armenia systematic country diagnostic - public...

Armenia

Systematic Country Diagnostic

“Future Armenia”

Key Findings, June 2017

Objective: Identify Forward Looking Options for Fostering Inclusive Growth to Support Poverty Reduction and Shared Prosperity

2

Armenia Systematic Diagnostic

Analyze Current Economic Model (poverty reduction and growth over the last decade)

Identify Elements of a New Economic model

Global Connectivity

Productive and Competitive Firms

Raising People’s Productivity and Removing Barriers to

Work

Resilience for Sustainable Growth

1. Introduction

2. Poverty, Vulnerability and Shared Prosperity

3. Slowing Growth, New Conditions and a New Growth Story

4. Global Connectivity

5. More Productive and Competitive Firms

6. Raising People’s Productivity and Removing Barriers to Work

7. Resilience for Sustainable Growth

Report Structure

4

Current Economic Model Brought Poverty Reduction and Growth, However,…

Until 2008, Armenia featured as one of the “pre-eminent reformers among the former Soviet Republics”

Since 2009, radically different and challenging circumstances, low growth-low investment environment and stalledpoverty reduction

-20

-10

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

per capita GDP growth

poverty headcount

FDI led, nontradable sectors, construction, high remittance flows

Construction sector collapsed, weakening remittance inflows, recession in main trading partner, contracting private consumption

Source: NSSRA (poverty headcount, national) and WDI (real GDP per capita growth). National poverty rate reported.

Pe

rce

nta

ge

po

ints

Poverty Reduction Did Not Result in a Larger Middle Class; Instead, the Size of Moderately Poor and Vulnerable Grew..

5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Extreme poor (Living below $US 2.5)Moderate poor (Living between $US 2.5 and 5)Vulnerable (Living between $US 5 and 10)

Source: World Bank staff calculations using harmonized consumption data for ECA countries. Poverty is measured at the international poverty line of US$2.50 per person per day, 2005 purchasing power parity. The threshold of $10 per day as the “middle class line” was estimated by Lopez-Calva and Ortiz-Juarez (2014) through a vulnerability-to-poverty approach and corresponds to the income level associated with a probability smaller than 10 percent of falling into poverty

Sustaining Poverty Reduction Would Require Growth In Labor Income, Pensions, Employment, Remittances, and Agricultural Income

6

-30 -25 -20 -15 -10 -5 0 5

Dependency rate

Employment rate

Labor income per employed adult

Per capita agriculture income

Per capita pension income

Per capita private transfer income

Per capita public transfer income

Per capita asset income

Per capita remittances income

Total reduction in poverty

Rural

Secondary Cities

Yerevan

Note: Based on the micro-decomposition of poverty change, negative numbers indicate that the factor helped to reduce poverty, positive numbers

indicate the opposite effect. Agriculture income includes value of home produced food. Following adjustments were made: 1) home consumed

agriculture production was added in household total income; 2) data was trimmed by dropping extreme values at 1%; 3) Consumption to income

ratio was trimmed at 1%.

Source: ILCS data for 2004 and 2015.

Contributors to poverty reduction, 2004-15

The “High-Low” Growth Performance was Due to i) Reliance on External Conditions (consequent Dutch Disease)

7

Export earnings and copper price

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

REER NEER

0

500

1000

1500

2000

0

2,000

4,000

6,000

8,000

10,00020

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Copper ($/mt) lhs Mineral, stones, metal and others (UD$ million) rhs Total

-

200

400

600

800

1,000

Total FDI (US$ million) Russia

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Remittances o/w: from Russia

Remittances, 2007-16 (US$ million) Nominal and Real Effective exchange rates

Foreign direct investment flows

ii) Fueled by Domestic Consumption

8

-2

0

2

4

6

8

10

2000-2008 2010-2015

Growth by sectors

Net indirect taxes

Agriculture

Industry

Construction

Services

GDP (at marketprices)

per

cen

tage

po

ints

-2

0

2

4

6

8

10

2000-2008 2010-2015

Growth by expenditures

Privateconsumption

Publicconsumption

GrossInvestment

Net Exports ofG&S

GDP at marketprices

per

cen

tage

po

ints

Growth decomposition by sector and expenditures

Source: NSSRA.

(iii) Supported by Only Piecemeal Reforms

ARMENIA ESTONIA

9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Source: EBRD Transition indicators.

Reform progress

Leaving Fundamentals Unaddressed

-15

-5

5

15

25

35

45

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Investment Savings current Account Balance

Savings, investment, and the current account balance (% of GDP )

Source: NSSRA

10

And Reliance on Countercyclical Government Spending (with Consequent Debt Burden)

0

10

20

30

40

50

60

-8

-7

-6

-5

-4

-3

-2

-1

0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Public debt (rhs) Fiscal balance (lhs)

Fiscal and debt developments (% of GDP)

Source: Ministry of Finance and World Bank.

11

Under “Business As Usual” Armenia’s Modest Per-capita Growth Would not be Sufficient by 2050 to Reduce Poverty Significantly

12

Source: Simulations using the DEC-MFM Long-Term Growth Model (LTGM)

Systemic Demographic Change of Shrinking and Aging Population, If Unaddressed, Will Also Take a Toll

13

2.5

2.6

2.7

2.8

2.9

3.0

3.1

0

10

20

30

40

50

60

70

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

202

1

20

23

20

25

20

27

20

29

20

31

20

33

20

35

20

37

20

39

20

41

20

43

20

45

20

47

20

49

Age dependency ratio (% of working-age population)

Population, total (million)

Source: World Bank staff estimates based on age distributions of United Nations Population Division's World Population Prospects.

Demographic Trends and ForecastsPopulation Decline Has A Significant Impact on GDP GrowthPopulation Aging Has Even Larger Impact on GDP Growth

Looking Ahead: SCD ExaminesNeeded Elements of a Re-designed Economic Model

The SCD recommends the adoption of a new economic model. One that addresses both the fundamentals of growth-poverty relationships AND tackles the systemic challenges posed by aging and shrinking workforce and climate change.

• Re-balance growth from non-tradable to tradable goods and services through greater global connectivity - trade and investment, and from the perspective of the underlying drivers of that connectivity: hard infrastructure to connect to others (through land, and air), and soft infrastructure (ICT) as well as trade and investment policies. (chapter 4)

• Build a vibrant business sector that is dynamic, productive and competitive that creates jobs (a good buffer against the “new global normal” of challenging external conditions) (chapter 5)

• Raise people’s productivity and remove barriers to work participation as a cushion against productivity decline coming from an aging workforce. Removing barriers to participation – especially by women – is the only way available to counteract the negative demographics and raise the share of working age people that participate in the labor force (chapter 6).

• Build resilience into the economic model both to pro-actively tackle macroeconomic and microeconmic vulnerabilities but also to be forward looking and be prepared for the impacts coming from climate change, environmental degradation, and possibilities of natural disasters (chapter 7).

14

RE-BALANCE GROWTH THROUGH GLOBAL CONNECTIVITY

Trade Outcomes

16

Low merchandise export competitiveness Low base, low sophistication, low diversification, low survival rate

-10

10

30

50

70

90

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

%

ARM

ALB

HUN

MDA

SRB

SVN

GEO

Exports of goods and services as a % of GDP

AR

M TU

R MK

D GE

O LV

AA

ZE

MD

A

CZ

E ES

T

LT

U SV

K

-40

-20

020

40

60

Exp

ort

Orienta

tion Index

-40 -20 0 20 40 60Ranking

Residuals Residuals

Exports 2012-20152005 2015 CAGR

Georgia 0.009 0.011 1.6%

Latvia 0.035 0.075 8.0%

Moldova 0.008 0.009 0.2%

Macedonia 0.022 0.029 3.2%

Armenia 0.008 0.009 1.2%

Czech Republic 0.826 1.033 2.3%

Slovakia 0.336 0.493 3.9%

Lithuania 0.127 0.167 2.7%

0

20

40

60

80

100

120

140

ALB ARM BIH GEO HUN MDA MKD SER SVN

2000 2005 2010 2014

0

500

1000

1500

2000

2500

3000


2000 2005 2010 2014

Spell Length BIH ARM ALB GEO HUN MDA MKD SRB SVN

1 year 47.8% 36.8% 38.9% 39.5% 54.6% 45.9% 43.7% 48.9% 59.1%

2 years 29.2% 16.8% 20.7% 19.9% 37.3% 26.9% 26.5% 30.4% 42.0%

5 years 13.4% 5.0% 7.1% 5.5% 19.2% 11.4% 11.9% 13.9% 23.6%

10 years 4.2% 1.3% 2.1% 1.2% 9.4% 3.7% 3.5% 5.0% 13.1%

Number of export markets reached Number of exported products

Relative market shares (%) Export orientation index

Source: Authors’ calculations based on data from WDI, UN Comtrade, and UNCTAD

Trade Outcomes: Services

17

However, the ratio of trade in services

to GDP for Armenia is lower than for

comparable countries, such as

Albania, Hungary, and Georgia.

Largest share of services exports:

travel (62 percent), construction (11

percent), transportation (11 percent),

and computer and ICT services (11

percent).

Recent trends: travel is most dynamic,

(tourism). While the ICT subsector has

not grown as fast, it is also expanding. 0

5

10

15

20

25

30

35

40

45

ARM ALB BIH HUN MKD MDA SRB SVN GEO%

2005 2010 2015

Exports of services more than doubled between 2005 and 2015, growing at an average annual rate of 14.4%

Source: Authors’ calculations based on data from UNCTAD

Trade Outcomes: Agriculture

18

0

50

100

150

200

250

300

350

400

450

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015U

S$ m

illio

n

All Agriculture Beverages

Tobacco Crop and Livestock commodities

Growth of agricultural exports has been dramatic, but primarily driven by tobacco and (alcoholic) beverages (70% of agriculture exports)

Neither group draws significantly on Armenia’s agricultural resource base: Wine grapes, the raw material for

Armenia’s internationally renowned wines and spirits, are grown on just 10,000 ha, or only 3 percent of Armenia’s cultivable land

Cigarettes are manufactured from imported tobacco.

Armenia agriculture exports

Source: UN Comtrade.

Global Value Chains (GVCs)

19

Low participation in GVCs

The analysis of performance of key GVC-prone sectors suggests:

Firms in final and intermediate apparel and footwear have

managed to integrate most with international production networks.

ICT, in which Armenian firms have expanded over the past ten years,

has increasing links to global suppliers and clients.

Medical tourism is a promising export sector that may help move

Armenia’s export basket towards a more knowledge-intensive level

0

500

1000

1500

2000

2500

3000


2000 2005 2010 2014

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Armenia Georgia Czech Republic Serbia Slovakia

%

1996 2000 2006 2011

Share of foreign value added in home exports

Share of home value added in foreign exports

Source: Authors’ calculations based on EORA

26%

24%7%

6%

11%3%

23%

Alternative/Renewable energy CommunicationsFood & Tobacco Software & IT servicesTransportation TextilesFinancial Services

Investment Outcomes

20

0

2

4

6

8

10

12

14

ALB ARM BIH GEO HUN MDA SRB SVN MKD

2001-2004 2005-2008 2012-2015

GEO

MDVARM

AZE

CZE

LTUBIH LVASVK

SVN

-50

510

1520

FDI (

% o

f GD

P)

6 8 10 12

Log of GDP per capita (PPP, av.)

1%

1%

5%2…

31%

2%49%

4%

2%

3%

Beverages Alternative/Renewable energyAutomotive OEM Coal, Oil and Natural GasCommunications Financial ServicesHotels & Tourism MetalsSemiconductors TextilesConsumer Products

FDI integration

FDI - % of GDP FDI inflows by sector

2004-14

2014-16

Source: Authors’ calculations based on WDI. Source: FDI Markets

Diaspora

21

Between 9 and 11 million individuals of Armenian descent live worldwide.Contribution through financial, philanthropic and (intangible) institutional, knowledge and network transfers

Under-utilized potential to support increased international trade, investment flows, knowledge transfer and innovation: Globally, the size of a country’s diaspora is correlated with both trade and investment. In Armenia, little correlation between migrant destinations, trade, FDI.

Members of the diaspora best placed to identify opportunities in Armenia with their combination of outside know-how and intimate knowledge of the home country.

Diaspora engagement as promoting search networks, and help them scale up and institutionalize innovative ideas. Introduce linkages between diaspora members and home country agencies to benefit from the dynamism and

external experience in shaping domestic institutions, removing barriers to growth, and fostering innovation.

Trade Environment: Global Connectivity

22

High trade costs

Trade dependent on third countries (Georgia) Traditional transport services operators

require higher professionalization and modernization

Under-regulated road freight services Rail and ferry services not yet meaningful

alternative Intra-country connectivity an issue: less than

half of the road network in good or fair condition.

Good progress in air connectivity, border management

0

200

400

600

Armenia Georgia

% a

d v

alo

rem

Armenia’s Logistics Performance Index (2016)

Trade costs

Source: World Bank’s Trade Cost Database.

Source: World Bank’s Logistics Performance Index 2016.

Trade Environment: ICT

23

50

20

10

4 58

2

$0.19

$0.50

$1.19

$2.09

$2.42

$3.25

$4.76

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

0

10

20

30

40

50

60

Moldova Bulgaria Georgia Armenia Latvia Chile Albania

Mbps US$/Mbps

Broadband internet access has improved

Markets becoming more competitive in cities

Low penetration of high-speed fixed broadband

in rural and poorer areas due to a lack of

infrastructure and limited affordable options

Internet pricing has declined but affordability

remains an issue

Average speeds lower than in comparator

countries

Fixed broadband speeds (Mbps)Mobile broadband speeds (Mbps)

Monthly entry level fixed broadband basket

Source: ITU 2015.

Source: speedtest.net & Opensignal; adapted from Armenian operators and Akamai.

Trade Environment: Policy Infrastructure

24

Armenia’s membership of the Eurasian Economic Union (EEU) since 2015 brings opportunities as well as challenges.

• Trade policy was very open after Armenia’s accession to the WTO in 2003.

• While Armenia’s membership of the EEU has brought immediate benefits, it has also added bureaucratic burdens for trade outside the Union.

• Membership in the EEU constrains Armenia’s ability to negotiate deep preferential trade agreements with third countries.

• Medium- to long-term impacts are mixed with reduced benefits from structural and institutional reforms, and knowledge transfer.

• However, Armenia may be able to attract considerable interest for FDI seeking markets in the EEU because of its more attractive investment climate relative to other EEU members.

Recommendations

25

High degree of overlap between different dimensions of connectivity. Trade, investment, information, knowledge, technological flows, diaspora, and labor mobility are all intertwined.

How can Armenia increase a reform momentum supportive of knowledge and technology transfers for exports?

Take advantage of “exports enablers” to open new markets

(i) Leverage trade in services as a platform for the sophistication of exports

(ii) Have world-class ICT connectivity and services to overcome land connectivity obstacles. Enable international e-commerce.

(iii) Provide export intelligence through modern export promotion institutions;

(iv) Make better use of diaspora trade, investment, knowledge networks;

(v) Improve logistics constraints where possible, in particular with regard to the north-south corridor.

(vi) Take advantage of the EEU membership by positioning the country as a springboard for market-seeking investors looking to access the wider EEU market; Adopt an open policy towards FDI and technology transfer.

BUILD A VIBRANT BUSINESS SECTOR WITH MORE PRODUCTIVE AND COMPETITIVE FIRMS

Firms’ Characteristics

27

14.4%

19.8%

13.7%

0%

5%

10%

15%

20%

25%

Armenia Azerbaijan Georgia WesternBalkans

Central Asia EU NMS

total population labor force wage workers

SMEs account for the bulk of the firms, are crucial employers and important job creator.

Firms exhibit dynamism with characteristics of a successful and vibrant private sector… high rates of entrepreneurship, SMEs lead the way in job

creation, firms’ size increases at they grow older. More productive firms are younger, use more technology,

and are more innovative, Exporters are more likely to be innovators and foreign

owned.

Exports and outward orientation, innovation come together as productivity-enhancing characteristics

Ever tried to set up a business? Share of:

Size

Small

(<19)

Medium

(20-99) Large (>99)

Tota

l

Number of

firms

Agriculture 86 11 3 2

Manufacturing 87 9 4 12

Services 88 10 2 86

Employment



Services 24 30 46 86

Revenues



Services 17 20 63 78

Percentage of firms and employment by firm size in 2015

Source: 2016 Life in Transition Survey (EBRD).

Note: Authors’ elaboration from the SCR dataset. Small firms have less than 20 employees, medium-sized firms have between

20 and 99 employees and large firms have more than 99 employees.

Barriers to Enter and Grow

28

64.5%

0%

20%

40%

60%

80%

100%

Azerb

aija

n

So

uth

Cauca

sus

Ka

zakhsta

n

Germ

any

Kyrg

yz R

ep.

Arm

enia

Mo

ldova

Centr

al A

sia

Ko

sovo

Bu

lga

ria

Georg

ia

Ukra

ine

Se

rbia

Ta

jikis

tan

Russia

Mo

ng

olia

Be

laru

s

FY

R M

acedonia

Uzb

ekis

tan

Cze

ch R

ep.

Weste

rn B

alk

ans

Mo

nte

ne

gro

Latv

ia

Po

lan

d

Rom

ania

Lith

uania

Hungary

Alb

an

ia

Bo

snia

an

d H

erz

.

EU

NM

S

Cro

atia

Esto

nia

Cyp

rus

Italy

Tu

rke

y

Slo

venia

Slo

vak R

ep.

Gre

ece

Firms are constrained in their ability to enter markets and grow.

Slow growth in the entry rates of new companies

Difficulties by small firms in growing larger suggest significant barriers to entry and in terms of employing more workers or accessing capital.

There is scope for improving efficiency by shifting labor and capital to more productive firms.

2015

2013 <5 5 - 9 10 – 49 50 - 99 > 99

Less than 5 92 7 1 0 0

5 - 9 26 63 11 0 0

10 – 49 4 12 81 3 0

50 - 99 0 0 15 77 7

More than 99 0 0 2 8 90

Small firms struggle to grow (Firm-size transition between 2013 and 2015)

Success Percentage among those that tried to start business

Source: 2016 Life in Transition Survey (EBRD).

Note: Authors’ elaboration from the SCR dataset. Values indicate the percentage of firms in each cell. Categories indicate the number of employees

Agriculture Productivity

29

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

La

nd

Pro

du

ctivity

La

bo

ur

pro

du

ctivity

Agriculture, value added (constant LCU)/agric worker

Agriculture, value added (constant LCU)/ha agric land

While agriculture sector growth has been strong, closer

examination shows that the high growth rate is

unsustainable. Recent strong growth has been driven

largely by increased productivity of semi-subsistence

farms rather than the widespread adoption of improved

technology and a shift towards modern, commercial

agriculture. In fact, changes in the composition of

production have been modest.

Yield increases and public investments have driven sector productivity (increased use of fertilizer, improved seeds through subsidies, increase number of livestock, improved (subsidized) access to capital and extension services)

No room for complacency, if the agriculture sector is to continue growing and become more export-oriented. By focusing on input subsidies for the smallest farms rather than facilitating farm enlargement and building the institutional infrastructure for knowledge transfer, government has preserved this structure rather than driving its transformation.

Trends in agricultural productivity

Source: World Bank Development Indicators; National Statistical Services (NSS).

Policy Levers for Growth and Productivity

30

Business climate has improved, but implementation lags behind.

Improved performance in business climate indicators: Increasing its Distance to Frontier in the Doing Business Index (DBI) from 61 in 2010 to 74 in 2017, Ranking in the Global Competitiveness Index (GCI) from 97 in 2009-10 to 79 in 2016-17.

0 10 20 30 40 50 60 70 80

BIH

ALB

SER

MDA

HUN

ARM

SVN

Ease of doing business index (1=easiest to 185=most difficult)

Ease of Doing Business Index 2017 Global Competitiveness Index 2016

Source: WBG DBI 2017. Source: World Business Forum 2016.

Policy Levers for Growth and Productivity

31

Much room for further improvement:

Incomplete implementation of regulatory reforms (Armenia’s public governance lags behind its peers, particularly in the rule-of-law and the control of corruption)

Corporate governance is another area where implementation has been lagging. The legal framework is in place, but implementation is limited (limited transparency, limited effectiveness of Boards, limited protection of shareholders rights)Most problematic factors for doing business(Global Competitiveness Report, 2016)

World Bank Governance Indicators, 2015

Source: World Business Forum 2016.

Source: WBGI 2015.

Market Contestability

32

Lack of market contestability

Improvements in recent years (World Economic Forum’s Global Competitiveness Report (2016-17).

Legal framework has improved, but could be further strengthened.

But investors in Armenia face one of the highest risks in doing business among other European and Central Asian countries. Perceived risks are related to: (i) vested interests and cronyism; and (ii) unfair competitive practices.

Lack of market contestability in sectors providing production inputs (railways, utilities, internet connectivity) adds to the costs of firms operating in Armenia and reduces their competitiveness

Lack of competition in procurement and transparency in state aid.

0

2

4

6

8

10

12

14

Ukra

ine

Arm

en

ia

Bo

sn

ia a

nd H

erz

eg

ovin

a

Mo

ldova

Alb

an

ia

Ma

ced

on

ia,

FY

R

Bu

lga

ria

Rom

an

ia

Se

rbia

Ge

org

ia

Po

lan

d

Hun

ga

ry

Latv

ia

Lith

uan

ia

Esto

nia

Vested interests/cronyism Discrimination against foreign companies

Unfair competitive practices Price controls

Business risks related to weak competition policies (by component)

Source: Economist Intelligence Unit, 2017

Access to Finance and Innovation

33

Access to finance remains an important constraint to growth and private sector development. Only 3 percent of firms indicated that access to finance was not a problem in 2013, compared with an average of 49 percent across ECA countries. Skewed towards large firms (75 percent of them reporting having bank loan, against 31 percent of small firms), concentrated in Yerevan

0 5 10 15 20 25 30 35 40 45 50

ARM

ALB

BIH

GEO

HUN

MDA

SVN

SEB

2015 2016

Progress in the development of an

innovation ecosystem, but limited use of

innovation

45.7

020406080

100120140160180200

Domestic credit to private sector (% of GDP) 2015

Banking depth

Global Innovation Index, 2015-16

Source: WDI Source: Global Innovation Index 2016.

Recommendations

34

Support firms’ entry, growth and exit by:

Address regulatory and implementation gaps in the investment climate and strengthen the evidence, consultative and institutional base of regulations.

Reinforce the effectiveness of Competition Law by including competition principles in regulatory impact assessment; introducing true investigative powers; adjusting the level of fines; accounting for individual companies that operate under common control; ensuring competitive neutrality (state aid control, competitive/transparent e-procurement)

Strengthen conflicts of interest framework and follow through cases.

Improve corporate governance (improve corporate transparency, including disclosure of financial and non-financial information, strengthen Boards of Directors and protect the rights of shareholders)

Enable access to finance (implement the new secured transactions framework, develop the capital markets, promote savings; improve skills in MSMEs and in lenders). CBA is carrying out a financial inclusion assessment to identify the key policy and institutional constraints to access to finance.

Enhance access to innovation (innovation institutions; intellectual property rights; dissemination and commercialization of new technologies; marketplace for innovation; access to Armenian scientists abroad; international standards for R&D and private-sector innovation)

Build a modern agriculture sector using new institutional infrastructure and knowledge transfer (focus on medium-scale farms, farmers willing to invest in modern farming technology, and the knowledge needed to use this technology effectively; Facilitate farm enlargement through the land market)

RAISE PEOPLE’S PRODUCTIVITY AND REMOVE BARRIERS TO PARTICIPATION

Declining Labor Resources, Aging PopulationLow Labor Productivity Growth

80

85

90

95

100

105

110

115

120

125

2008 2009 2010 2011 2012 2013 2014 2015

Labor resources 2008=100

Emp 2008=100

Unemp 2008=100

Econ active 2008=100

36

Growth in labor resources, economically active, and employed workers, 2008-15

9.2

12.7 12.3 12.8

5.8

-12.8

-1.3

0.7

5.3

0.6

4.1

1.1

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Labor Productivity growth (percent change)

Source: Computed using Data from WDI

Source: Based on Data from NSSRA (2016) Report on Labor Market

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Armenia Georgia

Median Age of the Population (Years), 2000-2050: Population Aging

Source: UN Population Prospects 2015

Labor supply is affected by population shrinking and aging. The average worker (15-75) is 43 years old (in 2015) –she/he completed most schooling before transition.

Employment is contracting, unemployment growing and labor productivity growth slowing down – due to combination of demographics, job creation patterns, and changing skills demand

Workers’ Productivity: Low Foundational Skills

37

500452 450

516

607

469

InternationalAverage

Armenia Georgia Serbia SlovakRepublic

Turkey

TIMSS 2011 Grade 4 Math Achievement

Workers’ Productivity: Qualification Mismatch (Over-Education) Especially for Older Workers

38

4.8

4

5.1

3.8

66.2

66.4

72.6

72.1

28

29.4

22.3

24

0 20 40 60 80 100 120

Armenia

Georgia

FYR Macedonia

Ukraine

Individual (actual) match rates between worker education and job required education

Under-education Matched Over-education

05

10152025303540

Ove

r-ed

uca

tio

n (

%)

Un

der

ed

uca

tio

n(%

)

Ove

r-ed

uca

tio

n (

%)

Un

der

ed

uca

tio

n(%

)

Ove

r-ed

uca

tio

n (

%)

Un

der

ed

uca

tio

n(%

)

Ove

r-ed

uca

tio

n (

%)

Un

der

ed

uca

tio

n(%

)

Armenia (2013) Georgia (2013) Macedonia (2013) Ukraine (2012)

Young workers (15-29) Prime age workers (30-49) Older workers (50-64)

Source: Kupets 2015 based on STEP SurveyNote: Estimates based on STEPS (Skills Toward Employment and Productivity) household surveys of working-age adults (aged 15-64) residing in urban areas.Source: Handel, Valerio and Sanchez Puerta (2016

% over- and under-educated by age

1. Over-education is more common than under-education. Common for transition economies.2. Share reporting over-education is highest for older workers (like Georgia but unlike Macedonia or Ukraine). Degrees obtained during the Soviet era may have now become obsolete. 3. Younger workers also report over-education. Suggesting that education systems may not be keeping up with an evolving economy, failing to equip young people with sufficient skills and quality of education need for the labor market.

Workers’ Productivity: High Returns to Tertiary Education

Reflecting Demand for Skilled Workforce

39

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2010 2011 2012 2013 2014 2015

Lower secondary Upper secondary Tertiary

Returns to schooling by level

Source: ILCS data. Note: Estimates from a standard OLS Mincer regression

0

5

10

15

20

25

30

No Yes

Invested in R&D

Major Obstacle Very severe obstacle

% of Firms Reporting Inadequately Educated Workforce to be a Constraint by Investment in Research and Development

Source: World Bank Staff estimates using BEEPS 2013.

Skills not a constraint for most firms . Higher share of Firms Investing in R& D report skills to be a constraint

Worker Productivity: Structural Transformation,

Skills Needed for Technology in Workplace

40

25%

44%

27%

14%11%

4%

37% 38%

19%

35%

18%

11% 10%

5%

53%49%

0%

10%

20%

30%

40%

50%

60%

AgricultureGDP

AgricultureEmployment

Industry GDP IndustryEmployment

ConstructionGDP

ConstructionEmployment

Services GDP ServicesEmployment

2000 2015

Armenia’s economic transformation, 2000-15

Source: NSSRA

74.867.9

80.1 83.8

59.8

36.6

88.882

98

83.3 85.8

65.1

0

20

40

60

80

100

120

Armenia Small firms (1-19 employees)

Medium (20-99employees)

Large (100+employees)

ECA Lower MiddleIncome

Percent of firms using own website

Percent of firms using email to communicate with clients/suppliers

Source: Enterprise survey 2013. Manufacturing and Service Sector Firms.

Firms’ use of ICT 2013

1. Rural workers, especially the rural poor, are predominantly in agriculture operating small scale semi-subsistence farms. Employment in agriculture declining, attributable to short term migration. Increasing diversification to rural non-farm employment.

2. Information technology, the expansion of broadband and greater use of digital technology bringing another change in the demand for skills

Work Participation Rates:Scope to Raise Women’s Participation

41

Source: World Development Indicators (2016)

Male-Female Difference in Labor Force Participation Rates, Ages 15 to 641.5 women for every

man enrolled in tertiary

education. However,

most do not participate

in the labor market.

An key obstacle to work participation by women – their care responsibilities.

Several countries have managed to raise women’s participation by addressing care needs.

Work Participation Rates:Women’s Greater Participation to

Offset Rising Dependency Rates & Gain in Aggregate Output

42

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

2015 2020 2025 2030 2035 2040

nu

mb

er o

f in

div

idu

als

0 t

o 1

4 o

r 6

5+

per

per

son

act

ive

in

the

lab

or

mar

ket

Scenario A: Labor participation does not change

Scenario B: Female labor force participation growing at average rate of 1.05% annually to equalizemale and female rates of participation in 2040Scenario C: Female and male labor force participation growing at average rate of 1.24% and 0.18%annually to equalize male and female rates of participation TO 80% IN 2040

Source: World Bank staff calculations using age specific UN population projections and modeled ILO estimates of labor force participation for 15-64.

Albania

Armenia Georgia

Croatia

Netherlands

Sweden Norway Finland

0

5

10

15

20

25

30

Gain in Output From Reducing Gender Gap in Participation (as % GDP)

Source: World Bank staff calculations following Cuberes and Teignier.

Trends in Ratio of Economic Dependents to Economically Active Persons 2015-2040

Recommendations

Education System Provides Skills Relevant for the Labor Market + Support Women’s Work

• Expand Early Childhood Education to cover children under 3; expand to rural areas.

• Improve teacher training in General and Tertiary education systems to teach technical and soft skills needed for labor market.

• Scholarships to rural students for tertiary enrollment. (support movement to non-farm)

• Reform National Center for VET Development and National Council for VET Development; improve VET curricula and integration with labor market.

• Establish clear pathway to STEM and improve student’s performance on STEM subjects

• Modernize workforce development

• Strengthen lifelong learning/adult education43

Support Matching of Workers to Jobs

- Improving job-worker matching by strengthening the State Employment Agency (SEA)

- facilitate the best job-worker matches; reduce skills mismatches, especially shortages of some types of skills, by providing career guidance and necessary active labor market programs (ALMPs)

- Low-income groups, including social assistance beneficiaries, need targeted activation policies to facilitate their transition to (more productive) employment.

BUILD RESILIENCE FOR SUSTAINABILITY

Role of Resilience In Mitigating Impact of Vulnerabilities

45

Vulnerabilities Resilience and Sustainability

Impact

Current and future aggregate economic output; individual

consumption

Macro resilience:

Macro policy; environmental regulations; disaster risk management;

management of natural resources

Macropolicy and the business cycle

Natural disasters; environmental pollution;

degradation of natural capital

Micro resilience: Consumption smoothing;

social protection; basic services; adaptation

Health shocks/job loss; impact of energy tariff increases; and other

individual shocks

Need for Resilience Policies at the Macro and Micro Levels

• Macrofiscal and financial: A sharp rise in Armenia’s public debt burden: 84 percent of public debt denominated in foreign currency. Debt sustainability analysis suggests that real GDP growth has the largest impact on Armenia’s debt indicators. Armenian financial sector appears to be healthy. CBA has employed macro-prudential policy tools to address risks from dollarization.

• Climate change is exacerbating natural and environmental vulnerabilities with significant implications for agriculture, such as an increase in the use of irrigation water, reduced yields of major crops, reductions in soil fertility, land degradation, and greater severity and frequency of extreme weather events. In 2013, financial losses to Armenia’s agriculture from extreme weather events amounted to AMD 23.9 million.

• Natural disasters Most of Armenia is also exposed to significant risk of earthquakes, hailstorms, and floods. It is estimated that currently more than 2.5 million people in 48 cities of Armenia are located in seismically active areas.

• Mining, one of the largest contributors to GDP and exports, is also a source of air and water pollution.

• Among Armenia’s natural resources, the use of water needs to be better managed, especially as future water availability appears to be uncertain due to climate change. Some areas outside Yerevan lack full time access to water.

46

• Targeted Family Benefit Program: Program reaches around 13 percent of the population in 2015, but could be better targeted: only 61 percent of its resources went to the poor. Low coverage of the poor. Concerns that program may discourage take up formal employment (although no evidence of work dis-incentive).

• Simulations show pensions played significant role reducing poverty and inequalities. Pensions cover 60 percent of poorest 20 percent of the population. Pension system consists of two components: (i) a defined benefit component that is financed from the State budget; and (ii) a defined contribution program that has been in place since 2014, which covers only civil servants and new labor force entrants since that date.

• Health affordability: households shoulder a large burden of health spending, especially on pharmaceuticals. Free primary health care services but 32 percent of poorest decile and 4.2 percent of richest decile report going without primary health care due to affordability concerns (ILCS, 2014). Targeting is a issue as many of the poor are not covered for the full Basic Benefit Package.

• Credit/financial access: Shallowness savings and credit markets inadequate to enable individuals to respond to shocks. Only 19.3 percent of adults (aged 25+) had an account at a financial institution in 2014. This is the lowest among peer countries, which had an average of 74.5 percent.

Recommendations

47

Macro resilience Micro resilience

Re-build fiscal buffers and mitigate fiscal risks Consider gradual implementation of pension targets for the defined benefit component (PAYG) and pursue as planned the re-establishing of the defined contribution component in 2018.

Strengthen response to climate change with a clear and comprehensive plan for adaption in agriculture. Translate Nationally Determined Contribution (NDC) document into an effective implementation strategy by promoting cross-sectoral dialogue.

Improve coverage and targeting accuracy of the Family Benefit Program (FBP) and promote labor activation among its beneficiaries. An important priority would be to strengthen the State Employment Agency (SEA).

Enhance capacity of Armenia’s Disaster Risk Management (DRM) system. mainstream DRM in urban planning and building disaster resilience in key infrastructure sectors such as schools.

Pursue the integrated delivery of social services, especially for marginalized and vulnerable families.

Implement existing environmental laws and regulations; strengthen fines and consequences for non-compliance; and raise public awareness.

Given the constrained fiscal space, improve targeting of the Basic Benefit Package (BBP) to improve affordability of health spending.

Improve management of forests Effort to deepen and broaden credit, savings, insurance, and capital markets needed to provide financial services and products to help households cope with shocks.

Strengthen management of water resources to ensure sustainable and productive use.

NEXT STEPS

Next Steps

• World Bank Management Concept Review (February 2017)

• Consultations on SCD concept (March 2017)

• Consultations on reform priorities (June 2017)

• Prioritization of Recommendations

• World Bank Management Decision Meeting

• Report Publication

49

THANK YOU

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