How to annually lose 750 million USD

As we informed a few days ago a few days ago the report of Policy Forum of Armenia was publicized titled Corruption in Armenia.

The report’s main finding is that corruption’s negative impact on Armenia’s economy is substantial. One of the chapters of the report relates to the impact of corruption at the macroeconomic level. It talks of the harms to economy because of corruption. The experts of PFA presented through calculations and concrete numbers. The authors of the report start with the allegation that what was called the soviet silicon valley back in the day is not focused in the hands of oligarchs and is strongly linked with the political elite. On the policy side, the report makes a compelling case that the design and implementation of public policy in Armenia often serve the interest of the entrenched corrupt elite and not the country or its citizens.

The team employed both quantitative techniques and case studies to help effectively gauge the extent of corruption and bribery taking place in various segments of the economy and public life in Armenia, from the judiciary and military to money laundering and petty crime. The most striking finding was that corruption in Armenia is highly concentrated and puts in place insurmountable barriers for economic development and progress in the country. “The public policy with its fiscal, monetary, social and structural components works only for one final goal to even more enrich the political elite of Armenia. This first of all harms vulnerable groups – the poor, elderly, disabled as well as the country’s national security and military preparedness. As a result of all this the inequality of wealth and revenues in Armenia has grown and the number of the poor drastically grew. Migration reached catastrophic rate. Several buses transport people abroad from this small country. At the moment, the feedback mechanism between power and people is broken in Armenia.

This makes the country’s ruling regime immune to any pressures from the electorate to perform better and fundamentally changes the incentives of individuals at the top of the ruling pyramid,” reads the report. Going forward, the report offers a strategy of reducing corruption in Armenia, which is built on a principle of boosting individuals’ opportunities and freedoms otherwise restricted by corruption. In addition, the report provides detailed recommendations on how to fight corruption and mismanagement in sectors with highest corruption risks. It notes that assistance from the international community and the Diaspora are required for the people of Armenia to improve governance while forcing the entrenched corrupt elite to either reform or leave. Internally, credible actions would be required to prosecute senior level abuses; reform the judicial system; and institute a mechanism for re-claiming stolen assets.

Tax collection

The government does not properly tax large businesses under their patronage, i.e. oligarchs and high ranking officials that own large businesses, and instead of that intimidates on other businesses by imposing more taxes and expecting bribe. Such policy hampers the growth of independent businesses by making them non-viable, as a result of which large businesses with patronage grow even larger and centralize sources of income. As a result of such policy a small group is becoming richer, which weakens competition, limits incentives for innovation and economic development prospects.

The PFA report authors bring interesting facts to illustrate how the tax collection policy is implemented. According to research by IMF and World Bank, the potential relation of GDP and taxes in Armenia is 21%, without social payments. This indicator 2009-2011 was 16.1-16.7% (only Tajikistan among CIS countries has a lower indicator). Based on this research and information, the authors of the research conclude that Armenia failed to collect 4.3-4.9% tax of its annual GDP.

This means that in 2011 only the Armenian budget received less income by 450 million dollars than it could. The IMF research says this failure to collect taxes is a result of non-sufficient collection of income tax. According to the authors of the research, this area is under the direct control of oligarchs, which is why this portion of tax was not collected.

Budget spending

According to the report, the Armenian government provides little money for education, social protection and investing in infrastructure. This is proven by the World Bank’s research as well: “Public spending on health as a percentage of GDP is one-half of that in CIS and one-fifth of that in Europe and has fallen consistently below official projections. While life expectancy in Armenia in 1970 was about two years behind Western Europe and ten years ahead of East Asia, it is now about eight years behind Europe and on par with Asia. Low public spending on health and the resulting high out-of-pocket health care payments cause households to fall below the poverty line.”

The report writes that only 30% of Armenia’s roads are in good condition, and the reason is that the constituencies that are the main stakeholders of that infrastructure have little political influence. In other words, the government does not have to spend money on these voters as this way their “political price is cheaper.”

Budget spending is limited with tax collection and borrowing potential, and high level of corruption and shortcomings in the state purchase system affect the spending too.

For these shortcomings and malfeasance the country pays with economic and social failures. The economic price is inefficiency and misspending of resources. The social price is the greater influence of politically entrenched business networks and a small group of the society. Greater influence of such networks weakens rule of law, as a result of which alienation from the government grows and the efficiency of public service suffers.

According to the authors of the research, budget losses in spending exceed the 7% of GDP. For example, in 201 the budget loss was approximately 750 million dollars. This is huge money that could be spent on education, healthcare and other sectors.

The research also suggests that corruption and inefficient governance affect economic growth. According to the report, as a result of corruption the economic growth rate is reduced by 2%.

Armenia’s GDP could be 16.4 billion instead of 10.5 if we could fight corruption and eliminate shortcomings in the state administration system.

By Babken Tunyan