Transcript 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
Economic structure and productivity, c. 2007
3500
20000
Number of people (thousands)
Labor productivity (thousand dram/person)
18000
3000
16000
2500
14000
12000
2000
10000
1500
8000
6000
1000
4000
500
2000
0
0
population
of working age
labor force
employed
agriculture
construction/real
estate
Observe: 1. under-employment; 2. productivity gaps
manufacturing
IT
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%
Construction has reached its limits (and
probably has to shrink), while agriculture
remains too large
1. Domestic stock adjustment
2. Diaspora demand
both are
one-time
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
Even under the best of circumstances, IT
cannot drive the Armenian economy
Consequences of a ten-fold expansion of IT employment (assuming all new hires come from among the ranks of the unemployed)
1800
current
w ith a ten-fold expansion of IT
1600
1400
1200
A cumulative increase of only
9.5%
1000
800
600
400
200
0
economy-w ide labor productivity (thousands drams)
IT employment
Implications


Moving people from unemployment and agriculture into higherproductivity 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
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.
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