Food for Thought for Armenia’s Development - Lilia Aleksanyan and Jules Hugot | Asian Development Bank

Food for Thought for Armenia’s Development - Lilia Aleksanyan and Jules Hugot

Op-Ed / Opinion | 31 May 2018

As a new government sets its agenda in Armenia, now is the time to look ahead on the policies that could speed up economic development. This column argues that Armenia should develop value chains based on its world class fruits and vegetables, to increase exports while protecting the environment.

Armenia is a small economy. As a result, Armenia cannot produce large quantities of all products, a major setback to its global competitiveness in the sectors where size matters. The country thus needs to focus on a few export products for which it has a comparative advantage. If economic theory is any guide, Armenia should export goods for which (i) it can produce better or more cheaply than other countries, (ii) production of small quantities is viable and (iii) foreign demand can be reached relatively easily. Processed fruits and vegetable products satisfy all three criteria.

The mild climate of the Ararat plain enables yearlong cultivation of fruits and vegetables, under greenhouses. However, Georgia and regions with similar climates in Turkey have been more successful at exporting such products. In 2016, Armenia exported $226 million of fruits and vegetable products – raw and processed –, about half the $436 million exported by Georgia, accounting for just $449 per hectare of suitable land in Armenia versus $718 for Georgia (Figures 1 and 2). This suggests a large remaining potential for exporting fruits and vegetable products.

Cognac accounts for 60% of Armenia’s exports of fruits and vegetable products ($141 million), far ahead of raw fruits and vegetables ($55 million). Conversely, exports of other processed fruits and vegetable products – e.g. jam, fruit juice, sauce, soup – barely reach $31 million (Figure 1). This suggests an even larger export potential for processed fruits and vegetable products, beyond Cognac. Moreover, the food processing industry could be a major source of quality job creation – especially in rural areas.

Armenia’s fruits and vegetable products remain virtually absent from the European Union (EU) market. The EU market is more than 11 times larger than the Russian market; and Armenia’s total exports to the EU are 1.5 times greater than to Russia (Figure 3). Yet, less than 4% of Armenia’s exports of fruits and vegetable products are bound for the EU (Figure 1). Weak exports to the EU also stand out in the comparison with other countries: Armenia’s exports to the EU barely reached $3 per capita in 2016, compared to $51 for Georgia (Figure 4), despite benefitting from a similar trade regime for trade in fruits and vegetable products.

Some successful firms have seized opportunities in the Russian market, but the EU potential remains virtually untapped. One single firm – Spayka – contributes more than 90% of Armenia’s $19 million exports of tomatoes. Similarly, Pernod-Ricard and Multi Group contribute the vast majority of Cognac exports. But more than 85% of these products are sold in Russia. Of course, the EU market is more demanding: product quality and certification requirements are constraining and competition is fierce, but the payoffs may also be larger. Securing market shares in the EU is therefore primarily a matter of product quality and certification, marketing, and transport costs.

To secure market shares, Armenia should specialize in high quality products, which have seen the highest increase in consumption in mature markets such as the EU. Certified organic products have huge potential, not only because they are better for the environment, but also because they command higher prices. The government could set up rules to ensure compliance with international organic production standards, and then negotiate an equivalence agreement with the EU. More generally, the government could actively support prospective exporters to comply with EU norms and the additional certifications requested by most EU buyers, including traceability, phytosanitary, labelling and packaging standards.

The government should strive to stimulate foreign demand for Armenian products, beyond the diaspora and traditional markets in Russia. A campaign to build a reputation for selected Armenian fruits and vegetable products should be launched in Europe. Most Europeans have never heard of Armenian Cognac, let alone wine, grapes, or apricots: this needs to change.

Access of goods and people from and to Armenia should be facilitated, through stronger regional transport links and diplomacy. Better quality and quicker transit would make Armenian products more competitive abroad and foreign goods cheaper for Armenians. The efforts already put in the North-South Road corridor need to be maintained. Beyond infrastructure, foreign policy can also facilitate trade. As 85% of Armenia’s trade transits through Georgia, Armenian diplomacy should lobby hard to facilitate overland transit through Georgia. More generally, any initiative to facilitate transit through Georgia should be encouraged, perhaps even by financially contributing – even symbolically – to investment on Georgian soil that would have strategic importance for Armenia.

The government should ensure competition in food-processing and transport, and protection of the environment. Fair and transparent markets are the only antidote to a few oligarchs appropriating most of the wealth. It also leads to higher international competitiveness, better pay for workers, and lower prices for consumers. The government needs to provide the appropriate legal framework to ensure that emerging actors can compete with large incumbents. One way could be to support cooperation among small producers to collectively export to large markets. This can be achieved by sharing costly resources – cold storage, processing facility – across farmers, through setups such as cooperatives. Finally, the government should always ensure that development does not come at the expense of the fragile environment of Armenia.

Armenia has tremendous human and natural resources. Through the right investments and good public policy, it can grow the economy, create quality jobs, and earn Armenia its rightful place as a global leader in high quality food production.

Lilia Aleksanyan is a Senior Lecturer, University of the Philippines School of Economics.

Jules Hugot is economist, Asian Development Bank.