Armenia Strengthening Competition

ARMENIA

Strengthening Competition

Prepared by Paul Holden and Vahe Sahakyan for the World Bank

Introduction 

The Armenian economy has registered sustained, rapid growth over the past decade, especially in the last few years. In 2003, GDP increased by 14 per cent in real terms, after having increased by 12.9 per cent in 2002. Economic growth continued at 10.1 percent in 2004 with agriculture, construction and services leading the growth. This growth performance is one of best in the world. The government has committed to economic reform and the economy is gradually being transformed. It has made private sector development the main pillar of its growth strategy and has been working to improve the business environment through a reduction in regulations, improving the bankruptcy law, improving customs administration, strengthening the banking system and reducing the capacity of officials to hamper businesses. In this process, it has received substantial support from donors. Nevertheless, per capita GDP remains low. Although extreme poverty and poverty has fallen strongly over the recent past, there are still large numbers of poor in Armenia, especially in the rural areas and urban centers outside the capital, Yerevan. Unemployment statistics still show large number of unemployed, although the informal sector, which currently is about half as large as official GDP, , probably has absorbed a substantial number of those who are recorded as being out of work.

Although the growth performance of the economy has been strong, the government is anxious to ensure that it is sustainable. In this regard, there is concern that the lack of competition within Armenia could threaten the long term sustainability of growth and that it has been a contributing factor to the apparent failure of the recent economic expansion to benefit a larger proportion of the population.

The aim of this paper is to come to a preliminary judgment on the importance of this issue for the development of the Armenian economy. The paper examines the scope for anticompetitive behavior, which sectors are the most affected, what relevant work has been done on these issues, what policy options are available to deal with the problems and what additional work is needed. The paper touches on the political economy issues related to areas of the economy where competition is lacking and suggest policy options for the government.

The paper is organized as follows. We look at three main areas where competition issues are important in Armenia. In the first section, we discuss briefly those sectors that are traditionally regulated; where there are natural monopolies or where competition is inherently limited, such as utilities, telecommunications and transportation. Then, in the second section, we look at sectors of the economy that in Armenia are generally viewed as being controlled by a small number of incumbents who either singly or in cartels dominate distribution of particular products. These include gasoline, wheat, cut flowers and sugar. In this section we also discuss some of the methods that appear to be used to maintain market dominance and make some suggestions for dealing with it. In the third section, the paper looks at barriers to entry into economic activities more generally – the higher the entry barriers, the less likely is growth to trickle down to the population more generally and the greater the long run constraint on growth. The final section of the paper provides some conclusions and policy implications.