Armenia and the Prospects for Regional Economic Cooperation

Statement of Vrej Jijiyan,
Armenian Center for National and International Studies
at a regional conference
under the auspices of Mr. Johannes Linn,
Vice President of the World Bank,
July 19, 2001,
Yerevan, Armenia

Honorable guests, ladies and gentlemen,

With the dissolution of the Soviet Union, the concepts of inward-looking and import substitution economic development diminished. New ideas of economic development based on economic liberalization and regional integration have became dominant in their stead.

Currently every country willing to integrate into world economy faces a challenge of internal structural reforms. Meanwhile, the relevant reform harmonization with the new situational integration processes on the regional level has become a policy imperative.

Armenia also is part of the above-mentioned processes. There are defined approaches on structural reforms, but Armenia's perspectives on regional cooperation are still under discussion.

Given its small territory and limited market, Armenia has adopted an open economy development model, which means that much importance is attached to foreign economic relations. Therefore, it is necessary to develop the modus operandi for these relations.

We should view Armenia's regional economic cooperation primarily within the context of the South Caucasus regional economic cooperation. Its necessity is determined by two main factors. First, the geographical proximity among the countries of the South Caucasus creates favorable conditions for natural economic relations. Second, these countries find themselves at a similar stage of economic development. Hence, they have approximately the same level of GNP per capita. That is, every consumer in one country can afford the goods produced in the two other countries.

One can accordingly suppose that a gradual liberalization of trade among the South Caucasus countries can cause growth of incomes, attract investments, as well as create a certain division of labor in the region.

Further development of these processes may lead to the establishment of a customs union among this region's countries, enabling them to enhance the competitiveness and productivity of commodities produced in the region.

However, given the low level of GNP in the region's countries an increase in incomes might be limited and labor division would relate mainly to agricultural and consumer goods. In addition, political discord and instability in the region may delay the complete implementation of the derived regional cooperation. Therefore, to ensure the development of the region and Armenia's economy, we need to define their role and place within the neighboring regions.

The issue of the region's integration into the European mainland is often deliberated at various fora, amongst them within the framework of cooperation with the European Union and the Black Sea Economic Cooperation Organization (hereinafter BSEC Organization).

To clarify these integration prospects, we should consider the logic of the frameworks. The directions of European Union development depend on the following two approaches: first, the deepening of economic processes within the current EU member-states and second, EU enlargement, on the one hand to the Central and Eastern European countries, called the "the eastern enlargement," and on the other to the EU non-member Mediterranean countries, called "the southern enlargement."

For Armenia, as well as for Georgia and Azerbaijan, economic relations with the EU are mainly implemented within the context of bilateral Partnership and Cooperation Agreements which differ from similar agreements with EU non-member Mediterranean countries, in that in the former case more emphasis is put on structural adjustment and less on trade liberalization issues.

For the South Caucasus countries, including for Armenia, with the BSEC Organization is the core link for economic contacts with Europe. As it is known, the organization had a number of achievements such as institutional development, projects implemented in the fields of energy, transportation and communication, the launching of the Black Sea Economic Development Bank, and the 1997 commitment by members to establish a free trade zone.

In view of the political and economic disintegration factors within the BSEC Organization, the latter currently serves as a discussion forum for its member countries. BSEC's mission can be best realized if it manages to serve as a link among the Black, Mediterranean, and Caspian Seas. This factor would enable the South Caucasus and Armenia to take part in the production network and intra and inter-sectoral trade emerging in Europe and the Mediterranean. To implement the afore-mentioned, certain amendments to the Partnership and Cooperation Agreement are needed.

For Armenia, the formation of this process enables development of the production of mainly capital goods, chemicals, and to some extent textiles, in addition to the currently popular precious and semi-precious stones. The IT sector can be considered as well, but it is better viewed in a broader supra-regional context.

Economic collaboration among CIS countries could be realistic, provided appropriate emphasis is made on the CIS countries' place and role in the new world economy. Mainly it is Russia's economic development process that determines the above-mentioned course, enabling operability of some of the Soviet-era production networks still potentially effective nowadays. One such example is the re-operation of the Armenian Aluminum factory as a Russian-Armenian joint venture company.

Against this background, we may refer to other directions of cooperation within which the South Caucasus can serve as a link between CIS countries, and particularly Russia, on the one hand, and the Mediterranean and Persian Gulf areas, on the other. These, of course, all need to be examined in detail.

Naturally, discussions of regional economic cooperation issue is incomplete if we do not take Turkey into consideration. For Armenia, an advantage of normalization of Turkish-Armenian relations would embrace the following pattern: Armenia could gain the shortest route to the Mediterranean area and, to some extent, could be enabled to participate in the economic processes taking place in the Middle East, mainly in the fields of infrastructure, tourism, and trade. In the case of electricity export from Armenia to the eastern areas of Turkey, as an additional benefit, at least theoretically, Armenia would create links with Middle Eastern and European electricity networks.

Between the parties there also abides the possibility to cooperate in projects related to building materials and tourism and, to a lesser extent, in agriculture and light industry. Joint programs can be entertained within the framework of close border-region contacts or, along a wider range, via Turkish-South Eastern Anatolian development GAP projects which could be mutually beneficial for both parties.

Armenia, however, should pay close attention to Turkish economic development dynamics and the latter's ability to produce highly competitive consumer and capital goods.

As for its relations with Iran, Armenia attaches importance to the transportation and industrial projects with this country that could operate on the routes amid the Persian Gulf-Southern Caucasus-Black Sea regions and, to a lesser extent, the Black Sea-Southern Caucasus-Iran-Iraq-eastern Mediterranean ports.

It should be mentioned that Armenian consumer goods from Iran are mixed blessing-on the one hand, Armenian low-income consumers use cheap Iranian commodities, but on the other hand these commodities impede the development of similar substitutes. The same can also be said about the import of consumer goods from Turkey. Armenia's exports to Iran are also impeded by the latter's protectionist policy, with certain positive exceptions. Energy sector between Iran and Armenia could be prospective. Nevertheless, for the Armenian vantage point, it is necessary to reconsider the unequal norms in the economic relations between these two countries, in the light of their constructive political relations.

Moreover, Armenia can develop effective relations with countries of the Middle East. This cooperation will be more effective upon elimination of transport impediments to reach that region. By exporting to the Middle East, Armenia can foster the productivity of certain goods and services, such as IT, chemicals, and capital goods.

In this regard, to make the cooperation more efficient, we need to follow the economic processes taking place in this region within the framework of the Middle East and North Africa economic conferences, the Euro-Mediterranean partnership, progressive trade liberalization among Arab countries, and the development of Persian Gulf non-oil sectors.

To sum up, there are a number of opportunities for regional cooperation for the South Caucasus countries, and Armenia in particular, which are more mutually complementary than mutually exclusive. The diversity of alternatives and the elements of integration among them are necessary precondition for sustainable development of the South Caucasus and each of its constituents.

Finally, I would like to mention that this outline is a first draft conducted from a functional point of view, the details of which are not yet fully explored and which needs the test of theoretical and methodological models of regional and spatial economies.

Vrej Jijiyan
Analyst, Economic Policy
Armenian Center for National and International Studies