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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