CBE Hosts Discussion With Armenian Government Officials on Shadow Economy

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YEREVAN, Armenia — On August 31, the American University of Armenia Manoogian Simone College of Business and Economics (CBE) hosted representatives from the Ministry of Finance, Ministry of Economy, State Revenue Committee (SRC), and Central Bank of Armenia, led by Deputy Minister of Finance Eduard Hakobyan, to discuss the College’s assessment of the shadow economy in Armenia. The working paper was produced by CBE Dean Dr. Vache Gabrielyan, Assistant Professor Dr. Hayk Kamalyan, and former students Martun Hovhannisyan (MSE ’20) and Karen Manukyan (BAB ’20), who had researched the topic for their theses for the degree of Master of Science in Economics and Bachelor of Arts in Business, respectively. Associate Professor Vardan Baghdasaryan also participated in the discussion, sharing insights based on his long-term collaboration with SRC and topical expertise. 

CBE’s study employed direct and indirect assessment methods to gauge the size of the shadow economy in Armenia. The direct approach measured the size of the informal economy based on the estimate of shadow employment in the Armenian economy. The corresponding data was drawn from the Labor Force Sample Surveys (LFSS) compiled by the Statistical Committee of the Republic of Armenia (RA). The indirect (model-based) approach utilized the currency demand model, electricity consumption model, and multiple indicators multiple causes (MIMIC) model. For the latter, the authors used aggregate data from both the Statistical Committee of Armenia as well as international organizations (such as the World Bank and International Monetary Fund). 

Further elucidating the approaches used in the study, Dr. Kamalyan noted: “While we acknowledge the merits of the indirect model-based methods, we nevertheless prioritize the survey-based approach. Not only does it uncover the distribution of shadow activities across the sectors of the economy, but it is also more accurate and unlikely to suffer from overestimating the absolute size of the shadow economy.”

There was a lively discussion about estimation methods, particularly considering that 10-20% of the GDP is estimated to be “in shadow,” the practicality of using different tools, and data availability for both academic and policy purposes. The participants mentioned the decade-long decreasing trend of the shadow economy in Armenia and the need for sustained efforts in that direction. They also discussed different modes of cooperation with CBE to enhance analytical capacity within government agencies.

Dr. Gabrielyan pointed out that the working paper is also noteworthy from a pedagogical viewpoint, as the work of former AUA student co-authors, Hovhannisyan and Manukyan, demonstrates the high quality of their research and practical relevance of their analysis and findings to the economy.

Deputy Finance Minister Eduard Hakobyan added: “CBE’s research assessing the shadow economy and the ensuing discussion on this topic are of great practical importance. In particular, the results of this research can advance macroeconomic analysis and forecasting, increase the credibility of tax gap estimates, and generally help formulate tax and fiscal policy. Considering that the results of the research also provide an opportunity to estimate the size of the shadow economy by sector, it can make a significant contribution to decision-making in the realm of fiscal and sectoral economic policies.”

Founded in 1991, the American University of Armenia (AUA) is a private, independent university located in Yerevan, Armenia, affiliated with the University of California, and accredited by the WASC Senior College and University Commission in the United States. AUA provides local and international students with Western-style education through top-quality undergraduate and graduate degree and certificate programs, promotes research and innovation, encourages civic engagement and community service, and fosters democratic values.