## Real Growth in Armenia

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### Background
- Armenia’s economy: performed well since independence; GDP growth volatile and potential growth has fallen mainly due to a decline or limited growth in total factor productivity.
- Key vulnerabilities: landlocked with only two open borders out of four; narrow economic base; dependence on remittances and commodity export revenues.
- Model and authorship:
  - Prepared by Hamid Reza Tabarraei (MCD) and Michal Andrle (RES).
  - Uses the Middle East and Central Asia Department Module (MCDMOD) of the IMF’s Flexible System of Global Models (FSGM).
- High-level conclusion: full implementation of the reform package could increase real GDP by as much as 7 percent over the long run.

### Reform Program (policy measures simulated)
- Fiscal policy
  - Tax policy: migrate personal income tax brackets from 23/28/36 percent to a single rate of 23 percent (revenue-neutral); fiscal cost: 0.7 percent of GDP to the budget to be offset by other measures and improved compliance/revenue administration.
  - Pension reform: new self-financing defined contribution system mandatory for those born after 1973; government will match employee contribution at 5 percent of payrolls; could increase national saving by up to 3 percent of GDP in the long term.
  - Reduction in current spending: current spending decline by around 1.5 percent of GDP over three years (following new fiscal rule).
  - Increase in capital investment: public investment will increase by 0.8 percent of GDP over the next three years beginning from 2018; PPP law implementation to scale up infrastructure investment.
- Governance, corruption, and government efficiency
  - Assume government efficiency and business environment improve gradually; distance to frontier is cut in half over 10 years (mapped in model to productivity and Doing Business improvements).
- Labor markets
  - Measures to make wages more flexible and make employment programs more active (training compensation, youth programs, internships, re-engaging long-term unemployed).
  - Reforms could increase steady-state labor force and employment by 2-4 percent.
- Competition
  - Remove barriers to entry in tradable sector, improve contract enforcement, and use tax policy to level playing field.
  - Authorities’ diagnostic: profitability in non-tradable sector about 16 percentage points higher than in tradable sector; model incorporates a 3 percent increase in tradable-sector productivity phased in over 10 years.

### Fiscal Reforms Package — Simulation Results
- Overall: Full reform package simulated with MCDMOD produces substantial medium- and long-run gains; effects traced through TFP, labor supply, public investment, and composition of spending.
- Tax reform (revenue-neutral, lowering PIT to a single 23 percent)
  - Long-run impact: real GDP increases by almost 0.4 percent in the new steady state.
  - Labor force increases by 0.5 percent; real wage declines due to increased labor market competition.
  - Current account deteriorates due to stronger domestic demand despite some REER depreciation.
- Tax and spending reforms (combine tax reform with composition change)
  - Reduce current spending and raise productive public investment (reducing deficit by 0.7 percent over three years).
  - Debt-to-GDP ratio declines by more than 5 percentage points over 10 years.
  - Short-run: mild negative and temporary impact on GDP; Medium/long-run: permanently higher output and permanently lower debt-to-GDP ratio.
  - Current account improves due to lower imports and higher exports; private investment initially declines before public investment benefits materialize.
- Pension reform (raising private saving)
  - Assumption: permanent increase of private saving by 1 percent of GDP.
  - Short-run: GDP shrinks by 0.16 percent at its lowest point; consumption and investment fall initially.
  - Long-run (10 years): consumption, investment, and output recover; national saving increases, capital stock rises; current account improves immediately as savings increase and REER depreciates.
- Improvement in governance (mapped to TFP increase)
  - Assumption: Doing Business improvements mapped to a 1.5 percent increase in total factor productivity.
  - Permanent positive impact on GDP, consumption, and investment as productive capacity rises; higher real wages and private investment.
  - Current account: marginal deterioration as imports rise faster than exports due to higher domestic consumption and investment.
- Labor reform
  - Assumption: unemployment rate falls by 3 percentage points over the next decade.
  - Result: GDP and potential output increase by close to 2.5 percent; consumption rises but less than output due to suppressed real wages from higher labor supply.
  - Investment demand rises as marginal product of capital increases; current account only slightly worsens.
- Improvement in competitiveness (tradable-sector productivity)
  - Assumption: gradual 3 percent increase in tradable-sector TFP.
  - Result: higher domestic consumption and investment; demand for labor and capital intensifies; wages and disposable income rise.
  - Current account: temporary gain followed by mild deterioration as REER appreciates (Harrod-Balassa-Samuelson effect) partially offsetting competitiveness gains.

### Key quantitative outcomes and assumptions (selected)
- Potential long-run GDP gain from full reform package: as much as 7 percent.
- PIT bracket change: from 23/28/36 percent to single 23 percent.
- Fiscal cost of tax reform: 0.7 percent of GDP.
- Pension government match: 5 percent of payrolls.
- Potential increase in national saving from pension reform: up to 3 percent of GDP.
- Current spending reduction: around 1.5 percent of GDP over three years.
- Public investment increase: 0.8 percent of GDP over three years beginning from 2018.
- Tradable-sector productivity shock used in model: 3 percent (phased over 10 years).
- Expected labor force and employment increase from labor reforms: 2-4 percent.
- Simulated unemployment reduction scenario: 3 percentage points → GDP and potential output increase close to 2.5 percent.
- Tax reform long-run GDP increase: almost 0.4 percent.
- Pension reform shock (private saving): 1 percent of GDP increase → GDP shrinks by 0.16 percent at lowest point before recovering.
- Governance improvement mapped to TFP increase: 1.5 percent.

### Major macroeconomic impacts (summary)
- Successful implementation of comprehensive structural reforms can yield substantial impacts on growth, public finance, and external accounts.
- Based on scenarios in the chapter and upon successful implementation of all reforms, real GDP can increase by more than 7 percent.
- Key channels:
  - Change in composition of fiscal spending and reducing the deficit → significant impact on debt reduction.
  - Higher public capital investment, if well targeted to infrastructure or human capital development projects → can raise potential output.
  - Tax policy reform, accompanied by firm measures to improve tax administration → impact on compliance and tax efficiencies.
  - Pension reform → critical for future pensioners, fiscal sustainability, and capital market developments.
  - Economy-wide improvement in governance → increases potential output permanently and leads to higher growth in the transition process.
  - Labor market reforms → tackle high unemployment and have large impacts on consumption and investment.
  - Use of export potential and addressing weaknesses in the tradable sector → important for external sector performance.

### Model framework (Annex I — MCDMOD summary)
- MCDMOD: annual, multi-economy, forward-looking model combining micro-founded and reduced-form formulations; country blocks for Middle East and Central Asia economies.
- Consumption: overlapping-generations households and liquidity-constrained households.
- Investment: Tobin’s Q investment model; firms are net borrowers and risk premia vary with the output gap.
- Trade: reduced-form equations driven by competitiveness indicator (relative prices).
- Potential output: endogenous via Cobb-Douglas production function with exogenous trend TFP, endogenous capital, and equilibrium employed labor.
- Inflation: consumer price and wage inflation modeled by forward-looking Phillips’ curves; includes weight on real effective exchange rate.
- Monetary policy: interest rate reaction function; Armenia assumed to follow a flexible inflation-forecast targeting.
- Migration and remittances: bilateral migration and remittance flows; foreign workers remit and are liquidity constrained.
- Commodities: three commodities—oil, metals, and food.
- Countries differ by unique parameterizations though structurally identical.

### Expanding women’s role in the economy — key findings and policy directions
- Female labor force participation (LFP) and demographics:
  - Female LFP rate around 53 percent.
  - Gender gap in LFP rates about 18 percentage points (as of 2017, age 15+).
  - Population projected to decline to 2.7 million by 2050 from about 3 million in 2018; percentage aged 65+ expected to increase from about 12 percent in 2018 to about 23 percent by 2050.
  - Women have higher educational attainment: 1.3 women for every man with tertiary education.
  - Armenia ranks 98 out of 149 countries in the World Economic Forum’s Global Gender Gap Index with a general score of 68 percent.
  - Women in senior management: 29 percent (Armstat, 2018b).
  - Gender pay gap (ILO estimates): raw gender pay gap 20.3 percent; factor-weighted gender pay gap 26.3 percent.
- Policy measures recommended:
  - Improve provision of childcare and care for people with disabilities.
  - Promote better access to information technology to facilitate job search and flexible work arrangements.
  - Improve the education system to provide equal opportunities for males and females.
  - Implement gender budgeting.
  - Coordinate these with efforts to tackle slack in the labor market and promote job creation.

### Determinants and Economic Benefits of Female Labor Force Participation — Microeconometric Analysis (ILCS 2016)
- Method: Logit model using 2016 Household’s Integrated Living Condition Survey (ILCS).
- Key explanatory variables: age, edu, experience, mstatus, child (age groups 0-3, 4-5, 6-11, 12-17), disabled, ewellbeing (1 to 6, where 6 is the poorest), access (index for access to computer/internet/cellphone/credit).
- Microeconometric results (selected coefficients reported as in source):
  - age: coef 0.091 (Yerevan), 0.097 (Other urban), 0.049 (Rural), 0.014 (Armenia).
  - age^2: coef -0.001 across regions.
  - edu: coef 0.095 (Yerevan), 0.188 (Other urban), 0.219 (Rural), 0.076 (Armenia).
  - experience: coef 0.542 (Yerevan), 0.662 (Other urban), 0.264 (Rural), 0.652 (Armenia).
  - mstatus: coef 0.510 (Yerevan), 0.669 (Other urban), 0.585 (Rural), 0.121 (Armenia).
  - child_0_3: coef -0.323 (Yerevan), -3.683 (Other urban), -3.404 (Rural), -0.195 (Armenia).
  - child_4_5: coef -0.114 (Yerevan), -0.218 (Other urban), -0.460 (Rural and Armenia).
  - disabled: coef -0.579 (Yerevan), -0.579 (Other urban), -0.871 (Rural), -0.768 (Armenia).
  - ewellbeing: coef 0.263 (Yerevan), 0.114 (Other urban), 0.312 (Rural), 0.049 (Armenia).
  - access: coef 0.125 (Yerevan), -0.001 (Other urban), -0.094 (Rural), 0.096 (Armenia).
- Interpretation:
  - Hump-shaped relationship between female LFP and age observed.
  - Higher educational attainment is associated with higher participation, particularly in secondary cities and rural areas.
  - Previous working experience is positive and significant for participation.
  - Being married has a negative association with female LFP in many specifications.
  - Childcare responsibilities (especially children 0-3) and presence of disabled household members negatively associated with female LFP.
  - Lower household economic well-being associated with higher female LFP.
  - Access to IT and credit significantly associated with higher female LFP in Yerevan but not uniformly elsewhere.

### Productivity and Growth Accounting (Regions 2008–2017) — Panel and GMM Results
- Data: Panel for Armenia’s 11 regions (marzes) for 2008–2017; labor productivity measured as real value added per worker.
- GMM key coefficients (selected):
  - Level of labor productivity (t-1): coefficients -0.464**, -0.538***, -0.595***, -0.567***.
  - Growth of capital stock per worker: coefficients 0.448***, 0.375***, 1.126***, 0.527***.
  - Regulatory quality (t-1): coefficients 0.169**, 0.469***, 0.319**, 0.273**.
  - Rule_of_law: coefficients 0.25**, 0.682***, 0.498**, 0.525***.
  - GDP_gap: coefficients 0.001*, 0.002***, 0.015**, 0.002.
  - Labor force participation variables:
    - All females: coef 0.261** (one specification).
    - Females with high educational attainment: coef 0.483*** and 0.256*** (two specifications).
    - Males with high educational attainment: coef 0.418*** (one specification).
    - Females with low educational attainment: coef 0.194* (one specification).
- Memorandum items:
  - Number of Observations: 77.
  - Number of Provinces: 11.
  - AR(1) p-values: 0.006, 0.002, 0.010, 0.007.
  - AR(2) p-values: 0.073, 0.210, 0.099, 0.085.
  - Sargan p-values: 0.071, 0.170, 0.071, 0.104.
- Interpretation: Female labor force participation rates are positively and significantly correlated with labor productivity growth; contribution by women with high educational attainment particularly large.

### Simulation: Economic Impact of Closing Gender Participation Gap
- Baseline gender participation gap for high educational attainment: averaged 18.3 percentage points in 2008-2017.
- Potential labor supply increase:
  - Closing the gap could increase the number of highly educated female workers by up to 50,000, depending on labor market absorption capacity.
  - This increase equals 3.7 percent of total labor force (including both men and women with all levels of educational attainment at all ages).
- Productivity channel estimates:
  - Estimated coefficients used: 0.26–0.48 (standard errors 0.068 and 0.084).
  - Closing the gap could raise labor productivity growth by 0.8–2.5 percentage points.
- Aggregate GDP impact:
  - Adding labor supply and productivity effects, the level of GDP would be higher by about 4 to 6 percent, depending on labor market absorption capacity.
- Policy recommendations (integrated set):
  - Improve provision of childcare and care for people with disabilities; public spending on pre-primary education has been about 0.3 percent of GDP.
  - Promote better access to information technology.
  - Improve education system to provide equal opportunities and reduce gender streaming; promote women in STEM.
  - Implement gender budgeting and transition to program budgeting.
  - Tackle labor market slack and promote job creation to absorb new entrants.

### Labor market and education system — diagnostics and priorities
- Labor market and demographic indicators:
  - Recorded unemployment rate hovered around 18 percent since 2009.
  - Youth unemployment nearly double national average; youth unemployment about 40 percent (ages 15-19) and about 35 percent (ages 20-34).
  - Real GDP growth averaged 4 percent over 2010–18.
  - Total employment contracted by about 15 percent since 2010.
  - Population declined from around 3.5 million in 1990 to just under 3 million today; projected to fall to 2.7 million by 2050.
  - Working-age population projected to decrease by 8 percent by 2030 and 19 percent by 2050 from current level.
  - Annual net emigration in 2014-17 averaged 24 thousand people.
  - Labor force participation rate increased marginally from 59.5 percent in 2008 to 60.9 percent in 2017.
  - Share of labor force with intermediate education close to 70 percent.
  - Female LFP 52.8 percent; 18-percentage-point gap between male and female participation.
- Education system and TVET issues:
  - Gross enrollment in primary and middle schools ~90 percent; drops to 65.5 percent at high school level.
  - 16 percent of high school age cohort enrolls in vocational schools.
  - In academic year 2017-2018 STEM first degree graduates ~3200 (18 percent of all graduates).
  - Public education spending: MTEF 2019-21 envisages education expenditure at about 2.2 percent of GDP and 9.2 percent of total expenditures in 2020-21.
  - Public spending on pre-primary education about 0.3 percent of GDP.
  - Low pupil-teacher ratio: 9.6 average in 2017-18.
- Priority reforms:
  - Improve early childhood education, teacher quality, alignment of tertiary education with labor market, enhance education sector management and financial planning, reform TVET, support on-the-job training, and bolster active labor market policies.

### Active labor market — SEA and ALMPs
- State Employment Agency (SEA): mandate to facilitate job-worker matches and reduce skills mismatches; services free to jobseekers and employers.
- Coverage shortfall: In 2017, around 1800 people benefited from government programs, less than a quarter of the target.
- Skills mismatch statistics (2016 STEP-based study):
  - 66.2 percent of workers’ jobs require education that match their own.
  - About 5 percent under-educated for jobs.
  - 28 percent over-educated; over-education highest for ages 50-64 at 34 percent and for those with secondary specialized education at 56 percent.
- Reform actions for ALMPs and education:
  - Expand quality preschool, focus on children under 3 and rural communities.
  - Upgrade teacher education and participate in international assessments.
  - Promote STEM and embed entrepreneurship in education.
  - Modernize and standardize TVET; consolidate institutions; align with private sector needs.
  - Strengthen SEA capacity, integrated information systems, and targeted activation policies.
  - Authorities developing a comprehensive employment strategy for 2019-23.

### Anti-corruption findings and enforcement priorities
- Context and recent activity:
  - Peaceful political transition in May 2018; new government set anti-corruption strategy for 2019-2022.
  - 2018 enforcement: cases and prosecutions increased (Prosecutor General’s Office reports); convictions increased more than 3 times compared to 2017.
  - Anti-corruption campaign revealed damage to the state about AMD 64 bln during nine months of 2018.
  - State Revenue Committee reports recovery of about AMD 21 bln (1.7 percent of annual tax revenue target for 2018) by fighting corruption and shadow economy in 2018H1.
- Institutional weaknesses:
  - Asset declarations: centralized electronic system since 2014; in 2018 over 11,000 declarants and related persons processed; verification limitations; no requirement to disclose beneficial ownership.
  - Crime of illicit enrichment exists since 2016 but seldom used — only 4 cases brought before courts over past years.
  - Transition from CEHRO to Corruption Prevention Agency (CPC) interrupted functions; CEHRO had 17 staff.
  - Fragmented investigative architecture: SIS division 43 staff; Investigative Committee about 680 investigators; State Revenue Committee 29 investigators; National Security Service 20 agents—overlap leads to diluted capacity and focus on smaller-scale corruption.
- Enforcement bottlenecks and case attrition:
  - High attrition: 2016 Investigation 262; Prosecution 50 (19%); Adjudication 34 (13%). 2017 Investigation 287; Prosecution 72 (25%); Adjudication 41 (14%).
  - OECD and IMF note Statute of Limitations (SoLs) causing many case terminations; IMF estimates dismissals due to SoL as high as 30 percent in some years.
  - Table of cases closed for violating SoL (OECD, 2018): 2016 Number of cases 15; Percentage of Prosecutions 30%. 2017 Number of cases 7; Percentage of Prosecutions 9.7%.
  - Clearance rate of corruption cases halved over 2017-2018 and stands at 53%; backlogs building; courts unlikely to cope with projected increased inflow for 2018-2019.
- Statutory issues:
  - SoLs run from "completion of the corrupt act" and run uninterrupted; no suspension across investigation/prosecution/adjudication phases.
  - Value threshold restrictions: embezzlement criminality only if “significant scale”; abuse of office only if “essential damage”; difficulty defining these terms has constrained prosecutions.
  - Draft Criminal Code reportedly drops these qualifications; passage timing uncertain.
- Priority policy recommendations (institutional and statutory):
  - Concentrate investigative resources: enact legislation to concentrate resources into a single, autonomous anti-corruption agency with responsibility for investigating corruption.
  - Reinforce asset declaration and preventive framework: enact and operationalize CPC law; grant verification powers for forensic reconciliation and beneficial ownership disclosure; employ illicit enrichment provisions effectively.
  - Improve investigative capacity and coordination: address fragmentation; build analytical capacity for complex financial transactions and large network corruption.
  - Strengthen statutory framework: amend SoLs and value threshold rules to remove impediments to effective investigation and prosecution.
  - Ensure political and operational commitment: sustain high-level political commitment and donor coordination to implement 2019-2022 anti-corruption strategy.

### The need for a single autonomous anti-corruption agency (unified body)
- Rationale: a single specialized agency would optimize resources, develop expertise in undercover operations, classical investigation techniques, financial investigations, asset analyses, and public information analysis; could embrace investigative and prosecutorial functions.
- Case attrition and processing bottlenecks:
  - SoL-related dismissals and long court processing (debt enforcement cases can take up to 10-12 years in extreme cases).
  - Lack of specialized anti-corruption judges and specialized prosecutorial body; cases handled in courts of general jurisdiction.
- Recommendations:
  - Immediate measures to ensure continuity of asset declaration system through 2018/2019 and operationalize CPC.
  - Establish a single autonomous anti-corruption agency to address fragmentation and weak specialization.
  - Amend Statute of Limitations and Value Thresholds to avoid premature terminations of complex corruption cases.
  - Enhance public accountability via regular publication of key performance data.

*Source: IMF chapter “Real Growth in Armenia”, 1armea2019006 (May 3, 2019).*

### 1.    Real Growth in Armenia ______________________________________________________________ 4

### 1.    Real Growth in Armenia

### Background
- Armenia’s economy has performed well since independence but GDP growth has been volatile and potential growth has fallen, mainly due to a decline or limited growth in total factor productivity.
- Key vulnerabilities: landlocked with only two open borders out of four, narrow economic base, dependence on remittances and commodity export revenues.
- The chapter estimates that a full implementation of the reform package could increase real GDP by as much as 7 percent over the long run.
- Model and authorship:
  - Prepared by Hamid Reza Tabarraei (MCD) and Michal Andrle (RES).
  - Uses the Middle East and Central Asia Department Module (MCDMOD) of the IMF’s Flexible System of Global Models (FSGM).

### Reform Program (policy measures simulated)
- Fiscal policy
  - Tax policy: migrate personal income tax brackets from 23/28/36 percent to a single rate of 23 percent (revenue-neutral), costing 0.7 percent of GDP to the budget to be offset by other measures and improved compliance/revenue administration.
  - Pension reform: new self-financing defined contribution system mandatory for those born after 1973; government will match employee contribution at 5 percent of payrolls; could increase national saving by up to 3 percent of GDP in the long term.
  - Reduction in current spending: current spending decline by around 1.5 percent of GDP over three years (following new fiscal rule).
  - Increase in capital investment: public investment will increase by 0.8 percent of GDP over the next three years beginning from 2018; PPP law implementation to scale up infrastructure investment.
- Governance, corruption, and government efficiency
  - Assume government efficiency and business environment improve gradually; distance to frontier is cut in half over 10 years (mapped in model to productivity and Doing Business improvements).
- Labor markets
  - Measures to make wages more flexible and make employment programs more active (training compensation, youth programs, internships, re-engaging long-term unemployed).
  - Reforms could increase steady-state labor force and employment by 2-4 percent.
- Competition
  - Remove barriers to entry in tradable sector, improve contract enforcement, and use tax policy to level playing field.
  - Authorities’ diagnostic: profitability in non-tradable sector is about 16 percentage points higher than in tradable sector; model incorporates a 3 percent increase in tradable-sector productivity phased in over 10 years.

### Fiscal Reforms Package — Simulation Results
- Overall
  - Full reform package simulated with MCDMOD produces substantial medium- and long-run gains; effects traced through TFP, labor supply, public investment, and composition of spending.
- Tax reform (revenue-neutral, lowering PIT to a single 23 percent)
  - Long-run impact: real GDP increases by almost 0.4 percent in the new steady state.
  - Labor force increases by 0.5 percent; real wage declines due to increased labor market competition.
  - Current account deteriorates due to stronger domestic demand despite some REER depreciation.
- Tax and spending reforms (combine tax reform with composition change)
  - Lower current spending and higher productive public investment (reducing deficit by 0.7 percent over three years).
  - Debt-to-GDP ratio declines by more than 5 percentage points over 10 years.
  - Short-run: mild negative and temporary impact on GDP; Medium/long-run: permanently higher output and permanently lower debt-to-GDP ratio.
  - Current account improves due to lower imports and higher exports; private investment initially declines (household smoothing and crowding out) before public investment benefits materialize.
- Pension reform (raising private saving)
  - Assumption: permanent increase of private saving by 1 percent of GDP.
  - Short-run: GDP shrinks by 0.16 percent at its lowest point; consumption and investment fall initially.
  - Long-run (10 years): consumption, investment, and output recover; national saving increases, capital stock rises; current account improves immediately as savings increase and REER depreciates.
- Improvement in governance (mapped to TFP increase)
  - Assumption: Doing Business improvements mapped to a 1.5 percent increase in total factor productivity.
  - Permanent positive impact on GDP, consumption, and investment as productive capacity rises; higher real wages and private investment.
  - Current account: marginal deterioration as imports rise faster than exports due to higher domestic consumption and investment (real exchange rate depreciation).
- Labor reform
  - Assumption: unemployment rate falls by 3 percentage points over the next decade.
  - Result: GDP and potential output increase by close to 2.5 percent; consumption rises but less than output due to suppressed real wages from higher labor supply.
  - Investment demand rises as marginal product of capital increases; current account only slightly worsens with pickup in domestic demand.
- Improvement in competitiveness (tradable-sector productivity)
  - Assumption: gradual 3 percent increase in tradable-sector TFP.
  - Result: higher domestic consumption and investment; demand for labor and capital intensifies; wages and disposable income rise.
  - Current account: temporary gain followed by mild deterioration as REER appreciates (Harrod-Balassa-Samuelson effect) partially offsetting competitiveness gains.

### Key quantitative outcomes and assumptions (selected)
- Potential long-run GDP gain from full reform package: as much as 7 percent.
- PIT bracket change: from 23/28/36 percent to single 23 percent.
- Fiscal cost of tax reform: 0.7 percent of GDP.
- Pension government match: 5 percent of payrolls.
- Potential increase in national saving from pension reform: up to 3 percent of GDP.
- Current spending reduction: around 1.5 percent of GDP over three years.
- Public investment increase: 0.8 percent of GDP over three years beginning from 2018.
- Tradable-sector productivity shock used in model: 3 percent (phased over 10 years).
- Expected labor force and employment increase from labor reforms: 2-4 percent.
- Simulated unemployment reduction scenario: 3 percentage points → GDP and potential output increase close to 2.5 percent.
- Tax reform long-run GDP increase: almost 0.4 percent.
- Pension reform shock (private saving): 1 percent of GDP increase → GDP shrinks by 0.16 percent at lowest point before recovering.
- Governance improvement mapped to TFP increase: 1.5 percent.

### Conclusion
- Comprehensive implementation of the reform package—tax simplification, pension reform, reorientation of public spending toward productive investment, governance improvements, labor market reforms, and enhanced competition—yields substantial medium- and long-run gains for Armenia’s productive capacity, output, and external positions.
- Short-run transitions can include temporary output reductions or current account adjustments, but the modeled reforms deliver permanently higher output, higher investment, higher savings, and a lower debt-to-GDP ratio under the simulated assumptions.

*Source: IMF chapter “Real Growth in Armenia”, 1armea2019006 (May 3, 2019).*

### 17.      The impact of implementing a comprehensive structural reforms package on

### 17.      The impact of implementing a comprehensive structural reforms package on 

### Major macroeconomic impacts (summary)
- Successful implementation of a comprehensive structural reforms package can yield substantial impacts on growth, public finance, and external accounts.
- Based on the scenarios in this chapter and upon successful implementation of all the reforms, real GDP can increase by more than 7 percent.
- Key channels highlighted:
  - Change in composition of fiscal spending and reducing the deficit → significant impact on debt reduction.
  - Higher public capital investment, if well targeted to infrastructure or human capital development projects → can raise potential output.
  - Tax policy reform, accompanied by firm measures to improve tax administration → considerable impact on compliance and tax efficiencies.
  - Pension reform → critical for future pensioners, future fiscal sustainability, and capital market developments.
  - Economy-wide improvement in governance → increases potential output permanently and leads to higher growth in the transition process.
  - Labor market reforms → important to tackle high unemployment and will have large impacts on consumption and investment.
  - Use of export potential and addressing weaknesses in the tradeable sector → important for external sector performance.

### Selected simulation outcomes (figures overview)
- Figures presented (IMF Staff Calculations) illustrate dynamic responses (2018–2026) across variables including:
  - Aggregate Labor Force
  - Real GDP level
  - Real consumption
  - Real investment
  - Current account/GDP
  - Government net debt/GDP
  - Government deficit/GDP
  - Tax revenue/GDP
  - Real effective exchange rate
  - Real wage
- Pension reform simulations show distinct dynamics for the same variable set over 2018–2026.
- Other reform-specific simulations shown include: Tax Reform, Fiscal Reform, Improved Governance, Labor Reform, Enhancing Competition.

### Model framework (Annex I — MCDMOD summary)
- MCDMOD is one module of the IMF’s Flexible System of Global Models (FSGM).
- Key model characteristics:
  - Annual, multi-economy, forward-looking model combining micro-founded and reduced-form formulations.
  - Individual country blocks for Middle East and Central Asia economies, plus additional regions.
  - Consumption: overlapping-generations households (can save and smooth consumption) and liquidity-constrained households (consume all current income every period).
  - Investment: Tobin’s Q investment model; firms are net borrowers and their risk premia vary with the output gap.
  - Trade: reduced-form equations driven by a competitiveness indicator (relative prices) and domestic/foreign demand; competitiveness improves one-for-one with domestic prices (no local-market pricing).
  - Potential output: endogenous via Cobb-Douglas production function with exogenous trend TFP, endogenous capital, and equilibrium employed labor; equilibrium labor determined by equilibrium unemployment rate given the labor force; labor force participation is endogenous and responds to incentives to work.
  - Inflation: consumer price and wage inflation modeled by forward-looking Phillips’ curves with lags/leads and an output gap weight; consumer price inflation includes weight on the real effective exchange rate and second-round food and oil effects.
  - Monetary policy: interest rate reaction function (inflation-forecast-based rule). Armenia is assumed to follow a flexible inflation-forecast targeting.
  - Migration and remittances: complete bilateral migration and remittance flows; population, labor force, and employment distinguish “domestic” and “foreign” households; foreign workers remit a fraction of disposable income and are assumed liquidity constrained.
  - Commodities: three commodities—oil, metals, and food—allowing distinction between headline and core CPI. Global real commodity prices determined by global output gap (short-run), global demand level, and commodity production.
  - Countries differ by unique parameterizations (steady-state ratios, behavioral parameters) though structurally identical.

### Expanding women’s role in the economy — key findings and policy directions
- Economic potential from higher female labor force participation (LFP):
  - Armenia’s female LFP rate at around 53 percent.
  - Gender gap in LFP rates stood at about 18 percentage points (as of 2017, age 15+).
  - Armenia faces severe demographic pressure: population projected to decline to 2.7 million by 2050 from about 3 million in 2018; percentage aged 65+ expected to increase from about 12 percent in 2018 to about 23 percent by 2050.
  - Bringing more females into the workforce could increase labor supply and help counterbalance demographic pressure and alleviate fiscal pressure.
  - Women have higher educational attainment: 1.3 women for every man with tertiary education.
  - Armenia ranks 98 out of 149 countries in the World Economic Forum’s Global Gender Gap Index with a general score of 68 percent (implying a 32 percent gender gap to close).
  - Women in senior management: 29 percent (Armstat, 2018b).
  - Female LFP remained broadly unchanged over the last decade; rose until 2014 then rolled back to about 53 percent in 2017; LFP gap widened from 2012-13 lows to around 18 percentage points.
  - Gender pay gap (ILO estimates): raw gender pay gap 20.3 percent; factor-weighted gender pay gap 26.3 percent.
  - Female LFP differs markedly by life-cycle and family status: participation rates much lower for women with children, particularly ages 20–35; differences between married and unmarried women reach nearly 30 percentage points during ages 20–30.
  - Education paradox: women are better educated than men overall, but higher educational attainment has not translated into higher female LFP; nearly half the women with intermediate education and more than one-third of women with advanced education do not participate in the labor market.

- Policy measures to promote female employment (recommended integrated set):
  - Improving the provision of childcare and care for people with disabilities.
  - Promoting better access to information technology to facilitate job search and increase opportunities for flexible work arrangements.
  - Improving the education system to provide equal opportunities to succeed in the labor market for both males and females.
  - Implementing gender budgeting.
  - These should coincide with efforts to tackle slack in the labor market and promote job creation.

*Source: IMF Staff Calculations.*

### 11.      To analyze the drivers of female LFP, we estimate a logit model using a 2016

### Determinants and Economic Benefits of Female Labor Force Participation

### Methodology: Microeconometric Analysis of Female LFP (ILCS 2016)
- Model: Logit model estimated using a 2016 Household’s Integrated Living Condition Survey (ILCS) for Armenia. Simplified regression form:
  - Φ(SSi =1) = βj Xij + εij, where Φ is the probability function and S is a dependent dummy variable on woman’s participation in labor force (1 if participates, 0 otherwise).
- Explanatory variables (in line with the literature):
  - Individual characteristics:
    - age: age (for the 15-75 age group)
    - edu: the highest level of completed education (values 1 to 9, where 9 is the highest level, in line with the ILCS)
    - experience: previous work experience (1 if woman has had a profitable employment before, 0 otherwise)
  - Measures of family composition:
    - mstatus: marital status (1 if not married, 0 otherwise)
    - child: presence of children of different age groups (age groups 0-3, 4-5, 6-11, 12-17) in the family (1 if there is a child, 0 otherwise)
    - disabled: whether there are disabled people in the household (1 if there is a disabled person, 0 otherwise)
  - Household’s economic well-being:
    - ewellbeing (values 1 to 6, where 6 is the poorest)
  - Access to opportunities:
    - access (index for access to computer/internet/cellphone/credit)

### Microeconometric Results: Determinants of Female LFP (Table 2 summary)
- Sample sizes and fit:
  - Obs.: 1144 (Yerevan); 1392 (Other urban); 7113 (Rural); 247 (Armenia) — as listed in table columns.
  - McFadden R-squared: 0.191 (Yerevan); 0.214 (Other urban); 0.214 (Rural); 0.22 (Armenia)
- Key individual characteristics:
  - age: coef 0.091, z-Stat 3.874, P value 0.000 (Yerevan); coef 0.097, z-Stat 4.767, P value 0.000 (Other urban); coef 0.049, z-Stat 1.737, P value 0.082 (Rural); coef 0.014, z-Stat 1.860, P value -0.063 (Armenia) [values as presented in table]
  - age^2: coef -0.001, z-Stat -4.588, P value 0.000 (Yerevan); coef -0.001, z-Stat -5.677, P value 0.000 (Other urban); coef -0.001, z-Stat -2.172, P value 0.030 (Rural); coef -0.001, z-Stat -4.146, P value 0.010 (Armenia)
  - edu: coef 0.095, z-Stat 2.944, P value 0.004 (Yerevan); coef 0.188, z-Stat 6.120, P value 0.000 (Other urban); coef 0.219, z-Stat 4.738, P value 0.000 (Rural); coef 0.076, z-Stat 4.425, P value 0.000 (Armenia)
  - experience: coef 0.542, z-Stat 4.793, P value 0.000 (Yerevan); coef 0.662, z-Stat 6.431, P value 0.000 (Other urban); coef 0.264, z-Stat 1.600, P value 0.110 (Rural); coef 0.652, z-Stat 9.737, P value 0.000 (Armenia)
- Family composition:
  - mstatus: coef 0.510, z-Stat 3.479, P value 0.001 (Yerevan); coef 0.669, z-Stat 4.464, P value 0.000 (Other urban); coef 0.585, z-Stat 3.515, P value 0.000 (Rural); coef 0.121, z-Stat 1.678, P value 0.09 (Armenia)
  - child_0_3: coef -0.323, z-Stat -3.036, P value 0.002 (Yerevan); coef -3.683, z-Stat -7.096, P value 0.000 (Other urban); coef -3.404, z-Stat -5.257, P value 0.000 (Rural); coef -0.195, z-Stat -3.815, P value 0.00 (Armenia)
  - child_4_5: coef -0.114, z-Stat -0.894, P value 0.379 (Yerevan); coef -0.218, z-Stat -2.323, P value 0.020 (Other urban); coef -0.460, z-Stat -3.602, P value 0.000 (Rural); coef -0.460, z-Stat -7.865, P value 0.00 (Armenia)
  - child_6_11: coef -0.115, z-Stat -1.111, P value 0.267 (Yerevan); coef 0.023, z-Stat 0.196, P value 0.845 (Other urban); coef -0.033, z-Stat -0.223, P value 0.823 (Rural); coef -0.058, z-Stat -0.797, P value 0.43 (Armenia)
  - child_12_17: coef 0.039, z-Stat 0.378, P value 0.716 (Yerevan); coef 0.014, z-Stat 0.159, P value 0.874 (Other urban); coef 0.015, z-Stat 0.112, P value 0.911 (Rural); coef -0.067, z-Stat -1.177, P value 0.24 (Armenia)
  - disabled: coef -0.579, z-Stat -4.484, P value 0.000 (Yerevan); coef -0.579, z-Stat -5.412, P value 0.000 (Other urban); coef -0.871, z-Stat -4.968, P value 0.000 (Rural); coef -0.768, z-Stat -11.274, P value 0.00 (Armenia)
- Household economic well-being:
  - ewellbeing: coef 0.263, z-Stat 4.611, P value 0.000 (Yerevan); coef 0.114, z-Stat 2.377, P value 0.018 (Other urban); coef 0.312, z-Stat 4.241, P value 0.000 (Rural); coef 0.049, z-Stat 1.732, P value 0.08 (Armenia)
- Access to opportunities:
  - access: coef 0.125, z-Stat 1.721, P value 0.085 (Yerevan); coef -0.001, z-Stat -1.828, P value 0.068 (Other urban); coef -0.094, z-Stat -3.038, P value 0.002 (Rural); coef 0.096, z-Stat 6.004, P value 0.000 (Armenia)
- Interpretation from microdata:
  - The usual “hump-shaped” relationship between female LFP and age is observed.
  - Higher educational attainment is related to higher participation, particularly strong in secondary cities and rural areas.
  - Previous working experience is statistically significant and positive for participation.
  - Being married has a negative and significant association with female LFP.
  - Childcare responsibilities (especially children 0-3) and presence of disabled household members have negative and significant associations with female LFP across regions.
  - Lower household economic well-being is associated with higher female LFP.
  - Access to cellphones, computers, internet, and credit is significantly associated with higher female LFP in Yerevan, but not in other urban or rural areas.

### Macroeconomic Analysis: Productivity and Growth Accounting (Regions 2008–2017)
- Data and scope:
  - Panel data for Armenia’s 11 regions (marzes) for 2008 to 2017.
  - Labor productivity measured as real value added per worker (hours not available by marz).
  - Full list of variables in Annex I.
- Regression model:
  - Dependent variable: ∆LPit (labor productivity growth)
  - Explanatory variables: female labor participation variables and controls (level of labor productivity, exports growth, growth of capital stock per worker, rule of law index, regulatory quality, output gap).
  - Estimation method: difference GMM (Arellano and Bond, 1991; Arellano and Bover, 1995) with instruments: lagged explanatory variables, fertility rate, voice and accountability index, percentage share of female legislators, and percentage share of female senior officials and managers.
- Key regression results (Table 3, Arellano-Bond GMM specifications):
  - Level of labor productivity (t-1): coefficients -0.464**, -0.538***, -0.595***, -0.567*** (t-statistics in parentheses: (2.599), (3.846), (6.555), (5.201))
  - Exports growth: coefficients -0.079, 0.038, 0.006, -0.153 (t-statistics (0.686), (0.533), (0.068), (1.233))
  - Growth of capital stock per worker: coefficients 0.448***, 0.375***, 1.126***, 0.527*** (t-statistics (4.153), (4.798), (5.111), (2.784))
  - Regulatory quality (t-1): coefficients 0.169**, 0.469***, 0.319**, 0.273** (t-statistics (2.129), (4.249), (3.189), (2.631))
  - Rule_of_law: coefficients 0.25**, 0.682***, 0.498**, 0.525*** (t-statistics (2.024), (8.159), (2.562), (4.661))
  - GDP_gap: coefficients 0.001*, 0.002***, 0.015**, 0.002 (t-statistics (1.862), (3.451), (2.638), (1.144))
  - Labor force participation rate variables:
    - All females: coef 0.261** (t-statistic (2.023)) [present in one specification]
    - Females with high educational attainment: coef 0.483*** (t-statistic (5.759)); coef 0.256*** (t-statistic (3.742)) [two specifications]
    - Males with high educational attainment: coef 0.418*** (t-statistic (3.933)) [one specification]
    - Females with low educational attainment: coef 0.194* (t-statistic (1.943)) [one specification]
  - Memorandum items:
    - Number of Observations: 77 (all models)
    - Number of Provinces: 11 (all models)
    - AR(1) p-value: 0.006, 0.002, 0.010, 0.007 (models 1–4)
    - AR(2) p-value: 0.073, 0.210, 0.099, 0.085 (models 1–4)
    - Sargan p-value: 0.071, 0.170, 0.071, 0.104 (models 1–4)
- Interpretation:
  - Female labor force participation rates are positively and significantly correlated with labor productivity growth across specifications.
  - The contribution by women with high educational attainment is particularly large and remains significant when controlling for males with high educational attainment.

### Simulation: Economic Impact of Closing Gender Participation Gap
- Baseline gender participation gap for high educational attainment:
  - For men and women with high educational attainment, the gender participation gap averaged 18.3 percentage points in 2008-2017.
- Potential labor supply increase:
  - If the gender gap were closed, the number of highly educated female workers could potentially increase by up to 50,000, depending on the labor market capacity to absorb new labor.
  - This increase is equivalent to 3.7 percent of total labor force (including both men and women with all levels of educational attainment at all ages).
- Productivity channel estimates:
  - Estimated coefficients used for simulation: 0.26–0.48 (with the standard errors of 0.068 and 0.084).
  - If the participation rate of females with high educational attainment increases to close the gender gap, labor productivity growth would be higher by 0.8–2.5 percentage points.
- Aggregate GDP impact:
  - Adding the labor supply and productivity effects, the level of GDP would be higher by about 4 to 6 percent, depending on the labor market capacity to absorb new labor.

### Policy Recommendations to Promote Higher Female LFP
- Main policy priorities:
  - Improve the provision of childcare, and care for those with disabilities:
    - Lower female LFP among women with young children and low fertility rates could indicate weaknesses in childcare provision.
    - Public spending on pre-primary education in Armenia has been at about 0.3 percent of GDP (UNESCO database), comparable to Georgia but well below Moldova, Kyrgyz Republic, and countries of Eastern Europe.
  - Promote better access to information technology:
    - Access to IT facilitates job search and increases opportunities for flexible work arrangements, enabling women to combine family and paid work.
  - Ensure the education system provides equal opportunities for boys and girls:
    - Demoting “gender streaming” in subject choice would help girls acquire skills matching labor market demands.
    - Early action at primary and secondary levels to increase women in STEM is important.
    - Job training policies should support reducing occupational segregation by gender.
  - Use fiscal policy and gender budgeting:
    - Transition to program budgeting can incorporate gender-oriented objectives into the budget process.
    - Spending ministries should identify gender-oriented goals and develop programs and budgets to achieve them.
  - Address labor market slack and structural bottlenecks:
    - The unemployment rate in Armenia has hovered around 18 percent since 2009.
    - Total employment contracted by about 15 percent since 2010.
    - Promoting job creation and addressing vertical and horizontal skill mismatches will help absorb new labor and support higher female LFP.

### Conclusion
- There is a large untapped economic contribution from women in Armenia:
  - Eliminating the current gap of 18.3 percentage points between male and female labor force participation with high educational attainment could raise the GDP level by about 4 to 6 percent, depending on labor market absorption capacity.
- Policy actions required:
  - An integrated set of policies is needed to promote and support female employment, including:
    - (i) improving the provision of childcare and care for people with disabilities,
    - (ii) promoting better access to information technology,
    - (iii) improving the education system to provide equal opportunities to succeed in the labor market for both boys and girls,
    - (iv) implementing gender budgeting.
  - The impact of policy action is likely to take time to materialize, calling for early action.

### Annex I — Data Description (selected definitions)
- Labor productivity growth: In percent. The first difference of the logarithm of real value added per worker (from 15 years old and over).
- Female/male labor force participation rate (LP): Number of labor force participants as a percentage of working age population. Subgroups:
  - High degree: Tertiary, post-graduate.
  - Low degree: Secondary specialized, vocational, general secondary, general basic, primary and lower.
- Level of labor productivity (t–1): In logarithm.
- Exports growth: In percent. Growth rate of exports of goods in real terms.
- Growth of capital stock per hour worked: In percent. First difference of logarithm of real capital stock per worker.
- Regulatory quality and Index of rule of law: Worldwide Governance Indicators proxies for institutional quality.
- Fertility rates: In logarithm. Number of births to the female population (used as instrument).
- Index of voice and accountability: Worldwide Governance Indicators (used as proxy for female-friendly environment and instrument).

*Source: IMF staff analysis based on Armenia ILCS 2016 and regional panel data (2008–2017).*

### 10.      Female legislators, senior officials and managers. In percent. The share of legislators,

### 10.      Female legislators, senior officials and managers. In percent. The share of legislators,

### Measure and data usage
- Definition: The share of legislators, executives, and managers who are women, for Armenia as a whole.
- Purpose: Serves as a proxy for the role model effect, expected career improvement, and a measure of female access to nontraditional jobs.
- Empirical use: Used as an instrument for female labor participation variables.

### GDP gap computation
- GDP gap calculated using HP filter with 흀흀=ퟓퟓퟓퟓ, to control for business cycle.

### OLS regression results (Annex II)
- Estimation method: OLS (fixed effects).
- Dependent variable: labor productivity growth.
- Models presented: Model 1 and Model 2.

Key estimated coefficients and t-statistics (t-statistics in parentheses; significance: *, **, *** at 10, 5, and 1 percent)
- Level of labor productivity (t-1)
  - Model 1: -0.591*** (-4.077)
  - Model 2: -0.612*** (-5.094)
- Exports growth
  - Model 1: -0.008 (-0.092)
  - Model 2: 0.024 (0.305)
- Growth of capital stock per worker
  - Model 1: 0.318*** (3.561)
  - Model 2: 0.255*** (3.174)
- Regulatory quality (t-1)
  - Model 1: 0.246** (2.154)
  - Model 2: 0.521*** (4.768)
- Rule_of_law
  - Model 1: 0.408*** (3.047)
  - Model 2: 0.645*** (5.229)
- GDP_gap
  - Model 1: 0.004*** (3.622)
  - Model 2: 0.004*** (3.727)
- Labor force participation rate (included in Model 2 only)
  - All females: 0.181** (2.049)
  - Females with high educational attainment: 0.408*** (4.673)

Model fit and sample
- Number of Observations: 99
- Number of Provinces: 11
- R squared:
  - Model 1: 0.527
  - Model 2: 0.640

Memorandum note:
- Note: T-statistics are in parentheses. The symbols *, ** and *** indicate that the estimated coefficients are significantly different from zero at the 10, 5 and 1 percent confidence level, respectively.

### Findings on gender and labor productivity (from regression results)
- Female labor force participation variables are positively and significantly associated with labor productivity growth in Model 2:
  - All females coefficient: 0.181** (2.049)
  - Females with high educational attainment coefficient: 0.408*** (4.673)
- Institutional quality measures (Regulatory quality (t-1), Rule_of_law) show positive and significant associations with productivity growth in both models.
- GDP_gap (HP-filtered) has a small positive and significant coefficient (0.004***) in both models.

### Anti-corruption enforcement priorities (selected substantive findings and reform priorities)
Findings on anti-corruption context
- Political and social context:
  - Armenia experienced a peaceful political transition in May 2018 with a new government pledging to tackle corruption and pursue an “economic revolution.”
  - The new government set an anti-corruption strategy for 2019-2022 emphasizing implementation.
- Historical reform record:
  - Significant legislative and institutional development over the last decade, with intensified efforts post-2015.
  - Limited impact of past efforts on enforcement; persistent weaknesses in enforcement across judiciary, tax and customs, health, education and military sectors.
- Recent enforcement activity and results (2018):
  - Prosecutor General’s Office reports: number of initiated cases and officials prosecuted for corruption increased by almost 4 times compared to 2017; number of convicted increased by more than 3 times.
  - Anti-corruption campaign revealed damage to the state of about AMD 64 bln during the nine months of 2018.
  - State Revenue Committee reports recovery of about AMD 21 bln (1.7 % of annual tax revenue target for 2018) by fighting corruption and shadow economy in 2018H1.

Institutional weaknesses
- Asset declarations and preventive bodies:
  - Centralized electronic system of asset declarations in operation since 2014; in 2018 over 11,000 declarants and related persons were processed.
  - Declaration analysis initiated administrative disciplinary proceedings against 419 officials resulting in 219 warnings and 68 fines.
  - Verification limitations: commission lacks powers for forensic reconciliation across years and ownership identification; no requirement to disclose beneficially-owned assets.
  - Crime of illicit enrichment exists since 2016 but is seldom used — only 4 cases have been brought before the courts over the past years.
  - The 2017/18 Corruption Prevention Law (CPC) interrupted the declaration system: CEHRO responsibilities transferred in law to a yet non-operational Corruption Prevention Agency (CPC), creating a gap in preventive functions.
  - CEHRO had 17 staff; transition to CPC stalled with risk of loss of experience and collapse of the system unless interim arrangements are found.

- Fragmented investigative architecture:
  - Multiple agencies with overlapping mandates investigating corruption, leading to dilution of resources and weak analytical capacity:
    - Special Investigation Service (SIS) division (Investigation Department for Corruption, Organized and Official Crimes): 43 staff specialized in corruption cases (formed in 2014).
    - Investigative Committee: about 680 investigators in Yerevan and other major cities/regions (not all focused on corruption).
    - State Revenue Committee: 29 investigators assigned to three investigative departments in Yerevan, with no specific specialization in corruption offences.
    - National Security Service: 20 agents in a new department handling corruption and economic crimes.
  - Consequences of fragmentation:
    - Inefficient use of resources and diluted analytical capabilities.
    - Focus tends to be on smaller-scale and simple transactional corruption instead of complex, large network transactions.
    - Investigative competence and independence constrained by the Criminal Procedure Code; none of the agencies enjoys the independence demanded by international standards.

Priority policy recommendations (institutional and statutory)
- Concentrate investigative resources:
  - Enact legislation to concentrate resources into a single, autonomous anti-corruption agency with responsibility for investigating corruption to streamline and focus efforts.
- Reinforce the asset declaration and preventive framework:
  - Enact and operationalize the CPC law and ensure continuity of the asset declaration system to restore preventive functions.
  - Grant verification powers to the preventive body for forensic reconciliation across years and ownership identification, and require disclosure of beneficial ownership to improve detection of illicit enrichment.
- Improve investigative capacity and coordination:
  - Address fragmentation by consolidating investigative responsibilities or creating clear, enforced coordination mechanisms to reduce overlap and analytical dilution.
  - Build analytical capacity to understand complex financial transactions and detect large network corruption, rather than focusing only on simple transactional cases.
- Strengthen statutory framework and implementation:
  - Revise statutory provisions where necessary (including criminal procedure) to improve investigative independence, decrease attrition rates in investigation and prosecution stages, and enable effective prosecution of corruption.
- Ensure political and operational commitment:
  - Sustain high-level political commitment and donor coordination to prioritize implementation of the 2019-2022 anti-corruption strategy and associated institutional reforms.

*Source: 1armea2019006 - 10.      Female legislators, senior officials and managers. In percent. The share of legislators,*

### 14. The need for a single autonomous anti-corruption agency (or “unified body”)

### 14. The need for a single autonomous anti-corruption agency (or “unified body”)

### Rationale for a single specialized agency
- A single specialized agency would optimize use of resources by developing expertise in:
  - undercover operations,
  - classical investigation techniques,
  - financial investigations,
  - asset analyses,
  - analysis of public information concerning corruption,
  - facilitating effective and efficient handling of cases.
- The agency could embrace both investigative and prosecutorial functions.
- The establishment of a single autonomous anti-corruption agency was repeatedly identified by the current administration (when in opposition) and supported by counterparts and civil society partners.

### Strengthening governance: case attrition and processing bottlenecks
- High attrition in criminal enforcement of corruption cases:
  - 2016: Investigation 262; Prosecution 50 (19%); Adjudication 34 (13%)
  - 2017: Investigation 287; Prosecution 72 (25%); Adjudication 41 (14%)
- OECD findings and IMF assessment highlight a problem with the Statute of Limitations (SoLs) causing many case terminations; IMF estimates dismissals due to SoL to be as high as 30 percent in some years.
- Table of corruption cases closed for violating the SoL (OECD, 2018):
  - 2016: Number of cases 15; Percentage of Prosecutions 30%
  - 2017: Number of cases 7; Percentage of Prosecutions 9.7%
- Court performance and backlog:
  - Clearance rate of corruption cases halved over 2017-2018 and now stands at 53%, with backlogs continuing to build.
  - Courts are unable to handle the inflow of cases and are unlikely to cope with the increased inflow projected for 2018-2019.
- Specialization gaps:
  - There are no specialized anti-corruption judges or a specialized prosecutorial body for anti-corruption, although there is some specialization within the Prosecutor General’s Office.
  - Corruption cases are examined in courts of general jurisdiction of the first instance.
- Debt enforcement inefficiencies:
  - Most court cases relate to debt enforcement/unpaid bills; cases can take up to 10-12 years in extreme cases.
  - Recovery rates reportedly are low; enforcement is mostly physical (seizure and liquidation via public auctions), a high-cost, inefficient process vulnerable to fraud.
  - State bailiff incentives may be suboptimal; unlike some countries (e.g. Germany, Sweden), bailiffs in Armenia do not have a pay component based on a percentage of actual recovery.
  - Armenia reportedly has a robust IT infrastructure; computerized processing of simple debt claims is identified as an approach that could cut down vulnerabilities, speed up the process and reduce court workload.
- Need for new management structures in the courts to ensure higher performance accountability in both speed and substantive outcomes.

### Improving the statutory system: Statute of Limitations and value thresholds
- Statute of Limitations (SoL) issues:
  - Armenia’s SoLs run from the "completion of the corrupt act" and run uninterrupted without the possibility of suspension or other interim stops.
  - The trigger based on completion of the act can reduce time available for effective enforcement because corruption is typically concealed and discovery may occur well after the act.
  - Armenian law does not distinguish SoL durations for investigation, prosecution, and adjudication stages; SoL is a straightforward time count that does not pause during different phases.
  - The uninterrupted SoL creates incentives for suspects to be non-cooperative to “outrun the statutory clock.”
  - International instruments:
    - UNCAC suggests the SoL needs to be “long.”
    - OECD specifies that SoL durations must be “adequate.”
  - Potential mid-term implications if not addressed:
    - A disproportionate number of corruption cases being dismissed/terminated due to SoL deadlines even when cases may have substantive merit.
    - SoLs incentivize suspects to delay cases by refusing cooperation, applying for deferments or filing spurious appeals to outrun the SoL.
    - High-value and high-profile prosecutions, which are more complex and involve sophisticated perpetrators, have the greatest likelihood of being terminated early due to SoL rules; failure rates will be disproportionately weighted towards such cases.
- Value threshold restrictions for criminality:
  - Armenian law restricts criminality of certain corrupt acts to value thresholds referenced in general terms and not clearly defined (e.g., “significant scale” for embezzlement and “essential damage” for abuse of office).
  - Articles cited:
    - Embezzlement qualified as criminal only if property involved is of a “significant scale” (Articles 179 and 175 Criminal Code).
    - Abuse of office qualified as criminal only if it resulted in “essential damage” (Articles 308, 309, 375 and 214 Criminal Code).
  - Difficulty in defining these terms has forced litigators to focus on non-pecuniary damages; litigation has failed to fully resolve the issue.
  - UNCAC interpretation and international practice:
    - International practice qualifies corrupt acts of embezzlement and abuse of office as criminal regardless of material impact; prosecutors exercise discretion whether to prosecute minor acts.
    - The stipulation in Armenian law that “essential damage” must accrue is viewed as a “most significant deviation from the text of the Convention” and as a restriction of Article 19 UNCAC; the Fund follows UNCAC travaux préparatoires that prosecution discretion should determine whether acts merit enforcement.
  - Draft Criminal Code reportedly drops these qualifications, but passage timing is uncertain.

### Policy recommendations and priorities (concrete focus areas)
- Asset declarations:
  - Immediate measures to ensure reporting system continuity through 2018/2019,
  - Verification process to be affected through a newly-established CPC,
  - Sanctioning mechanism to be implemented through effective application of notably illicit enrichment.
- Institutions:
  - Immediate measures to address fragmentation of investigations and weak specialization of prosecutions through establishment of a single autonomous anti-corruption agency.
- Substantive law:
  - Amend the Statute of Limitations and Value Thresholds for prosecution to remove impediments to effective investigation and prosecution of corruption crimes.
- Public accountability:
  - Enhance performance transparency and accountability of anti-corruption institutions, including regular publication of key performance data.

### Strategic context and conclusion
- Armenia is at a watershed with political determination, public support and practical mechanisms required for meaningful anti-corruption reform.
- Multiple stakeholders expect the incumbent administration to advance a progressive agenda addressing governance weaknesses and corruption at all levels.
- Coordinated, sequenced efforts across public administration are essential to close the implementation gap from prior decades and to strengthen market and societal trust in government institutions.

*Source: 1armea2019006 - 14. The need for a single autonomous anti-corruption agency (or “unified body”)*

### 1. The person is exempted from criminal liability, if the following periods of time have elapsed after the committal of 

### 1armea2019006 - 1. The person is exempted from criminal liability, if the following periods of time have elapsed after the committal of

### Criminal liability: prescription periods and rules
- Exemption from criminal liability if the following periods have elapsed since the committal of the crime:
  - 2 years, since the day of committal of not grave crime;
  - 5 years, since the day of committal of medium-gravity crime;
  - 10 years, since the day of committal of grave crime;
  - 15 years, since the day of committal of particularly grave crime.
- The prescription period is calculated from the day of committal to the moment when the sentence comes into legal force.
- The prescription period is disrupted if prior to the expiry of these periods the person commits a new medium gravity crime, grave crime or particularly grave crime. In this case the calculation of the prescription period begins from the moment of committal of the new crime.
- The prescription period is suspended if the person avoids investigation or trial. In this case the prescription period resumes from the moment of arrest or surrender.
- Special cumulative thresholds if no disruption occurs:
  - The person cannot be subjected to criminal liability if 10 years have elapsed since the day of committal of the not grave or medium-gravity crime, and 20 years have elapsed in the case of a grave or particularly grave crime, and the prescription period was not disrupted with new crimes.

### Armenia — Labor market and education system: key findings and diagnostics
- Context and structural challenges
  - Education mismatch and skills shortages weigh on labor productivity and growth and constrain job creation.
  - Reforms needed: (1) improving early childhood education; (2) ensuring a high-quality, effective teaching force; (3) better aligning tertiary education with the labor market needs; (4) enhancing education sector management and financial planning; and (5) reforming the TVET system and supporting on-the-job training.
- Labor market performance and demographics
  - Recorded unemployment rate has hovered around 18 percent since 2009.
  - Youth unemployment rate is nearly double the national average and is the highest in the CCA region.
  - Real GDP growth averaged 4 percent over 2010–18.
  - Total employment contracted by about 15 percent over the same period.
  - Armenia’s population declined from around 3.5 million in 1990 to just under 3 million today; projected to fall to 2.7 million by 2050.
  - Working-age population is projected to decrease by 8 percent by 2030 and 19 percent by 2050 from its current level.
  - In 2014-17 the annual net emigration was 24 thousand people on average; emigrants are mostly men with general secondary and specialized education.
  - Labor force participation rate increased marginally from 59.5 percent in 2008 to 60.9 percent in 2017.
  - Share of labor force with intermediate education is close to 70 percent.
  - Female labor force participation rate is 52.8 percent; there is an 18-percentage-point gap between male and female participation.
- Employment composition and sectoral shifts
  - Services now employ about half of the labor force.
  - Information technology and high-technology sector gross production increased on average by 20 percent in 2014-2018.
  - Agriculture still accounts for a third of jobs but contributes only 17 percent of GDP.
  - Share of employed in construction decreased from 8.6 percent in 2008 to 3.6 percent in 2017.
- Unemployment patterns
  - Youth unemployment: about 40 percent for ages 15-19 and about 35 percent for ages 20-34.
  - Unemployment rate is highest among those with secondary, specialized and vocational education.
- Education system overview and problems
  - Public education is free and compulsory until age 16.
  - Gross enrollment in primary and middle schools has remained at about 90 percent; drops to 65.5 percent at the high school level.
  - About 16 percent of the high school age cohort enrolls in vocational schools.
  - Dropout rates in high school and tertiary levels have been rising; poor students are more likely to drop out.
  - Share of youth neither in employment nor in education or training (NEET youth) in Armenia is high compared to other countries.
  - TIMSS 2011 results were lower than those in 2003, indicating deterioration in secondary education outcomes.
  - Low pupil-teacher ratio at 9.6 on average in school year 2017-18 raises inefficiency concerns.
  - Teachers’ full workload is defined as 22 hours of teaching per week.
- Higher education and TVET
  - In 2018 there were 53 higher education institutions (HEIs) (27 public and 26 private).
  - 44 percent of the population aged 34 years and younger had a higher education degree (2011 census).
  - Average subvention is about 20 percent of a HEI budget.
  - In academic year 2017-2018 the share of graduates from humanities first degree programs was 48 percent; share of graduates from STEM related first degree study programs was 18 percent.
  - TVET system is outdated; occupational standards and skills competencies in many areas remain poorly defined.
- Public financing and management
  - MTEF 2019-21 envisages education expenditure at about 2.2 percent of GDP and 9.2 percent of total expenditures in 2020-21.
  - This is lower than the 5 percent recommended by the OECD and the Global Education 2030 Framework for Action benchmarks.
  - Education spending envelope has often been underutilized due to slow project implementation and low absorption capacity.
  - Ongoing shift towards program budgeting aims to align expenditure allocations with specific and measurable targets for the medium term.
- Labor market institutions
  - There is no unemployment insurance in Armenia.
  - Statutory minimum wage is not high compared to other lower middle-income countries.
  - Unemployment is concentrated among those with secondary, specialized and vocational education and tertiary and post-graduate degrees.

*REPUBLIC OF ARMENIA / INTERNATIONAL MONETARY FUND*

### 21.      Active labor market

### Active labor market

### Coverage and role of the State Employment Agency (SEA)
- The SEA’s mandate: facilitate the best job-worker matches and help reduce skills mismatches in line with the annual “State Employment Policy” approved by the Government.
- Services offered free of charge to jobseekers and employers:
  - To jobseekers: sharing information about vacancies and employment events, providing career guidance and professional orientation, mediation during job placement, arranging vocational (re)training.
  - To employers: provision of vacancy information, labor market statistics, legislative changes, and available vocational training programs; job fairs; arranging training courses aligned with employers’ needs.
- Government also provides wage subsidies for vulnerable “non-competitive” segments of the labor force and assists them with launching a small business.
- Coverage shortfall: In 2017, only around 1800 people have benefitted from the government’s programs, which was less than a quarter of the target.

### Educational relevance and skills mismatches — summary findings
- Skills mismatches reduce labor productivity and hinder job creation, particularly among more productive firms.
- Transition-economy dynamics: education systems lag labor market demands; adult training systems undeveloped; overeducation coexists with skills shortages, impeding the shift to higher value-added activities.
- Key microdata statistics (2016 STEP-based study):
  - 66.2 percent of workers’ jobs require education that match their own.
  - About 5 percent of workers report being under-educated for jobs.
  - 28 percent of workers are over-educated.
  - Over-education by group:
    - Highest for older workers aged 50-64: 34 percent.
    - Among those with secondary specialized education (vocational) from the Soviet era: 56 percent.
- Occupational/field mismatch: workers with degrees in engineering, manufacturing or construction account for a significantly larger share of overeducated workers due to job reallocation from industry to services.

### Education system distortions and labor market effects
- Fast-growing IT and high-tech sectors report up to 4000 vacancies that they are struggling to fill while youth unemployment rate exceeds 30 percent.
- STEM education supply:
  - In 2017-18 the number of graduates from all STEM related first degree study programs was around 3200 (18 percent of all graduates).
  - The share of STEM has recently started growing, but vocational education and training (VET) STEM programs remain small.
- Quality of acquired skills:
  - 2018 Global Competitiveness Report: relatively low scores on “skillset of graduates” and “extent of staff training”.
  - WB Armenia Employer STEP Survey 2013: firms report that technical and vocational education does not produce practical skills (76 percent), updated knowledge (70 percent), and the level and kinds of skills needed (around 65 percent) — identified as major obstacles to firms’ growth and competitiveness.

### Labor market outcomes and macro patterns (high-level)
- Employment decline despite relative macroeconomic stability in recent years.
- Moderate wage growth indicative of contained labor market pressure.
- Increasing reports of labor shortages by firms due to inadequate education.
- Structural sectoral patterns:
  - More than 30 percent of jobs remain in agriculture.
  - Labor productivity in industry continues to exceed that in agriculture threefold.
- Demographic and migration pressures:
  - Lack of job opportunities is the main cause of modern migration from Armenia.
  - Intermediate educated individuals have a higher probability to migrate abroad.
  - Armenia's population is expected to decline and dependency ratio is projected to increase as population ages; emigration is a driving force.

### Reform areas — recommended policy actions
- Overarching objective: address qualification mismatches and skills shortages to promote higher sustainable and more inclusive growth via multi-front reforms — strengthening education, modernizing TVET, and bolstering active labor market policies.

- Education system reforms (summary of specific recommendations):
  - Expand provision of quality preschool education:
    - Focus on children under 3 and rural communities.
    - Define central and local government roles in standards, financing, provision, monitoring, and evaluation.
    - Facilitate access for socioeconomically disadvantaged households to promote inclusive growth.
  - Ensure a high-quality, effective teaching force:
    - Continue initiatives to upgrade teacher education (pre-service structure and in-service training).
    - Undertake comprehensive teacher education reform: policy and regulations, institutional capacities, teacher education systems, and program delivery.
    - Regular participation in international assessments of education achievement to inform policymaking.
  - Ensure that all students learn:
    - Narrow learning outcome and skills gaps associated with family background and rural-urban divide by supporting lagging students.
  - Better align tertiary education with labor market needs:
    - Promote students’ learning and performance in STEM subjects.
    - Embed entrepreneurship objectives into education and training courses, including at tertiary level, to raise start-up survival rates and create jobs, especially in remote areas.
  - Enhance education sector management and financial planning:
    - Consider school network structure, number, location, size and deployment of teaching force.
    - Consider hub-and-satellite schools, multi-grade teaching, and multi-discipline teacher training for remote access.
    - Strengthen Education Management Information System (EMIS) capacity for financial management and resource-use information.
    - Operationalize tertiary education management information system in the short term.

- Modernizing TVET:
  - Increase standardization and integration with labor market needs at national and regional levels; set regional skills development priorities.
  - Align initial and further vocational training programs and streamline study pathways within the TVET ladder.
  - Consolidate vocational education institutions for cost efficiency; modernize facilities, equipment, and programs; pursue closer cooperation with the private sector.
  - Move beyond externally funded, project-based approaches toward institutionalized comprehensive TVET reform.
  - MOES engagement with European Training Foundation and aim to link TVET and higher education with EU standards noted, but initiatives are at early stages and require sustained effort and external support for governance, monitoring, program upgrades, and institutionalization.

- Bolstering active labor market policies (ALMPs):
  - Strengthen SEA capacity to serve a larger number of clients and raise effectiveness under resource constraints.
  - Enhance SEA’s integrated information systems and analytical tools to provide more targeted services based on local labor demand.
  - Implement targeted activation policies for low-income groups, including social assistance beneficiaries, to improve growth inclusiveness.
  - Authorities developing a comprehensive employment strategy for 2019-23 aimed at tackling structural unemployment and youth unemployment through proactive and mutually beneficial cooperation with employers.

### Conclusion — prioritized reform elements
- Achieving sustainable and more inclusive growth requires:
  1. Improving early childhood education;
  2. Ensuring a high-quality, effective teaching force;
  3. Better aligning tertiary education with labor market needs;
  4. Enhancing education sector management and financial planning;
  5. Reforming the TVET system and supporting on-the-job training;
  6. Bolstering active labor market policies to improve matching of workers to jobs.

*Source: IMF staff chapter “Active labor market” (1armea2019006).*

### References

### References

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*REPUBLIC OF ARMENIA INTERNATIONAL MONETARY FUND 67*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1armea2019006.pdf_