Association for Foreign Investment and Cooperation’s 2006 roundtable with local business leaders on tax reform in Armenia. (Photo: AFIC)
Private sector-led economic growth is the key to prosperity for any country. However, without a tireless advocate to give voice to the concerns of small businesses, corruption and bureaucracy can suffocate entrepreneurial activities. This, in turn, hampers economic and democratic development.
In 2001, 95 percent of all business entities in Armenia lacked any kind of formal representation to advocate for pro-business reforms to government. Over the next ten years, CIPE and the Association for Foreign Investment and Cooperation worked together to cultivate a grassroots reform network of local business associations and chambers of commerce. AFIC is an Armenian membership-based business association, established by former CIPE business association trainees, devoted to the promotion of foreign investment, international economic cooperation, and private entrepreneurship. What began as an informal network among friends and colleagues eventually, thanks to CIPE’s and AFIC’s assistance, took on greater structure as a reform-oriented coalition.
Hernando de Soto famously asked: although cities across the developing world are teeming with entrepreneurs, why do those countries seem unable to become prosperous market economies? The answer, he argues, is that they hold “resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them.”
CIPE and partners Association for Foreign Investment and Cooperation in Armenia, Unirule Institute of Economics in China, Institute of Economic Affairs in Kenya, Institute for Solidarity in Asia in the Philippines, and Saratov Chamber of Commerce and Industry in Russia set out to explore this crucial question in more detail, identifying the barriers small entrepreneurs face in urban property markets using the International Property Markets Scorecard.
The Scorecard provides a methodology for property market system analysis to investigate the six core elements necessary for sustainable market development: property rights laws and enforcement, access to credit by small businesses, efficiency of governance, rational dispute resolution, financial transparency, and appropriate regulations. This approach not only illustrates the linkages between property market elements but also helps identify gaps and advocacy priorities where some of those important institutions remain weak, either due to a lack of proper legal and regulatory framework or its weak implementation.
Following an in-depth analysis of the available secondary data such as international indices and national statistics, CIPE partners conducted fieldwork in two select cities to localize the results. This work was tailored in each country through a mix of focus groups and interviews to obtain the most accurate snapshot of the conditions entrepreneurs face in dealing with the government, banks, and professional services providers in the property sector. These views from small businesses have a unique power to illustrate key problem areas because of the real, personal experiences they reflect.
Property markets are multi-dimensional institutional frameworks that touch upon issues key for all citizens but particularly vital for small businesses. As such, property markets are a microcosm reflecting the state of a country’s institutions that build democracies and market economies alike.
This Feature Service article summarizes key findings – both shared and country specific – as well as reform recommendations for the next advocacy-oriented stage of our efforts. You can also read full country reports here (China coming soon): Armenia, Kenya, and the Philippines.
Article at a Glance
- Understanding of property rights often remains limited to property titles, without deeper appreciation of the underlying and interconnected institutions that make property rights meaningful and allow property markets to function.
- Although private property rights are legally protected in most countries, that protection varies greatly in practice because the implementing regulations and institutions that build property markets remain weak.
- The development of competitive and transparent property markets for small businesses requires not only legally protected rights but also strengthening of the broader institutions of good governance and market economy.
An open and transparent dialogue between the broad-based business community and the state is a key feature of a functional democracy. Grassroots advocacy efforts introduce government officials to new ideas and provide a roadmap for policy improvements supported by the voice of the people. This is the context that served as a foundation for the Association for Foreign Investment and Cooperation’s (AFIC) efforts to create a platform for public-private policy dialogue on tax reform in Armenia.
In this Feature Service article, Gagik Poghossian, one of the founders and the Deputy Chairman of the AFIC’s Board, discusses his organization’s successful approach. Following a period of extensive analysis of the existing tax code, AFIC produced concrete reform recommendations, outlined its advocacy plan, and conducted an awareness campaign. On August 19, 2008, Armenia’s National Assembly adopted a package of legislative reforms that included those recommended by AFIC. The participation of the business community and other stakeholders in every step of this process created an excellent foundation for a broad-based, informed policy debate.
The new system reinforces the rule of law in Armenia and helps develop fair and relevant policies for the private sector. Mr. Poghossian comments, “AFIC’s tax reform initiative showed the importance of getting private sector actors organized to identify their interests and to base the arguments for the policies they advocate on sound economic analysis.”
Article at a Glance
- Corruption generated by Armenia’s tax system undermines public confidence in the rule of law and democracy.
- The private sector is often an unwilling participant in corrupt transactions.
- Government initiatives to combat corruption have shown little measurable impact.
- Armenia’s private sector must solve the collective action problem and stand up to corruption.