Poverty in Armenia and What to Do About It

Central Yerevan looks more and more prosperous every year. Walking past the Hugo Boss boutique near the opera, a diasporan visitor might be forgiven for skipping the anemic offerings of the Yum-Yum coffee-and-doughnut shop and taking instead a sidewalk seat at the nice restaurant around the corner.

While a handsome waiter or waitress fetches surj, the English-speaking visitor might open the latest issue of Armenian Forum, picked up earlier in the day from the lovely Artbridge bookstore café established by a Persian-Armenian woman from Los Angeles.

Paging through, our visitor would appreciate a simple statistic from the World Bank: Armenia’s per-capita gross domestic product is back to its “pretransition” level.

Reading on, however, she would start to discover what that simple statistic—and the glitter of central Yerevan—obscures.

First, when the World Bank says “pretransition,” it means pre-1991, whereas Armenia’s rapid economic decline began soon after Soviet leader Mikhail Gorbachev began introducing market reforms in 1985. Life in 1991 is not the standard of living Armenians wistfully recall.

Second, Armenia’s population has declined so much since 1991 that it takes a lot less GDP to achieve that year’s per-capita level.

Third, and perhaps most significant, the distribution of income is infinitely more skewed than it was before independence.

Our visitor would find the situation illustrated in a photo-essay by the talented British-Armenian journalist Onnik Krikorian, who has been living in Armenia for several years now. In the essay, titled “Social Vulnerability in Armenia,” Krikorian notes that “according to official government, World Bank, and International Monetary Fund statistics, half of the population lives below the national poverty line, set at 12,600 dram (21 United States dollars) per month—the cost of the minimum average ‘consumer basket’; approximately seventeen percent of the population is considered ‘extremely poor,’ living on less than 7,200 dram ($12) a month.”

Policy Research

Turning from the photo-essay to policy research, our visitor would discover an article by economist Annette N. Brown of BearingPoint. Brown, who was stationed in Armenia until recently, looks more closely at the income and expenditures of Armenia’s population. Her main resource is the household survey data from the Integrated Survey of Living Standards prepared by Armenia’s National Statistical Service. Almost four thousand households participate in this survey by maintaining a daily diary of income and expenditures for thirty days.

Brown finds that among households reporting any income, the richest household received over two thousand times the income of the poorest household. The majority of income comes from work, including the sale of agricultural production and self-employment. The second most significant source of income is private transfers, including money sent home by relatives abroad. The rest comes from pensions and from cashing in real property, savings, and valuables.

Armenians with the highest incomes relied most heavily on transfers from relatives. (Put another way, those who had relatives sending them money ended up being better off than those who did not.) Those with the lowest incomes relied most heavily on pensions and benefits. Wages accounted for most of the income of middle-income Armenians.

Brown goes beyond an analysis of incomes. Her article, titled “Tax Policy and Poverty in Armenia,” participates in an important policy debate about taxes in Armenia.

At the insistence of the International Monetary Fund, Armenia has adopted a poverty reduction strategy. A popular argument during the preparation of the strategy “was that the best way to increase taxes without hurting the poor is through the property tax.” Indeed, taxing wealth rather than income has its attractions.

But this approach raises problems. When the Soviet system collapsed, people were granted ownership of the houses or apartments in which they were living. Thus, some of the most valuable real estate belongs to people with no income. Indeed, the data Brown looks at confirms that people with the lowest incomes have larger residences, on average, than those with the highest incomes.

Brown concludes that “a property tax based on market values might be unaffordable and could thus force [households] out of their homes. Some would argue that there is no problem with this, as it is merely forcing these households to realize the income possible from their wealth by selling or renting. But that argument is always controversial, because people often do not want to move.”

Brown also discusses a new minimum tax for entrepreneurs. “At the end of 2002, the Parliament passed changes to the tax law, including a change to the income-tax law that requires individual entrepreneurs to pay a minimum annual income tax of 30,000 drams. This minimum tax is in addition to the current minimum social insurance contribution for entrepreneurs of 60,000 drams.”

Showing that for most startups, a tax bill of 90,000 drams represents a tax rate that is completely out of whack with individual income-tax burdens, Brown observes that the law “could discourage people from entrepreneurial activity or from declaring their taxes, both of which are undesirable outcomes.”

Concluding, Brown writes: “Proponents of entrepreneurship suggest that the solution is to have tax breaks and privileges during the first years of operation, but such provisions introduce their own complications and disadvantages to the tax system. Better would simply be to tax everyone according to the same rates, but fairly, so that those who have bad years, especially during start up, have a low or zero tax bill. It is better to get these agents into the tax system with a zero tax bill so that they can be taxed over the years when they do become profitable than to scare them out of the tax system and have them develop their tax-evasion procedures from the beginning.”

What Is to Be Done?

By this time, our diasporan visitor will have switched to something stronger than surj. Armenian brandy perhaps. And she will be contemplating what is to be done.

An article in the very same issue of Armenian Forum explores the role of the Armenian diaspora in Armenia’s economic revival. The article, by economists Aleksandr V. Gevorkyan (BearingPoint) and David Grigorian (International Monetary Fund), is titled “Armenia and Its Diaspora: Is There Scope for a Stronger Economic Link?”

The two authors find that the diaspora’s involvement in Armenia’s economy has been, for the most part, in the nature of humanitarian aid. There are some important, recent exceptions, such as the investments of the Lincy Foundation (public works, loans to small and medium businesses) and the Cafesjian Family Foundation (museum complex, mass media).

The diaspora must move from humanitarian support for Armenia and Gharabagh to various forms of investment, the authors argue. Without such investment, Armenia’s economy is highly unlikely ever to grow fast enough for the country to prosper.

They explore various modes of investment. First they look at the possible immigration of diaspora Armenians to Armenia—the investment of human capital. They consider the impact of repatriation on the economies of countries that have experience with it, and find the evidence encouraging. The authors note that immigrants need not necessarily finance their own immigration. International aid could be solicited for this purpose. They point out that the Norwegian Refugee Council recently providing funding to Armenian immigrants residing in Turkmenistan to return to Armenia.

Beyond immigration, the authors look at research on whether diaspora Armenians want to do business in Armenia. They identify hurdles that need to be overcome. They propose indirect investment vehicles, such as a mutual-fund-type investment pool. Such funds, managed hands-on by diasporan professionals in Armenia, would allow investors to invest in businesses in Armenia without having personally to supervise them.

For smaller, more risk-averse investors, the authors propose the eventual establishment of a development bank covered by credible deposit insurance. Finally, they consider a diaspora bonds program, akin to Israel Bonds, which they discuss in detail in one of six boxes accompanying their article. They note that bonds, unlike the other vehicles they discuss, invest in the public rather than the private sector.

Gevorkyan and Grigorian discuss the risks as well as the potential social impact of the proposals they consider. Their article serves as an excellent starting point for an in-depth discussion of the future of the Armenian diaspora’s economic involvement in Armenia.

Where Can It Be Found?

Our visitor in Yerevan would no doubt put her copy of Armenian Forum away, saving for another day Stefan Kristensen’s essay on Egoyan’s Ararat, an essay by novelist Nancy Kricorian about the life of a writer, and some reviews.

Since she’s not quite done with her copy, you might want to order your own. The issue, vol. 3, no. 2, can be obtained by calling toll-free 1-888-927-6369, E-mailing forum@gomidas.org or writing Armenian Forum, PO Box 208, Princeton NJ 08542-0208.

The single-copy price is $12 plus shipping. For substantial savings, readers can subscribe to volume 3 (which includes the current issue). The rate is $34 for four issues. Students pay only $24.

—V.L.