1. Background Information

General

The territory of Armenia, a Caucasian state, is 29,743 square km. In accordance with the 2002 census, Armenia is populated with 3.21 million people (1.29 million less than in 1990), with 64.57 % of urban population (including 34.33% living in Yerevan) and 35.43 % of rural population. The 2003 birth rate is 11.2 per thousand population (in 1989 this indicator was 21.6). The Republic enjoys dry sharply continental climate with high risk agriculture.

The 2004 GPD was $3.6 US billion. The per capita GDP is $1099 US. The external sovereign debt is $ 1.084 US billion. Agriculture including forestry employs 46% of the working population. As of March 1, 2005, unemployment was 9.1% (apart from hidden employment). Below the poverty line (the 2002 data) is 49.7% of the population including 13.1% people living in extreme poverty.

General Economic Characteristics

Between 1990 and 1994 GDP decreased more than double fold by 53% (collapse of the single economic space of the former USSR, the first stage of the reforms, transport blockade and energy crises). Since 1995, following the continuation of the NPP operation, the national economy started slowly recovering.

The official statistics showed that the 2004 GDP reached 99.6% of the 1989 GDP, with the 2004 per capita GDP surpassing the level of $1,000 US (Figures 1 and 2). Therefore, it has been three years since the Republic of Armenia has been ranked a middle-income country rather than a low income one.

Figure 1. Per Capita GDP, $.

Figure 2. Annual Economic Growth

Though the country demonstrates polarization of population by income became lower (Gini coefficient in 1999 was 0.372, 0.344 in 2001 and 0.325 in 2002; the income ratio of the rich quintile to the poorest quintile in 1996 was 32, with the 2003 indicator becoming 17), this differentiation is still rather high. Therefore, the GDP growth was not accompanied with the adequate rates of poverty reduction.

Agriculture

In the context of the overall economic collapse of 1990-1994, agriculture remained only the only “living” sector, though a substantially degraded one. Looses in agriculture could be judged from the following indicators: throughout the transition period arable land areas decreased by 30-32 percent, perennial plants by 54%. Cattle farming and bee husbandry also suffered a lot. In recent years, along the overall economic recovery, there are signs of agricultural recovery in both crop growing and cattle husbandry. In 2002-2004 production of grain increased by 10%, vegetables – by 54%, potatoes – by 2004.

Recovery in agriculture is due to the following factors:

• Farming of those agricultural areas that were abandoned (not used) in the crises years;
• Partial recovery of the irrigation system and other infrastructure components;
• Improved agricultural productivity.

At the same time, agriculture still faces a number of severe problems (see below) preventing the full recovery of agriculture and its further sustainable development. As an example, we site here statistics on crop growing productivity showing that despite the above progress, the 1986 figures are mostly higher than 2004 figure on most products (grain, sugar-beet, tobacco, vegetables, fruits), except for potatoes and grapes.

Foreign trade

Trade of Armenia was growing during last years. The main trading partners do not now include the CIS countries (they account for 20.3% of national foreign trade), but EC (the original 15 EC countries account for 34.7% of trade, with 25 new EC countries claiming 36.5%). Taken individually, Russia is among the main trading partners accounting for 12.5% of trade, followed by Belgium (11%), Israel (9.8%), USA (8.5%), Germany 7.3%) Great Britain (5.8%, Iran (4.8%) and Georgia (3.7%). The situation may drastically change due to the restoration of the railway communication between Russia and Armenia. There is hope that the current negotiations on restoring the Georgia-Abkhazia section of the route will be successful.

Figure 3 shows the external trade figures of the country in 1996-2004 and forecast for 2005-2008.

Figure 3 shows the external trade figures of the country in 1996-2004 and forecast for 2005-2008.

Trends in Agricultural Imports/Exports

Imports are still a prevailing feature in the agricultural trade flow. Figure 4 and 5 show specific features of this process.

Figure 4. Pattern of Trade in Agricultural and Food Products

Figure 5. Share of Agriculture in Trade Between 1993 and 2004 (share in export, share in import)

2.WTO Status of the Country

Agreement of Accession

On February 5, 2003, the Republic of Armenia became the 145th WTO. The accession negotiation process lasted for 10 years. In 2002, bilateral and multilateral negotiations with WTO members were completed. The bilateral negotiations discussed goods and services trade, while the multilateral ones focused on the harmonization of the national legislation on trade and economics with the WTO agreements.

The package of the accession documents was approved by the Constitutional Court of the Republic of Armenia, adopted by the National Assembly and ratified by President. The discussions involved the following documents:

• The package of WTO agreements and the WTO Working Group Report on the accession of Armenia to WTO;
• The table of exports subsidies amount and domestic agricultural support;
• Table of commitments for trade in services and goods.

Armenia's trade and economic policies were based on principles of liberalism (in this context, this country is characterized by international organizations as “generally free” ranking 42 among 155 countries by an indicator such as economic liberalism). Therefore, the policy required no special conceptual changes. For example, under its bilateral negotiations Armenia undertook not to apply customs tariffs above 15% of the customs value of the goods following the WTO accession. Currently, the Government applies a simplified customs tariff scheme (ranging between 0 and 10 percent), which is lower the commitments.

To fully harmonize the legislation framework of the country with the WTO agreements, the Government developed and the National Assembly adopted laws regulating spheres such as customs valuation of goods, TRIPs, technical barriers to trade, sanitary and phytosanitary measures, agricultural production, etc.

WTO Accession Requirements Related to Agriculture

It is the agricultural aspect that raises the major concern, as this includes the following commitments:

As mentioned above, the country committed not to raise customs tariffs higher than 15% of the customs value of the goods covering both the agricultural and good products. This rule has operated for a long time and is not likely to lead any new risks. The concerns are mostly associated with taxation and subsidies related to the production and export of agricultural and good products. For example, agricultural producers are currently exempt from VAT (i.e. at the first stage of the sales process). The WTO commitments required elimination of these VAT exemptions.

WTO provided Armenia with a deadline till 2009 to implement the commitments. Towards the end of 2002, Armenia adopted the Law on Amendments to the Law on VAT concerning the elimination of VAT exemptions for agricultural producers. This Amendment will become effective as of January 1, 2009. Most of the experts believe that this will result in a severely painful process for agriculture and negative impacts for both agriculture and food industry.

In addition to this, exports subsidies are fixed at a zero level, i.e. Armenia will have no rights to subsidize exports of its agricultural and food products. The minimum level of domestic subsidies linked or not linked with individual products should be 10% before December 31, 2008 and 5% from January 1, 2009.

Issues of Sustainable Development in the Course of Negotiations

Unfortunately, prior to accession no analysis was conducted to assess the social and environmental impacts from the future WTO membership. No holistic approach to the problem was taken from the point of view of sustainable development.

At the same time, the risks are great that the cost of WTO accession may be too high. It is likely that creating equal competitive conditions in the market may lead to the destruction of the burgeoning small and middle-sized businesses in the country, in particular at the regional level. This runs in parallel with the process of the strengthening of the national currency (drum), which has been in progress throughout this year affecting the domestic producers (possibly in the short-term perspective). It should also be noted that the stronger national currency brings about the stability or (in most cases) increased prices for most goods including essential products rather than reducing them. All this exacerbates the unfavorable socio-economic situation in Armenia. This negative phenomenon should be viewed as a sign of the market that is not free, i.e. result of its monopolization.

The proposed elimination of the VAT exemption for the agricultural producers and the system of subsidies may result, as stated above, in negative consequences including the bankruptcy of some farms.

At the same time, any social and economic deterioration leads to the deterioration of the environmental conditions as vulnerable groups have to maintain their livelihoods by overexploiting the resources available and increasing the man-induced pressure on natural and artificial ecosystems.

3. National Policy to Mitigate Consequences of Agricultural Trade Liberalization

Current Situation

As stated above, the agricultural sector in Armenia is reviving and developing. The recent years the sector has received substantial investment flows both internal and external. There is a dramatic increase in the area of land which is not under cultivation. Most of the unused land is located in the border areas and this should be reflected in the agricultural support measures given the fact that farming of these areas is just not safe.

As the most profitable sectors of agriculture, gardening and grape culture demonstrated the highest rates of development over the last two years. According to the Ministry of Agriculture, in 2004 alone Armenia planted 1,500 ha of new vineyards and 1,000 ha of gardens. Today, the total area under gardens has reached 35,000 ha. We have every reason to believe, that this trend will continue. Today, agro-industrial complex accounts for about 35% of GDP, agriculture – 25%. The sector numbers 335,000 peasant holdings accounting for more than 98% of the total agricultural production.

The national policy to mitigate the consequences of trade liberalization should be aimed at overcoming the obstacles that are listed below to further develop agriculture and promote competitiveness of agricultural and food products.

Current Problems

The sector development faces (or would face in the near future) a number of problems including:

• Small size of peasant holdings

• One holding operates an average of 1.4 ha of land, which makes it difficult to apply modern technologies and machinery;
• The current 335,000 holdings employ about 550,000 workers, who are mostly seasonal and show low productivity of labor;

• Low yields caused by the inadequate use of fertilizers and pest and disease control

• Inadequate irrigation infrastructure (almost 30% of the land is not irrigated)
• It should be noted here, that even today many farmers find it difficult to pay for irrigation,
  while international financial institutions recommend to raise irrigation fees;
• Poor state of repair of the agricultural machinery
• There is a great demand for machinery in agriculture. Unfortunately, during the privatization process a lot of machinery was obtained by people and companies that had no interest in agriculture and it was sold as scrap to the neighboring countries. Also, the service life of most of the fleet is over 95% and it is very difficult to procure spares. Another reason for low efficiency of the fleet use is that it was meant to be used in larger collective and state farms rather than in the context of the current small holdings.
• High risk of natural disasters (mostly hail and draught)
• The existing hail suppression installations are obsolete and the new installations and charges cost a lot;
• Weak legal framework
• Insufficient number of centers for seeding, pedigree farming and veterinary
• Inadequate network of purchasing and procurement centers
• Limited agricultural market

• According to the authorities, the main reason for this is the transportation blockage of the country preventing agricultural exports. However, as indicated above, agricultural imports are 3-4 times as high as exports. This shows that there are additional mechanisms that distort the real situation by favoring agricultural imports rather exports as a whole including agricultural exports.

• “ 2009 problem” (deadline for elimination of VAT exemptions).

Some experts believe that the problem is not that dramatic this measure will be applicable only for farmers who have more then 30 million drum of turnover. It is it too high ceiling for most of the farmers and the proposed cancellation of the VAT exemption will not be applicable to most of them;

Others highlight the following points:

• The mechanism of subsidies will not work in the context of the weak institutional framework;
• The budget expenses will grow to finance additional infrastructure for taxation and subsidies;
• Given the current tax payment situation, we may well predict a shadow business in this sphere as well.

Current Objectives

The international experience shows that the Government can use the following mechanisms to subsidize agriculture:

• Direct payments from the budget;
• Soft credits;
• Debt redemption;
• Tax breaks;

These and other mechanisms allowed under the “green box” and partially under the “amber box” (taking into consideration the opportunities offered by the de-minimis provision) will allow the government to address the following objectives:

• Subsidizing land reclamation, in particular by irrigating vineyards and orchid plantations (especially, the young ones) promoting new plantations and vineyards;
• Establishing the system to provide farmers with quality seeds and pesticides; establishing a system to control the seed quality and pest control; restoring local seed centers;
• Facilitating the procurement of modern, in particular small-sized machinery adapted to the mountain conditions;
• Managing agricultural risks including mitigation of natural disasters; in this respect, some steps have been taken (though they took a lot of time) to establish hail suppression centers in the area that poses the greatest hail risk (Aragatsotn). These measures should cover the entire territory of the country.
• Establishing a mechanism to provide insurance against the risk of natural disasters;
• Promoting exports, in particular in the context of the transportation blockage;
• Subsidizing the introduction of good pedigree cattle species, restoring and developing the local pedigree and veterinary centers;
• Ensuring preferences in the procurement of local agricultural and food products to support local product prices as one of the government support options; establishing a network of procurement and processing centers and enterprises, including small slaughter houses;
• Subsidizing interest rates for farmers. The agricultural sector is commonly composed of three elements. About 5 percent of the farms are ranked as strong commercial farms capable of operating under the standard credit terms and conditions and pay back. Another part, which is slightly bigger, are farms that are similar to the above strong enterprises and could also use standard commercial loans but provided they rely on some institutional support. The rest of the farms are actually subsistent holdings that are incapable of payback. The subsidizing system for the first two groups could be established very quickly. This will require an arrangement with a bank that has branches in the rural areas. The Bank for Mutual Peasant Aid could actually serve as such a bank in Armenia.
• Supporting highland and remote communities; implementing at the initial stage a pilot subsidizing project in one of the most vulnerable agricultural regions; using the outputs to develop and implement national action plans;
• Subsidizing the entire agricultural support infrastructure including the restoration of rural roads and development of the irrigation network;

There is also a need in the institutional measures such as:

• Improving the accounting system in agriculture and incorporating a dedicated subsidy expenditure line into the national budget; reviewing an opportunity for the establishment of special funds;
• Developing a set of criteria to differentiate the operating agricultural entities by their needs in subsidies; identifying those agricultural entities that do not need subsidies;
• Improving the Land Code to facilitate the involvement of unused land areas;
• Initiating a comprehensive preparation of a system to subsidize farms prior to them becoming part of the taxation system in 2009;
• Developing by-laws to ensure the implementation of a national law aimed at adapting to the Sanitary and Phytosanitary Standards provisions as otherwise Armenian goods will not be able to access some of the foreign markets;
• Information, advisory and human resources services for the agricultural sector.

It should be noted that many of these objectives (most of them are under the “green box”) have been addressed to some extent by the Ministry of Agriculture under the Strategy for Sustainable Development of Agriculture in Armenia in 2004-2015 as approved by the Government of Armenia. What is needed here is to increase the scope and scale of these programs and enhance the regulatory role of the government in facilitating the production and marketing of the agricultural products.

There is an overall need in enhancing the responsibility and regulatory role of the Government to facilitate the production and marketing of agricultural products throughout the entire product cycle. One good example here is the activity of the Department of Agriculture in the USA, which is responsible for the entire cycle of the agricultural production and marketing.

Global Outlook

It would be wrong to maintain that debates of the opponents and proponents of free trade are no longer on the agenda. And this is not accidental. Liberalization benefits for global trade are clear. What is not clear is to how distribute these benefits among the countries. And this is the main stumbling block.

The modern economics are full of contradictions. Despite the proclaimed commitment to the principles of free trade, the western countries continue to use a hidden system of protection that makes problematic for the developing and competing countries to gain access to their markets. And since the developing countries are devoid of an opportunity to use such sophisticated and costly forms of protection they are likely to lose.

These developments resulted in a situation whereby the assessment of the role of WTO in the global economic process varies to a great extent. In fact, most of the developing countries concluded that WTO and the entire international trading system favors the developed countries and this brings about certain international tension. The fact that the developed countries subsidize their agriculture is the subject of debates at most international forums focusing on the issues of economic and sustainable development. The approach is gaining momentum in accordance with which the fair system of international trade should not only be based on the equal rules but also on the recognition of individual development stage of countries.

It is clear that the national policy to be pursued by Armenia should take into consideration these developments and new approaches. Therefore it makes sense to update the system of principles of the national foreign trade policy by reducing the radical accent in the liberalization policies. In particular, in order to protect domestic agricultural producers, it would be useful to increase the import tariffs to 15% of the goods value for those products that compete domestically with local products.

4. Potential Initiatives/Measures to Integrate Principles of Sustainable Development into Agriculture

In Armenia, integration of sustainability principles into the sectoral policies including in agriculture is rather slow due a number of objective and subjective reasons. In the context of transition, the social and environmental components of development have not been adequately considered. Antimonopoly policy has been implemented as strongly as it should have been.

As a result, we have a society with a high income differentiation (living below the poverty line is mostly rural and urban population) and a variety of signs signaling the degradation of the environment. Liberalization of agricultural trade may exacerbate the above situation.

Trade liberalization is closely associated with the critical environmental issue of today, genetically modified organisms (GMO) and GMO-associated food products. The legislation of Armenia does not provide as full treatment of this problem as it should. There are individual acts (but this is not enough) and no respective marking is applied. There are no laboratories capable of running tests for GMO and GM components. The Republic of Armenia signed and ratified the Protocol on Biological Safety and Convention on Biological Diversity (the Protocol was ratified by the National Assembly on March 16, 2004 and became effective on July 29, 2004). The Republic implemented a GEF-supported Program of Capacity Building regarding the implementation of the Protocol and is implementing steps to establish the National System of Biological Safety in keeping with this Protocol.

In order to pursue the policy of sustainable development of agriculture, it is advisable to develop and apply the following principle and approaches:

• Pursuing practical antimonopoly policy to target both agriculture (preventing monopolization of land use and fixed assets) and internal and external trade (exports/imports);
• Promoting cooperation of small farms;
• Enhancing control over compliance with land reclamation standards and pest control application norms;
• Phasing-in sustainable models of agricultural production (study and implementation of biodynamic farming in Dmitrov Settlement of Artashat Rayon including local traditions of sustainable farming;
• Facilitating energy supply to the rural areas focusing on the use of alternative renewable sources of energy to reduce cutting of forests;
• Developing agricultural and environmental tourism based on the extensive cultural and historical inheritance of natural resources of the country;
• Conserving and developing the unique biological diversity of the country including the restoration and development of local species;
• Intensifying efforts to establish the National system of biological safety aimed at minimizing GMO-associated risks;
• Preventing land degradation and desertification; ensuring access to the irrigation resources (both availability of irrigation at specific periods of time and affordability of this resource); restoring and developing protection belts; implementing steps for land reclamation;
• Implementing the system of differentiated taxation and investigating an opportunity for the establishment of free economic zones in order to properly manage the resettlement and urbanization issues (in particular, to solve problem of concentration of people in the capital of the Republic and outflow of population from the border areas);
• In addressing the resettlement issues and regulating migration, care should be taken of the fact that rural population is often the main carrier of the ethnic and cultural traditions, which should be conserved and developed in order to maintain the ethnic and cultural identity of the modern civilization.

The above principles and approaches in combination with the basic ideas outlined in Section 3 (National Policy), Action Plans with regard to the implementation of the signed and ratified conventions of the social and environmental importance, National Concept of Sustainable Development, National Action Plan for the Environmental Protection and Strategy of Sustainable Development of Agriculture in 2004-2015, will ensure that the agricultural sector in Armenia will be developing in line with the principles of sustainability.

5. Recommendations for Further Action together with Other Countries

It is believed that joint efforts could target the attainment of fair rules of international trade aimed at achieving sustainable development of all the member countries. Developing countries are being more active in international trade negotiations and we believe that it would be good if Armenia joins this cooperation. Economic cooperation between India and China may have a substantial effect on international trade and it is advisable to keep an eye on this process and try to adapt to the new realities in the most practical way.

Armenia may find it practical to cooperate with countries that have been developing under similar conditions. For example, common issues, problems, interests and, of course, similar positions could be found with:

• Land-locked countries;
• Dry climate countries where irrigation farming prevails.

At the same time, we believe that the most important benefits may be obtained through the cooperation among economies in transition of Eastern Europe, Caucasus and Central Asia, which have similar processes in the social and economic sectors. Though these countries enjoy a different WTO status, there is a need in the exchange of experience in this sphere and joint efforts aimed at establishing fair rules and integrating the principles of sustainability into the international trade. We also believe that it is necessary to make sure that the incentives applicable to the developing countries should also be applicable for the economies in transition.

Proactive and targeted cooperation among the countries in transition within the framework of WTO may give good results for both individual countries and group of countries.