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Accumulation, Competition, and Connectivity and Competition, Accumulation, Armenia of Republic 76827-AM No. Report Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank World Document ofthe Asia Region Europe andCentral Reduction andEconomicManagementUnit Poverty April 2013 Accumulation, Competition,andConnectivity Republic of Armenia Report No.76827-AM CURRENCY EQUIVALENTS (Exchange Rate as of April 16, 2013) Currency Unit Armenian Dram US$1.00 416.90 AMD Weights and Measures: Metric System ABBREVIATIONS AND ACRONYMS ACRA Accounting and Corporate Regulatory ILCS Integrated Living Conditions Survey Authority ILO International Labor Organization ADB Asian Development Bank IMF International Monetary Fund AEA Armavia and Atlantis European Airways IT Information Technology ASA Air Service Agreement ITES IT-Enabled Services AMD Armenian Dram LRI Location Readiness Index ASM Average Seat Miles MNC Multinational Corporation AUA American University of Armenia MSME Micro, Small and Medium Enterprise BEEPS Business Environment and Enterprise NGO Non-governmental Organization Performance Survey NSRC North-South Road Corridor CBA Central Bank of Armenia NSS National Statistical Service CIS Commonwealth Independent State OECD Organization for Economic Development CPI Consumer Price Index PER Public Expenditure Review CSA Czech Airlines PES Armenia’s Public Employment Services DSA Debt Sustainability Analysis PPP Public Private Partnership ECA Europe and Central Asia PMR Product Market Regulations ECF Extended Credit Facility PSRC Public Service Regulatory Commission EFF Extended Fund Facility R&D Research and Development EIF Enterprise Incubator foundation SCPEC State Commission for the Protection of EU European Union Competition FBP Family Benefit Program SRC State Revenue Commission FDI Foreign Direct Investment SME Small and Medium Enterprise GCI Global Competitiveness Index SOE State-owned enterprises GDCA General Department of Civil Aviation USAID United States Agency for International GDP Gross Domestic Product Development IFS International Financial Statistics USD US dollar ICT Information and Communication Technology VAT Value Added Tax IDA International Development Association WTO World Trade Organization Vice President: Philippe Le Houérou Country Director: Henry Kerali Sector Director: Yvonne Tsikata Sector Manager: Ivailo Izvorski Task Team Leaders: Ulrich Bartsch, Souleymane Coulibaly TABLE OF CONTENT ACKNOWLEDGMENTS .......................................................................................................................................... VI EXECUTIVE SUMMARY ....................................................................................................................................... VII A. Armenia’s New Growth Model ................................................................................................................. viii B. Higher Investment, and Better Financial Intermediation ..............................................................................ix C. Better Use of Human Resources ...................................................................................................................xi D. Enhancing Competition in Armenia’s Markets ......................................................................................... xiii E. Improving Land Connectivity ................................................................................................................. xviii F. Improving Air Connectivity ....................................................................................................................... xix G. Improving Internet and Communication Technology (ICT) ...................................................................... xxi H. Previous Growth Studies .......................................................................................................................... xxii I. Overview ................................................................................................................................................. xxiii 1. MACROECONOMIC DEVELOPMENTS AND OUTLOOK ............................................................................ 1 A. Economic Growth Before the Global Financial Crisis .................................................................................. 1 B. The Global Economic Crisis and Armenia’s Recovery 2009-12 ................................................................... 5 C. Macroeconomic Outlook ............................................................................................................................... 8 2. SAVING, INVESTMENT AND FINANCIAL INTERMEDIATION ............................................................... 11 A. Determinants of Aggregate Private Saving ................................................................................................. 11 B. Microeconomic Determinants of Household Saving ................................................................................... 14 C. Financial Sector Development ..................................................................................................................... 15 D. Foreign Direct Investment ........................................................................................................................... 22 E. Policy Recommendations ............................................................................................................................ 27 3. HUMAN RESOURCES ..................................................................................................................................... 31 A. Labor Market Trends ................................................................................................................................... 31 B. Challenges to Armenia’s Labor Market ..................................................................................................... 35 C. Policy Recommendations ............................................................................................................................ 39 D. Promoting Diaspora Engagement ................................................................................................................ 39 4. COMPETITION ................................................................................................................................................. 47 A. Competition Indicators ................................................................................................................................ 48 B. Barriers to Competition in Key Economic Sectors ...................................................................................... 50 C. Sector Case Study: Prices of Food Products ................................................................................................ 53 D. The Competition Policy Framework ........................................................................................................... 57 E. Policy Recommendations ............................................................................................................................ 67 5. LAND CONNECTIVITY ................................................................................................................................... 69 A. the Transit Situation .................................................................................................................................... 70 B. Comparison of Road Transit Options .......................................................................................................... 71 C. Logistics and Trucking Services .................................................................................................................. 74 D. Policy Recommendations ............................................................................................................................ 75 6. AIR CONNECTIVITY ....................................................................................................................................... 77 A. Institutional Set-up ...................................................................................................................................... 77 B. Business Environment ................................................................................................................................. 78 C. Benchmarking Armenia’s Air Connectivity ................................................................................................ 79 D. Likely Impacts of Liberalization ................................................................................................................. 88 E. Policy Recommendations ............................................................................................................................ 90 7. INTERNET AND COMMUNICATIONS TECHNOLOGY (ICT) ................................................................. 103 A. The IT-based Services Industry in Armenia .............................................................................................. 103 B. Policy Recommendations .......................................................................................................................... 108 REFERENCES .......................................................................................................................................................... 111 iii LIST OF TABLES Table 1. Price Differences for