Postcommunist Economic Reform

Postcommunist Economic Reform

When Mikhail S. Gorbachev began advocating economic reform in the late 1980s, Armenians introduced elements of the free market and privatization into their economic system. Cooperatives were set up in the service sector, particularly in restaurants-- although substantial resistance came from the CPA and other groups that had enjoyed privileged positions in the old economy. In the late 1980s, much of the Armenian economy already was operating either semi-officially or illegally, with widespread corruption and bribery. The so-called mafia, made up of interconnected groups of powerful officials and their relatives and friends, sabotaged the efforts of reformers to create a lawful market system. When the December 1988 earthquake brought millions of dollars of foreign aid to the devastated regions of Armenia, much of the money went to corrupt and criminal elements.

Beginning in 1991, the democratically elected government pushed vigorously for privatization and market relations, although its efforts were frustrated by the old ways of doing business in Armenia, the Azerbaijani blockade, and the costs of the war in Nagorno-Karabakh. In 1992 the Law on the Program of Privatization and Destatization of Incompletely Constructed Facilities established a state privatization committee, with members from all political parties. In mid-1993 the committee announced a two-year privatization program, whose first stage would be privatization of 30 percent of state enterprises, mostly services and light industries. The remaining 70 percent, including many bankrupt, nonfunctional enterprises, were to be privatized in a later stage with a minimum of government restriction, to encourage private initiative. For all enterprises, the workers would receive 20 percent of their firm's property free of charge; 30 percent would be distributed to all citizens by means of vouchers; the remaining 50 percent was to be distributed by the government, with preference given to members of the labor organization. A major problem of this system, however, is the lack of supporting legislation covering foreign investment protection, bankruptcy, monopoly policy, and consumer protection.

In the first postcommunist years, efforts to interest foreign investors in joint enterprises were only moderately successful because of the blockade and the energy shortage. Only in late 1993 was a department of foreign investments established in the Ministry of Economics, to spread information about Armenian investment opportunities and improve the legal infrastructure for investment activity. A specific goal of this agency is creating a market for scientific and technical intellectual property.

A few Armenians living abroad made large-scale investments. Besides a toy factory and construction projects, diaspora Armenians built a cold storage plant (which in its first years had little produce to store) and established the American University of Armenia in Erevan to teach the techniques necessary to run a market economy.

Armenia was admitted to the International Monetary Fund in May 1992 and to the World Bank in September. A year later, the government complained that those organizations were holding back financial assistance and announced its intention to move toward fuller price liberalization and the removal of all tariffs, quotas, and restrictions on foreign trade. Although privatization had slowed because of the catastrophic collapse of the economy, Prime Minister Hrant Bagratian informed United States officials in the fall of 1993 that plans had been made to embark on a renewed privatization program by the end of the year.

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