The “other” crisis

While the world is zoomed on Greece and euro’s fate, elsewhere the flips in macroeconomy are assuming their own crisis-prone dynamic. A case at hand, the fragile economy of Armenia as suggested in the Policy Forum Armenia (PFA) report on Armenian economy.

Some alarm factors: speculative debt financing in private and public sector; currency pressures via implied peg; complex structural problems such as dominance of import trade vs. low domestic industrial base and reliance on one-sector growth model (e.g. construction in early 2000s; mining-presently).

The report also suggests that an indirect exogenous shock can have a strong potential of destabilizing the economy, with all subsequent and characteristic to post-socialist models troubles. But the internal dynamic is also susceptible to self-fulfilling Ponzi financing. The growing external exposure to short-term foreign currency denominated obligations in this case is not helping either. See official CBA stats.

In Armenia, despite earlier nominally strong growth and off-the-charts incoming remittances, the country has long since been losing to outward labor migration and high poverty, among others.

Furthermore, it should be noted that the case of Armenia outlined here & discussed by PFA is symptomatic of the post-socialist landscape in general, with variations, of course, in levels and intensity.

In fact, report’s technical treatment is a sober contrast to the once pioneered mantra of post-socialist economies avoiding the crisis. Not so.  Transition economies did not avoid the “first wave” of the recent crisis, and one may find detailed clarification in the Innovative Fiscal Policy (IFP).

The crisis propagation channels for both net exporters and net importers, identified in the IFP, remain the same: a) natural resources exports; b) exchange rate; c) banking sector (consumer and commercial lending) and total debt; d) remittances through migration.

Only this time around, a repetition with a “second wave” possibly due to rising risk perceptions and credit tightening in Eurozone –a key trading partner—would lead to more severe structural deterioration in these relatively weaker economies.

The culprit would be in finance, i.e. timely and adequate financing provisions by the fiscal/monetary authorities’ to either fulfill social obligations and/or support credit flows and real economy. Relying on diverse financial sources (and in case of countries such as Armenia-by wishful way of active Diaspora involvement, here and here) would be a preliminary step building up some financial protection that unlike large economies (e.g. Russia & Kazakhstan) the less-endowed cannot afford.

Nasty politics aside, a pragmatic thoughtful approach to productive economic diversification, education, and infrastructure investment and improvement needs to prevail in Armenia as much as in other post-socialist states. Diversification of financing sources is related. Together that would help the emerging economies withstand the fundamental uncertainty of the global financial economy.