vahram ghushchyan, ph.d., aiprg mher baghramyan, aiprg implications of armenian dram appreciation...
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Vahram Ghushchyan, Ph.D., AIPRGMher Baghramyan, AIPRG
Implications of Armenian Dram Appreciation for the Competitiveness
of Armenian IT, Tourism, and Food Processing Industries
Washington, DCMay 17-18, 2008
Conference Looking Forward: Global Competitiveness of the Armenian Economy
AMD/USD Nominal Exchange Rate, Armenia
1997 2002 2003 2004 2005 2006 2007May 2008
Nominal Exchange Rate, AMD/USD, (year average)
490.8 573.4 578.8 533.5 457.7 416 342 310
Change in Nominal Exchange Rate, % to previous year
3.3% 0.9% -7.8% -14.2% -9.1% -17.8% -9.4%
Source: NSS of Armenia
Technical Inefficiency
Methodology: Stochastic Frontier Model
Outputs
.
.
..
. . .
Production frontier
Actual production
.
.
. .
Source: Wu, 1996, modified by authors
Inputs
Allocative Inefficiency
Methodology (continued)
Collected Data
23 Food Processing Companies
13 IT companies15 Incoming Tour Operators7 Hotels
Mean Annual Values per Company, 2006
IT Hotels Tour Operators
Food
Revenue, USD 489,942 761,072 170,209 1,346,085
Profit, USD 57,466 303,894 26,209 155,653
Capital Assets, USD 348,788 3,295,673 44,524 415,954
Labor, persons 51 71 13 71
Monthly wage of productive workers, USD 329 111 173 81
Wage of admin. workers, USD 380 250 183 158
Model 1: Translog Production Function
itititLtitKtititKL
itLLitKKttitLitKtit
vutLtKLK
LKtLKtY
))(ln(ln))(ln(ln))(ln(ln
)(ln2
1)(ln
2
1)(
2
1lnlnlnln 222
0
Model 2: Cobb-Douglas Production Function
itititLitKtit vuLKtY lnlnlnln 0
Technological Progress (TP) :
TP is calculated as a derivative of the production function with respect to time
If TP is positive (negative), then the production frontier shifts up (down).
)(ln)(ln)( itLtitKtttt LKtTP
Summary Statistics of Technical Efficiency (te1) by Company Type,
Average 2003-06
Obs Mean Std. Dev. Min Max
Hotels 22 0.43 0.21 0.21 0.86
IT companies 27 0.50 0.27 0.06 0.86
Tour Operators
22 0.52 0.23 0.10 0.87
Food Processing companies
73 0.26 0.25 0.03 0.82
Mean of Estimated Parameters, IT and Tourism
Industries, 2003-06,
year te1 te2 tp1 tp2
2003 0.44 0.47 -0.23 -0.08
2004 0.49 0.52 0.02 -0.08
2005 0.50 0.55 0.18 -0.08
2006 0.49 0.55 0.27 -0.08
Note: te – technical efficiency, tp = technological progress. 1 and 2 refer to the Translog and Cobb-Douglas production functions respectively.
Mean of Estimated Parameters, Food Processing
Industry, 2003-06
year te1 tp1
2003 0.263 -0.538
2004 0.260 -0.162
2005 0.268 0.100
2006 0.267 0.238
Note: te – technical efficiency, tp = technological progress. 1 refers to the Translog Production Function.
Regression Outputs, using Nominal AMD/USD Exchange Rate
te1IT&TOUR = 0.3554323 + 0.0002701*exch*** – 0.0011503*infa – 0.0002147*inff + 0.0005063*exp** + 5.09e-07*marketr+ +0.0279733*tour – 0.0501147*hotel
te2IT&TOUR = 0.4780624 +0.0000438*exch*** – 0.0001404*infa + +0.0002289*inff + 0.0000968*exp** + 1.24e-07*marketr + 0.0578764*tour + 0.0000625*hotel
te1FOOD = 0. 2681958+ 0.0000164*exch*** + 0.0000148*infa + 0. 0003993*inff + 0.000027*exp – 4.10e-09*marketr
* significant at 10%; ** significant at 5%; *** significant at 1%.
Regression Output, IT and Tourism, using Real Effective Exchange Rate
te1IT&TOUR = 0.6885364 – 0.0021411*reer*** + 0.0006226*exp* + 7.91e-07*marketr ++ 0.0278303*tour – 0.0513877*hotel
te2IT&TOUR = 0. 5328573 – 0.0003383*reer*** + 0.0001125*exp** + 1.65e-07*marketr ++ 0.0578545*tour – 0.0001084*hotel
* significant at 10%; ** significant at 5%; *** significant at 1%.
Estimating Loss in Export of IT and Food Processing Companies 1
ExportIT = – 64415.22 + 244478* te1***ExportFOOD = – 147614.9 + 743663.2* te1***
10% improvement in the degree of technical efficiency of an average IT company brings about 24.5 million dram or 73.9 thousand USD of export and 74 million (about USD 225 thousand) of additional exports of processed food.
Estimating Loss in Export of IT and Food Processing Companies 2
Loss in ExportIT = 66,034*Number of companies * ∆ exchange rate13 IT companies Exchange Rate: 2004- 579 , 2006 – 416 AMD/USDExport Loss: 140 million AMD, or 13% of their actual Exports
Loss in ExportFOOD=12,196 *Number of companies * ∆ exchange rate 23 Food Processing companiesExport Loss: 45 million AMD, or 3% of their actual Exports
Profit Loss of Tourism and Food Processing Companies
Each point of dram appreciation caused an average tour operator and hotel to lose about 112 thousand AMD (about 340 USD) of profit before tax.
Total loss - 401 million AMD or 15% of actual profit
andAverage food processing company lose just
14 USD of profit before tax which for our surveyed companies was slightly less than 1%.
Policy Recommendations
• Effect of Work Experience:one year increase of average work experience of the company’s staff offsets about 2 points of dram appreciation. Allow companies to spend more than
1% of revenue for training purposes Creating a link between educational
institutions and employers in the area of curriculum development
• Exemption or delayed payments of VAT on Investments and/or Import of capital assets
A. How much would be the difference (in percentage terms) of Company’s 2006 revenue, if the exchange rate remained at the level of 2003, i.e. 580 drams per 1 USD?
%
B. What AMD/USD exchange rate would be the most favorable for Your Company and would make it competitive?
AMD/USD
C and D. What is the percentage change of Company’s Domestic prices (in AMD) and Export prices (in USD) compared to 2003?
E. What percentage of your Company’s capital assets and human recourses is being used (rate of utilization), on average, during year?
%
F. Please, evaluate State – Your Company interrelations according to 0-10 point system (0 - extremely unfavorable, 10 - the most favorable).
