Barriers to the development of Armenia’s high-tech sector

12 min readOct 20, 2021

It is no secret that there are many economic problems in Armenia: limited financial resources, lack of necessary labor force, small domestic consumption market, difficult access to foreign markets, disproportionate distribution of production capacity, disproportionate development of regions (page 3), etc. Against this background, one of the providers of economic growth is the sphere of information and communication technologies. It maintains the growth rates for more than a decade. In addition to this positive news, there are notable shortcomings. Let’s try to get acquainted with them one by one.

First of all, why do we need cheeks? For the solution of small problems one can choose the spheres of mining, agriculture or tourism with the same success, as with their development one can presumably overcome poverty, provide certain financial incomes, etc. Consider models from several countries. Take Georgia, which has developed tourism, but has a slight advantage over Armenia in terms of public debt-GDP. Azerbaijan even has a standard of living of the population comparable to Armenia with its oil. Seychelles և The Maldives has a global reputation in the field of tourism, but as a state they still lack something. Take Germany, South Korea, Japan, which are already more developed countries. This is evidenced by the fragility index of states. The reason is that these countries have developed industries, from the production of drugs and nanotechnologies to machine building and manufacturing. It turns out that the existence and development of the goat sector separately, without the rest of the economy, is inefficient, because even if there is some technological progress, it can remain at the service country level. For example, North Korea and Pakistan are able to develop nuclear weapons, but these countries, living in the 21st century, in many ways resemble the Stone Age. Armenia reminds of a Middle Age state, the last war is to prove of that. Despite the fact that Armenia had great initial resources, it still could not effectively withstand the technological competition. The solution is one. It should be understood that the field of high technologies is an infrastructure that provides infrastructure for the whole economy and if we act on our own, we can meet only a few economic indicators at best, while in our country there are many problems of socio-psychological and political nature, which will be discussed in the next section.

Many people think that if we have 300,000 programmers, all the problems in the country will be solved automatically. If all of these specialists are engaged in outsourcing, the state budget can be replenished, the social problems of the citizens of Armenia can be solved, but it will not provide qualitative growth, that is, it is nothing from the point of view of state building. First, factors limiting the further growth of the sphere will already appear here. The business environment of any country should be attractive. Such are, for example, developed science and cheap labor. We all know about the problems of the scientific-educational sphere (18 pages), the only thing left is the cheap labor force. Or Armenia positions itself as a country of cheap labor (p. 38), but in Armenia prices և wages are approaching such a level that our country will lose its competitive advantage (12 pages). In other words, if we focus only on increasing the number of specialists working in the field, sooner or later the field will destroy itself. The solution is to take steps to ensure long-term development and attractiveness, such as science and education reforms. Whether the implementation of long-term strategic planning is a state function is to some extent done only by private business.

The current economic model in our country does not presuppose that the government acquires shares in companies. State intervention will hinder the free operation of business. We may and should talk about the government’s share only when the solution and the tools have a nationwide disruption, as in this situation there will be a national security component. For example, in 2020, Caucasus Online, a company that provides internet cable coming to Armenia via Georgia, was sold to Azerbaijan’s “Nexol Holding”, as Armenia decided not to intervene. You do not even need imagination to imagine its dangers. The participation of the state should be not only for solving current problems, such as correcting gaps in tax or customs legislation, but also for ideology and direction. Only the state can prioritize the creation of artificial intelligence instead of bitcoin mining in the garage, since AI is a more promising direction, it implies complex production chains — serious research activities, R&D and STEM, requiring real science problems to get resolved. Only the state can issue a military-industrial order, where the most important is to license a company at first (page 13).

Problems hindering economic development in Armenia are not limited to the fields of science, education (p. 22) and the legislative field. Although has ICT already presented a huge progress, Armenia is not yet perceived by the world as an IT destination country. This is evidenced by the report of “Kearney” consulting company. Armenia is not included among several dozen countries having ICT. Besides “First Christian State”, “Brandy Production Center” and “Ancient Winery Center” brands, the “Armenia — Ancient Technology Center” brand should be promoted. Being one of the oldest cultures of the world and one of the possible cradles of civilization, Armenia always was one of first innovators of technological tools like chariots, metalworking (New Light on the Most Ancient East, Gordon Childe), astronomy (The Great Game, volume 1, M. ․ Hakobyan, p. 850) and etc., often had dictatorial positions. The launch of the “Why Armenia” project can be a decisive step for the promotion of such a brand in Armenia. Scientific and technical progress is not an unknown direction for Armenia.

Another problem is the reputation of the companies. Although some companies are achieving great success, local companies have a problem of trust abroad. This can be corrected if there are mechanisms in place to provide state orders to local companies, as a result of which companies will not only earn money through purely business activities, but will also gain “work experience”, which will allow them to appear in the international market. But the level of domestic demand for cheek products և solutions is low (p. 17). The public և private sector avoids the local. As a result, the company is making extra efforts to inspire confidence in the outside world, while being able to present its solutions already implemented in the local market.

Let’s try to understand some of these problems through a practical example. Through the efforts of local specialists, the “Defense Linux” operating system was created, which will provide an encrypted connection for the circulation of information containing potential state secrets, and in the future can serve as a basis for a secure e-government system. But it is not evaluated by the government, it is not invested. At first glance, all the structures և officials seem to be guilty, who refuse the secret communication in the warring country. But the problem is multi-layered. Let’s look at this proposal from the point of view of the state structure. In that case we will see that there is a tool, the effectiveness of which is spoken only by the author himself, that is, the interested party. Here the state structure has the right to doubt the effectiveness of that tool and the objectivity of the manufacturer. The solution would be for a third party, impartial and objective, to give a professional opinion on the need for that tool. But that third side does not exist yet. There is no independent body in the system of government operating outside the general civil service system, which will not be interested in accepting or rejecting the instrument, but will deal with its work. Another problem is the lack of staff who should have used that innovative solution. The absence of an independent unit և specialists also affects the state procurement process. First of all, it is necessary to formulate the order correctly, to compile the technical task correctly, to determine the right price-quality ratio, to make the payment on time, etc., which are not done due to the lack of specialists and structures. The third party is foreign organizations, specialists who do not know the local realities, may not take into account the national peculiarities, are not sympathetic. In such cases, the money is often wasted. Despite all this, local companies are succeeding, they are able to force the existing solutions to be applied. A good example is the Root Free STEM Education Program, which was started on a private initiative but received state sponsorship. As a result, several laboratories are fully implemented in India and Georgia.

In Armenia, 95% of software development and service companies were established after the 2000s (page 18). About 70% of companies face a shortage of highly qualified professionals, from programmers to managers. There are both “shortages” and “surpluses” in Armenian IT labor market simultaneously (page 22). Specialists are trained who do not fit with the requirements of the business. The reason is the lack of connection between education and business.

The outflow of highly qualified professionals is a problem for 1/3 of the companies, but in recent years these numbers have significantly decreased, which shows that they are in demand in the local market և due to the growth of start-up enterprises.

About 40% are hindered by difficult access to financial resources. An obstacle for the same number of companies is the lack of support from government NGOs, which affects the growth of software development and services sectors. Tax-customs procedures are an obstacle to development for about 1/3.

It is difficult for about 25% to enter the international market. The reason is that Armenia is not known as a technological hub, and there are no diplomatic relations with some countries. 20% of companies have faced factors that do not contribute to healthy economic competition.

Currently, the number of ICT companies is close to 1000, a little more than half of which are local. Foreign companies bring with them a new culture and connections, and local enterprises, by switching from outsourcing to their own product, generate higher revenue. Now the number of employees is approaching 20,000. The sectoral strategy developed by the UITE envisages having 100,000 employees in 8–10 years, which will give the country qualitative growth. Therefore, it is crucial to have enough number of research workers in the development of both software and hardware. Only with research activities it will be possible to develop completely new directions. For example, the role of unmanned aerial vehicles has not always been high. When the whole world uses fighter jets for military purposes, no one thinks of fighting with small devices, since it is about another principle of military action and approach. The role of science here lies not only in the technical design and assembly of the equipment, but also in the idea of considering unmanned aerial vehicles as weapons in general. It is a fundamentally new direction, the existence of which is nourished by scientific research activity.

In the worst case, the growth of the ICT sector is equal to the growth of the world market — 15–20%, which occurs even when nothing is done. This option will not give Armenia a technological priority. 3 development scenarios of the sector can be modeled (page 30):

1 ․ Existence of a digital indifference barrier or “Stuck in Digital Negligence” when high-tech solutions are not available to the general public. In this case, everything is under gravity. For example, no irrigation automation systems are introduced in agriculture, no observations are made with the help of artificial intelligence on the possible development or spread of fungal diseases or pests, nothing is automated at all.

2. Barrier overcoming or “Bottleneck Removal” when simple problems are solved — code, finances, etc. This is the situation of short-term planning and solving tactical problems. 94% of the population of the Republic of Armenia already has the Internet, the spread of which has led to the growth of online commerce, which assumes the demand for relevant products. In case of increase of internet literacy, more people will be involved in this process. This will give some growth, but it has a limit.

3. E-society Leadership, in which the government pursues a proactive-aggressive policy. Other spheres of industry, agriculture, tourism do not use segmental solutions, but the whole sphere becomes fully high-tech-scientific.

The development of countries can be conventionally divided into 3 stages (p. 41), which can follow each other

1 ․ Information society, when e-government, digital society, telecommunications, computer literacy, internet security are developed to meet the domestic demand for technology solutions, mostly state-run, and hints are set for further export. Estonia is such a country.

2 ․ The center of regional expansion, when the country positions itself as a technological country, aspires to participate in large projects. Such countries are Ireland and Egypt. With huge volumes of cargo, Egypt needs modern tools to manage it, from drones to logistics, without which it is impossible to service the huge ships passing through the Suez Canal.

3 ․ A high-tech center based on a highly qualified workforce, the creation of competitive scientific and educational institutions around the world, the establishment of STEM education, and large investments in R&D. Most of the steps do not provide quick results, they are aimed at the future. Such countries are Japan, South Korea, Israel and Singapore.

Armenia is still in the process of establishing the first stage. But only the economic preconditions are enough for the next regional expansion. For this stage we need a worldview change. We lack ambition, and maximalism causes a fear, look at the Armenia’s political behavior. Expansion to other countries is hindered by the lack of diplomatic relations with the country, which is a consumer market. A number of African countries, especially Ethiopia, as a result of their rapid development may need a large number of not highly scientific solutions, such as payment terminals, network business automation, ATMs, etc., but that potential is not used by us.. Another country, Saudi Arabia, in which conservative approaches have been changing for decades, is investing heavily in other sectors of the economy to reduce its dependence on petrodollars. Special solutions of Armenian companies reach that country, but due to the lack of relations between the two countries at the state level, the market is not fully accessible.

Becoming a world technology center is even more difficult. We need huge financial resources, infrastructure, science parks և advanced science, for the achievement of which we need to carry out very profound reforms, change the public perception of the image of a scientist և high technology. There is no “Failure culture” in Armenia. Some people who got stuck in their business are considered “Loser” instead of being accepted as “Somehow experiences”. This can even deter a person not only from taking risks, but also from raising issues.

Political freedoms are essential for economic development. Tax privileges, financing, legislative reforms, the creation of science park; state-business relations of all kinds should in no case be based on the good will of a particular political force, as it is not appropriate; depriving them, which can even be directed by the big competitors of a particular company և not only. In order to avoid such a scenario, it is necessary to put the protection of labor activity and opportunities for the development of the ICT sector on an institutional basis. For that, we need to have only a civil society that relies on itself, which has never existed in Armenia. Financial independence is a key factor for the ability to act independently. Those involved in the ICT related areas are the closest ones to forming a middle class, which is an important component of civil society.

Examples of civil society are trade and labor unions, business associations, Issue-based groups, societal groups, professional groups and other collective bargaining forms. Forming a huge group of people presupposes the existence of trust in interpersonal relations. In the book “The Rise and Decline of Nations”, the examples of Japan (p. 46) and Germany (p. 76) illustrate the corelation between trust at the interpersonal level and economic growth. In the list of countries, rich in different types of unions, are mainly economically developed countries. The graph shows that there is a connection between the level of trust in strangers and economic indicators. The book “Unions and Collective Bargaining” shows how working conditions can be improved through bargaining (page 23). But the problem is that the level of trust in each other in Armenia is low, about 25% (Page 6). Maybe that is why the number of employees of 84% of the companies in Armenia does not exceed 25 (page 32). This is a serious problem for the development of the whole sector, as only 2 to 3% of the revenues generated by the entire sector fall to small companies, while the lion’s share of revenues is generated in multidisciplinary collectives (p. 14).

The High Tech is not only code writing, not even mathematics, algorithms և data structures. The purpose of having high technologies is not only to solve problems on a personal level, but also to contribute to the solution of state problems.

Main sources used:

1) https://www.eif.am/arm/researches/report-on-the-state-of-the-industry/

2) https://www.eif.am/arm/researches/armenian-it-industry-growth-model/

3) https://www.eif.am/arm/researches/armenia-e-health-feasibility-study-2010/

Sources of additional materials used:

1) https://fragilestatesindex.org/analytics/fsi-heat-map/

2) Armenia, Teacher Profile and Policies — https://openknowledge.worldbank.org/bitstream/handle/10986/35540/Armenia-Teacher-Profile-and-Policies.pdf

3) https://www.forbes.com/sites/robtoews/2021/06/01/what-artificial-intelligence-still-cant-do

4) https://www.forbes.com/sites/wadeshepard/2020/01/31/welcome-to-the-worlds-next-tech-hub-armenia

5) Digital resonance — https://www.kearney.com/digital/gsli/2019-full-report

6) https://www.bbc.com/news/world-europe-12158341

7) https://www.forbes.com/sites/stevenbertoni/2021/08/26/picsart-is-techs-newest-unicorn---and-adobe-should-be-afraid