Armenian International Magazine (AIM) August 1998

VIEW: Selling Off the Big Ones

[Editorial by Hratch Tchilingirian]

Privatization, de-nationalization, investments, free-market are among the most complex and misunderstood terms in virtually all the newly independent states. Like chemotherapy which introduces drastic and painful changes in the body even while trying to save it, the introduction of free-market economics brought major pain (together with some good and the promise of more). All of this came with many unexpected and often undesired side effects.

Despite the many "life and death" challenges which compounded Armenia's already troubled economic transition-earthquake, blockade and war-Armenia was among the first countries in the former Soviet republics to start the process of privatization, the first step to a free market economy. By 1992, it had successfully completed land privatization, turning over 840,000 acres of agricultural land to the farmers. Armenian and foreign experts have since said that was what saved Armenia from famine in the difficult energy-starved war years which followed.

In 1992, Armenia's law on privatization and de-nationalization of state-owned enterprises encouraged the involvement of the entire population of Armenia in the process. The government issued and distributed 3.2 million vouchers to the population, one voucher per person, with a face value of $20 (in 1992) for the first phase of privatization which lasted until 1995.

However, things did not go as planned. Coming out of a state-controlled economy was not easy. Economic stagnation and low living standards forced 90 percent of the population to sell their vouchers. The government's calculations and estimates were substantially off target. For example, in 1996, cash payments for privatization represented only one percent of the total investment. The receipts for the state budget from privatization were 221 million Dram (US $534,000) instead of the planned 3.5 billion Dram (US $8.4 million).

Despite these shortcomings, Armenia has almost completely privatized land and small enterprises. By April 1998, 1,381 enterprises and 6,278 small businesses (out of 7,000) had been privatized. State property has been purchased for a total of 99.5bn Dram, with more than 61bn Dram worth paid with privatization vouchers and 38.3bn Dram in cash. Today only about 87,000 vouchers remain in circulation.

So, when at the beginning of this year, four of the 16 medium and large enterprises earmarked by the government for privatization in 1998 at international tender were on their way to being transferred, the population began to look at the whole process with more than a bit of skepticism and lots of emotion. ArmenTel was sold to the Greeks, the Cognac Factory to the French. Armenia Hotel and Mars enterprise appear to be heading towards takeovers by Diaspora Armenians (see page 34).

The de-nationalization of these major enterprises-however emotional they may be, for example the selling of the Armenian brandy factory caused controversy and debate especially among political opportunists-is necessary if Armenia's economy is to compete on the global market. Without major investments, privatization will be a failure. Buying a factory is one thing, turning it into a functioning and profitable workplace is another.

Investors look for several important things in a country: political security, a free trade environment and incentives, some commitments and guarantees by the government; and finally, a sense that at the end of the day they are making money. The aggressive engagement of the Armenian government in investment projects is hopeful. However, everyone, still talks (on and off the record) about the lack of a sufficiently "business friendly" environment, the lack of a logical tax policy, and most importantly, the unrealistic expectations of a cash-strapped government.

There is clearly a long way to go. Yet, the current pace and energy are hopeful signs for Armenia.