Combating Corruption through Collective Action in Armenia

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The Center for International Private Enterprise (CIPE) partnered with the Association for Foreign Investment and Cooperation (AFIC) in 2006 to establish a grassroots coalition of business associations and chambers of commerce, known as the Business Advocacy Network (BAN), with the aim of improving the environment for small and medium-sized enterprises (SMEs) in Armenia.

CIPE and AFIC have combatted corruption in Armenia through a series of targeted reforms focused on the adoption of a new SME law, a reformed law on state inspections of private sector entities, and improved regulations protecting the rights of SMEs in commercial property transactions. With CIPE support, AFIC galvanized SME engagement in the policy process through collective action resulting in an improved operating environment for SMEs in Armenia, reduced corruption risks, lower costs of doing business, and increased transparency and accountability in governance.

Combating corruption through collective action

Corruption is a systemic problem that plagues the entire post-communist world, rooted in weak rule of law and lack of private property rights (Anders Aslund “From Crime Toward Law” in How Capitalism was Built: The Transformation of Central and Eastern Europe, Russia, the Caucus, and Central Asia, Cambridge University Press 2012, p.283). Corruption can best be addressed by building responsive institutions that protect private property rights and ensure law and order. These institutions are “crucial for economic growth and particularly for investment”, because they “diminish transaction costs”(Anders Aslund, p. 284) and improve the business environment.

Since gaining independence from the Soviet Union in 1991, Armenia has suffered from widespread corruption and the dominating role of oligarchs in politics. In 2001, 95 percent of all business entities in Armenia lacked any kind of formal representation to advocate for pro-business reforms to government.

While corruption takes a heavy economic toll on the Armenian private sector, no individual company can take a stand against bribery on its own. Through advocating for targeted reforms and by working together, chambers of commerce and business associations can act in concert to reduce corrupt behavior.

CIPE and AFIC established a grassroots reform network of local business associations and chambers of commerce, called the Business Advocacy Network (BAN), in order to address challenges associated with corruption. CIPE staff facilitated training sessions on coalition building and organizational management and guided AFIC in developing the BAN’s institutional framework to ensure the Network’s effectiveness and sustainability as the voice of small business. AFIC is a leading member of the Business Advocacy Network, acts as Network spokesperson, and provides Network leadership. The 32-member Network is unprecedented in Armenia and has provided a key voice for business in policy dialogue related corruption issues.

In order to tackle the corruption challenges through collective action, the BAN Secretariat developed an advocacy strategy based on consultations with members and their constituents in order to gain a better understanding of the barriers faced by Armenian companies and the legislative environment affecting their business activity. As a founding member of the Business Advocacy Network, AFIC led analysis efforts, which included surveying business community representatives in Yerevan and three other provinces in order to formulate the reform priorities of the Network. The top reform priorities for BAN members were identified as SME development, tax and customs policy, inspections reform, European integration, and property rights.

Under AFIC’s leadership, BAN members held a series of meetings and roundtables involving both private sector representatives and government officials to promote reforms to small business laws and draft legislation, with particular focus on the SME State Support Law. BAN held a series of advocacy roundtables to present to government the concerns and recommendations of the SME business community. Representatives from the Ministry of the Economy, SME Development National Center, the State Revenue Committee, and civil society organizations participated in the roundtables.

Developing the Network’s strategy and sustainability plan, and building an advocacy agenda, were necessary prerequisites for addressing the corruption challenges facing Armenia through collective action and improving the policy environment for small businesses.

Publicizing the Network’s policy positions and activities was another important element of the advocacy campaign. In their role as the Network’s spokesperson, AFIC shared information through the publication of a monthly electronic newsletter “The Voice of the Entrepreneur,” which contained updates on legislative and administrative changes and news about Network advocacy activities. AFIC also launched a website to increase the visibility of the Network and its members’ activities and provide a steady flow of information to interested groups on the position of the business community on a variety of issues. In addition, AFIC published a report titled “The Role and Importance of Business Advocacy Network in Improvement of Business Environment,” which summarized the outcomes of surveys, interviews, and roundtables conducted within the framework of the project and described the Network’s role, mission, and business advocacy strategy.

Legislative Impact

Various legislative reforms were pursued to promote a better business climate for SME’s. One of the key successes of the reform process was the implementation of a new SME law in January 1, 2011; BAN played a major role in drafting, and advocating for, the new law. The law includes provisions that streamline tax reporting requirements by implementing e-reporting; the provisions also help to ensure that SMEs benefit from state support programs.

Furthermore, the Network institutionalized the voice of small business in public-private policy dialogue by advocating for the creation of an SME Development Council. Established in 2011 and chaired by the Prime Minister, the Council is composed of representatives of government, SME support organizations, and international financial institutions. BAN members hold six of the Council’s 12 seats. The establishment of the Council was an important step in the reform process, after years of the government failing to consult SMEs on relevant legislation and regulation. The SME Council has successfully amended SME support laws through working with government ministries and political parties in the National Assembly.

BAN members were able to utilize their position on the SME Development Council to advocate for simplified leasing procedures for small businesses. The time and costs businesses faced in obtaining notary verification of lease agreements was a major impediment to local property transactions. As of January 1, 2012, SMEs have no longer been required to provide notary verification of leases, and the payment for state registration of leasing contracts is now a fixed amount rather than a percentage of the transaction. These changes have benefited SMEs by reducing the costs of renting premises. Moreover, the more predictable regulatory environment has further decreased opportunities for corrupt behavior.

One of BAN’s top advocacy priorities was reform of the state inspections law. Inspections impose considerable administrative and regulatory costs on businesses, and unclear guidelines and overlapping authorities among inspections agencies provide opportunities for bribery. Initially, inspection reform seemed a daunting task as any change in the system would affect some 19 different government inspection bodies. Collective action through the Network overcame considerable opposition in the Armenian government to reforms and provided essential private sector support by publicly explaining the private-sector case for reform. A BAN representative provided key private sector input to the government’s Inspection Reform Coordination Committee, led by the Ministry of the Economy.

In July 2011, the President signed the Law on Changes in the Law on State Inspections. The new legislation introduced a risk-based approach to state inspections of business entities, categorizing businesses by level of risk in particular inspection areas. Businesses with higher risk are subject to more frequent inspections while lower risk ones are subject to fewer, less frequent inspections. The legislation reduced the number of state inspections of small businesses while also decreasing the corruption risks faced by the private sector.

BAN also strengthened its own sustainability as a coalition promoting dialogue on market reform at all levels. As a result of the Network’s advocacy and policy achievements, its membership increased from 16 to 25 organizations. BAN has become the primary representative of the small business sector in civil society calling for democratically-oriented reforms to bring Armenia in line with European standards.

Conclusion

CIPE’s partnership with AFIC established the Business Advocacy Network and strengthened the role of the private sector in Armenia’s economic policymaking. In order to advance private sector priorities, AFIC identified legal and institutional structures that propagated corrupt practices, developed recommendations for reform, and garnered broad support within the private sector to advocate for those reforms.

The Business Advocacy Network provided a platform for impactful collective action by small and medium businesses to advance concrete policy changes, improve the business environment in Armenia, and eliminate opportunities for corruption.

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