The Armenian economy has performed surprisingly well in recent years. However, most experts remain skeptical, viewing this high growth as an unsustainable result of short-term external factors. In contrast to this skeptical view, we argue in this paper that, since 2018, Armenia’s growth model has improved significantly, becoming more sustainable and inclusive. Furthermore, this improvement in growth quality has largely been overlooked by both professional experts and the educated public. As a result, Armenia has missed out on potential political and investment benefits from its effective economic management. Meanwhile, the new growth model has been creating additional development opportunities for the country. It is time to recognize this ongoing transition to a new growth trajectory and to explore ways to enhance the social and political benefits of more rapid and sustainable growth.

Steady growth against the odds

Armenia’s economic trajectory has been marked by resilience and steady growth for over two decades, despite the significant challenges it has faced. These challenges include protracted regional conflicts, the blockading of major transport routes, deep-seated political divisions, and widespread frustration and migration.

Until recently, Armenia’s economic growth, while commendable, was not exceptional. The nation’s economic fortunes have been heavily tied to Russia through exports, remittances, and foreign direct investment.  From 2000 to 2008 high oil prices and Russia’s strong economic performance led to massive investment in real estate by Armenians from Russia and those Armenians who went there for work driving up the Armenia’s growth. However, concerns about the sustainability of this growth trajectory have been raised. The nation’s exports have remained static and insufficiently diversified, job creation has been largely stagnant, and there is an over-reliance on remittances.

Armenia’s economic success in the early 2000s, with an average annual growth rate of 11.2%, was initially hailed as a post-Soviet transition triumph. The World Bank’s 2007 report, “The Caucasian Tiger,” was ill-advised in its title which distracted from the report’s explicit warning about the need for further reforms to sustain high rates of growth. Armenia’s stellar growth was halted by the 2008-09 global financial crisis, and the country has yet to fully recover, with the average growth rate dropping to 3.5% in the years following the crisis. Armenian economy happened to be a paper tiger.As the fundamental problems of the business climate remained unaddressed, they quickly became a major barrier for most private investors, both local and foreign, and effectively blocked the formation and expansion of firms unrelated to the ruling elites.

Since 2018, however, Armenia has been on a “better-quality development trajectory,” with a record growth of 12.6% in 2022, surprising international experts. The short-term impact of Russia’s aggression against Ukraine has been positive for Armenia, with the country viewed as a safe haven and benefiting from strong inflows of people and capital from Russia.

We believe that the recent growth acceleration is based on a more robust foundation than just short-term gains from the war in Ukraine, with improvements in Armenia’s investment climate and shifts in its economic structure supporting the strengthening of the country’s economic fundamentals.

Armenia’s competitive edge is bolstered by several social, cultural, and historical characteristics. These include a robust reserve of human capital, a legacy partially inherited from the Soviet era, which encompasses professional excellence across a broad spectrum. Additionally, cultural traditions that emphasize the value of hard work and uphold strong work ethics play a significant role. These traditions encourage private investments in learning and science, particularly in STEM disciplines, fostering an environment conducive to intellectual growth and technological advancement.

Moreover, Armenia boasts a well-established entrepreneurial tradition, dating back to the time when Armenians were among the most active and sophisticated traders along the Silk Road. This historical background is intrinsically linked to a tradition of mastery in intercultural communication and interaction, skills that remain invaluable in today’s globalized economy. Furthermore, the sophisticated and affluent Armenian diaspora has been a steady source of support. The diaspora serves as a crucial conduit for transferring knowledge and facilitating market access for Armenians residing in Armenia, further bolstering the nation’s competitive advantage.

An educated reader might note that all these factors were also present in Armenia 20 years ago, yet they did not then result in the sustained accelerated growth dynamics that have become increasingly apparent recently. Something else has happened that allowed for a more effective utilization of Armenia’s competitive advantages. We would like to highlight two interrelated recent developments that have combined to become a game changer.

Freedom dividend

Armenia’s 2018 popular protests were driven by concerns about corruption, governance, and inequality. The subsequent liberalization and removal of corrupt oligarchs and artificial monopolies have opened up the economy for innovation and entrepreneurship. The government’s anti-corruption efforts have brought substantial economic benefits, dismantling entry barriers and boosting investor confidence.

To clarify, we are not great admirers of the current Armenian government’s economic policies. They have missed many opportunities and could do much better in clarifying strategic priorities and acting on them consistently. However, they have managed to do several things right. These achievements are not always visible from the outside, but the most fundamental changes are noticeable. Despite the many mistakes the government has made, these changes have been a primary source of its electoral wins so far. Significant progress on anti-corruption has been one of the most important achievements of the post-2018 administration.

The current investment climate in Armenia has been liberated from various costly illegal restrictions, resulting in an increase in registered businesses, improved tax compliance, and a strong recovery in net FDI volumes.

The marked manifestation of the “freedom dividend” can be seen in a significant increase in budget revenues, rising from an average of 20 percent of GDP in 2016-17 to 23 percent in 2023. This growth is largely attributed to the reduced incidence of corruption in tax and customs administration after 2018. Meanwhile, the number of registered SMEs in Armenia (all data from ArmStat) has expanded by about 50 percent, from around 60,000 in late 2017 to about 90,000 by the end of 2021. The accelerated pace of business creation led to a drastic decline in the unemployment rate – from 19.0% in 2018 to 18.2% in 2020, 13.5% in 2022, and down to 11.7% in 2023 (the lowest unemployment level in post-Soviet era).

Many businesses moved out from the shadow and joined the formal economy. In addition, with the realization that they do not need protection (krysha) any longer, many perspective entrepreneurs, especially in the service sector, are more willing to take risks and have launched their own businesses.

Just an illustration from the recent past for those who might have forgotten. About 20 years ago, a friend of ours wanted to open a gas station in Yerevan. According to the unwritten rules of the time, he had to ask (through intermediaries) for permission from the defense minister to launch his business in this sector. However, the minister did not give his blessing. The response our friend received was, “Not yet. The guy is too young.” This was typical of how the system “administered” market entry and competition in Armenia for decades. These feudal arrangements undermined market mechanisms. They have largely disappeared by now due to targeted government interventions and the natural disintegration of old informal arrangements about market control.

International observers also registered improvements in corruption perceptions in Armenia. According to Transparency International (TI), Armenia’s score at the Corruption Perception Index increased from 33 (out of 100) in 2016 to 49 in 2020-21 and 47 in 2023. Despite the TI index remains at the much higher level compared to its pre-2018 values, some decline in its values since 2021 has been of concern because it accurately reflects a more limited progress in this area in recent years caused by a gradual dissipation of the earlier anticorruption drive. On control of corruption index of the World Bank Armenia (https://www.theglobaleconomy.com/rankings/wb_corruption/) was ranked 80^nd globally (out of 193) in 2022, above few EU members such as Bulgaria, Romania, and Hungary.

However, the easy gains in the fight against corruption have already been realized, and further progress requires comprehensive public administration and judicial reforms. Without these reforms, anti-corruption instruments could become barriers to innovation and reform in the public sector, as well as a tool for punishing political opponents. There is also a risk that a new oligarchy could emerge and limit market opportunities for the general public.

Public procurement is one of the most vulnerable areas to corruption, and the current procurement arrangements guided predominately by cost minimization has been doing much harm. It is crucial to build capacity for managing complex procurements and to introduce new regulations that use of cost-benefit analyses, reward professionalism in execution and bottom-line impact. Procurement decisions should aim at achieving the best value for spent budget money, rather than just getting the lowest price.

As the government advances in the reform process, public demands are expected to shift towards the formation of an effective regulatory system, emphasizing the need for “smart regulation” over “honest regulation.”

Hi-Tech sector’s expansion

The transformative impact of the hi-tech sector on Armenia’s economic performance and longer-term development prospects is significant. The growth of the sector, driven by home-grown talent and diaspora pioneers, has been rapidly changing the basic structure of the entire economy.

In the first half of the 2000s, technology MNCs started to enter Armenia, joining the early local IT companies. They were not interested in the relatively small Armenian market. Instead of opening traditional marketing offices, MNCs quickly established R&D units in Armenia, capitalizing on the availability of local competencies. Synopsys and National Instruments were the pioneers of this movement, and today the list includes technology giants like Adobe, AMD, Amodeus, NVIDIA, Siemens, and VMware. Smaller but influential global players are also present: BostonGene, EPAM, Miro, Veeam, and others. Such concentration of MNCs significantly strengthened Armenia’s position on the global map of locations with high-tech growth potential, creating fertile ground for the formation of a thriving startup ecosystem since the mid-2010s. This refined sectoral landscape has become a decisive factor in attracting non-Armenian technology talent and businesses to Armenia since the onset of Russian aggression against Ukraine, which gave the sector an additional boost over the past two years.

While several Armenian IT companies have been successful for over 20 years, none have become household names like Skype from Estonia or World of Tanks from Belarus. However, this is changing, with the first Armenian unicorn, Picsart ($1.5 billion), gaining recognition in its market niche. Other local companies, such as Krisp, Vineti, and 10Web, are also rapidly rising. There have also been less high-profile but worth mentioning success stories: e.g., one of the oldest IT companies in Armenia, Synergy, operates far from fashionable markets and has matured before the recent startup boom. Meanwhile, it is a provider of large, specialized IT solutions for national government agencies and international organizations in many countries around the world. This list of high-tech successes could be easily expanded.

The habitual attitude of many commentators towards the Armenian tech sector exclusively as a provider of “cheap qualified labor” is seriously outdated. The country has now become an important player in advanced tech products and services.

Armenia’s IT sector has reached a new level of development in the past five to six years, coinciding with the country’s recent business liberalization efforts. However, the sector’s steady growth over the past 30 years has been largely independent of these changes, with the administrative burden on IT firms traditionally being relatively light. The previous administration’s corrupt and distortive policies had little impact on the sector, as the country’s leaders failed to recognize the value of IT either as a potential driver of long-term growth or as a source of personal gain.

Despite the limited benefits IT firms have realized from the recent “freedom dividend,” the feeling of new business opportunities in Armenia has been contagious, contributing to the expansion of IT startups and investment deals. The sector’s progress is a testament to its resilience and potential as a key player in Armenia’s economic future.

In 2022, the adjusted share of GDP derived from the IT sector amounted to around 5.7%, and in 2023, it reached 7.3%. The hi-tech industry has become the country’s fastest-growing sector, with a growth rate exceeding 30% in recent years, considerably over-performing traditional sectors including mining and agriculture.

And thematic breadth of areas where these new firms have been trying to establish themselves has been expanding: It spread out much beyond the traditional IT/software to include various additional high-value niches in e.g. chip engineering, biotech, and the segments that require advanced mathematical skills (cyber security, big data, AI, supercomputers). The successful track record of the 1st generation of Armenian startups and growth in the number of leading corporate residents further expanded opportunities for recently established startups in reaching out to the global venture industry. By the estimates of the consulting company Dsight, during 2021 and the first half of 2022, Armenian startups raised more than US$1 billion in new investments through 26 deals with the participation of the leading international venture funds, such as Sequoia Capital Global Equities and Tiger Global Management.

The ongoing high-tech boom has a transformational effect on the preferences of the new generation of Armenian entrepreneurs. Launching their own tech startups has become a national sport among young businessmen and STEM researchers. Simultaneously, local home-grown venture entities have emerged in Armenia, becoming a source of initial funding for many startups. Startups in Armenia can now raise $1-2 million domestically before going abroad for additional financing, significantly reducing time needed and accelerating business development.

The Russian war in Ukraine has provided an unforeseen strategic opportunity for the Armenian economy, especially for its high-tech sector. Since March 2022, more than 110,000 non-residents have moved and registered in Armenia, with an unusually high concentration of people with hi-tech-relevant skills in this inflow.

However, Armenia is currently underutilizing the unique opportunity to attract and retain global talent. Many highly skilled technology professionals who arrived in Armenia in 2022 have since moved out. The current wedge in tax rates on personal incomes of IT staff influences the choice of longer-term business location in favor of Armenia’s competitors. To succeed in the quest for global talent, Armenian authorities should consider a paradigm shift in understanding the country’s long-term priorities and competitive advantages.

The hi-tech sector has already become a significant driver for the development of the rest of the economy. High-paid tech professionals, who tend to be relatively young and dynamic, shape new consumption patterns through their demand for good food, quality wine, and exquisite personal services, which in turn stimulates developments in the hospitality, food, agriculture, and other sectors, and also accelerates shifts in mass consumption. In addition, successful technology professionals often become investors – the authors of the article know a few examples of when IT engineers became investors with critical contributions to either launch or expansion of agriculture and hospitality businesses.

The authors suggests that the Armenian government should further prioritize the development of the hi-tech sector by emphasizing changes in business environment that would help attract and retain global talent. The officials should be much less concerned about potential short-term losses of income taxes, while more worried about more quite real longer-term losses of “brainy people” and associated damage to the country’s competitiveness at world markets.

The Next Big Thing for Armenia

What kind of development objectives Armenia should aim at over the next 20-25 years and how prominent should the role of its high-tech sector be in the future economy of Armenia? We believe that Armenia has a real chance to make a breakthrough to become an important player at the global technology market while the country’s development path would be shaped by its built-up competitive advantages in the technology sector. Several countries made similar breakthroughs in the last 30 years, including Ireland, Singapore, Israel, Taiwan, suggesting that this task could be accomplished. For instance, between 1990 and 2019, Ireland and Singapore through a comprehensive restructuring of their economic structures had achieved close to sixfold increase in per capita GDP. What lessons could we draw for Armenia from these successful country cases of growth acceleration accompanied by a drastic structural shift towards the technology sector? We would start from Isarel.

It has been quite popular to compare challenges Armenia faces with those that Israel has managed to overcome over its 75 years of independence. Indeed, two countries share many unusual characteristics, including hostile and unstable neighbors, access to the tremendous economic and political resources of the diaspora, well-established tradition of investing in knowledge and education, and entrepreneurial population.

50 years ago, Israel – a small arid country – had already become an unlikely success in developing its agriculture and was an innovation powerhouse in the defense industry. Few, however, considered Silicon Valley a realistic benchmark for Israel’s future. In the event, the transition to an innovation economy in Israel was a success and it went through three quite typical stages. During the first (up to the beginning of the 80s), the focus was on the creation of enabling conditions for growth in the tech sector. The period was characterized by rapid accumulation of advanced human capital (including through immigration from the former USSR) and growing diversity of private technology startups.

At the second stage (until the end of the 90s) the new tech sector expanded, built global linkages, and ultimately reached critical mass to become relevant on the global scale. Israeli startups increasingly went global, often with support from Jewish diaspora in the US and Europe. Between 1991 and 2000, Israel’s annual venture-capital investments rose nearly 60-fold, from $58 million to $3.3 billion a year. The number of tech companies launched annually with funding from Israeli venture funds rose over the same period from about 100 to more than 800.

The government program Yosma, launched in 1993, contributed to this success and became more than just a catalyst for the development of venture capital. It managed to coordinate and support parallel “soft” activities that inter alia supported a formation of a new global image of Israeli tech sector as well as building stronger partnerships and shared vision across various sector stakeholders.

These activities were followed by the third stage of explosive growth in the tech sector, which has taken place in Israel since the late 90s, and which defined the economic image of Israel as we know it now: one of the global technology centers with capabilities to lead in several critical market segments.

We believe that Armenia currently could be compared to Israel in the mid-90s. A significant influx of skilled people from Russia, Belarus and Ukraine has already taken place but the country is still in the waiting of a framework program that should help coordinate many existing individual initiatives, align interests of various influential stakeholders, and galvanize the talent and other resources already accumulated by the economy to make another leap forward by reaching critical mass of innovative businesses. This is a real opportunity for Armenia to secure its place on the map of the most technologically advanced countries over the next 10-15 years.

The experience of Taiwan provides additional insight on the importance of public-private collaboration for engineering a technological breakthrough. By the early 80es, Taiwan had already developed significant R&D capabilities and all key pre-conditions for accelerated development of the microelectronic sector were already in place but not much was happening. The large Hinschu Science Park, opened in 1980, was unable to find tenants despite aggressive efforts of the Government to lure multinationals. This was a classical coordination failure caused by the mistrust and lack of communication across major stakeholders – the Ministry of Finance (which was very skeptical of the country’s technological prospects), local financial sector (which remained very conservative and did not show any interest in trying new financing instruments such as venture financing), and Taiwanese high-tech diaspora in the Silicon valley (who did not see any benefits from returning to Taiwan and starting their own businesses there).

This coordination problem was solved through a strategic effort of the pro-reform coalition built by Kuo-Ting Li, who is widely regarded as the architect of Taiwan’s technology strategy. An engineer by training, during his earlier career, Li headed both the Ministry of Economic Affairs and the Ministry of Finance. By the 80s, he held the position of Minister without Portfolio with the reputation of political heavyweight. Because of his training, Li had a keen interest in technology and knew personally many of the leading successful Taiwanese IT entrepreneurs in the US.

By 1982, Li and his influential partners from diaspora, such as Stan Shih, the CEO of Acer, a leading PC maker, and Ta-Lin Hsu, an IBM executive, convinced the Ministry of Finance to introduce legislation, including comprehensive tax incentives and fiscal assistance, that would encourage the establishment and growth of VC firms in Taiwan and provide for their regulation. This triggered a virtuous chain of events that allowed Taiwan quickly to build a critical mass of high-tech businesses.

First VFs, as expected, were small and foreign. But they funded a sufficiently large group of startups to make a difference. This conspicuous success attracted growing numbers of diaspora engineers and entrepreneurs from the United States to build the next generation of startups. The return on these VC investments was so impressive that the conservative local family groups who controlled a major chunk of capital in Taiwan decided to invest in VC funds. The improved access to funding finally transformed the sectoral landscape: Hinschu Science Park became a growth center for new technology businesses.

Similarly to Taiwan in the 80s, Armenia already has various pieces of institutional and physical infrastructure needed for accelerated growth of the technology sector (incubators, technology centers, Engineering City, etc.), but yet they generate limited synergy, while the costs associated with limited coordination and lack of strategic vision are apparent. The Minister without a portfolio – influential member of national elite with a mandate for action – is one possible institutional solution for how to lead the accelerated development of institutional infrastructure necessary for hi-tech expansion.

Compared to Taiwan, Finland used an alternative set of institutional solutions to forge elite consensus regarding the centrality of innovation for Finland’s future. Before the 90s, Finland has never been seen as a potential global leader in the field of innovation and technology. Business incentives for innovation were undermined by availability of rents deriving from the special relations Finland developed with the USSR after the WWII. The structure of the economy remained traditional, and Nokia was still a leading producer of paper products. (Nokia’s sales of telecommunications equipment and consumer electronics amounted to only 15% of the company’s total sales in mid-80s).

Finland’s breakthrough into the league of global innovation leaders could be traced to the activities of Science and Technology Policy Council (STPC), a platform for public-private dialogue, chaired by the Prime Minister and with wide participation of leading firms and representatives from business associations. Traditionally, the STPC aimed at strengthening political support for investing in R&D but historically its effort made limited traction. However, during the economic crisis of the early 1990s, the STPC was able to convince the government that the best way to create new jobs was to make additional investments in R&D and high-tech despite the need to introduce significant expenditures cuts for most other budget programs.

The STPC’s ability to bridge divisions among powerful stakeholders was enhanced by its traditional mandate to manage the high-level training program called Sitra. These prestigious training seminars, which invited influential actors from across Finnish society, were introduced in the late 1960s, initially to forge consensus on defense policy. This instrument was re-used in the 90s for diffusing new ideas about the role of technological innovation and building consensus on government support for the sector.

In our interpretation, the main lessons for Armenia from this and similar success stories are three:

• An influx of capital is needed to accelerate growth. But it needs to be complemented by an influx of both skilled and unskilled migrants and by the high rates of absorption of modern technology. By combining imports of physical capital incorporating the latest technologies with imports of advanced skills needed to operate these technologies productively these countries managed to upgrade their industrial capabilities.
• The success of these countries in restructuring of their economies was also aided by a strong national consensus on the development priorities. A key pre-condition for building and sustaining such a consensus relates to the established tradition of the dialogue between the government, business and civil society that provides for the formation of effective and inclusive mechanisms of public-private cooperation and coordination.
• At the operational (day-to-day) level, the implementation of the country’s visions of their own technological leadership was helped by the availability of framework government programs to align interests of various stakeholders and coordinate their activities. This was commonly complemented by the establishment of a high-profile organization with a mandate to implement the program. Additional benefits were realized in the cases when the program managed to mobilize real political heavyweights to advance its objectives.

Human capital as a primary asset

The importance of human capital in technology-driven growth is undeniable, as the cases of successful acceleration have shown us. Adequate local human capital is essential, and the quality of education and the effectiveness of talent attraction are the primary determinants of a country’s stock of human capital. Armenia’s track record in this regard has been mixed, with a history of depressed rates of job creation, chronic unemployment, and labor out-migration, while currently facing serious challenges in global competition for technology talent.

However, recent developments have given us reason for optimism. Armenia has suddenly and quite unexpectedly become an attractive destination for labor migrants, including skilled managers and office personnel, from South Asia and the Middle East. The labor market has been strong and dynamic, and in 2023, we have even seen signs of labor shortages in Yerevan, although this is not yet fully reflected in the official statistics. It is another indication that the economy has been switching to a different development trajectory, one that is much more dependent on the quality of available human capital than on natural resource endowments.

To sustain the current successes in the technology sector and to remain on this new development trajectory, it is necessary to concentrate the state’s efforts on improving the quality of education, at both the school and university levels. This support should include privately managed educational programs that are the best performing currently, such as TUMO, COAF, Armath, and AYB. These programs have received international recognition and have already started their expansion beyond Armenia. For instance, TUMO, the network of after-school learning and creativity centers, operates not only in all major Armenia cities but also successfully performs in Berlin, Paris, Zurich, and other global centers. COAF Smart Centers are a major contributor to education in 82 rural communities across Armenia. Armath, supported by UATE, helps the establishment and operations of science and IT labs in 640+ schools in rural parts of Armenia.

However, the overall situation in Armenia’s educational system is far from ideal. The country’s education sector is an unsustainable combination of two very different segments: on one side, modern and innovative programs and institutions, and on the other, mediocre mass school education and very average at best university programs. For instance, Armenia’s TIMSS average mathematics (4^th grade students) scores (498 in 2019, the latest data available) showed some improvement relative to its 2011 level, but it remained one of the lowest in the region, much lower than in Turkey and Russia, and slightly lower than in Azerbaijan. According to the World Bank, the quality of tertiary education in Armenia is similarly below the regional average.

To address these underlying problems, it is important to study and adopt the experience of other countries, such as Portugal, that have made breakthroughs in the quality of education in the last 25 years. However, we must not get carried away by simplistic decisions that favor over-spending on educational infrastructure. The recently proposed development of the new Academic City, while demonstrates the welcome government’s commitment to expand its funding of science and education, unfortunately does not address the underlying problems of university education related to the quality, relevance, and formats of delivery of educational content.

Future public investments in university infrastructure should be accompanied by additional reforms to remove regulatory barriers and introduce new financing instruments for advanced academic and research programs. Strategically, university reforms should be aimed at expanding partnership opportunities between business and universities and increasing the role of the private sector in shaping technology education. Success in a related field can serve as a benchmark – the 30-year history of leadership and management programs at the American University of Armenia. The university has played a significant role in preparing the country’s next generation of leaders, including the CEO of Armenia’s first unicorn, Picsart, and one of the authors of this article.

High-quality education not only contributes to the development of the country’s human capital but can also become an important export sector. Armenia is not new to the international market for educational services, with several successful exporters of contemporary educational programs and the legacy of a strong university education during the Soviet era. And do not forget that the impact of historic Armenian universities, such as those in Sanahin, Tatev, and Gladzor, was felt far beyond the borders of historic Armenia.

Concluding remarks

While it is possibly a surprise for most of Armenian patriots, the world practically knows little if anything about the achievements of contemporary Armenia. Most of the outsiders’ knowledge about the country boils down to the fact that Armenia is a country with an ancient culture, small and proud, but in the wrong neighborhood. This is not the kind of information that helps national businesses enter new markets and build new technology partnerships.

We need to build a new image of Armenia as a regional technology center and regional island of freedom among the sea of tyranny. Armenia’s impressive progress in the Freedom House’s ratings serves as an important recognition of effective political liberalization and a valuable nation’s asset. Armenia is currently viewed as one of the regional leaders in the Global Freedom index (https://freedomhouse.org/country/armenia/freedom-world/2024). It is one out of only four countries in the Middle East and Central Asia  which are characterized by the Freedom House as either Partly Free (Armenia, Georgia, and Lebanon) or Free (Israel). The Global Freedom score of Armenia improved from 45 out of 100 in 2018 to 54 in 2024. By another measure, the quality of its democracy (https://freedomhouse.org/country/armenia/nations-transit/2024), Armenia moved up from the group of countries with semi-consolidated authoritarian regimes (score 26 out of 100 in 2018) to the group with the hybrid regimes (score 35 in 2024).

Unfortunately, the scale and structure of Armenia’s recent economic growth have not been captured accurately by various statistical indicators, resulting in informational gaps that are costly in terms of the nation’s business reputation and investment opportunities. For instance, the comparison of the official 2019-2020 data on the size of the ICT sector (including closely related parts of engineering) with alternative statistics that has been generated through the regular survey of all registered ICT businesses in the country, administered by Yerevan’s Enterprise Incubator Foundation (EIF), points to underestimation of the actual annual sales in the sector by at least 3.5 times. This means that the official statistics have been missing a significant part of high-tech operations in the country, which might exceed 7% of GDP annually.

Addressing these informational gaps through a joint government and business effort is crucial for the nation’s reputation and its investment attractiveness. It’s time to take seriously a more optimistic while less-traditional view of Armenia’s recent economic performance, which could be productive for ongoing discussions on what the government’s next steps should be in the economic field. The prevailing analysis of development options for Armenia often takes for granted its doom of remaining within the traditional development path, ignoring the ongoing rapid economic transformation and new opportunities.

Farther and more elaborate analysis is welcome to review the current trends in Armenia’s competitiveness and productivity. It would also be helpful to zoom deeper into actual and potential contributions of various growth factors such as:

• Human capital (emphasizing e.g. the importance of a skilled and mobile workforce)
• Robust and effective institutions including quality of judicial, legal and regulatory systems and public administration
• Capacity for innovation (including managerial, technological and other types of innovations), which also includes capacity for innovation adoption and transfer of knowledge
• Economic and market openness to trade and foreign investment

This process of “economic self-discovery” could be linked to the building of a necessary internal political consensus within Armenia, which would recognize that the shift to the new growth model, driven by high-tech and IT applications, could also bring a sustainable solution to the country’s existing geopolitical challenges. Apart from mining ores and diamonds/jewelry, most of Armenia goods exports are heavily dependent on markets in Russia and the FSU. The new Armenian economy that increasingly relies on exports of IT products, software, sophisticated equipment, and various IT applications (from management systems in energy and irrigation to the design of special effects in mass media and the movie industry) could be easily made much closer integrated into the existing market structures of the US, EU, and Middle East.

The new Armenian tech sector has already developed strong links with US companies, similar to the patterns observed in Taiwan and Israel. It is worth noting that having a strong economic sector that is well-integrated into the leading industry of the global superpower creates significant strategic advantages for an otherwise vulnerable country, as the history of Israel and Taiwan has also shown.

However, to realize this vision, Armenia needs more governance reforms to move towards a modern, open, and inclusive system of governance. The necessary policy decisions should be prepared and implemented through a dialogue between government agencies and various non-governmental stakeholders. This would reduce the risks of making significant mistakes and help build trust and social capital needed for an effectively functioning modern society. This would also help accelerate the removal of unnecessary regulatory barriers and advance regulatory alignment with the EU.

Simultaneously, Armenia needs to enhance the government’s dialogue with diaspora groups to further leverage their potential and contribution to Armenia’s growth and prosperity. The immediate focus should be on supporting existing and emerging diaspora networks that can facilitate sustainable Armenia-diaspora relationships. The government needs to demonstrate to its partners in diaspora that Armenia has become an open and hospitable place for diaspora investment, and not just a destination for diaspora-funded humanitarian assistance and cultural initiatives.

Armenia is at a critical juncture, with new drivers of growth pushing the country towards a new development trajectory. However, these drivers remain underdeveloped and fragile, requiring further policy support to ensure their sustainability.

If Armenia plays its cards right, it could join the ranks of successful countries like Israel, Taiwan, and Singapore, whose economic success is built on competitive advantages in the technology sector. While luck and international goodwill will be helpful, the real key to success relates to intelligent policy choices and disciplined execution.

In short, Armenia has a promising window of opportunity. It’s up to the country’s leaders to navigate this moment wisely and set Armenia on a path to long-term prosperity.