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Modern Economic History

At the beginning of the twentieth century, the territory of present-day Armenia was a backward

agricultural region with some copper mining and cognac production. From 1914 through 1921,

aucasian Armenia suffered from war, re!olution, the influ" of refugees from #urkish Armenia,disease, hunger, and economic misery. About 2$$,$$$ people died in 1919 alone. At that point,

only American relief efforts sa!ed Armenia from total collapse.

#he first %o!iet Armenian go!ernment regulated economic acti!ity stringently, nationali&ing all

economic enterprises, re'uisitioning grain from peasants, and suppressing most pri!ate market

acti!ity. #his first e"periment in state control ended with the ad!ent of %o!iet leader (ladimir ).*enin+s ew conomic olicy /0 of 1921-2. #his policy continued state control of the large

enterprises and banks, but peasants could market much of their grain and small businesses could

function. )n Armenia the years brought partial reco!ery from the economic disaster of the

post-orld ar ) period. 3y 192 agricultural production in Armenia had reached nearly three-

'uarters of its prewar le!el.3y the end of the 192$s, %talin+s regime had re!oked the and established a state monopoly

on all economic acti!ity. 5nce this occurred, the main goal of %o!iet economic policy inArmenia was to turn a predominantly agrarian and rural republic into an industrial and urban

one. Among other restrictions, peasants now were forced to sell nearly all their output to state

procurement agencies rather than at the market. From the 196$s through the 19$s, an industrialinfrastructure was constructed. 3esides hydroelectric plants and canals, roads were built and gas

pipelines were laid to bring fuel and food from A&erbai7an and 8ussia.

#he %talinist command economy, in which market forces were suppressed and all orders forproduction and distribution came from state authorities, sur!i!ed in all its essential features until

the fall of the %o!iet go!ernment in 1991. )n the early stages of the communist economicre!olution, Armenia underwent a fundamental transformation into a proletarian society.

3etween 1929 and 1969, the percentage of Armenia+s work force categori&ed as industrialworkers grew from 16 percent to 61 percent. 3y 196: industry supplied 2 percent of Armenia+s

economic production. ;ighly integrated and sheltered within the artificial barter economy of the

%o!iet system from the 196$s until the end of the communist era, the Armenian economy showedfew signs of self-sufficiency at any time during that period. )n 19 to other republics, and e"ported only 1.4 percent of what it produced to

markets outside the %o!iet =nion.

Armenian industry was especially dependent on the %o!iet military-industrial comple". About 4$percent of all enterprises in the republic were de!oted to defense, and some factories lost $ to

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Natural Resources

Although Armenia was one of the first places where humans smelted iron, copper is the

most important raw material mined there today. ?eposits of &inc, molybdenum, gold, sil!er,

bau"ite, obsidian, and semiprecious stones, as well as marble, granite, and other building

materials, are also present. %ignificant e"pansion is belie!ed possible in the e"ploitation of mostof those materials, which until the mid-199$s had been largely untouched. %ome oil deposits

ha!e been identified, but the comple" geology of the region makes reco!ery difficult ande"pensi!e. )n 1996 an American e"pedition tentati!ely identified further deposits of natural gas

and oil, but e"ploitation was not e"pected for se!eral years.

Agriculture

Armenia has 4. )n 199$ Armenia became the first %o!iet republic to pass a land

pri!ati&ation law, and from that time Armenian farmland shifted into the pri!ate sector at a fasterrate than in any other republic. ;owe!er, the rapidity and disorgani&ation of land reallocation led

to disputes and dissatisfaction among the peasants recei!ing land. specially problematic were

allocation of water rights and distribution of basic materials and e'uipment. 8elated enterprises

such as food processing and hothouse operations often remained in state hands, reducing thead!antages of pri!ate landholding.

3y 1992 pri!ati&ation of the state and collecti!e farms, which had dominated Armenian

agriculture in the %o!iet period, had put 6 percent of culti!ated fields, ost farms had electricity by

the early 19$s, and machinery was commonplace. )n the %o!iet era, women made up most of

the agricultural work force@ a large percentage of the younger men had responded to the %o!ietindustriali&ation campaign by migrating to urban centers. )n 19

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#he principal agricultural products are grains /mostly wheat and barley0, potatoes, !egetables,

grapes, berries, cotton, sugar beets, tobacco, figs, and oli!es. )n 19

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;ydroelectric plants pro!ide 6$ percent of domestic electricity, but the output of the largest

producer, the 8a&dan ;ydroelectric lant, was cut drastically because of its negati!e effect on

the water le!el of its source, *ake %e!an. 3y early 1994, howe!er, a fifth hydroelectricgenerating unit was under construction, with international funding, to help alle!iate the energy

shortage. lanners are also considering construction of two medium-si&ed hydroelectric stations

on the ?&oraget and ?ebet ri!ers in the far north, or 6$$ to 4:$ small stations on lakes. #heobstacle to such plans is the high cost of importing technology.

)n the early 199$s, se!ere shortages of energy led to blackouts, periodic shutdowns of the

subway system, inade'uate heating of urban buildings, and the further decline of industry.%chools, institutes, and uni!ersities were closed through the winters of 1991-92 and 1992-96.

)n the 19etsamor. ;owe!er, that station+s two reactorswere shut down after the 19etsamor, despite the station+s

location in earth'uake-prone northern Armenia and the possibility of a terrorist attack that couldrelease large amounts of radiation.

)n 1996 >etsamor had an estimated capacity to pro!ide 2$ percent of Armenia+s energy

re'uirements. lans were made for startup of one of the two reactors by 199: after carefule'uipment testing and international technical assistance--with the pro!ision that the plant would

remain closed if alternati!e sources of power could relie!e the acute shortage of the prior three

years.

)n 1996 the deli!ery of electric power to industrial consumers was cut to one-third of the 1992

le!el. =nder continued blockade conditions, the winter of 1996-94 brought acute shortages of

coal, heating oil, and kerosene to heat homes and city apartment buildings and to keep industries

running. %ignificant deposits of high-'uality coal ha!e been identified in Armenia, with holdingsestimated at 1$$ million tons. 3ut e"ploitation would re'uire massi!e deforestation, a

conse'uence that is considered en!ironmentally prohibiti!e. )n %eptember 1996, #urkmenistanagreed to deli!er

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millions of dollars of foreign aid to the de!astated regions of Armenia, much of the money went

to corrupt and criminal elements.

3eginning in 1991, the democratically elected go!ernment pushed !igorously for pri!ati&ationand market relations, although its efforts were frustrated by the old ways of doing business in

Armenia, the A&erbai7ani blockade, and the costs of the war in agorno-Carabakh. )n 1992 the

*aw on the rogram of ri!ati&ation and ?estati&ation of )ncompletely onstructed Facilitiesestablished a state pri!ati&ation committee, with members from all political parties. )n mid-1996

the committee announced a two-year pri!ati&ation program, whose first stage would be

pri!ati&ation of 6$ percent of state enterprises, mostly ser!ices and light industries. #heremaining $ percent, including many bankrupt, nonfunctional enterprises, were to be pri!ati&ed

in a later stage with a minimum of go!ernment restriction, to encourage pri!ate initiati!e. For all

enterprises, the workers would recei!e 2$ percent of their firm+s property free of charge@ 6$percent would be distributed to all citi&ens by means of !ouchers@ the remaining :$ percent was

to be distributed by the go!ernment, with preference gi!en to members of the labor organi&ation.

A ma7or problem of this system, howe!er, is the lack of supporting legislation co!ering foreign

in!estment protection, bankruptcy, monopoly policy, and consumer protection.

)n the first postcommunist years, efforts to interest foreign in!estors in 7oint enterprises were

only moderately successful because of the blockade and the energy shortage. 5nly in late 1996

was a department of foreign in!estments established in the >inistry of conomics, to spreadinformation about Armenian in!estment opportunities and impro!e the legal infrastructure for

in!estment acti!ity. A specific goal of this agency is creating a market for scientific and technical

intellectual property.

A few Armenians li!ing abroad made large-scale in!estments. 3esides a toy factory and

construction pro7ects, diaspora Armenians built a cold storage plant /which in its first years had

little produce to store0 and established the American =ni!ersity of Armenia in re!an to teachthe techni'ues necessary to run a market economy.

Armenia was admitted to the )nternational >onetary Fund in >ay 1992 and to the orld 3ank

in %eptember. A year later, the go!ernment complained that those organi&ations were holdingback financial assistance and announced its intention to mo!e toward fuller price liberali&ation

and the remo!al of all tariffs, 'uotas, and restrictions on foreign trade. Although pri!ati&ation had

slowed because of the catastrophic collapse of the economy, rime >inister ;rant 3agratian

informed =nited %tates officials in the fall of 1996 that plans had been made to embark on arenewed pri!ati&ation program by the end of the year.

Labor and standard of living

#he abrupt termination of economic relations with many former %o!iet republics, each

concerned with its own immediate needs, forced reduction of the work force and plant closingsin Armenia. )n the years following, the effects of the agorno-Carabakh conflict continued and

e"acerbated the trend. )n 1991 some 69 percent of the acti!e work force was employed in

industry and construction@ 21 percent in the arts, education, and health@ 19 percent in agriculture

and forestry@ percent in transportation and communications@ and percent in commerce andfood ser!ices.

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About 9,$$$ persons were officially classified as unemployed in %eptember 1996, a :: percent

increase since the beginning of the year. Another 1:$,$$$ workers were e"pected to apply for

go!ernment support grants before the end of 1996.

About

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#he ational 3udget

#he ta" base of the 1992 budget was to include a new !alue-added ta", se!eral e"cise ta"es, and

a re!ised system of enterprise and personal income ta"es. ;ard-currency e"port earnings were to

be ta"ed at 2: percent. #he fastest-growing e"penditure categories were national defense andallowances to citi&ens to mitigate the effects of price liberali&ation. #he 1992 budget called for acut of about 4: percent in real e"penditures /e'ui!alent to a nominal increase of 1:: percent0,

which would still lea!e a deficit of 1.2 billion rubles, or 11 percent of total e"penditures. 3udgets

were e"tremely difficult to plan because of the A&erbai7ani blockade and the unpredictableinflation rate.

rice olicy

)n mid-199$ the go!ernment introduced a three-stage price reform program, implementation ofwhich was se!erely hindered by the contraction of the national economy. #he purpose of the first

stage was to impro!e agricultural production incenti!es by raising go!ernment procurement

prices for staple products. #he second stage raised wholesale prices and tariffs to bring themcloser to world market le!els and to stimulate price negotiations. #he third stage fi"ed prices

/usually at increases of 6$$ to :$$ percent0 for food, medicine, utilities, and transportation, but it

freed the prices of most other items. "perts belie!ed that prices would not reach true

e'uilibrium until the end of shortages caused by the blockade.

3etween ?ecember 1992 and %eptember 1996, annual price increases for !arious goods and

ser!ices ranged from nearly $$ to o!er 1,2$$ percent. hereas the a!erage monthly increase for

all e"penditures in 1996 was 26 percent, the rate fell considerably in the second half of the year.3y the summer of 1996, monthly increases had fallen below 1 percent.