Free Market Principles Carve a Way Forward for Armenia

Armenia is a tiny country in a difficult neighborhood. The size of the 41st largest U.S. state with only half its people (Maryland and three million), Armenia is landlocked in the mountainous South Caucuses. Despite natural and geopolitical obstacles outside its control Armenia is carving a path similar to Singapore by putting free-market principles into action

The Tholos Foundation participated in an event hosted by the European Business Association ahead of the annual European Bank for Reconstruction and Development being held this year in the capital Yerevan. The EBA event focused on economic fundamentals crucial to growing high-tech investments.

Traditional growth economists assess economic potential by first looking at physical natural endowments and gravity with nearby economies. This would short-thrift countries like Armenia.  

There is an unsettled conflict on its Eastern border with Azerbaijan and a hostile Türkiye on its Western border means only two borders are open: to its North with Georgia and to its South with Iran. In the ground Armenia is loaded with minerals and farmers grow produce but exporting them to the global market is extremely difficult.

However, free-markets have no such restrictions. As long as people have property rights their property has value, as long as they are free to access global market they can trade skills and property to create value, they can even make and trade intangible assets. This is why the Tholos Foundations publishes the International Property Rights Index (IPRI) and International Trade Barrier Index (TBI), to track these fundamentals of freedom.

Leaders in Armenia seem to have followed this free-market recipe and have attracted huge investments from global high-tech innovation leaders. Not only is Armenia’s IPRI score stronger than its neighbors, it has also improved the most since the Index began in 2007 increasing its score 42 percent overall.

Specifically, to attract investment and venture capital the Intellectual Property Rights Protection component has the strongest relationship, a .82 Pearson correlation with the Venture Capital & Private Equity Attractiveness index, it is similar with other measures of entrepreneurship and innovation capacity. This is because investments in R&D are the riskiest a firm can make.

From discovery research to producing something that can reach consumers takes decades and billions in investment. In that time research could meet a dead-end and cause innovators to go back to the drawing board, it could develop into a product then meet delays or a brick wall with regulators. Finally, once it gets to the market it could be stolen, the brand could be tarnished, and wind up in years of courtroom litigation. For these reasons strong IP rights serve to mitigate such risks, inviting deep and long-term R&D investments.

That is why it is not surprising, considering Armenia’s score for IP protection in the IPRI has increased a whopping 211 percent since records began, it has attracted investments from leading high-tech firms from Nvidia and AMD, to Philip Morris International (which for example has invested more than $30 million to open R&D facilities), to leaders in renewable technologies. Its IP score is also higher than its neighbors and most of the world, it is 48th out of 125. Several of these investments also include scholarships, besides IP protections for a country with only three million people increasing the human capital that can make use of R&D funds is key. They represent a long-term investment in the innovation ecosystem and underline confidence in Armenia’s tech sector by enhancing workforce skills and prospects.

On trade, Armenia also scores positive points. Armenia avoids common obstacles faced by many upper and upper-middle-income countries of high tariffs and heavy restrictions on foreign services.

Armenia’s tariffs are average, a six percent MFN rate compared to the world average at seven percent. Unfortunately, according to the International Trade Barrier Index (TBI), one number in the tariff sections sticks out on the TBI. Only 16 percent of Armenia’s tariff lines are duty-free compared to its neighbor Georgia where 87 percent of lines are duty-free, or the 34 percent average for the region, and 38 percent average for the world.

On services, Armenia is completely open to foreign investment. No sector is off-limits to foreigners or faces special restrictions on funding or requirements to hire nationals. In fact, there is a streamlined single window to register foreign businesses for every sector. There are also very low Non-Tarff Barriers.

On trade Facilitation, the only major indicator that sticks out, related to the neighborhood mentioned earlier, it’s Logistics performance is very poor due to only two open borders. It ranks 74th out of 88 on the TBI in this category. Any slight improvement in logistics infrastructure or offering more complex logistics services- ranging from expanding airport capacity, decreasing customs inspection processing times, to decreasing transportation taxes would greatly increase this score, and wouldn’t depend on calcitrant neighbors to upend their foreign policy regimes.

In addition to these fundamentals, Armenia offers one of the lowest corporate tax rates in the world at 18 percent and for IT and small businesses, this can get to zero percent. As a result, Armenia’s GDP continues to be strong despite inflation and stagnation hitting larger economies and one-sided hostilities with a neighbor. Armenia’s development offers valuable lessons: growth is always achievable as long as the government can ensure property rights and access to markets.