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Integrative Project in Modern Production Methods (IE285e) Lecture #2 05 September, 2005 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 1 Topic: • An overview of Armenian Industry and Economy. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 2 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 3 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 4 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.). 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 5 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 6 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? 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 7 Natural Resources Mines a) metallic; b) non-metallic Forests Water Resources Energy related: Fossil Fuel Other, Renewables: Solar, Wind, Geothermal 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 8 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 9 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 05 September, 2005 Large quantities Large quantities Medium 15 million tons Ijevan Khor Virap, Bjni 1.2 million cubic meters Pambak Integrative Project in Modern Production Methods, IE285e 10 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 11 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 12 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! 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 13 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 14 Forests • • • • • • Oak Beech Hornbeam Ash Maple Many wild fruit trees 05 September, 2005 • • • • • • γÕÝÇ Ð³×³ñ»ÝÇ ´áËÇ Ð³ó»ÝÇ ÂËÏÇ ´³½Ù³ÃÇí í³ÛñÇ Ùñ·³ïáõ ͳé»ñ Integrative Project in Modern Production Methods, IE285e 15 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 16 ENERGY Fossil Fuel • Extremely scarce: more or less considerable are low quality gray coal mines located in between Gumri and Spitak 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 17 Armenian economic history highlights: Status at 1913 Percentage of Percentage of Population involved GNP Agriculture 85% 60% Industry 05 September, 2005 3% Integrative Project in Modern Production Methods, IE285e 20% 18 Status at 1913. Largest cities: • Alexandrapol: 51.3 thousand, • Erivan: 30 thousand inhabitants. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 19 Armenian economic history highlights: Production at 1913 Agriculture Cotton Wool Rice Vineyards Industry Copper Cognac Wine Soap (grapes) Preserves Beer 05 September, 2005 Integrative Project in Modern Production Methods, IE285e Energy 10 Hydropower plants, 3.1 MW total 20 Armenian economic history highlights: Status in 1988, energy Type Hydro Fossil Nuclear Total 05 September, 2005 MW 1017 1760 815 3592 Integrative Project in Modern Production Methods, IE285e 21 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 05 September, 2005 4,763,000 Integrative Project in Modern Production Methods, IE285e 22 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 23 Main Industry Branches in 1988 • • • • Electronics Metal processing Metallurgy Woodworking and paper production • Construction materials • Glass and porcelain 05 September, 2005 • Light industry (including shoe industry, the 15% of total national volume of production). • Food industry • Publishing industry • Chemistry and Drug manufacturing • Agro industry Integrative Project in Modern Production Methods, IE285e 24 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… 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 25 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 26 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 05 September, 2005 Georgia Kyrgizia Integrative Project in Modern Production Methods, IE285e Russia USSR 27 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 28 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 29 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 30 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). 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 31 The Reasons for Economic Decline • Avoidable costs: Mistakes in management of reforms: Delays; Too rapid; Inconsistencies. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 32 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 33 Modified TOT approach, Income Loss • • • • • 05 September, 2005 Armenia – 11.1% Moldova – 31.9% Georgia – 17.3% Estonia – 12.7% Comparing when with when? Not well described Integrative Project in Modern Production Methods, IE285e 34 Initial conditions • • • • • • • • 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 35 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 36 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 37 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 38 GDP dynamics 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 39 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. 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 40 Vulnerability index • of Armenian Economy: in 1988: 1.71 in 1990: 2.00 • <1.8 – good • >1.8 – bad • Lav chi dzevakerpats 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 41 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%! 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 42 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 43 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%). 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 44 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 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 45 In 1996 GDP = $1599M! 05 September, 2005 Integrative Project in Modern Production Methods, IE285e 46
