Questionable Economic Results Do Not Provide Justification For Signing The Turkey-Armenia Protocols


BY ARA KHANJIAN

Those who support the Armenia-Turkey Protocols claim that, when Turkey lifts the blockade, Armenia will experience a significant amount of economic gain, which will reduce poverty.

This article questions this claim. It argues that when Turkey opens the border, economic gains to the consumers, theoretically, could be positive; however its extent would be questionable. The article argues that open borders would hurt Armenian producers who could not compete with subsidized and protected Turkish products, that the open borders would cause just a modest increase in Turkish imports and finally, in order to generate economic development and reduce poverty, it is much more important for Armenia to implement domestic reforms than for Turkey to the lift the blockade.  

1. Will Armenian consumers benefit when Turkey lifts the blockade?

The answer is maybe. Currently Turkish products are imported through Georgia. When Turkey opens the borders, Turkish products will be able to enter Armenia directly from Turkey and the transportation cost will go down. Therefore the Armenian businesspeople who are importing the Turkish products will be able to bring them to Armenia at a lower cost. Economic theory assumes that there will be competition among importers and the price of Turkish imported goods will go down. In this scenario the Armenian consumer will benefit; however the problem is that there is no guarantee that there will be competition among importers. There is the possibility that a few oligarchs might control the major imports through Turkey. In that case the Armenian monopolists will be able to keep prices at the same level and the benefit of lower transportation cost will go to the powerful rich importers, instead of the consumers. Therefore there is no guarantee that there will be consumer surplus and that consumers will benefit from open borders.

From around 2003 to early 2009 when the value of the Armenian money Dram (AMD) was going up and appreciating, economic theory predicted that the prices of imported goods in AMD will go down. However the AMD prices of many imported goods did not go down or their decrease was insignificant; therefore the benefit of appreciated AMD went to the powerful rich importers, instead of the Armenian consumers and the poor. Armenia could experience the same, when the borders with Turkey are opened.

2. The lifting of the blockade would hurt Armenian producers who could not compete with subsidized and protected Turkish products

During June 2009 in Yerevan the ARF Bureau published an excellent report on the impact of the opening of the Turkish border on different economic sectors in Armenia. The report provides detailed information about both Turkish and Armenian economic sectors. [1]

The information of this section, is based on the information available in this report.

We could divide Armenian producers into two groups: First, large companies producing energy and raw materials such as copper. Most of Armenia’s exports are based on raw materials. This group will be affected very little from the opening of the Turkish border. The second group could be represented as small and medium size producers, producing for the domestic markets, mainly in the agricultural and food production sector. It is expected that the cheap Turkish imports would hurt this second group of Armenian producers and some of them would go bankrupt. A major advantage of Turkish producers is the amount of government support that they receive. It is safe to say that the Turkish government supports its domestic producers more than Armenia’s government supports producers in Armenia in three different ways: protecting domestic production, subsidizing domestic production and promoting exports.

Protecting domestic production: Turkey protects domestic production from imports through higher tariffs and quotas than Armenia. In Armenia, many goods don’t have import tariffs and the highest tariff is 10 percent, while in Turkey the average tariff is 10 percent and about 1/5 of the goods have tariffs higher than 10 percent. A major sector that is protected is the agricultural sector. Relative to Turkey, Armenia has significantly fewer import restrictions. When Turkey lifts the blockade this inconsistency must be addressed.

Government subsidies: In Turkey there are many state programs and agencies that provide state support and subsidies to local producers. Farmers are supported through law interest loans, and other subsidies, such as funds to buy fuel and fertilizer. When market prices of certain agricultural goods, such as olive oil, cotton, wheat etc. go down significantly, the government subsidizes their producers. Turkey reduces the tariffs and restrictions on imported goods that are used as inputs to produce goods in Turkey. These measures act as subsidies to the local producers. Also, Turkey spends relatively much more on research and development than Armenia, which could give it an advantage in the long run. Armenia’s government can’t afford to provide so many subsidies to its producers; therefore when Turkey lifts the blockade Armenian production will be vulnerable to Turkish imports.

Promoting exports: A Turkish government agency called Trade Promotion Center is the main organization through which the state promotes exports. This center achieves its goal through promoting research and development, providing and publishing information about trade, managing plans for exports and promoting trade through intergovernmental relations. The government also promotes exports through reduction in taxes and subsidies. Sixteen product groups, such as eggs, honey, processed fish, etc., receive export subsidies from 10 percent to 20 percent of their total value.

The Turkish government promotes exports through subsidized loans. In 1987 The Turkish government created a special bank called Eksimbank, to finance and support businesses that export goods. Its goals are to increase the volume of Turkish exports, to find new international markets for Turkish exports, to diversify the Turkish export goods and to support the businesses that cooperate with Turkish exporters, their investors or foreign partners.  This bank provides loans with low interest rates to these entities.

It is amazing that the government of Armenia still advocates unrestricted markets and justifies the signing of the protocols by arguing that the protocols are promoting free markets, given the fact that the Turkish government does not just rely on free markets and is actively involved in the economy,

3. The lifting of the blockade will cause a modest increase in Turkish imports

transportation cost will go down, when Turkey ends the blockade and Turkish imports start arriving to Armenia directly instead of through Georgia. This will increase the amount of Turkish products that would be competitive in Armenia. In 2007 Beilock and Torosyan estimated that the lifting of the blockade would increase imports from Turkey by about 50 percent. [2]

During 2008, according to the National Statistical Services of the RA, armstat.am, imports originating from Turkey represented just 6.1 percent of Armenia’s total imports. Therefore a 50 percent increase of a small percentage of Armenia’s imports should not have a major impact on the standard of living of the population and poverty, contrary to the c
laims of the supporters of the Protocols. It is interesting to note that Armenia has open borders with Iran and Georgia; however the level of imports from these two neighbors is very modest. The imports from Iran represent 4.6 percent of total imports, while imports from Georgia represent just 1.1 percent of total imports. This implies that open borders do not necessarily generate high levels of trade.

If the powerful rich Armenian oligarchic importers artificially keep the prices of Turkish products high, then the gains of the cheap Turkish imports would go to the rich Armenian oligarchs, instead of the Armenian consumers. In this case the Armenian consumers would gain very little from the lifting of the blockade, while the Armenian producers would lose significantly, generating a net overall economic loss.

4. For the reduction of poverty in Armenia, the improvement of the domestic economic and social environments is much more important than the lifting of the blockade

If the government and the leadership of Armenia are really concerned with the reduction of poverty in Armenia, then instead of wasting energy on lifting the Turkish blockade, which will have debatable economic impact on the standard of living, they should use their resources to implement domestic reforms, such as:  

1. Reduce the power of rich oligarchic monopolists and promote genuine competition in Armenia. We could argue that the increase in the level of competition in the Armenian markets is much more important for the development of the economy, than the lifting of the Turkish blockade.3

2. Reduce the level of corruption, bureaucratic obstacles and shadow economy. Improve the legal system. These measures will make it possible for Armenian small and medium size businesses to thrive and contribute to the generation of jobs in Armenia. This will also increase the tax revenues of the government, which are relatively very low compared even to the other former Soviet republics. With higher tax revenues, the government will be able and should: [3]

  • Build public infrastructure in agriculture such as: roads and water resources. Armenia should increase productivity and competitiveness of the agricultural sector. We should reduce the sector’s dependence on the climate, improve irrigation, provide financing to the farmers, improve marketing etc.
  • Improve the productivity of the Armenian economy in general. This could be achieved by increasing expenditures in education, research and development, health care and the infrastructure of the country, such as transportation, electricity, irrigation, communication, internet access, etc.,
  • Improve pensions, housing and safety nets for the poor.

All these measures would generate economic development and reduce poverty. They would increase the standard of living of the people and not just the living conditions of the upper middle class and the rich. [4]

In conclusion, dubious economic results do not provide justification for signing the Turkey-Armenia protocols, which will confirm and accept that Kars, Ardahan, Massis, Ararat and the remaining Armenian lands occupied by Turkey are Turkish land, which will generate directly or indirectly doubts about the Armenian Genocide and which could endanger Karabakh.

Footnotes
________________________________
1. Download the ARF Bureau economic report HERE.

2. Karine, Torosyan and Richard Beilock (2007). “A Phased Strategy for Opening Armenia’s Western Border.” Armenian Journal of Public Policy, Special Issue.

3. During December 2009, The Civilitas Foundation in Armenia conducted a poll through its web site and 88% of the respondent “think that domestic reforms will have a better influence on the economy” than the lifting of the blockade.   See the poll results.

4. Read a very good article by Serouj Aprahamian and Allen Yekikian, “In Who’s Interests? The Political Economy of Armenia-Turkish Relations,” Asbarez, December 28, 2009. This is an excellent investigative reporting and analysis of the economic interests of the ruling class in Armenia.

Authors

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13 Comments

  1. Aram Suren Hamparian said:

    Dr. Khanjian makes a solid, academic case regarding the economic and long-term national dangers inherent in the Protocols. Where is the intellectual pro-Protocols argument that 1) most Armenians (not just a handful) will benefit, and 2) the benefits outweigh the costs? Those who believe in ratification, if there are any left, should stand up and publicly offer their views.

  2. grigor malayan said:

    Armenian oligarks headed by Serzh Sargsyan are in total charge of lucritive businesses and are the only ones benefiting from this border opening. The farmers and small business operators are totally left to their faith and will be wiped out from seen if these oligards start purchasing food from Turkey. The Armenian small businesses can not compete with the competion. The level of poverty will rise while the oligards will sack their stolen money in Swiss banks. There are no laws in Armenia protecting the small businesses and their production and there is no Armenian Government programs to help import these goods to outside world. These oligards are all for themselves and will suck the blood of poor people and small businesses. What a shame! What a robbery!

  3. Giro Manoyan said:

    Those of us who are against the defeatist Armenia-Turkey protocols should be careful not to inadvertantly give credence to the baseless arguments of some of those who favor the signed protocols. I think Ara Khanjian’s article is one such approach, because his basic argument is “Questionable economic results do not provide justification for signing the Turkey-Armenia protocols.” Consequently, he implies that had there been solid economic results, the signing of the protocols would be justified. The real issue is that with the protocols as they are, there can be no justification of signing them, regardless of any economic benefits they may give, because so much else is being unilaterally compromised by Armenia. No economic benefit, real or otherwise, can justify giving up our rights, including territorial rights. That’s what these protocols, real and signed documents, would do.
    The arguments A. Khanjian makes could be part of a general discussion on whether Armenia and Armenians should favor openning direct transport and establihing diplomatic and other relations with Turkey. But, I think we’re beyond that phase; we have real defeatist protocols signed by Armenia, awaiting to be ratified by the Armenian parliament. That’s what we havw to stop now and for the forseeable future.
     
     
     

    • Aspiring future Armenian President said:

      Giro is right on the mark in his comments above. The defeatist and down right derogatory set of protocols should not be ratified even with the supposed promise of robust economic benefits.

      I refuse to sell the memory of my nations martyrs and my rightful legal claim to my land for some “questionable” economic outcome promised to me by ANYONE especially my nations centuries old enemy. It is wrong headed, insulting and backwards.

  4. Haro Mherian, Ph.D. Mathematics, UCLA said:

    Thanks for the reference documents, I will study them and validate them under a mathematician’s eye. These may serve possibly as a validation data for my models. However, I certainly am inclined on the side of Giro Manoyan, in other words, while we are wasting time on whether needle-surge incision is better than crack open surgery for a brain tumor patient, the patient is close to dying on the operation table. Once the patient is dead, the result of our method is absolutely of no use.

  5. Ara Khanjian said:

    I think the confusion is between the two words, justifications and justify. Justifications for an action might not be enough to justify that action. I don’t agree that the statement “Questionable economic results do not provide justification for signing the Turkey-Armenia protocols” implies that “had there been solid economic results, the signing of the protocols would be justified.”
    If there were solid positive economic results from the opening of the borders, then they would be considered as justifications for the signing of the protocols. But clearly for most of us these imaginary positive economic justifications, no matter how large they are, will not be enough to JUSTIFY the signing of the protocols and giving up Massis and Ararat, questioning the Genocide and threatening Artsakh. I am arguing that there aren’t even economic justifications for the protocols. Even if there were economic justifications, most of us are convinced that they are not enough to justify the signing of the protocols.

  6. mike said:

    The only real solution is to stay friendly with Turkey. Over 80 years of Russian domination has not been helpful for the Armenians. This may be a final and historic change to both Turkey and Armenia to stay friendly.
    Turkey is not that big power to keep the Armenian in small but Russia is.
    This will be a historic decision for both Country to finalize the  future generation to stay in friendship as well.
    Take it and secure your future or leave it and give-up your future !
     
    Good luck to both
     

  7. Ozan Isinak said:

    Dear Armenian Friends,
    It is very true that Turkish businesses, products and services are far more competitive than their counterparts in Armenia. This is primarily because Turkey has been in direct competition with the EU for at least two decades and I recall we had very similar concerns when faced with the flood of EU products in to Turkey when we signed the customs agreement. Looking back, many Turks now realize that the pain that the ‘customs agreement’ brought actually benefited Turkey in many ways. Turkey is now the 16th strongest economy in the world and the wealth is spreading well outside of Istanbul to all corners of the country.
    This article seems to take a ‘protectionist’ point of view and to this end, I do not believe that keeping borders closed will benefit Armenia in any way shape or form either in the short term nor in the long term. It will be the Armenian public (small business owners and farmers) who will continue to bare the pains of a closed border.
    Continuing the ‘as it were’ path and not doing anything is not effective and will not benefit anyone.
    Clearly, there are more pressing issues that both countries will have to deal with. Unless we break down some of the ‘smaller barriers’ dividing us, I do not believe it realistic to tackle other issues. There is just too much emotion, hurt, and ignorance in BOTH countries. These types of rapprochements between cultures, as is the case in all parts of the world, are always solved more effectively one small step at a time.
    I’m in the opinion that if the borders are opened up, at least it may give our two cultures a chance to ‘meet’ and ‘get to know each other’ once again after so many decades. My honest experience has been the majority of our populations do not know much (or anything) about the other. BOTH populations are taught to hate from and early age.
    Unfortunately there are extreme nationalists in both our countries who wish to block any such communication and interaction precisely because they know that ignorance and fear between the two (very similar) cultures will play to their end.
    Just some piece of mind from a friendly neighbor. :)
    /Ozan

  8. Nairian said:

    I completely agree with the above written documents and in most respects I already knew what is going on in Armenia.  To the demease of Armenia’s sovereignty those hungry for money oligarchs headed by our government are sucking the blood of Armenians in our Homeland; and they don’t let democracy to rein in Armenia, as the oligarchs are ruling the country with an iron fist.  The government of Sargsyan and the oligarchs that are reigning the country are obviously after one thing; the bulging of their suits’ pockets that are far more important for them than the future of the sovereignty of Armenia and Artsakh.  It is disgraceful for our nation to have such people heading our motherland.

    To Mr. Aram Hamparian, It is very unfortunate that these handful oligarchs seem to own the Armenian Parliament as well.  I read it somewhere that they form at lease 66% of the Parliament.  That’s how the government is being ensured that the Parliament will pass the dire and the dangerous protocols against the will of the Armenian people both in the Homeland and in the Diaspora.

    A new government must be formed that will improve the domestic economic and social environments of the country, without the corruption that is apparent among the oligarchs and the destructive regime among their ranks.

  9. Haroutiun Khachatrian said:

    The opponents of the Zurich protocols usually mention two reasons why they should be rejected: 1. Because of the co-called “Historical commission,” which might undermine the efforts to achieve international recognition of the Armenian Genocide
    2. Turkey and other countries might impose irrelevant concessions around Karabakh against opening of the borders.

    This article and many similar publications present another reason for rejecting the protocols. It can be formulated as follows:

    Reason 3: No one should dare to open the Turkish-Armenian border even if Turkey recognizes the Armenian Genocide and Azerbaijan recognizes the independence of Karabakh. Because the Armenian economy is not competitive against the Turkish economy and will remain non-competitive forever (as its authorities would not stop corruption and would not fight the oligarchs). Hence the Turks will simply swallow Armenia, unless Armenia keeps its borders closed indefinitely. Armenia cannot be but an asylum for pensioners fed by external assistance.

    My opinion about Armenia’s perspective is somewhat different, but I would mention here only the principal issue of the economic problems of the Armenian-Turkish relations, which are not mentioned in the article, probably, due to the unawareness of the author. The problem is that Turkey has imposed AN EMBARGO on Armenian imports, while the Armenian market is open to Turkish goods. In 2008, Turkish exports to Armenia were 200 million dollars, while the Armenian exports to Turkey were less than 1 million dollars. So, Turkish-Armenian normalization means, first of all, LIFTING THE EMBARGO, providing access for the Armenian businesses to Turkish market. Embargo is far worse than any other trade barriers described in the article, even if they do exist in reality, which I am not sure of.

    Just an example: Armenia can export right now to Turkey 3 billion kilowatt.hrs of electricity a year, which Turkey needs but does not import due to political reasons (the embargo). If these electricity supplies occur, the Armenian exports to Turkey will amount to approximately 180 million dollars, i.e., 180 times more than now. This is only one item of exports and it is not the only one. Even if the Turkish exports to Armenia grow by 50 percent (as the author claims), the benefit for Armenia will be much more.

  10. Pingback: Questionable Economic Results Do Not Provide Justification For … | armeniatoday

  11. Ara Khanjian said:

    This article is not arguing that we shouldn’t open the border and that we should isolate ourselves from the rest of the world. Turkey closed the border; therefore Turkey could open it at anytime. Armenia should be prepared for that day. Currently we aren’t.

    The article says that: “We could divide Armenian producers into two groups:”

    –“First, large companies producing energy and raw materials such as copper. Most of Armenia’s exports are based on raw materials.” If Turkey opens the borders, this group of producers could benefit, as Haroutiun Khachatrian says, because they could export energy, such as electricity to Turkey.

    –“The second group could be represented as small and medium size producers, producing for the domestic markets, mainly in the agricultural and food production sectors.” Most of the labor force in Armenia works in this group. The article argues that this group will suffer when Turkey opens the border, because they will not be able to compete with the subsidized Turkish products. The article describes that the Turkish government:

    –Protects its products through higher tariffs and quotas. Either Armenia should impose similar tariffs and quotas on Turkish products or it should negotiate with Turkey to reduce them.

    –Subsidizes its producers. Either Armenia should subsidize its producers at the same level or should negotiate with Turkey to reduce them.

    –Promotes its exports. Armenia’s government should support its producers to exports their goods all over the world.

    Finally the article argues that the best way for Armenia to improve its economy and raise the standard of living of the population, is to increase the productivity of production in general, and more specifically the production of the agricultural sector. In section four, the article argues that Armenia could increase productivity and improve living conditions in Armenia by increasing the level of competition, reducing corruption and shadow economy, improving the rule of law and increasing government expenditures on education, health care, communication, internet access, etc. When Armenia takes these measures and improves the quality of production and if Turkey opens the border, then Armenian products will be able to compete with Turkish ones.

    Lastly with respect to the protocols, it seems to me that there are three main reasons to oppose them. In my opinion the most important reason to oppose the protocols is that it accepts and confirms the current borders that exist between Turkey and Armenia. This implies that Armenia agrees that Kars, Ardahan, the rest of Western Armenia, even Massis and Ararat are Turkish territories. The second reason is that the protocols “will generate directly or indirectly doubts about the Armenian Genocide.” Finally, the protocols could endanger Karabagh.

    I am not using economic arguments to argue against the protocols. We don’t need the economic arguments to be against the protocols. The three arguments mentioned above are more than sufficient. Even if the gains from open borders are more than the losses, accepting that Ararat is a Turkish territory, is enough for me to be against the protocols.

    The article is just arguing that those who support the protocols couldn’t even use economic arguments in favor of the protocols, because when Turkey opens the borders, some groups in Armenia will benefit, while others will suffer and the effect on the whole economy and the population is questionable.
     

    • Haroutiun Khachatrian said:

      Dear Ara,
      Of course you had no intention to use economic arguments to argue against the protocols. But in fact, your article served to this purpose, at least by the title it bears. The answers to the article are evidence.
      Of course, no one can object against the measures you propose to improve  the business climate in the country. But it is evident that opening the Turkish-Armenian border will be beneficial  to that process (or at least neutral). If Armenia has the opportunity to export electricity and many other items to Turkey, i.e., to simply improve its balance of payments, it will be more in a position to perform the actions you are suggesting. And there is no need to discriminate between large companies and small ones. After all, there is no evidence that, say,  Armenian ice-cream cannot find a niche in the Turkish market. What seems even more important is the psychological effect. Armenia blockaded by Turkey and Armenia, having access to the 70 million-forth Turkish market are two different Armenias for investors.
      Finally, I share your concerns about the border issue. Here I just want to recommend you two “open letters” of Ambassador Ara Papian at http://www.wilsonforarmenia.org/, especially the one addressed to the Turkish foreign minister (sorry if  you have already seen them). Interestingly, here the point of view of Mr Papian, one of the most active opponents of the protocols is very similar to that expressed by President Serzh Sargsyan in his statement made on October 10, a couple of hours before the signature of the protocols.

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