Can Armenia’s Economy Thrive on Services

There is no shortage of recent success stories about national economies skipping the development of a large manufacturing sector and instead building a prosperous economy on a robust services industry alone. Countries like Ireland, Norway, and India have largely forgone manufacturing and instead focused their economies on services, the sector of the economy that includes things like finance, software development, design, IT, media, customer support, and other services that are increasingly becoming easier to trade in thanks to technology.

The traditional view of an economy’s services sector is a negative one; it is frequently accused of being unproductive and not valuable to an economy’s international competitiveness. This may have been true in the recent past; services have traditionally been immobile and involved only in the domestic economy, contributing little to a country’s exports. However, with the emergence of better communications technology the traditional barriers to exporting services have waned. India and Ireland have been able to capitalize on this opportunity and have built successful export economies based largely on services, attracting massive foreign investment and trade.

The traditional meat and potatoes of an economy has always been thought to be the manufacturing sector. Development economists still preach the tried-and-true methods of moving labor from agriculture to high-productivity manufacturing jobs. This is, undoubtedly, how economies have developed in the past; see South Korea, Taiwan or China as recent examples.

But the outlook on manufacturing is not as rosy for Armenia. Sure, Armenia was a manufacturing powerhouse in the Soviet Union, but without the protection of the centrally planned economy, Armenia is in a whole new ball game. In the new economic climate that Armenia finds itself in – with no sea ports of its own, eastern and western blockades, and an underdeveloped infrastructure – the manufacturing industry faces many obstacles. Meanwhile, a potentially strong services sector has many opportunities to look toward, providing new hope, at least for the near future.

Since independence, Armenia’s services sector has overtaken its manufacturing. And in the 2000’s, the services sector has been the clear driving force behind Armenia’s high economic growth rates. As a portion of GDP, Armenia’s services sector holds 46 percent, while it employs 36 percent of the labor force. One needs only to cruise down an avenue in Yerevan (driving carefully of course) to see evidence of this: advertisements for VivaCell-MTS, Ameriabank, and other such service corporations litter the city.

There are a number of reasons why a services-oriented economy offers better prospects for Armenia. For one, services – which are largely based on telecommunications and which lack the need for physical transportation of goods – can bypass Armenia’s troubles with infrastructure and its lack of sufficiently accessible trade and transportation routes.

A services industry also circumvents the need for a low-wage, exploitable labor force that is necessary in most newly industrializing economies. Armenia does not possess, nor should it want such a labor force.  Services jobs provide far better working conditions. The services industry is also a boon when it comes to opportunities for women. Services jobs are equally accessible, if not more accessible, to women as they are to men. Increased opportunities for women means not only greater social equality, but also increased incomes for households.

Lastly, services have far less impact on the environment. This is a very attractive offer to Armenia, which suffers its fair share of environmental degradation and problems arising from it.

Service-based is the industry that the global economy is shifting towards, with more room to grow than other industries and a plethora of new opportunities that well-prepared countries can seize. Considering that most of Armenia’s current manufacturing sector consists of raw commodities exports and not much high-value production, equipping itself to reap the benefits of favorable services opportunities is the most sensible thing Armenia can do.

If Armenia were to embrace services it would have no lack of useful resources. Armenia has an enthusiastic diaspora, who are educated and possess skills and knowledge about the services industry that they can introduce to Armenia, not to mention the capital with which to start such business ventures.  Armenia also has a capable workforce for the services, with decent education, good technical knowledge, and plenty of artistic skills. The only thing missing from the Armenian labor force is an English-speaking workforce, a vital component to any service economy.

Of course, it might be grossly overoptimistic to hope that Armenia, with its scores of growth-inhibiting problems such as corruption and an oligopolistic economy, is actually prepared to take on this challenge. But there are a number of things the Armenian government can do to create a more competitive services sector.  The most important task would be to invest more in education, especially in technical skills. An ideal decision also would be to replace Russian language learning courses in school with English.

The Armenian government should also invest in services infrastructure, further improving and upgrading telecommunications lines for example, encouraging more widespread Internet access and establishing helpful regulatory and oversight agencies.

Many of these needed investments into education and infrastructure have been undertaken by the private sector as business investments, as in the case of the massive telecom infrastructure overhaul that has been carried out recently almost exclusively by private companies. But the Armenian government should not rely on the benevolence of the private sector or non-governmental organizations; it should resolve to carry out these tasks on its own if it expects to guarantee its goals.

The most important thing that the Armenian government needs to do, however, is to overcome its crippling system of oligopolies and to encourage vigorous competition. To stay competitive internationally, the government must allow the services market to operate freely, intervening not to provide favors for government-connected pals, but to encourage more competitiveness and to protect nascent enterprises. On the same token, the government must allow the services industry to compete with foreign firms and do business with them; only in this way can Armenia bolster the quality of its services exports. With help from government, an Armenian architecture firm or web development company has the potential to be as large a company as some of its best-known European counterparts.

The recent opening of the Tumo Center for Creative Technologies in Yerevan provides hands on education in to youth in a state-of-the-art facility.  This type of instruction in the fields of animation, gaming, web development and video will lead to a broadening of career opportunities for our new generation.  The AYF, with its work in the Youth Corps program and through its donations of computers and books, among other efforts, can help towards this goal as well, supplementing the work needed to prepare for the future of Armenia’s services industry.