Why and How will global economic crisis effect Armenia's economy? 2009 Yerevan Vahram Ghushchyan, Ph.D School of Corporate Governance

Global Economic Crisis Real estate market collapse in the US ( ), Sharp increase in oil, gold, wheat and other commodities prices, Financial crisis in the US, Western Europe and Asia: Scarcity of financial resources, Large scale loses, Loss of customer confidence, Layoffs Fall of aggregate demand, Sharp decline in oil prices (Fall, 2008), Slow down of Russian Economy (Fall, 2008), Decrease in private transfers from Russia to Armenia (October 2008).

Individual, non-commercial transfers from RF in 2008

The role of individual, non-commercial transfers from RF 12% of GDP 15% of private consumption More than 40% of private investments

Real GDP Aggregate Demand (AD) and Aggregate Supply (AS) P AD 2 AD 1 AS GDP 1 GDP 2

GDP Structure Y = C + G + I + EX - IM C – Private Consumption, G – Government Expenditures, I – Private Investments, EX – Export IM – Import

Estimating the AD

The impact of transfers from RF Increase of transfers from RF by $1 mln. in time t increase GDP by mln. drams in time t and an additional mln. drams in time t+1. Increase of transfers from RF by 1 dram in time t increase GDP by 2.95 drams in time t and an additional 8.24 drams in time t+1.

Limitations Partial equilibrium, Labor Market, Data limitations (53 obs. only), From an average 30% growth trend to 30% decrease 60% deviation from previous trend, Stationarity.

Simulations Years GDP Private Consumption Private Investments Gov. Expenditures Export Import % decrease 20% decrease 30% decrease

So, How to Fight the Crisis Simulate aggregate supply? It is a long time solutions: Simulate aggregate demand? Yes and sooner better: But How? Economic theory suggests the use of following tools: a) decrease taxes, b) increase government spending, c) use both tools together.

So, How to Fight the Crisis What is the most efficient for Armenia? Increase government expenditures: What are the risks? Inefficient use of resources, Financing import: How to decrease risks and increase efficiency? Implement situation specific projects Can YOU be more specific please?

Projects 1) Finance the private construction outside Yerevan. This will result in: Increase demand for domestic products, Decrease unemployment, Strengthening the tax collections in construction sector, Decrease regional disparity, 2) Expand Armenias competitiveness infrastructure: North-South highway and railway, 3) Concessional financing of SMEs ready to invest in R&D in construction sector. Financing of construction should be channeled trough mortgage fund. Its assets can latter be securitized, which will help to payoff the external borrowings.