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Republic of Armenia Accumulation, Competition, and Connectivity

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Republic of Armenia Accumulation, Competition, and Connectivity Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Accumulation, Competition, andConnectivity Competition, Accumulation, Republic Republic of Armenia Poverty Reduction andEconomicManagement Unit Reduction Poverty Europe and Central Asia Region andCentral Europe April 2013 Republic of Armenia Accumulation, Competition, and Connectivity April 2013 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Contents Acknowledgments . ix Acronyms and Abbreviations . .xi Executive Summary . xiii Armenia’s New Growth Model . xiv Higher Investment, and Better Financial Intermediation . xv Better Use of Human Resources . xvii Enhancing Competition in Armenia’s Markets . .. xix Improving Land Connectivity . xxiii Improving Air Connectivity . xxiv Improving Internet and Communication Technology (ICT) . xxvi Previous Growth Studies . xxvii Overview . xxvii 1. Macroeconomic Developments and Outlook . 1 Economic Growth Before the Global Financial Crisis . 1 The Global Economic Crisis and Armenia’s Recovery 2009–12 . 4 Macroeconomic Outlook . 8 2. Saving, Investment and Financial Intermediation . 11 Determinants of Aggregate Private Saving . 11 Microeconomic Determinants of Household Saving . 14 Financial Sector Development . 15 Foreign Direct Investment . 21 Policy Recommendations . 26 3. Human Resources . 29 Labor Market Trends . 29 Challenges to Armenia’s Labor Market . 33 Policy Recommendations . 37 Promoting Diaspora Engagement . 37 Contents | v 4. Competition . 43 Competition Indicators . 44 Barriers to Competition in Key Economic Sectors . 46 Sector Case Study: Prices of Food Products . 48 The Competition Policy Framework . 52 Policy Recommendations . 61 5. Land Connectivity . 63 The Transit Situation . 64 Comparison of Road Transit Options . 64 Logistics and Trucking Services . 68 Policy Recommendations . 69 6. Air Connectivity . 71 Institutional Set-up . 71 Business Environment . 72 Benchmarking Armenia’s Air Connectivity . 73 Likely Impacts of Liberalization . 82 Policy Recommendations . 84 7. Internet and Communications Technology (ICT) . 95 The IT-based Services Industry in Armenia . 95 Policy Recommendations . 100 References . 103 TABLES Table 1 . Price Differences for Food Articles, Armenia and selected CIS countries, 2010 . xxi Table 2 . Summary of Policy Recommendations . xxix Table 1 .1 . Macroeconomic Trends and Projections . 2 Table 1 .2 . GDP Growth Decomposition from Employment Changes, 2003–08 . 5 Table 1 .3 . Debt Reducing Primary Balances . 9 Table 2 .1 . Determinants of Aggregate Saving (2002q1–2011q2) . 13 Table 2 .2 . Error Correction Model Specification . 13 Table 2 .3 . Monthly Household Income, Consumption and Saving . 14 Table 3 .1 . Impact of Diaspora Members: Armenia in Light of Relevant Benchmarks . 40 Table 4 .1 . Presence of State Owned Enterprises . 46 Table 4 .2 . Summary of Main Market Characteristics and Results of Price Comparisons Industry . 50 Table 4 .3 Price Comparison Analysis, Armenia vs . CIS Countries . 50 Table 4 .4 . Price Differences for Selected Food Products, as Compared to Selected CIS Countries . 51 Table 4 .5 . A Comprehensive Competition Policy Framework . 53 Table 4 .6 . Defining an “Economic Entity” for the Implementation of the Competition Law . 56 vi | Republic of Armenia: Accumulation, Competition, and Connectivity Table 4 .7 . Elements For Designing Merger Control Policies . 57 Table 4 .8 . Competition Indicators for Select Markets . 58 Table 4 .9 . Example of Direct and Indirect Support to Firms . 59 Table 5 .1 . Armenia’s Merchandise Trade Partners, by Region, 2010 . 64 Table 5 .2 . Trade Complementarity Index, Armenia and Selected Trading Partners, 2008–10 . 66 Table 5 .3 . Estimated Costs to Export One Truckload: Yerevan to Moscow (via Poti) . 67 Table 5 .4 . Ro-Ro Service Average Rates for a Full Truck . 68 Table 5 .5 . Import Costs from China to Yerevan (via Bandar Abbas), 20' and 40' Containers, 2012 . 68 Table 6 .1 . Base of Operations and Size of Selected Carriers in CIS Countries . 81 Table A6 .1 . Pooled OLS Regression Results, Aggregate Fare Elasticities . 85 Table A6 .2 . Pooled OLS Regression Results, Economy and Business Class Fare Elasticities . 87 Table A6 .3 . Instrumental Variables Regression Results, Aggregate Fare Elasticities . 88 Table A6 .4 . OLS Regression Results, Fare Elasticities by Market . 88 Table A6 .5 . Pooled OLS Regression Results, Determinants of Fares . 90 Table 6 .2 . Summary of Selected Studies on Air Transport Liberalization . 93 FIGURES Figure 1 . Saving, Armenia and Selected Countries, 2003–10 . xv Figure 2 . Lending-to-Deposit Rate Spreads, Armenia and Selected Countries, 2010 . xvi Figure 3 . Armenia: Labor Force Participation and Employment, 2000–2010 . xviii Figure 4 . Number of Firms in Each Sector, Market, or Market Segment . xx Figure 5 . Concentration Levels for Selected Armenian Food Products, HHI . xxii Figure 6 . Merchandise Trade by Mode of Transport, 2011 . xxiii Figure 7 . Number of Destinations by Frequency of Service from CIS Countries’ Capitals, 2012 . .. xxiv Figure 8 . Lowest Available Fares from (left) and to (right) Yerevan and Tbilisi Direct and non-stop routes . xxv Figure 9 . Total Turnaround Charges, for an Airbus A320-200 . xxvi Figure 1 .1 . Growth, Capital Formation, Exports, and Consumption in Armenia and Low Income Countries . 3 Figure 1 .2 . Current Account Balance, Construction, Investment, and Components of Growth . 4 Figure 1 .3 . Real GDP and its Components, Q1-2008 to Q2-2012 . 5 Figure 1 .4 . External Trade and Capital Flows, 2006–11 . 6 Figure 1 .5 . Key Fiscal Indicators, 2008–2012 . 7 Figure 1 .6 . Policy Rate and 12-month Inflation, 2008–2012 . 8 Figure 1 .7 . Public Sector Debt, 2012–32 . 9 Figure 2 .1 . Saving, Armenia and Selected Countries, 2003–10 . 12 Figure 2 .2 . Armenia : Composition of Domestic Saving, 2002–10 . 12 Figure 2 .3 . Armenia: Peer Comparison on Financial Sector Depth . 16 Figure 2 .4 . Composition of Bank Deposits, 2000–12 . 16 Figure 2 .5 . Corporate Leverage Ratios, Armenia and Selected Countries, 2011 . 17 Figure 2 .6 . Lending-to-Deposit Rate Spreads, Armenia and Selected Countries, 2010 . 18 Contents | vii Figure 2 .7 . Government Bond Yields and Lending Rates, Armenia and Regional Comparators, 2011 . 19 Figure 2 .8 . Stock Market Capitalization, Armenia and Selected Countries, 2010 . 20 Figure 2 .9 . Projection of Individual Pension Invested Funds, 2014–2020 . 20 Figure 2 .10 . Armenia: Savings Gap and Foreign Direct Investment, 2001–2011 . ..
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