Integrative Project in Modern Production Methods (IE285e)

05 September, 2005 Integrative Project in Modern Production Methods, IE285e

1

Integrative Project in Modern Production Methods (IE285e)

Lecture #2

05 September, 2005


2

Topic:

• An overview of Armenian Industry and Economy.


3

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


4

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


5

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.).


6

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.


7

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?


8

Natural ResourcesMines

a) metallic;

b) non-metallic

Forests

Water Resources

Energy related: Fossil Fuel

Other, Renewables: Solar, Wind, Geothermal


9

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


10

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


11

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.


12

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.


13

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!


14

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.


15

Forests

• Oak• Beech• Hornbeam• Ash• Maple• Many wild fruit trees

• Î³ÕÝÇ• Ð³×³ñ»ÝÇ• ´áËÇ• Ð³ó»ÝÇ• ÂËÏÇ • ´³½Ù³ÃÇí í³ÛñÇ

Ùñ·³ïáõ Í³é»ñ


16

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.


17

ENERGY

• Extremely scarce: more or less considerable are low quality gray coal mines located in between Gumri and Spitak

Fossil Fuel


18

Armenian economic history highlights: Status at 1913

Percentage of Population involved

Percentage of GNP

Agriculture 85% 60%

Industry 3% 20%


19

Status at 1913. Largest cities:

• Alexandrapol: 51.3 thousand,

• Erivan: 30 thousand inhabitants.


20

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


21

Armenian economic history highlights: Status in 1988, energy

Type MW

Hydro 1017

Fossil 1760

Nuclear 815

Total 3592


22

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


23

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


24

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


25

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…


26

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


27

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


28

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.


29

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.


30

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.


31


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).


32


• Avoidable costs:Mistakes in management of reforms:Delays;Too rapid;Inconsistencies.


33

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.


34

Modified TOT approach, Income Loss

• Armenia – 11.1%• Moldova – 31.9%• Georgia – 17.3%• Estonia – 12.7%• Comparing when

with when? Not well described


35

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


36

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.


37


d) New cost factors, such as increased transportation costs.

e) Excessive size of many enterprises that cannot be profitable at low rate of production.


38


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.


39

GDP dynamics


40

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.


41

Vulnerability index

• of Armenian Economy:in 1988: 1.71in 1990: 2.00

• <1.8 – good

• >1.8 – bad

• Lav chi dzevakerpats


42

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%!


43

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


44

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%).


45

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


46

In 1996 GDP = $1599M!

Documents

Integrative Project in Modern Production Methods (IE285e)