Debt, Taxes, and Confusing Economics
BY GAREN YEGPARIAN
It all started with “Electric Yerevan” and its demonstrations opposing the third time utility rates were being jacked up in four years. Then there was the government’s overreaction and ultimately, its pledge to conduct an audit of the electric utility and subsidize the higher electricity prices for those in need through an “off budget” funds … whatever that means.
Coincidentally, just as street demonstrations were simmering down, someone sent around an article from “The Guardian” titled “14 countries are spiraling towards government debt crises” which included, you guessed it! Armenia! This led to some research and discussion with an economist friend to grasp what was going on, and, of course, it wasn’t clear. But, a little bit of explanation is bound to be better than none, so here’s my attempt.
It turns out that the 14 countries in question are at risk because of their high foreign-debt-to-GDP (gross domestic product) ratio which puts them at severe risk of disaster if their economy takes a turn for the worse or interest rates on international markets go up. What matters in all this gobbledygook is that the Republic of Armenia is at risk because this ratio is high for a country such as itself.
Why is it high? There are a number of reasons. This ratio has increased ever since the 2008 worldwide economic downturn, and has not started going back down as things have improved slightly. Armenia is highly dependent on remittances from expatriates, primarily in Russia and the U.S., but other countries as well. Thus, if economies slow down in those countries, no matter what’s happening economically in Armenia, things will get worse for people. Basically, think of what has been happening to Greece, and you’ll have a good idea of what might happen to our homeland. You might also remember the troubles that South American countries had in the 1990s. Those stemmed from similar debt situations.
Yet, high debt/GDP levels aren’t necessarily bad. If that debt is coming from building up physical (roads, factories, energy sources) or human (education, health) infrastructure, then it is generally considered acceptable to have higher debt levels since the money was invested in things that will pay off later. Another reason why high debt might not hurt too much is that the country has a good tax-revenue-to-GDP ratio.
But… Armenia does not have a good tax/GDP ratio. The “tax” part of this includes ALL taxes, i.e. including things like social security, state, local, and anything else government collects. This ratio (as a percentage) lies in the mid-30s in the developed world. The U.S. is an outlier at around 25% over the course of the last half century (it is considered a tax haven!). Countries that have, extract, and export a lot of natural resources (especially oil) tend to have a lower percentage because they get a lot of money from the sale of the resources. For example, Saudi Arabia’s is under 4%! Getting back to Armenia, the percentage is in the low-20s, and that’s up from the mid-10s a decade ago.
Simultaneously, because of the corruption that is rife in Armenia, the money that has entered the country by way of international loans has not been optimally used. So the infrastructure benefits that might have otherwise accrued cannot be expected to the same degree.
Where does that leave us? It gives us one more front in the battle to improve the condition of our homeland. It leaves us with even more urgency to expose, confront, and reduce the corruption that is sapping the country’s economic vitality. It leaves us with the reinforced conundrum of whether to support, oppose, or be indifferent to international loans that come up and are made to Armenia. Imagine how much worse it would be for the average person in the country if a Greece-like situation were to develop there.
Link: Debt, Taxes, and Confusing Economics