Transcript Integrative Project in Modern Production Methods (IE285e)

Integrative Project in Modern
Production Methods (IE285e)
Lecture #2
05 September, 2005
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Topic:
• An overview of Armenian
Industry and Economy.
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Where are we?
•
One has to understand the current position
to find out the right direction to move…
• How to describe our position:
A. Geographic location
B. Natural resources
C. Economic relations
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Geographic location
• 29000 square KM total,
and Artsakh
• Being a landlocked,
isolated country, the most
reliable transportation is
through air
• Unfriendly countries from
East and West, friends in
North and South
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The cost of blockade
• While the cost of blockade is considerable it
is not a major development constraint for
Armenia.
• The estimate of the blockade is that it hurts
Armenia less directly (transportation costs,
lost volumes of exports)
• than indirectly (depressed investor’s
expectations, inflated internal perceptions of
risk, etc.).
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Economic regime
• Economic regime between
1924 - 1991was based on PLANNED
ECONOMY, where the goal was the PLAN,
which was decided not by the enterprise.
• During the last decade Armenia moved to
MARKET ECONOMY, where the goal is the
MONEY (should be replaced by “net utility
to the society”) through honest competition
for a MARKET SHARE.
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How well are we prepared?
• How well are we prepared for the relatively new
economic relations? How well do we know the
markets?
• The main problem is in the upbringing and
societal mentality.
• Is there business ethics norms well implanted?
• Do we respect wealthy businesspeople, and vice
versa?
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Natural Resources
Mines
a) metallic;
b) non-metallic
Forests
Water Resources
Energy related: Fossil Fuel
Other, Renewables: Solar, Wind, Geothermal
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Mines, metallic
Material
Location
Remarks
A
Copper, Molybdenum
Qadjaran
The most tangible resources
B
Copper, Gold
Alaverdi
The most tangible resources
C
Gold, Tungsten, Tellur
Kapan
The most tangible resources
D
Gold, Silver (1:2 – 1:20)
Zod
The most tangible resources
E
Iron, Titanium,
Vanadium
Abovian, Hrazdan
2 billon tons, but difficult to
extract
F
Chromium, Manganese,
Mercury, Arsenicum, …
Shorja, Sarigyugh,
Amasya, …
Small quantities
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Mines, non-metallic: Stones!
Material
Location
Remarks
A
Tufa
Artik
Large quantities
B
Anipemza
Avan
Aragats
Toumanian
Large quantities
G
Pumice
Salt
Perlites
Clay - thermo
resistant
Dolomites
Marble
H
Bentonite Clays Sarigyugh
Medium
I
Granite
6 million cubic meters
C
D
E
F
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Large quantities
Large quantities
Medium
15 million tons
Ijevan
Khor Virap, Bjni 1.2 million cubic meters
Pambak
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Future value of mineral deposits
• Note that the mineral deposits have future
value, that can be expressed according to the
following formula:
[Future Value] = [Present Value] x [exp (kt)],
where k is a coefficient, and t is the time.
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Strategy
• For certain mineral deposits this formula may
yield an increase of the value up to 10 times per
decade (in the currency of a particular year).
• This means that the wisest economic solutions are
NOT related with export of raw materials, but in
production of the products that are as close, as
possible to the final products.
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High technologies
• Manufacturing of final products from the mineral
deposits increases the net utility for the society
much more than selling raw materials to others.
• This is especially true
in the case of high
tech implementation.
• Electronics manufacturing
comprises 1/3 of all
manufacturing in the world!
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Forests
• Armenia has only 12%
of its territory in forests
in North-east and South.
• During the “dark years”
there has been a
dramatic deforestation,
which, to a considerable
extent, continues now.
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Forests
•
•
•
•
•
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Oak
Beech
Hornbeam
Ash
Maple
Many wild fruit trees
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•
•
•
•
•
•
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гó»ÝÇ
ÂËÏÇ
´³½Ù³ÃÇí í³ÛñÇ
Ùñ·³ïáõ ͳé»ñ
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Water Resources
• General water resources:
scarce, 7.5 times less of average of
FSU
• Underground Water:
scarce, 4 billion tons annually, 38%
goes to usable springs.
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ENERGY
Fossil Fuel
• Extremely scarce: more or less
considerable are low quality gray coal
mines located in between Gumri and
Spitak
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Armenian economic history
highlights: Status at 1913
Percentage of
Percentage of
Population involved GNP
Agriculture
85%
60%
Industry
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3%
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20%
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Status at 1913. Largest cities:
• Alexandrapol: 51.3 thousand,
• Erivan: 30 thousand inhabitants.
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Armenian economic history
highlights: Production at 1913
Agriculture
Cotton
Wool
Rice
Vineyards
Industry
Copper
Cognac
Wine
Soap
(grapes)
Preserves
Beer
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Energy
10 Hydropower
plants,
3.1 MW total
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Armenian economic history
highlights: Status in 1988, energy
Type
Hydro
Fossil
Nuclear
Total
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MW
1017
1760
815
3592
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Armenian economic history highlights:
Status in 1985, PRODUCTION
Machinery item
Volume, items
AC generators, 0.25 – 100 kW capacity
AC generators, more than 100 kW capacity
AC motors, 0.25 – 100 kW capacity
AC motors, more than 100 kW capacity
Mobile power plants
66,300
1500
98,360
1300
23,300
Power transformers, for millions of kW of power
7.2
Welding equipment
1369
Electric bulbs (fluorescent and incandescent), million
185.9
Copper wire, tons
20,800
Cable, power cable and flexible cable, km
12,700
Pumps
94,000
Compressors
5723
Clocks manufactured
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4,763,000
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Main Industry
Branches in 1988
• Chemical industry
• Machinery (including
electro technical and
electronics),
• 5th place in the volumes of
manufactured machinery
items, among the USSR
republics
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Main Industry Branches in 1988
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Electronics
Metal processing
Metallurgy
Woodworking and
paper production
• Construction
materials
• Glass and porcelain
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• Light industry (including
shoe industry, the 15%
of total national volume
of production).
• Food industry
• Publishing industry
• Chemistry and Drug
manufacturing
• Agro industry
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Armenian economic history
highlights, 1988
• There were 1744 conveyer belts, and
403 automated conveyer belts in 1985
• Total 2147 operations with conveyer
belt layout!
• However there were many typical
“soviet – style” problems…
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Armenian economic history highlights,
Science and Education, 1988
• The national academy of sciences (NAS)
had 34 research institutes and centers, a
publishing house, and 32 libraries. There
were also around 50 industrial research
institutes and centers.
Professional high schools
Higher education institutions, universities
65 schools, 48000 students in 156 specialties
13 schools, 59778 students, 156 specialties
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Output of industrial consumer goods
per capita, 1990
2000
1800
1740
1664
1546
1600
1598
Rubles
1400
1200
1000
884
800
600
400
200
0
Armenia
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Georgia
Kyrgizia
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Russia
USSR
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Problems at 1988
• Being Isolated from WORLD COMPETITION
• Thus, behind in quality, due to:
• Most technologies were outdated, by about
15 years!
• Management methods were not effective,
almost no incentives.
• Obvious strategic mistakes in Macro and
Microeconomics levels.
• Mistakes in setting directions for economy.
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Costing out the Big Bang: Impact of
external Shocks on the Armenian
Economy at the Outset of Transition
Reference:
Lev Freinkman,
Vahram Avanesyan
Armenian Journal of Public Policy, Volume
1, Number 1.
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The Reasons for Economic Decline
1. Unavoidable costs:
a) Terms of Trade (TOT) shock –
deterioration of real incomes due to
economic liberalization and shifts in
domestic prices towards prices in of the
world market.
b) External Demand Shock – Market Loss –
opening of markets to global competition.
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The Reasons for Economic Decline
c) Fiscal Shock – removal of traditional
explicit budget and quasi-budget transfers.
d) Secondary effects of all above shocks –
decline of the overall domestic demand
due to a), b), c).
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The Reasons for Economic Decline
• Avoidable costs:
Mistakes in management of reforms:
Delays;
Too rapid;
Inconsistencies.
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Analytical Framework
• The paper follows the framework suggested
by Rodrick (1992),
• It is also modified to include the fiscal
shock associated with elimination of fiscal
and quasi-fiscal transfers to Armenia from
the consolidated budget of FSU,
• however, these transfers were insignificant
before the 1988 earthquake.
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Modified TOT approach, Income
Loss
•
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•
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Armenia – 11.1%
Moldova – 31.9%
Georgia – 17.3%
Estonia – 12.7%
Comparing when
with when? Not well
described
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Initial conditions
•
•
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•
•
•
•
400 000 people in the Industrial sector
25 300 people involved in R&D
17 000 researchers
Light industry – 37.7%
Machinery – 25.2%
Food – 14.3%
Chemical – 10.0%
External trade – 103% of GDP
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Reasons for Industrial Decline
a) Sharp decline in defense and other
demand.
b) Low competitiveness of the Armenian
goods esp. in consumer sector after energy
and other subsidies withdrawn: markets
lost to Turkey and China.
c) Political factors that pushed Russian
producers (e.g. in defense) to switch to
local producers.
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Reasons for Industrial Decline
d) New cost factors, such as increased
transportation costs.
e) Excessive size of many enterprises that
cannot be profitable at low rate of
production.
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Reasons for Industrial Decline
In short:
“too many of wrong enterprises operated in
wrong sectors” –
too many subsidized sectors: low energy and
raw material prices and no international
competition.
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GDP dynamics
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In 1993
• 55% of GDP decline from ~$5B to $2.5B (the
great depression of the USA = - 26%)
• ¾ of the total industrial production affected by
negative price shock
• 77% of total exports affected by negative price
shock
• In 1987 exports were responsible for the 47% of
the GDP.
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Vulnerability index
• of Armenian Economy:
in 1988:
1.71
in 1990:
2.00
• <1.8 – good
• >1.8 – bad
• Lav chi dzevakerpats
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Balance of Payment (BOP) in 1987
• Balance in trade of goods and services –
- 10% of GDP
• Inter-budgetary transfers ~ - 2% of GDP
• Difference between Pension Fund transfers - 3.3% of
GDP, investment financing, and taxes of Armenian
Enterprises –
~ - 4% of GDP
• Total account deficit was ~ – 16.6% of GDP
(-12.7% was already sitting in the budget).
• HOWEVER THE INFLUENCE OF THIS DEFICIT
WAS VERY MODEST. REAL TRANSFERS = 6%!
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Trade Balance, viewed from
outside,1987
• If one assumes that in 1987 Armenian economy
would become overnight integrated to world
economy,
• Deterioration from
- 1.7% of GDP to
- 18.5% of GDP would take place,
• Totalling a loss of 17% of GDP.
• In 1996 the trade balance is - 32.3% of GDP
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Declined Markets
• Overall decline of demand by 3 – 10 times,
power and machinery are the most affected!
• About $2B lost in exports – 80% of the
export rate in 1987
• Equivalent of 25% of total industrial output,
• Equivalent of loss of $715M of GDP (8%).
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Overall Shock Results,
GDP in 1987 has been $5.2B (100%)
Scenario A
Scenario B
Scenario C
• Output: $1.7B • Output: $1.9B • Output: $3.5B
• GDP: $746M
• GDP: $793M
• GDP: $1555M
(14.2%)
(15.2%)
(29.8%)
• Export: $527M • Export: $527M • Export: $527M
• Import: $540M • Import: $541M • Import: $1030M
• Tr. Bal.: -$13M • Tr. Bal.: -$14M • Tr. Ba.: -$502M
-1.7% of GDP
-1.7% of GDP
-32.3% of GDP
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In 1996 GDP = $1599M!
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