD
* The small chart on the right hand corner compares Armenia’s performance (share of export in global exports) with that of Ireland (Ireland = 100).
INTERNATIONALIZATION
Resource-intensive (raw materials) export share is substantially high in
Armenia’s total exports, while share of high value added export is very small.
Export structure is very centralized.
Source: WB, WDI, UNCTAD
* The small chart on the right hand corner compares Armenia’s performance (non-mineral and non-raw material share of export) with that
of Ireland.
INTERNATIONALIZATION
Armenia has average position in terms of attracting FDI. However, Armenia is
behind most of the countries in terms of FDI per capita. The strategy of
attracting FDI driven by privatization and infrastructure deals needs profound
revision.
Source: WB, WDI, UNCTAD
* The small chart on the right hand corner compares Armenia’s performance (per capita FDI, 2000-2005 (average)) with that of Ireland
(Ireland = 100).
KNOWLEDGE
Armenia has not been able to recover its former capacities in R&D area. Very
little expenses are being made in R&D. However, relatively large number of
patents vs. expenditures were registered.
Source: WB, WDI, USPTO
* The small chart on the right hand corner compares Armenia’s performance (number of patents registered in the USA per one million persons)
with that of Ireland (Ireland = 100).
Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
FOUNDATIONS OF COUNTRY COMPETITIVENESS
Favorable macroeconomic environment is a necessary but not sufficient
precondition for achieving high level of competitiveness.
Source: M. Porter
MACROECONOMIC ENVIRONMENT
Armenia’s macroeconomic environment is rather favorable.
Positive achievements
 Liberal economic
environment
 Privatization and dominance
of private sector
 High rate of economic growth
 Low inflation
 Manageable level of fiscal
deficit
 Quite satisfactory budget
system
Distortions
 Significant fluctuations of
exchange rates
 Significant difference (spread)
between the interest rates for
deposits and loans
MACROENVIRONMENT
Legal and Institutional
Environment
Political Environment
The stability of political
situation is shaken by
recent post-election
events
 Comprehensive legislative
framework consistent with
the WTO and other
international requirements
X
 There are serious issues
with enforcement of
legislation;
 Imperfect secondary
legislation;
 Ambiguous procedures;
 Unsatisfactory human and
institutional capabilities
 Insufficient independence
of the judiciary
 Many global investors
still view Armenia as a
country in war
Social Environment
 Social situation is
improving relatively
fast.
 Real level of poverty
and unemployment
(above 30%) is still high
 Regional development
is extremely
disproportionate;
 Distribution of wealth is
unequal;
 Salary range is still
lower than the level in
1990
MICROENVIRONMENT
The most serious competitive disadvantages of Armenia are on the micro level.
• Wealth, after all, is created by companies and not due to the best combination of
macroeconomic indicators.
• The level of strategies and operations of companies defines their capability for
competing and long-term profitability.
• On the other hand, they are driven by its immediate environment, i.e. business
environment.
MICROENVIRONMENT
On the conceptual side Porter’s “diamond” model is used for studying the
microenvironment of the economy.
MICROENVIRONMENT
Factor Assessment
Physical
infrastructure
 Improved power
supply
 Improved air and
land transportation
infrastructure
 Developments in
telecommunication
 Weak
telecommunication
infrastructure
 Lack of a harbor
Administrative
infrastructure
Human capabilities
 Improved bureaucracy
 Low quality specialists
 Sufficient security
 Inefficiency of the
educational system
 Inefficient legal
framework
 Lack of high quality
management schools
 Dependent judiciary
Scientific and
technological
infrastructure
 Progress in obtaining
U.S. patents
 Low quality of R&D
institutions
 Weak cooperation
between businesses
and R&D institutions
 Low level of
spending for R&D
institutions
MICROENVIRONMENT
Financial sector is currently one of the major “constraints” of the Armenia’s
business environment. Financial system’s participation in economic life is
limited.
Source: WB, WDI
* The small chart on the right hand corner compares Armenia’s performance (local lending through bank system, 2005 (GDP%)) with that of
Ireland (Ireland = 100).
MICROENVIRONMENT
Root Causes of Financial Intermediation
 Structure of the Economy
Demand
 Financing of large foreign companies from external sources
 Opportunities for funding from internal sources from “informal tax
privileges”
 large share of small agricultural producers
Large share of construction, which is mostly funded by advance payments and
private transfers
 Shadow economy
 Low and unequally distributed revenues => small savings
Supply
 Low trust toward financial institutions
 Lack of institutions accumulating “long” money; weak ties with international
markets
 High level of risk for overall economy => expensive capital
 Competitiveness is restricted to several sections
Regulation and
Mediation
 Tough regulation
 Legal issues, weak mechanisms for sale of pledged collateral => tough
collateral requirements
MICROENVIRONMENT
Demand factors: the existing demand both in public and private sector still lack
the quality to serve as an incentive for sophistication of goods and services.
Lack of
specific
demand
Weak
pressure
on
businesses
Weak
incentives
for
sophistication
Simple
business
procedures
• The impact of state procurement is also insignificant.
• Standards and other regulatory requirement have been improved but still do not
have a serious impact.
MICROENVIRONMENT
Related and Supporting Industries
• Limited information flow and lack of
integration between the enterprises, suppliers
and buyers
• Weak connections with other industries
• Underdeveloped support institutions
• Extreme need for professional training centers
Lack of
Strong
Clusters
• Very limited flow of information within
industries
Given numerous synergetic impact the clusters are considered to be the
source of competitive advantages. This fact is not fully recognized in
Armenia.
MICROENVIRONMENT
Fundamental issues exist in corporate management and internal competition.
Drivers
 Relatively good relations between
employers and employees
 Protectionism in government decrees
 Lack of corporate management practices
 Inadequate reporting
 No protection of interests of minority
shareholders
 Weak IPR protection.
Internal Competition
 External trade administration is relatively
liberal
 The impact of corruption on businesses is
not prohibitive
 Fragmentation of local competition
(extremely differs by sector or market
segment)
 Dominance of powerful groups in selected
mass markets
 Weak protection of economic competition
MICROENVIRONMENT
Poor strategies of companies account for their most significant competitive
disadvantages.
• Not ready to delegate
• Shortage of professional management
Business
administration
• Enterprises are willing to use new technologies but
make little spending on R&D
• Production processes and operations are not
sophisticated
Production
operations
• Low spending on education and training of employees
Labor Force
• Companies do not use advanced tools for marketing and
do not establish international distribution networks
• Limited industries are internationally competitive
• Companies do not master profoundly the tactics for
competing in international markets
Marketing and
international sales
Global
competitiveness
Diagnostic Summary
The economy is growing, but the competitiveness is falling.
“The GrowthCompetitiveness” Paradox
Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
BUILDING COMPETITIVENESS
The issue of competitiveness assumes different approaches in the short- and in the
long-run.
Short-term
Long-term
Quick Wins
Strategic Breakthrough
• Quick wins, even if small,
serve as an incentive to strive
for long-term strategic
• Create basis for coalitions for
changes
• Allow to quickly improve
Armenia’s international
rankings
• Strategic targeting assumes
building a holistic picture
• Allows to identify the criteria
for assessment of different
actions
• Makes comprehensible the
directions of reform initiatives
• Establishes a sustainable
competitive advantage
BUILDING COMPETITIVENESS
Quick wins and strategic breakthrough address different issues.
• Certain improvement of current
competitiveness position can be achieved
very quickly through several initiatives
and improvements
• However, regional and international
competitiveness new, “higher level” of
actions are required with the timeframe of
10-12 years.
Currently
125
Quick Win
10-12 years
125
100
75
50
25
0
in 2-3 years
125
100
100
75
75
50
50
25
25
0
0
Quick Win
Time
QUICK WINS
Short-term priorities can be identified by using a newly developed tool called
“Prioritization filter”.
IDENTIFIED QUICK WINS
STRATEGIC TARGETING
Strategic targeting assumes presentation of main value proposal as the basis for
the main regional role.
THE SYSTEM OF COMPETITIVE LEVERS (LEVERAGE)
To ensure sustainability of respective positioning and to gain advantages in
regional competition it is necessary to identify the key competitive levers.
BASIS FOR LEVERS
The system of levers should be used in addition to the general economic policy.
•
The basis for levers is a three-component
system that will establish an efficient context
for applying the levers.
•
The central role is prescribed to the cluster
policy, which should become a model for
organizing the economic system rather than a
set of isolated initiatives in selected areas.
•
Economy should be viewed as a group of
clusters.
•
Clusters should be upgraded based on the
main value proposition.
•
Cluster policy becomes the link between the
innovation policy and the regional
development policy.
•
The three components are coordinated
together and support each other.
LEVERS
Competitive levers are the selected factors that would ensure the strategic
breakthrough.
FDI should become a source for large scale investments
and transfer of technology into Armenia. In addition, it
will improve the competitiveness through expansion in
international sector.
With relevant policy background the use of the
Diaspora resources may become focused, clusterspecific and aligned with innovation and regional
development policies.
Education in Armenia may not be only a general factor
for improving competitiveness, but also basis for
regional positioning.
IMPLEMENTATION
The logic behind levers assumes a renewed institutional approach.

The use of the leverage system may be efficient in a relevant
organizational and institutional environment.

Renewed institutional approach firstly assumes modernization of
existing institutions and in some instances establishment of new ones

In the context of introducing key levers it is important to involve
large investors and Diaspora representatives in such institutions.
COMPETITIVENESS
Increased competitiveness is as vital for Armenia as its national security.
Renewed strategic
approaches
Competitiveness
Renewed institutional
approaches