THE NEED FOR DRASTIC CHANGES

Even though Armenia’s economy grew by 5.2% in the last year and 7.5% the year before, one thing remains obvious: Armenia is still a poor country without its own natural resources that has an unfavorable geopolitical position and weak economic relations with some of its neighbors.

The time has come for the country’s political revolution to become an economic revolution.

Armenia cannot simply rely on international market forces and wait for the economy to grow naturally. Solving domestic issues and creating a market attractive for investors is impossible without reducing the burden of regulations for entrepreneurs. Any regulations protect the market share of the existing firms, make the economy less productive, and do not allow the wages to grow. And FEWER regulations means MORE choices for businesses. Armenian government should make the country’s investment environment attractive to businessmen.

Since Armenia does not have anything to offer to foreign investors, it should offer better REGULATIONS to attract investors, reduce the burden of entry barrier, audits, permits, business compliance costs, and unnecessary bureaucracy. Lower entry barriers can make Armenia more attractive for investors than Georgia with its access to the Black Sea, flourishing tourism industry, and hydropower.

The government should focus on increasing sustainable GDP per capita growth to at least 10% per year similarly to China. This is not an unreasonable goal since even with the population of 1,4 billion people, the GDP per capita in China is $8,826, which is double that of Armenia!

To put things in perspective, it is also important to note that Armenia’s GDP is $12.4 billion, which is $200 billion LESS than Samsung’s revenue. Airbnb, on the other hand, employs only 3000 people and has revenue equal to almost a quarter of Armenia’s GDP.

Waiting for the country’s GDP to grow naturally simply shows the investors that the government does not care. Which is why Armenian government should take matters in their own hands and proactively improve the investment climate by

offering the most competitive business regulations in the region

simplifying business registration

offering residency incentives

creating business infrastructure

improving taxation policies

and making Armenia a lucrative business destination.

People invest in the countries where the government protects their private property and fairly addresses any legal disputes. And showing hostility to foreign investors is economic suicide since entrepreneurs avoid the countries where they are not confident that the government will protect their business interests. The only answer for Armenia is becoming a regulatory haven. But before addressing the strategies for the country’s sustainable growth, it is important to address the main caveats the government should avoid.

WHAT NOT TO DO

Competing with giants instead of creating new industries. There is NO point in trying to compete with such large markets as India that has a $180 billion IT industry, massive English-speaking talent, and the presence of almost all Fortune 500 companies, including Oracle with 40,000 people and Goldman Sachs with 7000 employees. Only relying on educating new local talent. The country’s economic challenges need an IMMEDIATE solution. Simply focusing on changing people’s mentality and educating smart English-speaking engineers who can rebuild the economy can take more than 20 years. People will learn English even without any formal education when they receive more English-speaking job opportunities. The government needs to act TODAY by attracting foreign talent who can cooperate with the local entrepreneurs and immediately start building new products and services. Increasing the birth rate instead of attracting people from outside. Even though the government is incentivizing the people to have more children to help the economy grow, it is NOT a solution to the problem that already stifles the country. People cannot raise children in the country where the poverty rate is 30% and the GDP per capita is $4150 while the global average is $17,300. Relying on the weakest links of the economy. Since the country does not have any natural resources, no extraordinary tourism attractions, and lacks technological advances, the ruling elite should understand that it is counterproductive to try to rebuild something that isn’t there in the first place.

The government should create a free investment environment for both small and medium-sized businesses to build a foundation for the development of not only the business sector but also the country’s investment potential.

WHAT TO DO

STEP 1: BECOMING A PLATFORM FOR STARTUPS

The goal here is to turn the country from an outsourcing destination into a competitive tech center. To help startups in Armenia succeed, the government should focus on the following aspects of business development.

Simplifying business registration and offering residency incentives to entrepreneurs. An online business registration could help entrepreneurs open new businesses in a matter of hours and show the investors the country’s focus on innovation and sustainable growth. Foreign entrepreneurs should also receive residency incentives if they are willing to stay in the country to develop the startup. The residency permit and incentives should be easily extended if an entrepreneur creates at least 3 local jobs during that period.

Helping the government become a startup accelerator. Accelerators are quickly becoming a viable funding option for many startups. But since creating a new Y-Combinator and Angelpad in Armenia might be time-consuming, the government should take the initiative and become a business accelerator that offers young companies access to capital, mentorship, investment opportunities, and education(Startup Chile and Singaporean Temasek are very good references).

Targeting nonconsumption. Offering products that have not existed before in the developing markets or making such products more accessible can be a significant competitive advantage for businesses. Airbnb Inc. is one of such companies that quickly filled a gap in the hospitality service and solved the problem people did not know existed before. With only $20,000 of investment from Y-Combinator, the company turned into a $2.6 billion business, which is more than 25% of Armenia’s GDP, with the help of merely 3,100 employees. Creating an environment where such large companies can prosper is beneficial both for the country and foreign investors.

Creating infrastructure. Developing new products is meaningless if they cannot be quickly manufactured and delivered to customers, which is why the government should create strong business infrastructure, including broadband access, online payment structure, and transportation systems.

A good example of the impact of infrastructure on business growth is the case of Alibaba Group, one of the biggest internet commerce services in the world. The founder of Alibaba, Jack Ma, targeted non-consumption sectors of the economy when developing the platform. However, the needed infrastructure for an online commerce startup did not exist in China at that time, which is why the company and its investors steadily built an infrastructure network that consisted of logistics, marketing, and payment tools that allowed Alibaba to become one of the biggest unicorn startups in the world.

Today, Alibaba Group totals an astonishing $56 billion in revenue, which is 5 times higher than Armenia’s GDP.

Having only one of such startups in Armenia can propel its economy to unimaginable heights, which shows the importance of creating a strong infrastructure for the emerging businesses.

Eliminate compulsory military service to offer people an opportunity and time to build their businesses and benefit the economy as a result. People who do not want to serve should be able to legally pay the established government fee to avoid the draft, which could both enrich the country’s budget and curb widespread corruption in military commissariats.

STEP 2: CREATING A SUSTAINABLE BUSINESS ENVIRONMENT

Stimulating entrepreneurship and innovation is one of the most effective strategies of job creation and economic development. Since new jobs are mostly coming not from large companies but from small independent businesses, the Armenian government should create a strong “entrepreneurial ecosystem,” and the first step is introducing appropriate governmental policies. However, replicating business models of the developed countries in Armenia’s developing economy can often be ineffective due to cultural and operational differences and socioeconomic issues of the Soviet era that still haunt the country. The ease of doing business in Armenia is low and

Armenia is still 30 countries behind its close neighbor, Georgia.

Armenia’s regulatory environment is still not conducive to business operations due to inadequate intellectual property rights, inconsistent rule of law, and weak competition. The tax and customs administration still cannot properly collect revenue, whereas inadequate logistics system makes it challenging to access markets outside Yerevan.

The survey of 140 companies conducted by European Business Association that analyzed the main challenges for the MSME development showed that even though registering a business in the country is fairly simple, the country still has issues with tax incentives, monopoly, government support, and high custom fees and challenging custom procedures.

DRAMATIC CHANGES REQUIRE DRAMATIC ACTIONS, which is why the government should focus on the following aspects of economic growth.

Offer regulatory reforms for domestic and international investors to make the procedure of accessing the local market easier. The country should become a regulation HEAVEN similar to New Zealand with its strong regulatory architecture, procedural ease, and absence of bureaucratic red tape.

Grant residency to foreign investors. The government could offer residency to the leading investors since it gives foreign investors more opportunities and incentives to support Armenian companies as opposed to organizations in neighboring countries.

According to Arton Capital, Armenia can receive more than $140 million of extra revenue in the next 6 years if the citizenship program is implemented.

It is a lucrative deal that many investors will not be willing to miss since Armenia could offer access to Russia and other states in the region, which is more than 250 million potential customers. The only way to increase the flow of investment in the country is to make Armenia highly appealing to investors.

Digitization of taxation. The process of paying taxes should be digitized to become more automatic and user-friendly. Digitalization increases the efficacy of business operations and improves data transparency. It could allow financial institutions and the government to be more transparent, which could attract more investors as a result.

“Developing nations lose nearly $1 trillion per year due to illegal financial operations.”

The only way to close this gap is to motivate taxpayers to comply with the taxation procedure by making it simple.

Introduce one standard document and procedure of customs clearance to decrease the ‘red tape’ and improve the relationships with the country’s trading partners.

Work with the World’s Bank and the USAID on a simplified Investment Climate Improvement Project to simplify business registration and help investors to start operations and make it easier for the government to collect revenue.

Increase competition since the barriers to competition and monopoly harm innovation and economic growth. Use flexible Competition Assessment Framework (CAF) to understand which industries require legislations that support competition the most. To increase the competition, the policy should

Remove unnecessary entry barriers Eliminate price-fixing by the monopolies Liberalize market in the monopolistic sectors Control mergers of the dominant firms and investigate market dominance abuse Protect the rights of businessmen to enter and leave the market Improve the quality of transport services and decrease their price Promote privatization

Introduce effective taxation policies. The government tax revenue does not necessarily increase with higher taxes if they are applied unreasonably, which is why the government policies should focus on the following aspects of taxation:

Expanding earned income tax credit to attract more low-skilled workers to the labor market. Lowering marginal tax rates for interest, dividends, and capital gains to encourage savings and motivate companies to invest domestically and not abroad. Offering tax breaks for research to motivate the development of new ideas. Don’t tax money that is coming to the country and tax the money that is leaving the country. The country should offer free-trade zones, similarly to the UAE with its 100% import and export tax exemptions, 100% repatriation of capital and profits, corporate tax exemptions for up to 50 years, and no personal income taxes.

Invest in regional value chains to increase agricultural production and create a market information system that can help create an organized and trackable market system and increase cross-border trade at the same time.

STEP 3: TURNING BRAIN DRAIN INTO BRAIN GAIN

Following the fall of the USSR, most post-Soviet countries opened their borders as part of the transition to a free and democratic government. However, people quickly understood that they cannot realize their potential in a struggling economy while dealing with constant political oppression.

This realization became the major cause of one of the biggest migrations of the intellectual elite to the western countries, which became known as the brain drain.

The emigration was economically devastating since Armenia was and still is one of the poorest countries in the region due to its continental location, the lack of natural resources, and poor economic ties. The rule of kleptocracy motivated millions of people to leave post-Soviet countries in search of better opportunities. Out of all former Soviet republics, Armenia experienced the worst brain drain after more than a million people left the country.

Moreover, out of 11 million Armenians around the globe, only 3 million citizens live in Armenia itself.

These 8 million Armenians who live outside the country are the people capable of building businesses, creating new jobs, enriching the country’s budget, and restructuring the country.

The situation continues to worsen since the recent study conducted by Gallup World showed that

40% of the people above 15 years in Armenia who took part in the survey have an intention to leave the country in case an opportunity appears.

It is the highest rate among all the CIS countries.

Even the only positive aspects of brain drain, remittance, has its negative implications. Armenia receives the highest portion or remittances, which account for 10% of the country’s GDP. This number is stunning, but the families that receive remittances from immigrants work fewer hours, spend less on children’s education, and intend to leave the country in the future.

To solve the challenge and reverse the brain drain while attracting qualified professionals back to the country, the government should create a safe economic environment for the people and stimulate economic activity and

Implement legislative regulations that promote scientific development and increase the flexibility of both small and medium-sized businesses. Promote agility and adaptability of companies to the changing market environment and foster inclusive business values. Create a work environment that helps to maintain strong employee morale. Increase the quality of local education and offer adaptable school curricula for foreign students to eliminate the need for the people to search for education opportunities overseas. Incentivize the learning of the English language since it is the language of business and commerce and the main second language for the Armenian diaspora.

STEP 4: ADDRESSING HUMAN RIGHTS PROBLEMS

The end of the Soviet system did not end the widespread human rights problems in post-Soviet states. Turkmenistan is still a dictatorship where all other political voices are silenced. The leaders in Kazakhstan and Uzbekistan continue manipulating the elections to remain in power, while Belarus and Tajikistan are still nostalgic about the Soviet past.

However, to rebuild the institution, the government should respect due process and universal human rights.

The authorities also need to tackle the harassment against lesbian, gay, bisexual, and transgender people since widespread homophobia only hurts the country and its economy. The people who do not feel safe in the country leave it in search of better opportunities, taking with them all the potential to create new businesses and rebuild the economy. LGBT-inclusive policies are beneficial both for the community and the companies. For example, according to the US Chamber of Commerce Foundation, in the US

LGBT-inclusive policies would make Armenia more tolerant and tourist friendly, attracting more people to Armenia.

The same inclusive practices should be applied in Armenia to create a safe working environment and fine the individuals who violate basic human rights and restrict other people’s freedoms. Of course, changing people’s mindsets on LGBT issues should still be a long-term goal, but high penalties Inclusive management strategies, awareness training programs, and same-sex benefits coverages can accelerate the process and make people more inclusive.

The government should also support human rights campaigns, push social reforms that move the country further away from its Soviet past, create a fair voting process, and support young professionals since they are the ones who can rebuild the economy.

STEP 5: OFFERING DRUG TOLERANCE POLICIES

The examples of the US and other developed countries made it obvious that THE WAR ON DRUGS DOES NOT REDUCE THE DEMAND ON DRUGS. Legalizing drugs could help decrease the expenditures on prohibition enforcement, incarceration, and prosecution of drug users and allow the government to invest the saved money on rebuilding Armenia’s infrastructure and economy. The demand for illicit drugs in developing countries is already high, which is why the only alternative to deal with the black market is to limit the demand for illegal drugs by introducing legal alternatives. The main benefits of drug legalization are the following:

Growing the economy.

Illegal drug trade accounts for 8% of the global trade, which is $300 billion a year.

Since drug control policies do not work, the second-best alternative is to direct this money into the economy by curbing the monopoly of the black market.

Regulating the spread of illicit substances and eliminating the criminal marketplace.

Making recreational drug use safer by offering sanitized tools and settings, which can at the same time reduce the burden on the healthcare system. The same aspect can be applied to prostitution, whose legalization can help sex workers work in safer conditions due to mandatory health testing and the support of safer sex practices.

Lowering the addiction rates. Ironically, the examples of Portugal and Mexico showed that legalization of drugs lowers the addiction rates since the addicts are treated in regulated medical facilities instead of being sentenced to prison.

Attracting tourists from neighboring countries. The influx of recreational drug users from neighboring countries where even light drugs are still illegal can become a major push to the country’s economic development.

Creating new industries. Similarly to $32 billion cannabis industry that offers numerous pharmaceutical products used to treat neuropsychiatric disorders, cancer, Parkinson’s disease, and other conditions, Armenian industries could benefit from the legalization of drugs due to their wide application in beauty products, medical services, packaging industry, and food preparation.

The policy can be implemented gradually following the examples of Denmark and the Czech Republic where legalization affects only some of the neighborhood and drug-friendly locations. Creating a once mythical Paradise City where drugs and prostitution are legal could allow the Armenian economy to become a stable ground for future investment opportunities and industrial development. The south of the country should become a resort haven for tourists where such activities as recreational drug use, prostitution, and gambling are allowed and regulated. All of these activities will POUR funds in the country’s economy, which is why the government should not be dissuaded by the long-lasting stigma of such reforms since, as the Roman emperor Vespasian once put it:

“Pecunia non olet”

Which means money does not smell and illustrates that the value of money does not depend on its origin.

STEP 6: REDUCING PUBLIC HOLIDAYS

Armenia has 15 national holidays that maintain a fragile balance between people’s personal and spiritual life.

Compared to the UK with its 8 bank holidays, the number of Armenian holidays is surprisingly high for a country whose GDP per capita is $4,150 compared to the UK’s $44,177.

Most of them are religious Orthodox holidays, but Article 117 of the Constitution of the Republic of Armenia allows the government to declare one-time bridge holidays. Government offices and business are often closed during the holidays, which is why people often have to wait for the holidays to end to handle any urgent financial or business issues.

During public holidays, around 45% of the country’s economy suffers since the companies, factories, and construction sites do not operate.

Moreover, most companies still have to offer base pay to their employees if the public holiday falls on the working day, even if the workers are absent. If the workers choose to go to work, however, employers often have to pay extra of the worker’s base rate. Such expenses damage the functioning of the business and indirectly affect the country’s budget since companies pay fewer taxes as a result of lower profits.

Public holidays also lead to delivery delays, which can severely impact the customers who need to receive either perishable goods or urgent medical deliveries. The decreased productivity can put the struggling Armenian economy even farther behind other developed nations, which is why the number of public holidays in the country should be halved and spread more evenly throughout the year.

CONCLUSION

Armenia should become a country that listens to the needs of the people who are helping to build it. Since the country cannot rely on natural resources, the only strategy for today’s government is introducing policies that allow both domestic and international businesses to prosper and attract investors at the same time. The government should ALWAYS ask what it can do to attract either French, Indian, or African entrepreneurs and investors.

INVESTING IN ARMENIA SHOULD BE EASIER AND MORE PROFITABLE THAN INVESTING IN SUCH COUNTRIES AS UKRAINE, RUSSIA, INDIA, OR GEORGIA.

Therefore, Armenia should become an investment paradise and a platform for launching successful businesses since only drastic measures could help achieve drastic changes and revolutionize the country’s economy.