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Implications of Armenian Dram Appreciation for the Competitiveness of Armenian IT, Tourism, and Food Processing Industries Vahram Ghushchyan, Ph.D., AIPRG Mher Baghramyan, AIPRG ConferenceLooking Forward: Global Competitiveness of the Armenian Economy Washington, DC May 17-18, 2008
AMD/USD Nominal Exchange Rate, Armenia Source: NSS of Armenia
Production frontier Outputs . . . . . Actual production . . . . . . Source: Wu, 1996, modified by authors Methodology: Stochastic Frontier Model Technical Inefficiency Allocative Inefficiency Inputs
Collected Data • 23 Food Processing Companies • 13 IT companies • 15 Incoming Tour Operators • 7 Hotels
Model 1: Translog Production Function Model 2: Cobb-Douglas Production Function
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).
Summary Statistics of Technical Efficiency (te1) by Company Type, Average 2003-06
Mean of Estimated Parameters, IT and Tourism Industries, 2003-06, Note: te – technical efficiency, tp = technological progress. 1 and 2 refer to the Translog and Cobb-Douglas production functions respectively.
Mean of Estimated Parameters, Food Processing Industry, 2003-06 Note: te – technical efficiency, tp = technological progress. 1 refers to the Translog Production Function.
Regression Outputs,using Nominal AMD/USD Exchange Rate te1IT&TOUR = 0.3554323 + 0.0002701*exch*** – 0.0011503*infa – 0.0002147*inff + 0.0005063*exp** + 5.09e-07*marketr+ +0.0279733*tour – 0.0501147*hotel te2IT&TOUR = 0.4780624 +0.0000438*exch*** – 0.0001404*infa + +0.0002289*inff + 0.0000968*exp** + 1.24e-07*marketr + 0.0578764*tour + 0.0000625*hotel te1FOOD = 0. 2681958+ 0.0000164*exch*** + 0.0000148*infa + 0. 0003993*inff + 0.000027*exp – 4.10e-09*marketr * significant at 10%; ** significant at 5%; *** significant at 1%.
Regression Output, IT and Tourism, using Real Effective Exchange Rate te1IT&TOUR = 0.6885364 – 0.0021411*reer*** + 0.0006226*exp* + 7.91e-07*marketr + + 0.0278303*tour – 0.0513877*hotel te2IT&TOUR = 0. 5328573 – 0.0003383*reer*** + 0.0001125*exp** + 1.65e-07*marketr + + 0.0578545*tour – 0.0001084*hotel * significant at 10%; ** significant at 5%; *** significant at 1%.
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.
Estimating Loss in Export of IT and Food Processing Companies 2 Loss in ExportIT = 66,034*Number 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 ExportFOOD=12,196 *Number of companies * ∆ exchange rate 23 Food Processing companies Export Loss: 45 million AMD, or 3% of their actual Exports
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%.
Policy Recommendations • Effect of Work Experience: one year increase of average work experience of the company’s 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
A. How much would be the difference (in percentage terms) of Company’s 2006 revenue, if the exchange rate remained at the level of 2003, i.e. 580 drams per 1 USD? %
B. What AMD/USD exchange rate would be the most favorable for Your Company and would make it competitive? AMD/USD
C and D. What is the percentage change of Company’s Domestic prices (in AMD) and Export prices (in USD) compared to 2003?
E. What percentage of your Company’s capital assets and human recourses is being used (rate of utilization), on average, during year? %
F. Please, evaluate State – Your Company interrelations according to 0-10 point system (0 - extremely unfavorable, 10 - the most favorable).
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