Vahram Ghushchyan, Ph.D., AIPRG

1
Implications of Armenian Dram Appreciation for
the Competitiveness of Armenian IT, Tourism, and
Food Processing Industries

• Vahram Ghushchyan, Ph.D., AIPRG
• Mher Baghramyan, AIPRG

• Conference Looking Forward Global
  Competitiveness of the Armenian Economy

Washington, DC May 17-18, 2008
2
AMD/USD Nominal Exchange Rate, Armenia
  1997 2002 2003 2004 2005 2006 2007 May 2008
Nominal Exchange Rate, AMD/USD, (year average) 490.8 573.4 578.8 533.5 457.7 416 342 310
Change in Nominal Exchange Rate, to previous year   3.3 0.9 -7.8 -14.2 -9.1 -17.8 -9.4
Source NSS of Armenia
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Methodology Stochastic Frontier Model
Technical Inefficiency
Allocative Inefficiency
Inputs
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Methodology (continued)
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Collected Data

• 23 Food Processing Companies
• 13 IT companies
• 15 Incoming Tour Operators
• 7 Hotels

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Mean Annual Values per Company, 2006
  IT Hotels Tour Operators Food
Revenue, USD 489,942 761,072 170,209 1,346,085
Profit, USD 57,466 303,894 26,209 155,653
Capital Assets, USD 348,788 3,295,673 44,524 415,954
Labor, persons 51 71 13 71
Monthly wage of productive workers, USD 329 111 173 81
Wage of admin. workers, USD 380 250 183 158
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Model 1 Translog Production Function
Model 2 Cobb-Douglas Production Function
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Technological Progress (TP)

• TP is calculated as a derivative of the
  production function with respect to time
• If TP is positive (negative), then the production
  frontier shifts up (down).

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Summary Statistics of Technical Efficiency (te1)
by Company Type, Average 2003-06
Obs Mean Std. Dev. Min Max
Hotels 22 0.43 0.21 0.21 0.86
IT companies 27 0.50 0.27 0.06 0.86
Tour Operators 22 0.52 0.23 0.10 0.87
Food Processing companies 73 0.26 0.25 0.03 0.82
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Mean of Estimated Parameters, IT and Tourism
Industries, 2003-06,
year te1 te2 tp1 tp2
2003 0.44 0.47 -0.23 -0.08
2004 0.49 0.52 0.02 -0.08
2005 0.50 0.55 0.18 -0.08
2006 0.49 0.55 0.27 -0.08
Note te technical efficiency, tp
technological progress. 1 and 2 refer to the
Translog and Cobb-Douglas production functions
respectively.
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Mean of Estimated Parameters, Food Processing
Industry, 2003-06
year te1 tp1
2003 0.263 -0.538
2004 0.260 -0.162
2005 0.268 0.100
2006 0.267 0.238
Note te technical efficiency, tp
technological progress. 1 refers to the Translog
Production Function.
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Regression Outputs, using Nominal AMD/USD
Exchange Rate

• te1ITTOUR 0.3554323 0.0002701exch
  0.0011503infa 0.0002147inff
  0.0005063exp 5.09e-07marketr
  0.0279733tour 0.0501147hotel
• te2ITTOUR 0.4780624 0.0000438exch
  0.0001404infa 0.0002289inff
  0.0000968exp 1.24e-07marketr
  0.0578764tour 0.0000625hotel
• te1FOOD 0. 2681958 0.0000164exch
  0.0000148infa 0. 0003993inff 0.000027exp
  4.10e-09marketr
• significant at 10 significant at 5
  significant at 1.

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Regression Output, IT and Tourism, using Real
Effective Exchange Rate

• te1ITTOUR 0.6885364 0.0021411reer
  0.0006226exp 7.91e-07marketr
• 0.0278303tour 0.0513877hotel
• te2ITTOUR 0. 5328573 0.0003383reer
  0.0001125exp 1.65e-07marketr
• 0.0578545tour 0.0001084hotel
• significant at 10 significant at 5
  significant at 1.

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Estimating Loss in Export of IT and Food
Processing Companies 1

• ExportIT 64415.22 244478 te1
• ExportFOOD 147614.9 743663.2 te1
• 10 improvement in the degree of technical
  efficiency of an average IT company brings about
  24.5 million dram or 73.9 thousand USD of export
  and 74 million (about USD 225 thousand) of
  additional exports of processed food.

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Estimating Loss in Export of IT and Food
Processing Companies 2

• Loss in ExportIT 66,034Number of companies ?
  exchange rate13 IT companies Exchange Rate
  2004- 579 , 2006 416 AMD/USDExport Loss 140
  million AMD, or 13 of their actual Exports
• Loss in ExportFOOD12,196 Number of companies
  ? exchange rate
• 23 Food Processing companies
• Export Loss 45 million AMD, or 3 of their
  actual Exports

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Profit Loss of Tourism and Food Processing
Companies

• Each point of dram appreciation caused an average
  tour operator and hotel to lose about 112
  thousand AMD (about 340 USD) of profit before
  tax.
• Total loss - 401 million AMD or 15 of actual
  profit
• and
• Average food processing company lose just 14 USD
  of profit before tax which for our surveyed
  companies was slightly less than 1.

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Policy Recommendations

• Effect of Work Experience
• one year increase of average work experience of
  the companys staff offsets about 2 points of
  dram appreciation.
• Allow companies to spend more than 1 of revenue
  for training purposes
• Creating a link between educational institutions
  and employers in the area of curriculum
  development
• Exemption or delayed payments of VAT on
  Investments and/or Import of capital assets

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A. How much would be the difference (in
percentage terms) of Companys 2006 revenue, if
the exchange rate remained at the level of 2003,
i.e. 580 drams per 1 USD?

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B. What AMD/USD exchange rate would be the most
favorable for Your Company and would make it
competitive?
AMD/USD
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C and D. What is the percentage change of
Companys Domestic prices (in AMD) and Export
prices (in USD) compared to 2003?
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E. What percentage of your Companys capital
assets and human recourses is being used (rate of
utilization), on average, during year?

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F. Please, evaluate State Your Company
interrelations according to 0-10 point system (0
- extremely unfavorable, 10 - the most favorable).
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• THANK YOU!
• Emails mher_at_aiprg.net
  ghushchy_at_yahoo.com