Adjunct Professor Yan Islam was invited by the International Labour Organisation (ILO), Moscow and the Ministry of Labour and Social Affairs of the Armenian government in April to undertake a study on macroeconomic policy, growth and employment in Armenia. As the terms of reference were rather broad, he decided to focus on fiscal consolidation and its growth consequences. Armenia was in the middle of one of the most ambitious fiscal austerity programs in Central Asia and Eastern Europe – a harsh reality that has been recognised by major international agencies (IMF and World Bank). Fiscal austerity is driven by a rigid interpretation of Armenia’s public debt law which stipulates that public debt to GDP ratio must not exceed 60 percent and that, even if it crosses 50 percent, necessary action needs to be taken in order to bring down the fiscal deficit to a very low level.
Professor Islam argued that the fiscal consolidation program has inflicted considerable damage to growth and employment prospects. It has jeopardized Armenia’s long-term development aspiration to become an upper middle income country with plentiful supply of good jobs and low levels of material deprivation.
This study – which was well-received by local stakeholders when it was presented at a workshop in Yerevan, Armenia (26 May, 2017) – complements others that Professor Islam has done for various countries (Azerbaijan, India, Egypt) all of which have been sponsored by the ILO. Drawing on an extensive literature, he argues that the preoccupation with prudential limits to debt-GDP ratio is not rooted in theory and is not supported by empirical evidence. It is very difficult to substantiate the view that a resolute commitment to fiscal consolidation will boost private sector confidence to the point where more spending and investment will be forthcoming to offset contractionary consequences on aggregate demand of cuts in public expenditure. In Armenia, as elsewhere, spending cuts have led to substantial decline in public investment and on essential expenditure on health and education. This has deleterious consequences on long-term growth and productivity. The study concluded by arguing for a ‘growth and employment friendly’ fiscal policy which will seek to enact a sustainable resource mobilization strategy to support spending initiatives on public investment, health, education, social protection and active labour market policies.
The results of this study will be presented at a Griffith Asia Institute research seminar in September of this year by Adjunct Professor Yan Islam.