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The secret of economic growth is hidden in the constitutionalism Hayk Sargsyan

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09:30 , 09 Հոկտեմբեր 2017

Hayk Sargsyan, Dean of the Faculty of Economics and Management of YSU, Doctor of Economics, Professor is convinced that the high level of constitutionalism is the guarantee of economic development of Armenia.

So, our conversation with Hayk Sargsyan is not only and not as much about the economy, but the constitutionality and its impact on the economy.

* * *

Mr Sargsyan, let’s start with the latest economic indicators. The preliminary macroeconomic indicators for January-July 2017 have already been summed up and a 6.2% growth of economic activity has been recorded. What does this number tell you, and with what result will we summarize the year 2017?

There are several indicators that are really the basis for optimism, for example, the mentioned 6.2% growth of economic activity. I think the year will end better than planned by the budget, i.e. we will have around 4% growth of economic activity instead of 3.2%.

The prerequisites for economic growth reflected in the government program and, first of all, the atmosphere of trust is the basis for my optimism, which I wish were more intensive and continuous. I don’t want to cite many numbers, but in terms of improving the mechanisms, the Government program really provides opportunities for economic growth and development, and in the medium-term expenditure plan they have already been fixed in the form of figures.

As for the mechanisms, I should emphasize, for example, the idea of the I​investment Fund included in the program. However, this should not be merely acknowledged and remain on paper. The formation and operation of an investment fund should become a real process. I must say with great pleasure that concrete steps have already been taken in this regard, namely, the Central Bank has initiated a transformation process and, as a result, in August this year Panarmenian Bank transformed into the Investment Fund. The Fund will allow raising funds through fundamentally various means within the country and abroad with very small amounts, and for certain programs, which can become a serious driving force for the economy. I would like to note that the Investment Fund operates by mechanisms essentially different from banking regimes, which in this case is advantageous.

Do you think foreign investments will be made as announced, i.e. 830-840 million dollars this year, and 3.4 billion dollars in 5 years?

I think yes, but maybe with small deviations, so investments will be the source of economic growth. I mean not only foreign direct investments, but also internal resources. Investments should be mandatory, because there is no alternative. We economists know very well that countries like ours have to provide investments up to 1/4 of GDP to ensure 5-7% economic growth. In our case, in the case of about 10 billion dollars of GDP, annual investment must be 2-2.5 billion dollars. Whatever we do, we have to solve this problem.

– Yes, we have to, but how?

I am not going to speak about improvement of different environments and other factors. The most important thing to do is increase the level of constitutionalism in the country.

In general, it should be borne in mind that long-term sustainable socio-economic development in Armenia will continue in the coming years in terms of two groups of restrictions. The first group of restrictions is the fact that we have been forced by the actual situation of war and partial blockade. I consider these restrictions a set of unique transaction costs, which also places an additional burden on business.

I am convinced that this situation may be overcome by the most favorable structural transformation of the economy, and this is a topic for a separate discussion.

The second group of restrictions is the obvious deficit of constitutionalism. Surely, this circumstance is not only characteristic of us. It is expressed differently in different countries. It should be noted that the reduction of this deficit is mainly conditioned by the effectiveness of public administration system. Knowing this is the most important thing.

– What do we mean by constitutionalism and deficit of constitutionalism?

It is about the norms stipulated by the Constitution, and their implementation. In case the norms of the Constitution are not properly brought to life, we have a deficit of constitutionalism. This deficit has always existed in different countries, including Armenia, with varying degrees. This deficit is the reason for the loss of confidence and optimism of people, which leads to their negative behavioral consequences, i. e. indifference, lack of civil and social activism, lack of resourcefulness, etc. And today, the most important issue is the reduction of the deficit, since the guarantee of socio-economic progress is hidden here. The high level of constitutionalism can really create enough preconditions for ensuring high level of economic growth and economic development.

Do you mean that the secret of our long-term economic growth is hidden in the Constitution?

In the constitutionalism, and not the Constitution. In other words, how the norms stipulated by the Constitution are actually brought to life. The characteristics of the status of constitutionalism should be on the “radar screen” of the Government.

Many norms included in the Constitution, such as economic, democratic, legal, social, political, etc., should be viable and maximally implemented.

Let me clarify the issue of constitutionalism by the example of one of the specific norms. Article 200 of the Constitution states that the main objectives of the Central Bank of the Republic of Armenia are to maintain price stability and financial stability. Inflation control was the previously applied norm. That is to say, ensuring financial stability became a constitutional norm, which will have a positive impact on the expectations of people and business entities. This is just one of the hundreds of norms. There are other norms associated with a decent standard of living, employment, education, physical, mental and corporate property rights, the possibility of free competition, and other socio-economic norms. With respect to the legal and democratic spheres, we should mention the norms on independent judicial system, civil society, independent media, etc. The level of constitutionalism in a specific country may be described due to this set of norms or, in other words, by means of such indicators.

The deficit of constitutionalism, in fact, hampers our economic growth. How? To what extent?

– It’s one of the most important issues. There are still no effective mechanisms for assessing the economic consequences of legal regulations. More precisely, we will not have suficient solutions for the regulations, if we don’t know how and to what extent the improper implementation of a certain norm of the Constitution affects the economy. We will not be able to identify problems that need to be addressed, unless appropriate mechanisms are established and the consequences are assessed. This will result in the fact that we will not have the full implementation of potential in socio-economic field.

For instance, in the pre-election programs of different parties, various theses were declared, such as we are going to do this or that. No one has tried to assess the damage or the benefit in case those theses were brought to life. I don’t want to give political impetus, but there were really dangerous theses that could undermine our economic system and the basis for sustainable development. Moreover, I think that certain draft laws adopted by our Parliament have been harmful to the society …

Is the level of constitutionalism measurable? Is it possible to compare the level of constitutionalism of different countries?

– Yes, and we already have certain methodologies for assessment. If we try to introduce the level of constitutionalism through different indicators, we classify them the following way: norms of the rule of law and norms of sustainable development. In particular, due to these components, we can speak of the level of constitutionalism in a specific country. That was one of our perspectives when the Scientific-Analytical Center for Constitutional Economics was established.

In one sentence, development of mechanisms for economic legal regulations and assessing their consequences, as well as management of deficit reduction processes are the main objectives of the Center. Naturally, the level of deficit should be revealed first of all, and we must find out the “narrow places” and the “locomotive” constitutional norms which should be prioritized.

Establishment of assessment methods allows not only to solve the issue of revealing the level of constitutionalism, but also to manage the process of overcoming the deficit of constitutionalism in the country. That means not only to identify the issue, but also resolve it. That is why when talking about the issue of constitutionalism, we distinguish the following three words: diagnostics, monitoring and administration.

You speak of constitutionalism; however, the necessity of system changes is raised from time to time, and especially by the opposition. Isn’t this a radical way to solve the issues?

The questions are just, but in what sense? We deal with a requirement of increasing the level of constitutionalism, in case we consider the vision of progress on the plane of system changes. When people claim system changes, they wish to see provisions in our Constitution implemented, for instance the provisions of the Article 1, i.e. a sovereign, democratic, and social state governed by the rule of law. Therefore, constitutionalisation and systemic changes are directed to the solution of almost identical issues.

One of the recent publications co-authored by you is titled: “Constitutionalism: Issues of Diagnostics, Monitoring and Administration.” What is it about?

The publication has been issued by the International Analytical Center “Constitutional Culture” in cooperation with the “Scientific-Analytical Center for Constitutional Economics” of the Faculty of Economics and Management of YSU. The present stage of scientific development includes the creation of techniques and tools for diagnostics, monitoring and administration of the level of constitutionalism. It has been implemented in different countries and their groups. After summarizing and completing the research, we will have exportable scientific results in our Center, and our efforts are directed toward it.

They say that even without such research, it is clear that we will trample on the spot unless the competition is improved, corruption is reduced, and the judicial system is improved. How justified is the need for scientific research?

– Surely, you are right. Moreover, we can continue listing the required improvements, i.e. separation of business and politics, the rule of law, formation of institutions, etc. All this is obvious, but only listing will be primitive. Here’s one example. We know the reason why apple falls from the tree, but when the same apple is placed in the hot air balloon, it rises. In both cases there is a scientific explanation. Constitutionalisation process in the country needs joint (i.e., network) solutions of various interconnected issues. They need to be monitored by a combination of certain indicators, combined with global development patterns. We cannot expect good results without proper scientific service and justification. Finally, the obstacles and impetus for progress should be identified in the causal linkage, as well as effective mechanisms for economic legal regulations should be established.

– According to the Government program, economic growth is targeted to reach an annual average of 5% in the coming years. Is this the maximum barrier that Armenia can claim in terms of the current deficit of constitutionalism?

– I think the potential for economic growth is much bigger. On the other hand, I also understand the Government’s caution to have a realistic barrier. But if we make consistent steps in labor organization, development and implementation of strategic programs, the opportunities will be much larger.

For instance, we have great opportunities in the field of nature management, since there are many problems accumulated in this field that need to be settled. Particularly, in the Syunik region, it is necessary to switch from simple extraction of concentrates to outcomes (rare metal extraction, etc.). Or, for instance, we don’t fully use our land, in particular, 1.8 million hectares of agricultural land. I am from the Talin region, and every time I go there, I regret that the land areas all along the road from Ashtarak to Gyumri are not used. These areas could be simply turned into orchards.

– What hinders it?

I think, first of all, what hinders is the poor understanding that we already have an investment in the form of that land. An example of agriculture of Israel is often given. However, it was more difficult because they first had to get that land by turning the desert into a usable land. In our case this problem is solved. We must only work and ensure a high level of constitutionalism, favorable investment climate so that these territories are exploited.

Let me add something about the link between constitutionalism and economy: today’s economic thought has come to the conclusion that development of institutions is the most effective way of management. We will have a good economy if we have good institutions like the State Commission for the Protection of Economic Competition or the Public Services Regulatory Commission, etc. If you don’t have such institutions, you will not be able to use the growth potential.

Daron Acemoglu attaches importance to the role of institutions and notes that their development is caused by the level of of democracy. For instance, institutions operate in Singapore, but there is no democracy. How important is Democracy? Is it possible to have good institutions without sufficient level of democracy?

Who said that democracy or authoritarian system are not institutions? Yes, these institutions differ. But the question is whether we adopt European or Eurasian values. It would be desirable to have European models in the field of management.

I follow the economic situation and analytical thinking in Russia. During the last two decades, the average annual economic growth rate was 7% in the first decade, and in the second decade (2007-2016) economic growth rate, in practice, was near zero percent. What do you think the consequence is? The low level of constitutionalism. Of course some analysts think it is due to oil prices, but others make certain analysis and prove that the decline is only 20-25% due to oil prices. The main reason for the decline is the low level of constitutionalism.

Our methodology allows making that assessment in the countries in transition. With regard to the general level of constitutionalism, Armenia is far more favorable than the countries of Eurasian Economic Union. We are ahead of Russia and Kyrgyzstan, as well as Ukraine, Uzbekistan and Azerbaijan, which are not member states of Eurasian Economic Union. But this is not our barrier. In comparison, if we are in a better condition than those countries, it does not mean that we have to be satisfied with what we have.

We have benn a member of the Eurasian Economic Union since 2015. If the level of constitutionalism in Russia, the main player in this Union, is lower than in Armenia, what will integration give us in that respect? Will we encourage them to raise the level of constitutionalism or will they slow down us?

The issue of interacting with each other is in another dimension. No matter how unfavorable, according to individual assessments, the Eurasian Economic Union is, we cannot put the security component aside. Therefore, it is necessary to continue the cooperation on the political and economic fronts according to the “and-and” formula and integrate into the Eurasian space and the European system of values. Let me remind you that about 2 weeks ago, President Serzh Sargsyan once again affirmed that Armenia will sign the Comprehensive and enhanced partnership agreement with the EU in autumn and that there are no reasons for not signing it. This indeed means that the Government is guided by the “and-and” formula.

A team of economists headed by Kudrin, former Finance Minister of Russia, will develop a long-term economic policy in Russia to 2025. The country’s top economists, like Auzan, Dean of the Faculty of Economics of Moscow State University, are involved. Are such discussions conducted in Armenia with the participation of scientists? As a Dean of the Faculty of Economics of YSU, are you involved in such discussions with the Government?

Of course, we do not avoid such discussions. I am also a member of the Public Council, and I raise many questions indeed. I raised the issue of the Investment Fund four years ago as the most important mechanism and the best possible use of potential. Today, the idea of our economic community and our faculty is heard to some extent. Yes, it is heard, but they also should be consistent in realization of rational questions.

During our conversation, you emphasized several times that you are optimistic. What is the reason for such optimism? What has changed or evolved, that gives optimism?

– I think, today the President and the Prime Minister of the Republic solve a common issue of developing the country. Regardless of permutations and changes, I am convinced that the steps for improvement of the overall governance of the country will be continuous. We must be able to use our potential throughout more than 40 thousand square kilometers together with Artsakh. At long last, these “miracles” in all countries like Singapore, China, etc., were conditioned by the increase of the level of constitutionalism. This is the prop or cornerstone.

As for my general optimism, to be clearer, let me tell you one episode. On the day I was preparing a presentation on the Constitutional diagnostics, on the media accidentally I read an interview with a 20-year-old soldier Davit Vardanyan. He expressed the following idea: “I see Armenia as an intellectual, economic and cultural node. Our ability to understand and build relationships with other cultures gives us an exceptional competitive edge and enables us to become a leader in the region.” I liked this idea so much that I made it the epigraph of my presentation.

I must say that I only learned later that the 20-year-old soldier is Ruben Vardanyan’s son.

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