Model of a Knowledge-Based Economy for Armenia Hayk L. Sargsyan, Yerevan State University Kristine A. Antonyan, Yerevan State University AIPRG Annual Conference “Looking Forward: Global Competitiveness of the Armenian Economy”, May 17-18, 2008, Washington, DC.

purpose То have a sustained long-run economic growth adopting flexible economic policies in the new postindustrial society. outline I. Discuss long-run economic growth models with the productivity as the central factor, outline the knowledge as the main engine of productivity growth in a knowledge-based economy. II. Discuss Armenian economic growth in the transitional period within qualitative indicators and TFP growth trend. III. Decomposition of estimated TFP with Knowlede Economy pillars, revealing the strenghts and weaknesses the country has and emphasize the needed directions for policy towards a knowledge-based economic model.

Long-run growth models theoretical considerations neoclassical growth theory: using exogenous production functions revealed that the “Black box” residual is explained with capital accumulation and hence technological progress, resulting to a long-run sustained economic growth endogenous growth theory:explained the driving growth of productivity or the unexplained residual through the concept of the human capital R&D growth models: considered the driving development through adoption of innovations by means of trade among countries: qualitative transformations and structural change

Conclusion: KE pillars PRODUCTIVITY GROWTH OUTPUT GROWTH Physical capital accumulation Technologies Industrial society & Industrial Economy Innovations Postindustrial society & KE Human capital accumulation Human capital Knowledge ICT infrastructure Education Institutions

Armenian economic growth is accompanied with The substitution of goods production and agriculture by services production appropriates the global trends. Still, international comparisons indicate, that the country appropriates to low income countries. 2. The growth in non-agricultural sector is characterized by labor productivity growth (output per worker). Yet, it is mainly expounded with the permanent decrease of employment rate during the whole transformation. 3. The poverty rate is high in the country (although, it has reduced from almost half of the population to 26,5%) 4. The country is defined by unequal regional developments, mainly concentrated in the capital. 5. Continuous migration especially among younger population still exists in the country.

6. (1) Picture 1. The TFP growth rate of RA in the period of 1992-2006 Armenian economicic gowth is described with: Crisis (1991-1994) Stability (1994-2000) Improvement (2000-2006)

Table 2. The TFP decomposition through the KE pillars. KEI of Armenia and Estonia Variable Armenia Estonia (most recent) 1995 1 pillar: Economic Incentive and Institutional Regime (average) 5.26 3.52 8.60 8.75 2 pillar: Innovation (average) 4.81 4.63 8.12 7.07 3 pillar:Education (average) 3.40 2.61 8.22 7.37 4 pillar: ICT (average) 2.44 3.71 9.24 9.17 Knowledge Economy Index (average) 4.64 3.84 7.73 Source: World Bank, KAM, URL//www.worldbank.org/kam

Conclusion -In early transformational period, the crisis destroyed the Armenian economy so much, that the TFP present growth rates, calculated on low basic figures, do not assure a competitive level of knowledge-based economy -The growth is insufficient for being sustained

Education- the pillar of knowledge-based economy A. Picture 2. Enrollment in education institutions by age Source: NSS, Education Transitions in Armenia, UNDP, 2006. Higher education is rapidly becoming inaccessible for the greater part of the population.

B. The quality of Education - the combination of the three components - education inputs, educational process and outputs. INPUTS PROCESS OUTPUTS The level and quantity of school (middle-school, high school, after-school) graduates entering labor market Financing Basic education process Internet at schools Quality of teachers The level and quantity of school (middle-school, high school, after-school) graduates continuing studying Tertiary education process Selection of lecturers, students

Conclusion: Picture 3. . Employment by education degree The economic growth in Armenia is described with worsening quality of the human capital (the portion of human capital decreases in TFP)

Innovation- the pillar of knowledge-based economy The main issues through several substantial indicators: Public National producers and business environment Expenditures on R&D External financing Researchers holding scientific degree, average age of researchers holding scientific degree, average age of scientific equipment Expenditures on Innovations Innovative enterprises in industry Innovative output in industry The number of granted patents Science-HEI-private institutions cooperation

Conclusion: estimating policy Implications towards an Innovative economy EXTERNAL SHARE Towards KE STATE NGOs International organizations Estimating priorities 1. Venture funds, 2. techno parks ECONOMY SCIENCE INNOVATION EDUCATION

ICT- the pillar of knowledge-based economy The main issues through several substantial indicators: Provision of the population with home telephone sets, mobile phones, successful calls The number of Internet users, Internet access The number of ISP, Internet prices Phones, Computers, Internet accesses from workstation E-commerce Online government resources E-governance

Conclusion: estimating policy Implications towards a E-society ICT infrastructure social economic public Information society

CONCLUSION Decomposition of TFP growth estimates, that: The country has a comparative advantage in the factor of human capital, which though is worsening The country has improved its competitiveness through adopting new technologies, increasing the knowledge-based potential of its productions and services ICT, as an infrastructure becoming the most important pillar for a KE, is still on a low level in the country, thus preventing economic competitiveness, productivity growth, transformation to a KE and hence long-run sustained economic growth

Long-run policy conclusions Encouraging “education, science and innovation” with new strength and quality within a reconstruction of new “education-innovation-economy” model, that will form a base for passing to the third, innovative level of competitiveness, Transforming the “Book Society” to “E-Society”, within rapid development of ICT infrastructure and its assimilation in the social, public and economic aspects of life, such as e- commerce, e-governance, e-learning etc. Coordination the activities of different government institutions and donor initiatives.