Economic Challenges Faced by the New Armenian State

Abstract

The process of political and economic transition of Armenia toward independence has similarities with other republics of former Soviet Union. Contextual specificities, on other hand, are less known, because they are largely determined by an individual republic's transition toward civil society and a market-based economy.In case of Armenia, this contextual specifity is Nagorno-Karabakh, which was, as of March 1988, at center of a political movement initiated by a group of intellectuals meeting within Karabakh Committee. In context of perestroika and glasnost, these intellectuals supported efforts of their Karabakh compatriots to correct injustice committed by Stalin in 1922 that consigned Armenian area of Nagorno-Karabakh to Azerbaijan.This ended on September 21, 1991, with proclamation of Armenia's independence based on a general referendum. The new leaders were not members of old nomenklatura, and they quickly appeared to be proponents of democracy and a market-based economy. Independence, and hope it inspired, made people optimistic that a new class of leaders would arise from groups of intellectuals and former dissidents. The euphoria that gripped Armenia was reminiscent of what was happening in Central Europe, Poland, Czechoslovakia, and Lithuania.Harsh economic realities that threatened sovereignty of young republic quickly constrained political independence. The country had to contend with problem of how to make itself economically viable. The still-significant consequences of earthquake in December 1988 and economic blockade by Azerbaijan and Turkey exacerbated economic difficulties. This new political reality, which also applied to other republics in region, shed a new light on geopolitical, economic, and strategic realities. It was under these conditions that Armenia began its difficult transition to a market-based economy.Armenia's MetamorphosisDuring Soviet period, Armenia acquired enviable reputation of being a successful, industrial republic with a diversified economy that specialized in technological research, especially research related to military-industrial complex. In 1980s, number of graduates from higher learning institutions was one of highest in Soviet Union. Despite being deprived of natural resources, save for important copper, bauxite, molybdenum, and some gold deposits, country succeeded in becoming a manufacturing and technological center. The manufacturing material arrived from outside Armenia and products were then shipped to central planning bodies in charge of distribution. Given significant contribution of industry to net material product,! and an economy highly integrated into Soviet system of production distribution, economic interdependence became excessive. This helps explain domino effect that took place after collapse of Soviet Union.Industrial development in Armenia dates back to second half of nineteenth century, with construction of three Transcaucasian railways: BakuTbilisi (1883), Tbilisi-Aleksandrapol (Leninakan during Soviet period, currently named Gyumri, 1902), and Aleksandrapol-Yerevan (1902). The tsar was interested in exploiting three principal resources in region: oil in Baku, manganese in Tchiatourinski (Georgia), and copper in Zangezur (Armenia). Because of Russian Empire's financial situation, foreign capital was needed to exploit these resources. The French took over copper mines. French and Russian companies controlled production of wine and cognac.The first phase of Armenia's development took place from 1920 to 1940, with nationalization of companies and resources under Soviet regime, the electrification of Russias, and development of infrastructures, primarily transportation and, finally, heavy industry. After World War II, from 1946 to 1960, machine-tool industry was introduced; it developed three times faster than other industrial branches. …