## 1. Selected Export and Policy Variables

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### Promoting Export-Led Growth
- Historical growth drivers:
  - Until the GFC, private consumption and investment contributed 7 and 5.8 ppts, respectively, resulting in average growth of 12.1 percent per annum.
  - Over 2010-19, two-thirds of the average annual 4.5 percent growth came from private consumption.
- Need to rebalance growth:
  - Small domestic market and expected constraints on capital inflows and remittances imply sustainable higher growth requires rebalancing from domestic to external demand by boosting the tradable sector.
- Government export targets and strategy:
  - Strategy of 2017-22: exports of goods and services reaching 40-45 percent as a share of GDP.
  - Strategy of 2019: exports of products and services must reach 43-45 percent of GDP; increase role of technological products in export structure.
  - Latest government program: promote exports, expand export insurance toolkit, develop trade and economic cooperation with EEU, implement CEPA provisions, promote bilateral and multilateral cooperation within EU Eastern Partnership, expand cooperation with WTO.
- Empirical findings on export performance:
  - Armenia’s export volumes are in line with other CCA and EMEU countries after controlling for structural and macro factors, but underperform in high value-added products.
  - Gravity model estimates: having a trade agreement is estimated to more than double exports between two countries.
  - Armenia’s exports average around 32 percent of GDP during the past decade and are among the lowest of its peer group.
  - Exports have been declining in complexity ranking; largest goods exports concentrated in low complexity products like minerals and agriculture.
  - Armenia’s participation in GVCs has fallen below that of its peers since 2015; domestic value added sent to third economies through exports is lower than other CCA countries.
- Risks of low value-added export-led growth:
  - Concentration in low value-added products can produce a less competitive product structure and amplify vulnerability to trade volatility and foreign demand fluctuations.
- Determinants for upgrading exports (panel data analysis for CCA and peer European countries):
  - Goods: quality of physical infrastructure and education, export costs, and income equality matter for upgrading the quality of goods exports.
  - Services: quality of digital infrastructure, R&D expenditure, REER, and income equality matter for composition of service exports.
- Policy implications and recommended measures:
  - Further integrate with global trade networks: negotiate additional mutually beneficial trade agreements, leverage EEU membership, and GSP+ trade preferences with the EU.
  - Reduce nontariff barriers including documentary and border costs (Armenia’s documentary and border compliance costs exceed European peers by 90 and 40 percent, respectively).
  - Improve infrastructure quality, including transport network and telecommunication.
  - Strengthen education and research (including tertiary education in STEM).
    - Example estimate: if Armenia brought R&D expenditure as a share of GDP to the level of its peers in emerging Europe, it could improve revealed comparative advantage in modern services by 10-12 percent, raise the share of modern services in total exports of services by about 2 percent, boosting services exports complexity by about 3 percent.
  - Reduce rising income inequality through redistributive fiscal and social policies.

### Sustainable Financing for the Recovery in Armenia
- Trends in external financing:
  - Share of FDI in private external financing has declined significantly over the past decade; net FDI relative to GDP has remained at most around one-third of its pre-global financial crisis levels.
  - In 2019, net inward FDI flows to Armenia (around 2 percent of GDP) were ¾ percentage points below the corresponding average of countries with similar per capita income (2.7 percent of GDP).
- Sectoral shifts:
  - Inflows declined along with fading of FDI in utility and telecommunication sectors that took place as these sectors were opened up.
- Shift toward less-stable external financing:
  - Move to less-stable debt-based external financing in the form of other investment inflows (loans and deposits).
  - Growing importance of non-resident deposits may have been driven by (i) widening interest rate differential with advanced economies since the global financial crisis; and (ii) non-residents’ increased confidence in the health of Armenia’s banking sector.
- Costs of reduced inward FDI:
  - Decline in inward FDI implies loss of spillovers to productivity through knowledge and skill transfers and reduced financing for productive capital; as equity investment, FDI typically contributes more to financial and external stability than debt-based portfolio or other investment.
- Recommended actions to facilitate higher FDI:
  - Improve the business environment: fixed effects model indicates improving core governance and business environment characteristics (Control of corruption, government effectiveness, regulatory quality, rule of law, and voice and accountability) to levels of good performers among peer countries (CCA and Emerging and Developing Europe) could increase inward FDI inflows by ½-¾ percentage points of GDP.
  - Continue prudent macroeconomic policies to mitigate uncertainty around investment returns; prioritize efficient development of high-quality infrastructure in fiscal policy.
  - Promote reforms to expand and facilitate domestic financing to reduce reliance on less stable external sources:
    - Develop corporate bonds and equity markets (authorities’ capital market development program approved by the cabinet in July 2020).
    - Steady implementation of insolvency and bankruptcy reform to facilitate mobilization of domestic financing.
  - Development of a high-value-added export sector could help expand domestic saving and attract inward FDI, as utility and telecommunication did during the 2000s.

### Increasing Access to Finance in Armenia
- Overview and main challenge:
  - Access to finance is consistently identified by Armenian business executives among main obstacles for doing business.
- Financial inclusion for households:
  - Financial system dominated by banks, with their total assets of about 110 percent of GDP.
  - Account ownership: 48 percent of population ages 15+ have an account at a financial institution.
  - Number of ATMs and commercial bank branches per capita has significantly increased, reaching an average for Central Europe and the Baltics.
- Gender gap:
  - About 40 percent of females had a bank account compared with about 60 percent of males in 2017.
  - World comparator: World 65 percent; Eastern Europe and Central Asia 66 percent.
- Financial literacy:
  - OECD survey: average literacy score in Armenia is 11.4 (out of a maximum of 21).
  - Only 27 percent of adults achieved the minimum target score of at least 4 out of 7 on financial knowledge in Armenia compared with around 60 percent in South East Europe and close to 70 percent in OECD countries.
  - Heterogeneity in scores across urban/rural populations and socio-economic groups suggests targeted efforts are important.
  - Low financial literacy is associated with negative attitudes towards saving and is a deterrent to saving for the future (ADBI, 2018).
- Financial inclusion for firms (identified constraints):
  - Key bottlenecks for firms: informality, poor accounting practices, and low level of financial management practices.
  - Improving financial inclusion for firms could facilitate private sector development.

### Access to finance — key findings (Enterprise surveys and firm-level metrics)
- 2020 World Bank Enterprise Survey:
  - Access to finance identified by business executives as the main obstacle for doing business (30 percent of respondents).
  - Practices of the informal sector identified as the second main obstacle (15 percent of respondents).
- Access to finance for SMEs:
  - About 42 percent of all firms in Armenia had a bank loan or a line of credit (2020 Business Environment and Enterprise Performance Survey).
  - Only about 35 percent of small firms had a bank loan or a line of credit.
  - A much higher share of firms has a checking/savings account (no numeric value provided).
- Informal firms may have an unfair advantage over formal firms because they can compromise on rules, taxes and regulations, which slows down financial inclusion.

### Payments, cashlessness, and e-commerce
- Payments mainly made in cash.
- Armenia scores substantially lower than the CCA average and some peers on cashless transactions.
- E-commerce is underdeveloped, with less than 20 percent of the total value of payments being cashless.
- Informality, poor accounting practices and low level of financial management are major challenges for increasing access to finance.

### Corporate transparency, collateral, and lending costs
- Corporate transparency is low; informality and poor financial reporting generate information asymmetries that make it harder for banks to do due diligence and extend financing.
- Poor transparency among “corporations, sub-national entities and SOEs” hampers issuances on the capital markets and inhibits growth of products such as factoring and invoice financing that facilitate trade finance and are key for MSME access to finance.
- Banks charge a high premium on loans.
- Collateral requirements are particularly high due to:
  - Prevalence of cash-based transactions.
  - Lack of transparency from high informality and poor financial reporting.
  - Limited efficiency of collateral execution.
- These factors translate into extensive collateral requirements and larger risk premiums, impeding access to finance for the private sector, particularly SMEs.

### Insolvency regime
- Insolvency regime of private debtors needs to be strengthened to better protect creditors’ rights.
- Existing weaknesses in the insolvency law and inefficient debt enforcement procedures mean there is no adequate balance between the rights of secured creditors and enterprise reorganization.
- Although the bankruptcy law for both firms and households was amended in 2016, “further improvements are necessary to ensure that the main function of insolvency proceedings is to maximize return to creditors through reorganization of the debtor, or as a collective debt collection mechanism” (IMF, 2018).

### Policy recommendations to foster financial inclusion
- Promote financial literacy and education to increase the propensity to save.
- Improve financial reporting to simplify the due diligence process for banks, which could help reduce high collateral requirements.
- Improve the business environment and strengthen institutions to increase financial inclusion of SMEs and reduce informality.
- Strengthen the insolvency regime to better balance creditors’ rights.

### Fostering Inclusive Long-Term Growth (Reducing Informality)
- Macro framing:
  - Reducing informality to raise productivity and promote inclusion is macro critical.
  - Focus on factors behind supply of formal and informal sector workers and drivers of upward mobility, with empirical focus on youth.
- Informality trends:
  - Informality indicators show a decline in Armenia from an estimated 50 percent in 2000 to about 36 percent in 2019.
  - Decline similar to trends in the Kyrgyz Republic, Georgia, Kazakhstan, and Tajikistan.
  - Informality in Armenia has recently been lower than that of Georgia, higher than in Kazakhstan and Tajikistan.
  - Informal employment remains highest in the first (poorest) income quintile.
    - The poorest portion witnessed the most significant decline in informality since 2017 (by almost 40 percentage points by 2019).
    - Informality has been growing in higher income quintiles.
  - Entrepreneurs remain the largest share of informally employed in Armenia (Armenian Labor Force Survey, 2018-2020).
  - The second largest group of informally employed workers are employees of enterprises in the formal sector.

### Youth employment trends and school-to-work transition
- 2019 labor statistics:
  - Only 40 percent of women were employed.
  - Only 25 percent of youth were employed.
- Among women aged 15–24 in 2019:
  - Approximately 29 percent were not in employment, education or training.
  - Only 18 percent of men in the same age cohort were similarly situated — a gender gap of 11 percentage points.
  - This is the second-highest gender gap in the region; Georgia’s gap is 8 percentage points.
- SWTS findings (ages 15–29):
  - Around 36 percent of unemployed youth have tertiary education.
  - Unoccupied youth have about 60 percent with secondary education and 18 percent with tertiary education.
  - Formal and informal employment each account for around half of youth employment.
  - More than half of informally employed youth are part of the formal sector.
  - Around 37 percent of working young women have public sector jobs compared to 24 percent of working young men.
  - Among unemployed youth, more than 30 percent have been looking for jobs for more than two years; longer job search is associated with a higher likelihood of ending up in an informal job.
  - Labor market status in SWTS sample: nearly 30 percent not in labor force, education, or training; around 10 percent unemployed but searching; nearly 32 percent employed.
  - Sample composition: roughly around 5 percent of respondents are heads of households and half are female.
- Cross-region sample means:
  - Employed shares: Armenia 39 percent; EMEU 34 percent; MENA 27 percent.
  - Of the employed, share in formal jobs: Armenia around 56 percent; EMEU 85 percent; MENA 59 percent.
  - Average job-search duration: Armenia’s highest duration between 6 months and 2 years; EMEU and MENA have lower mean duration between 1 and 6 months.

### Empirical findings on informality determinants (Logit results and robustness)
- Demographics:
  - Older youths transition more to the informal sector compared to younger ones.
  - Age squared coefficient negative and significant (Age squared: -0.00*** [0.00]) indicating nonlinear effect where at a certain age additional age increases likelihood of transition to the formal sector.
- Education and parental education:
  - Tertiary education reduces likelihood of transitioning to the informal sector.
    - Tertiary education coefficients: -0.30** [0.12]; -0.34*** [0.11]; -0.42** [0.19]; -0.27* [0.21].
  - Secondary education coefficients: 0.09 [0.12]; 0.04 [0.12]; -0.71*** [0.21]; -0.63*** [0.22].
  - Vocational education coefficients: 0.06 [0.06]; 0.06 [0.06]; -0.16 [0.10]; 0.00 [0.11].
  - Father education coefficients: -0.06*** [0.02]; -0.13*** [0.02]; -0.11*** [0.02]; -0.07*** [0.02].
  - Mother education coefficient: -0.10*** [0.02]; -0.11*** [0.02] (where included).
- Gender, marital status, household role:
  - Female coefficients: 0.01 [0.06]; 0.06 [0.07]; 0.03 [0.06]; 0.06 [0.07] (not statistically significant).
  - Head of household coefficients: 0.07 [0.08]; 0.00 [0.09]; 0.07 [0.08]; -0.02 [0.09] (no consistent significant effect).
  - Marriage associated with higher incidence of being in a formal job for women:
    - Married*female interaction: -0.26* [0.14]; -0.31** [0.15] (in specifications where included).
  - Multinomial logit robustness checks: marriage, independent of gender, increases the probability of being unemployed as compared to informally employed.
- Time spent searching for a job:
  - Longer job search increases likelihood that individuals with secondary and vocational education transition to informal jobs.
    - Time looking for jobs coefficients: -0.04** [0.02]; -0.03 [0.02].
    - Time looking for jobs*secondary: 0.20*** [0.04]; 0.19*** [0.05].
    - Time looking for jobs*vocational: 0.06** [0.02]; 0.03 [0.03].
    - Time looking for jobs*tertiary: 0.04 [0.04]; 0.02 [0.04] (insignificant).
- Regional differences:
  - Youth in MENA and EMEU countries (relative to Armenia) have a higher chance of transitioning to formal jobs, effect strongest for EMEU.
    - MCD coefficient: -0.73*** [0.11]; -0.62*** [0.11]; -0.53*** [0.12]; -0.59*** [0.12].
    - EMEU coefficient: -1.15*** [0.12]; -1.10*** [0.12]; -0.98*** [0.12]; -0.99*** [0.12].
- Regression sample and model notes:
  - Logit(1=informal; Base=formal) model reported.
  - Observations by specification: 7287; 6872; 7307; 6461.
  - Constant terms: 1.28*** [0.15]; 1.09*** [0.15]; 1.15*** [0.16]; 1.22*** [0.17].
  - Standard errors in brackets. Significance codes: *p < 0.10, **p < 0.05, ***p < 0.01.
  - Robustness: multinomial logit model produced similar results for individual’s and parent’s education and same regional results.

### Policy conclusions and recommendations on informality and youth labor transitions
- Broad conclusion:
  - Providing young people with sustainable job opportunities requires sound macroeconomic and structural policies that are inclusive and address vulnerabilities and discrimination, including active labor market policies and training.
  - Addressing informality is crucial to raising productivity; policy responses depend on drivers of informality.
- Demand-side recommendations:
  - Provide quality infrastructure that fosters and supports formality at firm and national levels (informal businesses often suffer from inadequate access to infrastructure, mainly electricity).
  - Provide targeted training and technological support for SMEs, self-employed and entrepreneurs to increase connectivity to domestic and foreign value chains; offer advice on formalization and record-keeping requirements.
  - Ensure a simple, transparent, efficient, and fair regulatory environment, especially for startups; strengthen public institutions with governance and transparency to enhance investor trust.
  - Promote economic diversification to reduce volatility and dependence on domestic consumption and remittances; rechannel resources toward sectors with high productivity and job creation potential.
- Supply-side recommendations:
  - Enhance cooperation between the private sector and educational institutions through apprenticeships or internships to provide work-based experience and facilitate transition to formal employment.
  - Provide orientation and career guidance in schools to aid school-to-work transitions.
  - Strengthen vocational training through internships for those with post-secondary and professional qualifications.
  - Ensure access to affordable childcare to facilitate formal job and education seeking for females, lessen gender inequality, and encourage single females to compete for formal jobs by enabling work–life balance.

*Source: 1armea2021002 - 1. Selected Export and Policy Variables (December 3, 2021).*

### 1. Selected Export and Policy Variables _________________________________________________ 6

### 1. Selected Export and Policy Variables

### Promoting Export-Led Growth
- Historical growth models:
  - Until the GFC, growth was principally driven by private consumption and investment, with these contributing 7 and 5.8 ppts, respectively, resulting in average growth of 12.1 percent per annum.
  - Over 2010-19, two-thirds of the average annual 4.5 percent growth came from private consumption.
- Need to rebalance growth:
  - Given the small size of its domestic market and expected constraints on capital inflows and remittances, sustainable higher growth requires rebalancing from domestic to external demand by boosting the tradable sector.
- Government export targets and strategy statements:
  - Strategy of 2017-22 aspired “to achieve a significant growth in exports with the exports of goods and services reaching 40-45 percent as a share of GDP.”
  - Strategy of 2019: “exports of products and services must reach 43-45 percent of GDP. At the same time, there has to be a significant increase in the role of technological products in the structure for exports”.
  - Latest government program emphasizes promoting exports, expanding export insurance toolkit, developing trade and economic cooperation with EEU, implementing CEPA provisions, promoting bilateral and multilateral cooperation within EU Eastern Partnership, and expanding cooperation with WTO.
- Empirical findings on export performance:
  - Armenia’s export volumes are in line with other CCA and EMEU countries after controlling for structural and macro factors, but underperform in high value-added products.
  - Gravity model estimates: having a trade agreement is estimated to more than double exports between two countries.
  - Armenia’s exports average around 32 percent of GDP during the past decade and are among the lowest of its peer group; exports have been declining in complexity ranking with largest goods exports concentrated in low complexity products like minerals and agriculture.
  - Armenia’s participation in GVCs has fallen below that of its peers since 2015; domestic value added sent to third economies through exports is lower than other CCA countries.
- Risks of low value-added export-led growth:
  - Growth concentrated in low value-added products can produce a less competitive product structure and amplify vulnerability to trade volatility and foreign demand fluctuations.
- Determinants for upgrading exports (panel data analysis for CCA and peer European countries):
  - For goods: quality of physical infrastructure and education, export costs, and income equality matter for upgrading the quality of goods exports.
  - For services: quality of digital infrastructure, R&D expenditure, REER, and income equality matter for composition of service exports.
- Policy implications and recommended measures to raise export potential:
  - Further integrate with global trade networks: negotiate additional mutually beneficial trade agreements, leverage EEU membership, and GSP+ trade preferences with the EU.
  - Reduce nontariff barriers including documentary and border costs (Armenia’s documentary and border compliance costs exceed European peers by 90 and 40 percent, respectively).
  - Improve infrastructure quality, including transport network and telecommunication.
  - Strengthen education and research (including tertiary education in STEM). Example estimate: if Armenia brought R&D expenditure as a share of GDP to the level of its peers in emerging Europe, it could improve revealed comparative advantage in modern services by 10-12 percent, raise the share of modern services in total exports of services by about 2 percent, boosting services exports complexity by about 3 percent.
  - Reduce rising income inequality through redistributive fiscal and social policies.

### Sustainable Financing for the Recovery in Armenia
- Trends in external financing:
  - The share of FDI in private external financing has declined significantly over the past decade; net FDI relative to GDP has remained at most around one-third of its pre-global financial crisis levels.
  - In 2019, net inward FDI flows to Armenia (around 2 percent of GDP) were ¾ percentage points below the corresponding average of countries with similar per capita income (2.7 percent of GDP).
- Sectoral shifts:
  - Inflows have declined along with the fading of FDI in utility and telecommunication sectors that took place as these sectors were opened up.
- Shift toward less-stable external financing:
  - There has been a move to less-stable debt-based external financing in the form of other investment inflows (loans and deposits).
  - The growing importance of non-resident deposits may have been driven by (i) widening interest rate differential with advanced economies since the global financial crisis; and (ii) non-residents’ increased confidence in the health of Armenia’s banking sector.
- Costs of reduced inward FDI:
  - Decline in inward FDI implies loss of spillovers to productivity through knowledge and skill transfers and reduced financing for productive capital; as equity investment, FDI typically contributes more to financial and external stability than debt-based portfolio or other investment.
- Recommended actions to facilitate higher FDI:
  - Improve the business environment: estimation of a fixed effects model indicates that improving core governance and business environment characteristics (Control of corruption, government effectiveness, regulatory quality, rule of law, and voice and accountability) to levels of good performers among peer countries (CCA and Emerging and Developing Europe) could increase inward FDI inflows by ½-¾ percentage points of GDP.
  - Continue prudent macroeconomic policies to mitigate uncertainty around investment returns; prioritize efficient development of high-quality infrastructure in fiscal policy.
  - Promote reforms to expand and facilitate domestic financing to reduce reliance on less stable external sources:
    - Develop corporate bonds and equity markets (noted in authorities’ capital market development program approved by the cabinet in July 2020).
    - Steady implementation of insolvency and bankruptcy reform to facilitate mobilization of domestic financing.
  - Development of a high-value-added export sector could help expand domestic saving and attract inward FDI, as utility and telecommunication did during the 2000s.

### Increasing Access to Finance in Armenia
- Overview:
  - Access to finance is consistently identified by Armenian business executives among main obstacles for doing business. Improving access to finance could accelerate private sector development.
- Financial inclusion for households:
  - The financial system is dominated by banks, with their total assets of about 110 percent of GDP.
  - Account ownership: 48 percent of population ages 15+ have an account at a financial institution (compares well with CCA average but lags many emerging market peers).
  - Number of ATMs and commercial bank branches per capita has significantly increased, reaching an average for Central Europe and the Baltics.
- Gender gap:
  - Only about 40 percent of females had a bank account compared with about 60 percent of males in 2017, although this indicator improved substantially since 2014.
  - World and regional comparators: World 65 percent, Eastern Europe and Central Asia 66 percent (context for remaining gap).
- Financial literacy:
  - OECD survey: average literacy score in Armenia is 11.4 (out of a maximum of 21).
  - Only 27 percent of adults achieved the minimum target score of at least 4 out of 7 on financial knowledge in Armenia compared with around 60 percent in South East Europe and close to 70 percent in OECD countries.
  - Heterogeneity in scores across urban/rural populations and socio-economic groups suggests targeted efforts are important.
  - Low financial literacy is associated with negative attitudes towards saving and is a deterrent to saving for the future (ADBI, 2018).
- Financial inclusion for firms (identified constraints):
  - Key bottlenecks for firms: informality, poor accounting practices, and low level of financial management practices.
  - Improving financial inclusion for firms could facilitate private sector development.

### Fostering Inclusive Long-Term Growth (Reducing Informality)
- Framing:
  - Reducing informality to raise productivity and promote inclusion is macro critical.
  - The paper focuses on identifying factors behind supply of formal and informal sector workers in Armenia and what governs upward mobility in the labor market, with empirical focus on youth due to data constraints.
- Contents and structure (topics covered in the source):
  - A. Armenia’s Labor Market Trends
  - B. Youth Employment Trends in Armenia
  - C. Transition from School to Work: Evidence from Youth in Armenia
  - D. Conclusions
- Figures and table included in the source (listed for context):
  - Figure 1. Caucasus and Central Asia: Informality Estimates, 1991–2019
  - Figure 2. Youth Informal Employment
  - Figure 3. Unemployment Duration Among Youth
  - Table 1. Transitioning to Informal Versus Formal Jobs

*Source: 1armea2021002 - 1. Selected Export and Policy Variables (December 3, 2021).*

### 4. Access to finance is the main challenge for doing business in Armenia. According to

### 4. Access to finance is the main challenge for doing business in Armenia. According to

### Access to finance — key findings
- According to the 2020 World Bank Enterprise Survey, access to finance was identified by Armenian business executives as the main obstacle for doing business (30 percent of respondents).
- The practices of the informal sector were identified as the second main obstacle (15 percent of respondents).
- Access to finance is particularly low for small and medium enterprises:
  - About 42 percent of all firms in Armenia had a bank loan or a line of credit (2020 Business Environment and Enterprise Performance Survey).
  - Only about 35 percent of small firms had a bank loan or a line of credit (same source).
  - A much higher share of firms has a checking/savings account (no numeric value provided).
- Informal firms may have an unfair advantage over formal firms because they can compromise on rules, taxes and regulations, which slows down financial inclusion.

### Payments, cashlessness, and e-commerce
- Payments in Armenia are mainly made in cash.
- Data suggest Armenia scores substantially lower than the CCA average and some peers on cashless transactions.
- E-commerce is underdeveloped, with less than 20 percent of the total value of payments been cashless.
- Informality, poor accounting practices and low level of financial management are reported among major challenges for increasing access to finance (IMF, 2018).

### Corporate transparency, collateral, and lending costs
- Corporate transparency is low in Armenia. Informality and poor financial reporting generate information asymmetries that make it harder for banks to do due diligence and extend financing (IMF, 2018).
- Poor transparency among “corporations, sub-national entities and SOEs” hampers possible issuances on the capital markets and inhibits growth of products such as factoring and invoice financing that facilitate trade finance and are key for MSME access to finance (IMF, 2018).
- Consequently, banks are charging a high premium on loans.
- Collateral requirements are particularly high in Armenia due to:
  - Prevalence of cash-based transactions.
  - Lack of transparency from high informality and poor financial reporting, which make it harder for banks to validate borrowers’ cash flow sources.
  - Limited efficiency of collateral execution.
- These factors translate into extensive collateral requirements and larger risk premiums, impeding access to finance for the private sector, particularly SMEs.

### Insolvency regime
- The insolvency regime of private debtors needs to be strengthened to better protect creditors’ rights.
- Existing weaknesses in the insolvency law and inefficient debt enforcement procedures mean there is no adequate balance between the rights of secured creditors and enterprise reorganization.
- Although the bankruptcy law for both firms and households was amended in 2016, “further improvements are necessary to ensure that the main function of insolvency proceedings is to maximize return to creditors through reorganization of the debtor, or as a collective debt collection mechanism” (IMF, 2018).

### Policy recommendations to foster financial inclusion
- Promoting financial literacy and education to increase the propensity to save.
- Improving financial reporting to simplify the due diligence process for banks, which could help reduce high collateral requirements.
- Improving the business environment and strengthening institutions to increase financial inclusion of SMEs (for details, IMF, 2019), while also reducing informality in the economy.
- Strengthening the insolvency regime to better balance creditors’ rights.

### Informality and labor market — overview
- A large informal sector is associated with low productivity, reduced tax revenues, and higher poverty and income inequality.
- Informal sector workers tend to be low-skilled, work under poor conditions, have limited access to social protection, limited access to credit and government services, and exhibit low productivity and innovation.
- High levels of informality imply loss of potential tax revenues and resources necessary for public spending.

### Informality trends in Armenia
- Informality indicators (self-employment and Schneider Index) show a decline in Armenia from an estimated 50 percent in 2000 to about 36 percent in 2019.
- This decline is similar to trends in the Kyrgyz Republic, Georgia, Kazakhstan, and Tajikistan.
- Although informality in Armenia has recently been lower than that of Georgia, it is higher than in Kazakhstan and Tajikistan.
- Informal employment remains highest in the first (poorest) income quintile.
  - The poorest portion of the Armenian population—despite having the highest informality rate—witnessed the most significant decline in informality since 2017 (i.e., by almost 40 percentage points by 2019).
  - Informality has been growing in higher income quintiles.
- Entrepreneurs remain the largest share of informally employed in Armenia (Armenian Labor Force Survey, 2018-2020).
- The second largest group of informally employed workers are employees of enterprises in the formal sector.

### Youth employment trends and school-to-work transition
- In 2019:
  - Only 40 percent of women were employed.
  - Only 25 percent of youth were employed.
- Among women aged 15–24 in 2019:
  - Approximately 29 percent were not in employment, education or training.
  - Only 18 percent of men in the same age cohort were similarly situated — a gender gap of 11 percentage points.
  - This is the second-highest gender gap in the region; Georgia’s gap is 8 percentage points.
- To understand youth labor market transitions, the study uses ILO School to Work Transition Surveys (SWTS) covering ages 15–29.
- Youth employment characteristics:
  - Around 36 percent of unemployed youth have tertiary education.
  - Unoccupied youth (neither in labor force, education nor training) have about 60 percent with secondary education and 18 percent with tertiary education.
  - Formal and informal employment each account for around half of youth employment.
  - More than half of informally employed youth are part of the formal sector.
- Sectoral and duration patterns:
  - Around 37 percent of working young women have public sector jobs compared to 24 percent of working young men.
  - Among unemployed youth, more than 30 percent of young men and women have been looking for jobs for more than two years; longer job search is associated with a higher likelihood of ending up in an informal job.
- Labor market status in the SWTS sample:
  - Nearly 30 percent of youth were not in the labor force, education, or training.
  - Around 10 percent were unemployed but searching for work.
  - Nearly 32 percent were employed.
  - In the sample, roughly around 5 percent of respondents are heads of households and half are female.
- Cross-region comparisons (sample means):
  - Employed shares: Armenia 39 percent; EMEU 34 percent; MENA 27 percent.
  - Of the employed, share in formal jobs: Armenia around 56 percent; EMEU 85 percent; MENA 59 percent.
  - Average job-search duration: Armenia’s highest duration is between 6 months and 2 years; EMEU and MENA countries have lower mean duration between 1 and 6 months.
- Empirical approach:
  - Logit models using SWTS microdata are used to evaluate how factors (age, gender, relationship status, marital status, education, parents’ level of education, and job search duration) affect youth transitions into formal vs informal jobs.
  - Cross-country panel includes Armenia (2014), selected EMEU countries and MENA countries to control for demography, education, and country fixed effects.

*International Monetary Fund — Republic of Armenia report content (PDF chapter).*

### 22. These estimates suggest the following:

### 1armea2021002 - 22. These estimates suggest the following:

### Demographic characteristics and informality
- Older youths transition more to the informal sector compared than younger ones.
- Nonlinear relationship: age squared coefficient is negative and significant (Age squared: -0.00*** [0.00]), indicating that at a certain age the positive relationship between age and informality reverses and additional age increases the likelihood of a transition to the formal sector.
- Empirical consistency: findings align with Beręsewicz and Nikluin (2018) for Poland and Shehu and Nilsson (2014) across school-to-work transition surveys for Eastern Europe.

### Education and parental education
- Tertiary education reduces the likelihood of young individuals transitioning to the informal sector.
  - Tertiary education coefficients reported: -0.30** [0.12]; -0.34*** [0.11]; -0.42** [0.19]; -0.27* [0.21] across model specifications.
- Secondary and vocational education coefficients reported: Secondary education: 0.09 [0.12]; 0.04 [0.12]; -0.71*** [0.21]; -0.63*** [0.22]. Vocational education: 0.06 [0.06]; 0.06 [0.06]; -0.16 [0.10]; 0.00 [0.11].
- Parents’ education increases probability of transitioning into formal jobs:
  - Father education coefficients: -0.06*** [0.02]; -0.13*** [0.02]; -0.11*** [0.02]; -0.07*** [0.02].
  - Mother education coefficient: -0.10*** [0.02]; -0.11*** [0.02] (reported where included).
- Interpretation: father’s education generates a higher tendency of being formally employed; overall both parents’ education positively affect chances of formal employment (especially mother’s level of education).

### Gender, marital status, and household role
- Female coefficients: 0.01 [0.06]; 0.06 [0.07]; 0.03 [0.06]; 0.06 [0.07] (not statistically significant across specifications).
- Head of household coefficients: 0.07 [0.08]; 0.00 [0.09]; 0.07 [0.08]; -0.02 [0.09] (no consistent significant effect).
- Marriage associated with higher incidence of being in a formal job compared to informal jobs (positive effect for women; no significant effect for men).
  - Married*female interaction: -0.26* [0.14]; -0.31** [0.15] (in specifications where included).
- Note from multinomial logit robustness checks: marriage, independent of gender, increases the probability of being unemployed as compared to informally employed.

### Time spent searching for a job
- Longer time looking for jobs increases the likelihood that individuals with secondary and vocational education transition to informal jobs.
  - Time looking for jobs coefficients: -0.04** [0.02]; -0.03 [0.02] (where included).
  - Time looking for jobs*secondary: 0.20*** [0.04]; 0.19*** [0.05].
  - Time looking for jobs*vocational: 0.06** [0.02]; 0.03 [0.03].
  - Time looking for jobs*tertiary: 0.04 [0.04]; 0.02 [0.04] (insignificant).
- Interpretation: the informal sector can absorb excess formal workers and act as a way out of unemployment for those with secondary or vocational degrees; effect is insignificant for individuals with tertiary education.

### Regional differences
- Youth in MENA and EMEU countries (relative to Armenia) have a higher chance of transitioning to formal jobs compared to informal ones, effect strongest for EMEU countries.
  - MCD coefficient: -0.73*** [0.11]; -0.62*** [0.11]; -0.53*** [0.12]; -0.59*** [0.12].
  - EMEU coefficient: -1.15*** [0.12]; -1.10*** [0.12]; -0.98*** [0.12]; -0.99*** [0.12].
- Shehu and Nilsson (2014) similarly find residing in EMEU increases chance of formal employment.

### Regression sample and model notes
- Logit(1=informal; Base=formal) model reported.
- Observations by specification: 7287; 6872; 7307; 6461.
- Constant terms: 1.28*** [0.15]; 1.09*** [0.15]; 1.15*** [0.16]; 1.22*** [0.17].
- Standard errors in brackets. Significance codes: *p < 0.10, **p < 0.05, ***p < 0.01.
- Robustness: multinomial logit model adopted as additional robustness check produced similar results for individual’s and parent’s education and yielded same regional results.

### Conclusions and policy recommendations
- Broad conclusion: Providing young people with sustainable job opportunities requires sound macroeconomic and structural policies that are inclusive and address vulnerabilities and discrimination, including active labor market policies and training.
- Addressing informality is crucial to raising productivity; policy responses depend on drivers of informality.

- Demand-side recommendations to promote transition to formal employment:
  - Provide quality infrastructure that fosters and supports formality at firm and national levels (noting informal businesses often suffer from inadequate access to infrastructure, mainly electricity).
  - Provide targeted training and technological support for small and medium enterprises, self-employed and entrepreneurs to increase connectivity to domestic and foreign value chains; offer advice on formalization and record-keeping requirements.
  - Ensure a simple, transparent, efficient, and fair regulatory environment, especially for startups; strengthen public institutions with governance and transparency to enhance investor trust.
  - Promote economic diversification to reduce volatility and dependence on domestic consumption and remittances; rechannel resources toward sectors with high productivity and job creation potential.

- Supply-side recommendations to address skill mismatches and skills gaps:
  - Enhance cooperation between the private sector and educational institutions through apprenticeships or internships to provide work-based experience and facilitate transition to formal employment.
  - Provide orientation and career guidance in schools to aid school-to-work transitions.
  - Strengthen vocational training through internships for those with post-secondary and professional qualifications.
  - Ensure access to affordable childcare to facilitate formal job and education seeking for females, lessen gender inequality, and encourage single females to compete for formal jobs by enabling work–life balance.

*Source: 1armea2021002 - 22. These estimates suggest the following: (PDF chapter/section).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1armea2021002.pdf_