11 June, 2018 15:55

Disproportional Regional Development in Armenia: Causes, Consequences and Policies

By Aleksandr Grigoryan and Knar Khachatryan, American University of Armenia

In this research we explore disproportional patterns of regional development in Armenia. After the collapse of Soviet Union, Armenia has made substantial steps in liberalizing politico-economic environment via continuation of reforms undertaken at the early stage of independence. Since early 2000s the economy has experienced sound economic growth, severely disrupted by the world financial crisis in 2008. The research was made possible by a research grant from the USC Institute of Armenian Studies, supported in part by the Calouste Gulbenkian Foundation.

Despite satisfactory aggregate economic indicators, challenges peculiar to transition countries remain actual. Armenia heavily depends on remittances, which effectively transfers external shocks to domestic markets. Trade imbalance with the rest of the world is another channel by which the economy faces external shocks. High concentration in domestic markets together with strong dependence from foreign currency inflows creates high foreign exchange risk. Real earnings in private sector bear all the inefficiencies the country experiences. The link between the financial and real sectors is very strong and inefficiencies in one sector are propagated to another.

All the factors highlighted above have “contributed” to disproportional regional development in one way or another way. Disproportionalities in development are reflected by failure of inclusive growth, when prosperity and new opportunities are shared with all layers of the society. Regional aspects of disproportional development in Armenia involve several dimensions such as infrastructures, access to high technologies, financial services, education etc. The central research question in this context is “What are the causes of disproportional development in the country”. Determining causes of disproportionalities and observing their impact on fundamentals (such as inequality, poverty and access to productive technologies or utilities) helps use disclose channels by which the impact spills over. We can then address the second key research question, which is “What are the government policies to correct disproportionalities”.

In our paper we conduct several studies to answer the above raised research questions. In particular, we use multidimensional poverty analysis (Duclos, Sahn and Younger, 2006; Alkire, 2008; Ferreira and Lugo, 2012; Deutsch and Silber, 2012), access to opportunities (Karlan and Morduch, 2009; Slater and Kwami, 2005; Kenny, 2002; Duong and Izumida, 2002) and regression based inequality decomposition (Wan and Zhou, 2005) to explore causes and consequences of regional disparities of an economy. Next, we run semi-structured expert interviews with government, private sector and non-governmental representatives to assess the feasibility of our study recommendations and implications. In order to have a more representative sample of interviewees, we conduct interviews in Yerevan as well as in two regions (marzes): Lori and Tavush. The experts in the research are included from the public as well as from the private sector and non-governmental organizations. This is done in order to keep the diversity of opinions and find key similarities and differences between the points.

Our findings show that there are significant issues in proportional regional development in Armenia. Not only the poverty level is high but also regional differences remain persistent over time. According to our study, the existing governmental policies that aim at combating regional poverty efficiently are not being effectively implemented. We find that income from agricultural business is associated with increased inequality in Armenia implying that the spatial character of the agricultural sector is strong. This is conditioned by the high level of population density in Yerevan and the sector being one of the dominant ones in regions. The government undertakes a program of community enlargement which will allow for building better infrastructures. Education and professional training can be instrumental for farmers to acknowledge the necessity of the community enlargement, which will enhance productivity. The interviewed experts underline that government support should come in the form of creating environment for investments and also in the form of development of effective commercialization mechanisms and consumption channels for agricultural goods.

The government should introduce risk sharing mechanism in the agricultural sector. An important issue to address currently is improvement of anti-hail stations. The risk sharing mechanism could be seen via insuring farmers’ corps. These two mechanisms are much better and efficient than what currently is being practiced. The farmer are being provided with continuous subsidized loans, because of the not properly functioning anti-hail stations the harvest is being damaged and it becomes impossible to commercialize the harvest (if any). Consequently, farmers become more and more overindebted.  

Next, we find that education is associated with inequality. Our results show that years of education are positively affecting earnings. Also, we find that better-off citizens have more years of education. We claim that the existing policies and actions toward the education system still leave large gaps between the capital city and regions. Access to education is not an issue, the key problem is in its quality. “Brain-drain” is happening not only from regions to Yerevan, but also it is one of the main reasons why Armenians leave the country. Our results show a positive relationship between the household size and the inequality. However, better-off households tend to be smaller. We conclude that social benefits and support system should be further enhanced for large-sized households.

When looking at the human opportunity indicator we find that there is a disproportional evolution of access to internet. Though experts stated there is a high rate of internet access throughout the country, an important issue internet and information literacy and language barriers in order to citizens, in particular for those who live in rural and remote areas, to benefit from online opportunities (for instance, education, job).

In the light of the recently adopted government new program for 2017-2022 which is claimed to implement “large-scale reforms” with the objective of ensuring Armenia’s sustainable development, we believe that this study provides avenue for policy development and enhancement. Also, it reveals bottlenecks of action plans and policy implementations which create obstacles for the country’s proportional development process.  

References

Alkire, S. (2008), Choosing Dimensions: The Capability Approach and Multidimensional Poverty, MPRA Paper No. 8862

Deutsch, J. and Silber, J. (2012), Measuring multidimensional poverty: An empirical comparison of various approaches, Review of Income and Wealth, 51(1)

Duong, Ph. and Izumida, Y. (2002), Rural Development Finance in Vietnam: A Microeconometric Analysis of Household Surveys, World Development, 30(2)

Duclos, J-Y., Sahn, D. and Younger, S. (2006), Robust Multidimensional Poverty Comparisons, The Economic Journal, 116 (514)

Ferreira, F., Lugo, A.M. (2012), Multidimensional Poverty Analysis: Looking for a Middle Ground, IZA Policy Paper No. 45

Karlan, D. and Morduch, J. (2009), Access to Finance, Chapter 2, Handbook of Development Economics, Volume 5, Dani Rodrik and Mark Rosenzweig eds., North Holland publication

Kenny, C. (2002), Information and communication technologies for direct poverty alleviation: costs and benefits, Development Policy Review, 20

Slater, D. and Kwami, J. (2005), Embeddedness and escape: Internet and mobile use as poverty reduction strategies in Ghana, Information Society Research Group

Wan, G. and Zhou, Z. (2005), Income Inequality in Rural China: Regression‐based Decomposition Using Household Data, Review of development economics, 9(1)