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Integrative Project in Modern Production Methods (IE285e). Lecture #2 05 September, 2005. Topic:. An overview of Armenian Industry and Economy. Where are we?. One has to understand the current position to find out the right direction to move… How to describe our position: - PowerPoint PPT Presentation
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05 September, 2005 Integrative Project in Modern Production Methods, IE285e
1
Integrative Project in Modern Production Methods (IE285e)
Lecture #2
05 September, 2005
05 September, 2005 Integrative Project in Modern Production Methods, IE285e
2
Topic:
• An overview of Armenian Industry and Economy.
05 September, 2005 Integrative Project in Modern Production Methods, IE285e
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Where are we?
• One has to understand the current position to find out the right direction to move…
• How to describe our position:
A. Geographic location
B. Natural resources
C. Economic relations
05 September, 2005 Integrative Project in Modern Production Methods, IE285e
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Geographic location
• 29000 square KM total, and Artsakh
• Being a landlocked, isolated country, the most reliable transportation is through air
• Unfriendly countries from East and West, friends in North and South
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The cost of blockade
• While the cost of blockade is considerable it is not a major development constraint for Armenia.
• The estimate of the blockade is that it hurts Armenia less directly (transportation costs, lost volumes of exports)
• than indirectly (depressed investor’s expectations, inflated internal perceptions of risk, etc.).
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Economic regime• Economic regime between
1924 - 1991was based on PLANNED ECONOMY, where the goal was the PLAN, which was decided not by the enterprise.
• During the last decade Armenia moved to MARKET ECONOMY, where the goal is the MONEY (should be replaced by “net utility to the society”) through honest competition for a MARKET SHARE.
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How well are we prepared?
• How well are we prepared for the relatively new economic relations? How well do we know the markets?
• The main problem is in the upbringing and societal mentality.
• Is there business ethics norms well implanted?• Do we respect wealthy businesspeople, and vice
versa?
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Natural ResourcesMines
a) metallic;
b) non-metallic
Forests
Water Resources
Energy related: Fossil Fuel
Other, Renewables: Solar, Wind, Geothermal
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Mines, metallicMaterial Location Remarks
A Copper, Molybdenum Qadjaran The most tangible resources
B Copper, Gold Alaverdi The most tangible resources
C Gold, Tungsten, Tellur Kapan The most tangible resources
D Gold, Silver (1:2 – 1:20) Zod The most tangible resources
E Iron, Titanium, Vanadium
Abovian, Hrazdan 2 billon tons, but difficult to extract
F Chromium, Manganese, Mercury, Arsenicum, …
Shorja, Sarigyugh, Amasya, …
Small quantities
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Mines, non-metallic: Stones!Material Material LocationLocation Remarks Remarks
AA TufaTufa ArtikArtik Large quantitiesLarge quantities
BB Pumice Pumice AnipemzaAnipemza Large quantitiesLarge quantities
CC SaltSalt AvanAvan Large quantitiesLarge quantities
DD PerlitesPerlites AragatsAragats Large quantitiesLarge quantities
EE Clay - thermo Clay - thermo resistantresistant
ToumanianToumanian MediumMedium
FF Dolomites Dolomites IjevanIjevan 15 million tons15 million tons
GG MarbleMarble Khor Virap, BjniKhor Virap, Bjni 1.2 million cubic meters1.2 million cubic meters
HH Bentonite ClaysBentonite Clays SarigyughSarigyugh MediumMedium
I I GraniteGranite PambakPambak 6 million cubic meters6 million cubic meters
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Future value of mineral deposits
• Note that the mineral deposits have future value, that can be expressed according to the following formula:
[Future Value] = [Present Value] x [exp (kt)],
where k is a coefficient, and t is the time.
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Strategy
• For certain mineral deposits this formula may yield an increase of the value up to 10 times per decade (in the currency of a particular year).
• This means that the wisest economic solutions are NOT related with export of raw materials, but in production of the products that are as close, as possible to the final products.
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High technologies• Manufacturing of final products from the mineral
deposits increases the net utility for the society much more than selling raw materials to others.
• This is especially true in the case of high tech implementation.
• Electronics manufacturing comprises 1/3 of all manufacturing in the world!
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Forests
• Armenia has only 12% of its territory in forests
in North-east and South.• During the “dark years”
there has been a dramatic deforestation,
which, to a considerable extent, continues now.
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Forests
• Oak• Beech• Hornbeam• Ash• Maple• Many wild fruit trees
• γÕÝÇ• г׳ñ»ÝÇ• ´áËÇ• гó»ÝÇ• ÂËÏÇ • ´³½Ù³ÃÇí í³ÛñÇ
Ùñ·³ïáõ ͳé»ñ
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Water Resources
• General water resources: scarce, 7.5 times less of average of FSU
• Underground Water:scarce, 4 billion tons annually, 38% goes to usable springs.
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ENERGY
• Extremely scarce: more or less considerable are low quality gray coal mines located in between Gumri and Spitak
Fossil Fuel
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Armenian economic history highlights: Status at 1913
Percentage of Population involved
Percentage of GNP
Agriculture 85% 60%
Industry 3% 20%
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Status at 1913. Largest cities:
• Alexandrapol: 51.3 thousand,
• Erivan: 30 thousand inhabitants.
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Armenian economic history highlights: Production at 1913Agriculture Industry Energy
Cotton Copper 10 Hydropower
Wool Cognac plants,
Rice Wine 3.1 MW total
Vineyards Soap
(grapes) Preserves
Beer
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Armenian economic history highlights: Status in 1988, energy
Type MW
Hydro 1017
Fossil 1760
Nuclear 815
Total 3592
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Armenian economic history highlights: Status in 1985, PRODUCTION
Machinery item Volume, items
AC generators, 0.25 – 100 kW capacity 66,300
AC generators, more than 100 kW capacity 1500
AC motors, 0.25 – 100 kW capacity 98,360
AC motors, more than 100 kW capacity 1300
Mobile power plants 23,300
Power transformers, for millions of kW of power 7.2
Welding equipment 1369
Electric bulbs (fluorescent and incandescent), million 185.9
Copper wire, tons 20,800
Cable, power cable and flexible cable, km 12,700
Pumps 94,000
Compressors 5723
Clocks manufactured 4,763,000
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Main Industry Branches in 1988
• Chemical industry• Machinery (including
electro technical and electronics),
• 5th place in the volumes of manufactured machinery items, among the USSR republics
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Main Industry Branches in 1988
• Electronics• Metal processing• Metallurgy• Woodworking and
paper production• Construction
materials• Glass and porcelain
• Light industry (including shoe industry, the 15% of total national volume of production).
• Food industry• Publishing industry• Chemistry and Drug
manufacturing• Agro industry
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Armenian economic history highlights, 1988
• There were 1744 conveyer belts, and 403 automated conveyer belts in 1985
• Total 2147 operations with conveyer belt layout!
• However there were many typical “soviet – style” problems…
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Armenian economic history highlights, Science and Education, 1988
• The national academy of sciences (NAS) had 34 research institutes and centers, a publishing house, and 32 libraries. There were also around 50 industrial research institutes and centers.
Professional high schools Higher education institutions, universities
65 schools, 48000 students in 156 specialties 13 schools, 59778 students, 156 specialties
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Output of industrial consumer goods per capita, 1990
1546
884
16641598
1740
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Armenia Georgia Kyrgizia Russia USSR
Rubles
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Problems at 1988• Being Isolated from WORLD COMPETITION• Thus, behind in quality, due to:• Most technologies were outdated, by about
15 years!• Management methods were not effective, almost
no incentives.• Obvious strategic mistakes in Macro and
Microeconomics levels.• Mistakes in setting directions for economy.
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Costing out the Big Bang: Impact of external Shocks on the Armenian
Economy at the Outset of Transition
Reference:Lev Freinkman,
Vahram AvanesyanArmenian Journal of Public Policy,
Volume 1, Number 1.
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The Reasons for Economic Decline
1. Unavoidable costs:
a) Terms of Trade (TOT) shock – deterioration of real incomes due to economic liberalization and shifts in domestic prices towards prices in of the world market.
b) External Demand Shock – Market Loss – opening of markets to global competition.
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The Reasons for Economic Decline
c) Fiscal Shock – removal of traditional explicit budget and quasi-budget transfers.
d) Secondary effects of all above shocks – decline of the overall domestic demand due to a), b), c).
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The Reasons for Economic Decline
• Avoidable costs:Mistakes in management of reforms:Delays;Too rapid;Inconsistencies.
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Analytical Framework
• The paper follows the framework suggested by Rodrick (1992),
• It is also modified to include the fiscal shock associated with elimination of fiscal and quasi-fiscal transfers to Armenia from the consolidated budget of FSU,
• however, these transfers were insignificant before the 1988 earthquake.
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Modified TOT approach, Income Loss
• Armenia – 11.1%• Moldova – 31.9%• Georgia – 17.3%• Estonia – 12.7%• Comparing when
with when? Not well described
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Initial conditions
• 400 000 people in the Industrial sector• 25 300 people involved in R&D• 17 000 researchers• Light industry – 37.7%• Machinery – 25.2%• Food – 14.3%• Chemical – 10.0%• External trade – 103% of GDP
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Reasons for Industrial Decline
a) Sharp decline in defense and other demand.
b) Low competitiveness of the Armenian goods esp. in consumer sector after energy and other subsidies withdrawn: markets lost to Turkey and China.
c) Political factors that pushed Russian producers (e.g. in defense) to switch to local producers.
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Reasons for Industrial Decline
d) New cost factors, such as increased transportation costs.
e) Excessive size of many enterprises that cannot be profitable at low rate of production.
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Reasons for Industrial Decline
In short:
“too many of wrong enterprises operated in wrong sectors” –
too many subsidized sectors: low energy and raw material prices and no international competition.
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GDP dynamics
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In 1993• 55% of GDP decline from ~$5B to $2.5B (the
great depression of the USA = - 26%)
• ¾ of the total industrial production affected by negative price shock
• 77% of total exports affected by negative price shock
• In 1987 exports were responsible for the 47% of the GDP.
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Vulnerability index
• of Armenian Economy:in 1988: 1.71in 1990: 2.00
• <1.8 – good
• >1.8 – bad
• Lav chi dzevakerpats
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Balance of Payment (BOP) in 1987• Balance in trade of goods and services –
- 10% of GDP• Inter-budgetary transfers -
~ - 2% of GDP• Difference between Pension Fund transfers - 3.3% of
GDP, investment financing, and taxes of Armenian Enterprises – ~ - 4% of GDP
• Total account deficit was ~ – 16.6% of GDP (-12.7% was already sitting in the budget).
• HOWEVER THE INFLUENCE OF THIS DEFICIT WAS VERY MODEST. REAL TRANSFERS = 6%!
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Trade Balance, viewed from outside,1987
• If one assumes that in 1987 Armenian economy would become overnight integrated to world economy,
• Deterioration from - 1.7% of GDP to- 18.5% of GDP would take place,
• Totalling a loss of 17% of GDP.
• In 1996 the trade balance is - 32.3% of GDP
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Declined Markets
• Overall decline of demand by 3 – 10 times, power and machinery are the most affected!
• About $2B lost in exports – 80% of the export rate in 1987
• Equivalent of 25% of total industrial output,
• Equivalent of loss of $715M of GDP (8%).
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Overall Shock Results, GDP in 1987 has been $5.2B (100%)
Scenario A• Output: $1.7B• GDP: $746M
(14.2%)• Export: $527M• Import: $540M• Tr. Bal.: -$13M
-1.7% of GDP
Scenario C• Output: $3.5B• GDP: $1555M
(29.8%)• Export: $527M• Import: $1030M• Tr. Ba.: -$502M
-32.3% of GDP
Scenario B• Output: $1.9B• GDP: $793M
(15.2%)• Export: $527M• Import: $541M• Tr. Bal.: -$14M
-1.7% of GDP
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In 1996 GDP = $1599M!