Report No. ACS14153 Public Disclosure Authorized Republic of Armenia Export-Led Industrial Development Strategy: Implementation Review and Recommendations on New Toolset Public Disclosure Authorized June 2015 Public Disclosure Authorized GTCDR EUROPE AND CENTRAL ASIA Public Disclosure Authorized Document of the World Bank ARMENIA –GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of May, 2015) Currency Unit = Armenian Dram (AMD) US$1.00 = AMD 485 ACRONYM LIST ADA Armenian Development Agency HEI Higher education institution AJA Armenian Jewelers Association HR Hire and Recruitment AMD Armenian Dram HS Harmonized system ANAU Armenian National Agrarian University International Center for Agribusiness ICARE Armenian National Engineering Research and Education ANEL Laboratory Information and communication ICT AP Action Plan technology ArmEN Armenian Executive Network IDF Industrial Development Fund Armenian State University of ILO International Labor Association ASUE Economics IP Intellectual property CAGR Compound annual growth rate International exhibition of pharmacy IPHEX CBA Central Bank of Armenia and healthcare Centre for the Promotion of Imports IPO Initial public offering CBI from developing countries IT Information technology CCD Company Competitiveness Division M&A Mergers and acquisitions Competitiveness Development METU Middle East Technical University CDP Program MNC Multinational corporation CIS Commonwealth of Independent States MoE Ministry of Economy CJSC Closed joint-stock company MPI Medicine Producers and Importers DB Doing business MSME Micro small and medium enterprises DFA Development Foundation of Armenia NSS National Statistical Service European Bank for Reconstruction and NTP National Technology Park EBRD Development Organization for Economic Co- OECD Enterprise Development and Market operation and Development EDMC Competitiveness Project PCT Patent cooperation treaty EGP Enterprise Growth Program PE Private equity EIF Enterprise Incubator Foundation Pharmaceutical Inspection Co- PIC/S EU European Union operation Scheme FDI Foreign direct investment PPP Public-private partnership FEZ Free economic zone PR Public Relations Financial and Insurance Advisor R&D Research and development FIAS Services RA Republic of Armenia FYR Former Yugoslav Republic RCA Revealed competitive advantage GCR Global Competitiveness report SEP Scottish Equity Partnership GDP Gross domestic product State Engineering University of SEUA GFCF Gross fixed capital formation Armenia Global Financial Development SME Small and medium enterprise GFDD Database Small and medium enterprise SME DNC German Federal Enterprise for development national center GIZ International Cooperation SPZ Special Economic Zone GMP Good Manufacturing Practice T-bills Treasury bills TDZ Technology Development Zone United States Agency for International USAID TRY Turkish Lira Development UCO Universal credit organization USD United States dollar UN United Nations Commodity Trade VAT Value added tax ComTrade Statistics Database WB World Bank United Nation’s Conference on Trade WDI World Development Indicators UNCTAD and Development WEF World Economic Forum US United States Vice President: Laura Tuck Country Director: Henry G. Kerali Country Manager: Laura E. Bailey Senior Director: Marcello Giugale Practice Director: Satu Kahkonen Practice Manager: Ivailo Izvorski and Paloma Anos Casero Task Team Leader: Gohar Gyulumyan ii Table of Contents Acknowledgements ................................................................................................................................................ i Executive Summary .............................................................................................................................................. ii 1. Review of the Implementation of the Export-Led Industrial Strategy ...................................... 1 A. Export-led Industrial Strategy: Background and Approach ...................................................... 1 B. Industries Targeted by Industrial Strategy in 2010–13 ........................................................... 26 C. The Implementation Process and Progress ................................................................................... 30 2. Growth Agenda and Policy Recommendations ................................................................................ 38 A. Growth Imperative ................................................................................................................................... 38 B. Armenia’s Growth Agenda .................................................................................................................... 40 C. The Agenda for Growth-Stimulating Horizontal Policies ......................................................... 43 D. Recommendations for Industrial Policy and the New Support Toolset ............................ 46 Appendixes ............................................................................................................................................................ 62 References ........................................................................................................................................................... 106 List of Figures Figure 1.1:. Armenia’s GDP Structure, 2008–13 ......................................................................................................... 1 Figure 1.2: Armenia’s Merchandise Exports, 2003–13 ............................................................................................ 1 Figure 1.3: Resource Intensity of Merchandise Exports, Armenia and Benchmark Countries, 2009 .. 2 Figure 1.4: Identifying Sectoral Focus In The Jumpstart Phase ........................................................................... 9 Figure 1.5: Export-led Industrial Clusters in the Jumpstart Phase ................................................................... 10 Figure 1.6: Jumpstart Strategy Targets for Nonresource Exports, 2010–20 ................................................ 10 Figure 1.7. Export of Metals and Mining Products, Diamonds, and Other Goods, 2010–20 ................... 26 Figure 1.8: Export of Goods-to-GDP Ratio ................................................................................................................... 27 Figure 1.9: Export of Target Sectors and Metals and Mining, 2010–13 .......................................................... 28 Figure 1.10: Composition of Armenia’s Exports, 2010–13 .................................................................................. 28 Figure 1.11: Geographic Distribution of Exports, 2003–13 ................................................................................. 29 Figure 1.12: Geographic Distribution of Exports Other than Metals and Diamonds, 2003–13. ........... 29 Figure 2.1: GDP Growth and FDI for Armenia, 1992–2013 ................................................................................. 38 Figure 2.2: Share of Exports in GDP and GDP Per Capita PPP a, 2012 ............................................................ 39 Figure 2.3: Armenia’s Productivity Gap with the U.S. and Russia .................................................................... 39 Figure 2.4: Integrated Framework for Horizontal and Vertical Growth Policies ........................................ 42 Figure 2.5: The Cycle of Problematic Human Capital Development ................................................................. 44 List of Tables Table 1.1: Targets of the Export-led Industrial Strategy ......................................................................................... 6 Table 1.2: Assessment Factors for Sector Prioritization ......................................................................................... 9 Table 1.3: Growth Horizons of Targeted Sectors ..................................................................................................... 11 Table 1.4: Research and Development Spending ..................................................................................................... 13 Table 1.5: Priority Initiatives for Industrial Policy .................................................................................................. 15 Table 1.6: Special Toolset Target Areas ....................................................................................................................... 16 Table 1.7: Industrial Strategy Implementation Timeline ...................................................................................... 24 Table 1.8: Risks Associated with Industrial Policy and Possible Means of Mitigation ............................. 25 Table 1.9: Export Indicators, Target Sectors .............................................................................................................. 29 Table 1.10: Change in indicators of target sectors, 2010-13 ............................................................................... 30 Table 1.11: Growth Strategies of Targeted Sectors and Their Comparative Significance ....................... 31 Table 1.12: Status of Activities by Strategic Directions ......................................................................................... 32 Table 1.13: Status of all Activities on Action Plans for Target Sectors ............................................................ 32 Table 1.14: Institutions Responsible for Strategy Execution .............................................................................