The emergence of information and communication technologies provided Armenia, a country of limited natural resources, with a real chance to turn its developed human capital to economic advantages, thereby stimulating the development of the country. During the eleven years of its independence, the Armenian society underwent serious economic and political challenges that were caused by the collapse of the Soviet Union. Since its independence, Armenia has to rebuild the economy, the infrastructure and the administrative system. After ten years of economic decline, in 2000 – 2001, some positive tendencies are being recorded for the Armenian industry. The emergence of high tech business is one of the promising developments of Armenia.
The country economic and social indicators for year 2001 are the following :

Population: 3,000,000
Nominal GDP: 2,288 mil US$
GDP per Capita: 602 US$
Sectoral contribution to GDP in %:
Industry: 22.9
Agriculture: 25.8
Gross Fixed Capital Formation: 16.6

Information technologies are considered a unique opportunity for the Armenian society to solve both economic and political problems. A number of foreign and local IT companies were established in 1999-2000 and became a solid basis for the development of the knowledge-based economy and information society. This encouraged the government to develop a national strategy and action plan for the development of information and communications technologies in the country. The process of the development of the IT sector in Armenia is not easy due to the low level of domestic investments, the absence of venture capital, the low level of income of the major part of the population, and an insufficiently developed infrastructure. In spite of these difficulties, ICT business became a reality influencing public policy primarily in the areas of education, science, and public administration.

The Armenian Diaspora plays a significant role in the country’s economy. In number, it is comparable to the population of the Republic. IT professionals who left the country in 1996 – 1999 became an important factor for attracting investment to Armenian IT business. About 60% of IT enterprises that were recently established benefited from the support of Armenian professionals living in US and Europe. The Diaspora is also an important factor in accessing foreign markets by Armenian IT companies, which often cannot afford large scale marketing and product promotion activities. The combination of Diaspora’s opportunities with the high qualification of Armenian IT professionals creates a unique business mechanism, supporting the growth of the IT sector in the country.

In spite of several favorable conditions for the development of the ICT industry and the application of information technologies in the social sector and education, there are still some administrative, legal and institutional barriers for the establishment of the emergence of a knowledge based economy and information society in Armenia.

2. National Strategy and Action Plan

The Government and the President of the Republic have time and again underlined that ICT is considered a priority for Armenia, and its development is encouraged in every possible way by the political leadership of the country. The existence of highly qualified professionals in the field of software and microelectronics makes Armenia attractive for investments in this field. The Government Action Plan specifically declares: “taking into consideration the increasing growth of information technologies in the international economy, the Government of Armenia shall pay a special attention to the development of that field in Armenia”. On May 13, 2001 the Government approved the Programme for the Development of Information and Telecommunication Industry in Armenia. The programme was prepared by the Ministry of Industry and Trade. It is based on the ICT Master Strategy, which was developed with substantial technical assistance from the World Bank and USAID experts. The implementation of the ICT Master Strategy is regularly reviewed by USAID contractors, who report on its progress to both USAID officials and the Armenian government. The reports are analyzed by the ICT Development Council that provides the government of Armenia with relevant recommendations.

The Programme and the ICT Master Strategy are the basic guidance documents for both government and donor organizations supporting the ICT development in Armenia. The Programme specifies priorities of the government and indicates the main directions for the activities of governmental organizations in this field. According to the Programme, the activities of the Armenian Government should achieve the following objectives:
- Promotion of ICT applications in different areas of public life.
- Establishment of a legal framework promoting ICT development in the country.
- Building a competitive ICT industry attracting investments.
- Support of innovation as a main mechanism for economic growth.
- Promotion of favorable conditions for the work of ICT professionals.

The ICT Master Strategy lists a number of objectives for the development of a knowledge based economy and information society. These objectives are not limited to the areas of responsibility of governmental institutions, but also include potential activities of non-governmental, foreign and international organizations supporting the development of ICT and its applications in Armenia. The Master Strategy comprises two documents and is a kind of methodological guide for ICT stakeholders. The documents is a not official, but are being used by both governmental and non-governmental organizations when planning and evaluating their initiatives aimed at ICT growth in the country.

The Master Strategy proposes the following long-term objectives for the knowledge-based economy:

• To create a vibrant and sustainable ICT industry that promotes growth in other sectors of the Armenian economy.
• To position Armenia in the knowledge-based global economy.

The following conditions are identified for the development of a successful ICT industry in Armenia:
- Retention of skilled human capital in Armenia is the key aspect of competitiveness.
- Provision of emerging ICT businesses with access to capital and the market.

One of the focal points of the Mater Strategy is the establishment of a business incubator, which will provide small and medium ICT enterprises with management and marketing training, and with access to credits and to foreign markets. One of the objectives of business incubation is to facilitate the formation of venture capital in Armenia. The business incubator programme draws on best international practices to accelerate the creation of new ICT firms and will improve the survival and growth rates of such businesses. Other focal points of the Master strategy include:

- Support of an active national ICT association that caters for all aspects of the sector’s development by providing services and advice to its members.
- Promotion of a programme of productivity upgrading initiatives that have ICT at their center and develop both the Armenian market and businesses that are capable of supplying goods and services to it.
- Implementation of cluster development programmes to upgrade business capabilities, starting in the ICT sector, but quickly spreading to other sectors.

Significant parts of the ICT Master Strategy address the issues of a favorable investment climate and of the regulatory framework supporting the growth of an ICT industry. According to the Master Strategy, the following tasks are to be accomplished by the government for the establishment of an investment-friendly environment and favorable legislation:

- Identification of a trade policy that encourages investment and local business development by focusing on simplified customs rules and regulations.
- Exemption of customs duties for products essential for ICT business development.
- Improvement of delivery services for both domestic and international products and of services facilitating e-commerce in Armenia.
- Adoption of a comprehensive and standardized classification system and clearance procedures.
- Establishment of more detailed statutory regulations for the conclusion and enforcement of electronic contracts, as well as for the use of electronic signatures.

The participation of businesses through representatives of both employers and employees in law drafting processes is seen as a key factor for the successful establishment of a favorable investment climate and legislation supporting the growth of an ICT industry. Th Master Strategy also stresses importance of maintaining and further developing human capital through the strengthening of the educational system and the building of an effective innovation system. The strategy proposed in this respect consists of building a market-oriented higher education system, introducing computer literacy programs to different categories of state and private sector employees, as well as creating training courses for the unemployed in order to provide them with employment opportunities in the new economy. Important factors for the creation of effective education and innovation systems that are specified in the Master Plan are:

- Availability of a reliable high speed Internet broadband connection to support remote educational systems, including distance learning software support systems, digital library access systems and logistics support systems.
- Reliable and fast ways of communication between Armenian academic institutions and their counterparts worldwide.

The ICT Master Strategy addresses the development of a telecommunications market as an important component of the ICT industry, ensuring the growth of knowledge-based businesses. The strategy proposed for the improvement of the country information and communication system includes:

- Establishment of an independent regulatory body.
- Modification of the license issues to incumbent telecom operator.
- Development and adoption of telecommunications service quality standards.

The Master Strategy explicitly stresses the importance of the development of a high speed Internet connection as a success factor for the development of the country’s information system. The expansion of proper quality Internet services to provincial cities at an affordable price for the rural population should be one of the priorities of the development of the Armenian telecommunications system.

The adoption of the ICT Development Action Plan was the next step of the Government towards the development of a knowledge-based economy. The Action Plan includes specific tasks and relevant benchmarks. The Ministry of Trade and Economic Development is responsible for Action Plan implementation. In accordance with a Presidential Decree, an ICT Council has been established to coordinate implementation of the Action Plan. The Council is chaired by the Prime Minister and includes representatives of governmental, non-governmental and private organizations. The Council identifies main obstacles hindering the development of an ICT industry in Armenia and prepares relevant recommendations for the government.

3. The Institutional Regime

The state policy in the area of information and telecommunications is implemented by the General Department of Information and Communication (GDIC) of the Ministry of Transport and Communication. The GDIC licenses telecommunications operators and oversees their compliance with technical standards and licensing requirements. Licensing is in accordance with the Armenian licensing legislation and procedures established by the Ministry of Transport and Communication. Allocation of radio frequencies and technical standards of radio transmissions is also under the responsibility of the Department.

The Department approves tariffs for telecommunication services that are provided on an exclusive basis. The Tariffs are approved in accordance with the rules established by the law and decree of the Government of Armenia. The tariffs are to be calculated taking into account the costs of the services, including expenses related to network maintenance and development. The present tariffs of basic telecommunication services try to combine the interest of the telecommunications operator and different categories of users. Users of pubic switched telephone network (PSTN) can chose between call metering and flat rates .

GDIC is responsible for the coordination and support of scientific research in the areas of telecommunications and information. However, the lack of state budget resources does not allow the Department to carry out activities aimed at supporting scientific research and innovations. The Department is also responsible for the development of the telecommunications service quality standards – not achieved so far because of a lack of human and financial resources. The development and adoption of the County Telecommunications Programme, another important responsibility of the Department, is not in place because of the limited capacity of GDIC.

The Ministry of Trade and Economic Development of the Republic of Armenia is another governmental institution responsible for the development of ICT in the country. The Ministry is responsible for the implementation of the ICT Development Action Plan and coordination of the activities of other governmental institutions in this field. More specifically, the Ministry is in charge of the development of the legal and regulatory framework supporting the development of the ICT industry and attracting foreign investment in this area of the economy. It is an official recipient of the WB Business Incubating project and other initiatives related to the establishment of the ICT industry in Armenia.

An important role in the implementation of the ICT Master Strategy and the ICT Development Action Plan is played by the ICT Development Council and the Council’s Secretariat. The ICT Council provides Armenian businesses with the opportunity to influence state policy and to promote favorable conditions for the growth of the entire ICT sector. The members of the ICT Council are appointed by the President of the Republic of Armenia for a period of one year. The Council’s activities include the identification of obstacles hindering the growth of the ICT industry and the development of relevant recommendations for the government. The Councils work includes a discussion of Action Plan Implementation at monthly sessions, and weekly meeting of six thematic workgroups aimed at an assessment of the situation regarding the development of the ICT industry.

A significant part of responsibilities related to the promotion of foreign investments in the ICT sector is delegated to the Armenian Development Agency (ADA), a state-owned joint stock company established by the government for the purpose of attracting foreign investments to the economy. The Secretariat of the ICT Council is based in ADA and uses the Agency’s facilities for its everyday activities.

In spite of clearly defined responsibilities of state institutions responsible for the implementation of the ICT Master Strategy, the ICT Development Programme and Action Plan are lacking coordination between the activities of different governmental agencies. This situation impedes effective growth of the ICT sector. In some cases, different state agencies compete for the responsibilities under a particular governmental initiative.

4. Present Situation and Trends in the Country’s Informational System

The telecommunications situation in Armenia is perhaps best characterized as being dominated by ArmenTel, who at present is the country’s monopoly provider of virtually all telecommunications-related services. The ArmenTel monopoly is complemented only by those firms having their own internal private networks, and a few Internet Service Providers (ISPs) providing value-added services (using ArmenTel as backbone). ArmenTel is the only provider of domestic commercial fixed and mobile services, as well as International connectivity. ArmenTel is owned by OTE of Greece (90%) and the Government of Armenia (10%). The monopoly position of ArmenTel is for a period of 15 years (1997-2012) for basic services and mobile services.

The telecommunications license issued by the Ministry of Communication of the Republic of Armenia to ArmenTel grants exclusive rights for:
- Basic domestic and local and international long-distance telephone calls, including leased lines services.
- International voice, data transmission and informational services (including, but not limited to, such as teleconferences, call holding, call waiting and call transfer).
- Use of international satellite telecommunications services.
- Mobile telephone services and paid public telephone services.
- Toll free services and supplementary telephone services (800 and 900 services).
- Any other service that in the future will compete with the abovementioned services.

The total number of telephone lines in Armenia is 531,269. Telephone density in Armenia is 17.6 phones per 100 people. Growth has been relatively flat over recent years. The percentage of digital telephone lines increased from 9.7% in 1996 to 26.7% in 2001. ITU’s data for mobile reflects rapid growth, but on a very small base of only 7,000 in 1998, due in part to relatively high costs. The total number of mobile phones in 2001 reached 40,000 or 8.33 per 100 people. In spite of high cost (15 USD monthly fee and 0.18 USD per minute charge), there is a great demand (about 5,000 potential users) for this type of service . According to ArmenTel Shares Purchase Agreement, OTE is obliged to make significant investments in the county’s telecommunications system, including the installation of digital telephone switch stations (digitalization) in cities and 800 Armenian villages.

Growth in Internet and e-mail use has been very strong in recent years. There are 17 Internet Service Providers (ISPs) in Armenia, virtually all servicing the city of Yerevan, but with a few providing limited support in other cities. The declared data rate of Internet connections is 44,000 kbps for analogue phone lines and 56,700 kbps for digital phone lines. However, the real data rate of Internet connection is 20% less than that declared by ISPs. ISPs services include dial-up services and dedicated line services provided via leased lines and radio modems. The number of ISPs’ clients vary from 4,000 for big providers to 50 – 300 subscribers for medium and small companies. ISPs provide Internet dial-up and dedicated lines connection (leased lines and radio modems). In spite of relatively high rates of Internet services, ISPs offer flexible tariffs from 10 USD per month (night tariffs) to 60 USD (unlimited access).

From different points of view (government authorities, independent experts, ISPs), ArmenTel’s monopoly is a real restriction for the development of the telecommunications market in Armenia, as well as other ICT business. In 1999, a group of Members of Parliament applied to the Constitutional Court of the Republic of Armenia in order to rule whether ArmenTel’s license and article 24 of the Law on Telecommunication contradict article 8 of the Constitution of Armenia, guaranteeing free and equal market competition in Armenia. The Armenian Constitutional Court ruled that the ArmenTel license and subsequently adopted laws contradict the Constitution of the Republic of Armenia and obligated the Government of Armenia and the Parliament to find a solution to the legal contradictions before the year 2004. Many of telecommunications stakeholders are optimistic about the revision of the ArmenTel license and the relevant normative acts. However, the state policy in the sphere of telecommunications remains unclear for the operators (Internet and voice over IP providers) and other actors in the ICT market.

5. Characteristics of the Country’s Human Resources

Armenia was one of the former Soviet republics with a relatively developed high tech production. Armenian industry was closely linked with Soviet military industry and a substantial part of the country’s human resources was involved in the production of semiconductors, mainframe computers hardware and software. After the collapse of the Soviet Union, many Armenian professionals previously involved in the high tech sector of the economy had to seek jobs abroad or in other sectors of economy. A significant part of young engineers emigrated to the USA or the EU, or they lost their qualification. In spite of strong emigration trends, the Armenian educational system preserved scientific traditions, and experienced academic staff has been continually contributing to the development of the country’s human resources.

The main institutions of higher ICT education in Armenia are Yerevan Engineering University (departments of System Programming, Computer Engineering, Radio Engineering), Yerevan State University (department of Applied Mathematics), University of Management and Information Technologies (department of Information Technologies) and the French University. The number of young people interested in technical (mainly software programming) subjects also increased in response to the industrial demands. The above-mentioned highest education institutions annually prepare about 300 ICT professionals. Parallel with establishments of higher education, a number of vocational training centers started offering various short-term training courses for beginners and advanced professionals.

In 1999 – 2000, Armenia experienced an information technologies boom: the number of both local and foreign companies investing in software production increased dramatically. According to the survey conducted by the Union of Information Technologies Enterprises, there are about 60 companies running IT-related business. About 35% of those companies are software developers, employing from 20 to 200 people. IT education and services is the second largest category of IT businesses in Armenia. About 35% of the companies provide IT training and services, 15% of companies are EDP hardware developers and 15% of those companies are ISPs. About 45% of IT enterprises working in Armenia are subsidiaries of foreign companies.

Many computer software and hardware professionals are working for computer service and maintenance firms. There are about 30 companies selling computers in Armenia and providing relatively good consumer support and maintenance services. Some of ICT graduates work as network administrators or provide in–house services to different categories of medium-sized enterprises. However, the problem with emigration of ICT professionals and other highly qualified human resources still exists in Armenia. According to a survey curried out by the Union of Information Technologies Enterprises, since 1995, about 20% of professionals left Armenia for other labor markets, mainly USA and EU. In spite of a well-developed higher education system, many Armenian IT companies report that the deficit of qualified human resources is increasing, mainly due to emigration and the growth of the IT sector.

5. National Innovation Capacities and Capabilities and their Effectiveness

Armenia society traditionally possesses solid scientific and innovation potential. Knowledge and education have always been considered one of the highest values in the Armenian society. Armenian scientists have valuable achievements in the area of radio physics and electronics, geology and seismography, laser technique and non-liner optics, fundamental and applied mathematics, mechanics, astrophysics, biotechnologies, pharmacy, chemistry, solid-state physics and semiconductors. Major parts of scientific research have been undertaken in the area of fundamental science and were not targeted on technological solutions.
Similar to other former Soviet republics, scientific institutions in Armenia could be subdivided into the three following categories:
- Scientific institutions carrying out fundamental research
- Scientific organizations carrying out applied research and high-tech production
- Universities and institutes combining educational processes with scientific research

The radical shift from a state planned to a market economy undertaken by the Armenian government in the early 90’s significantly changed the country’s academic system and negatively affected the activities of scientific institutions. Many of scientific organizations significantly decreased research activities due to a lack of funding. Many of them survived due to the grants from foreign organizations and miserable state subsidies.

The new economic environment determined the structure of Armenian scientific institutions to turn to applied and technological research. Some scientific institutions have launched production departments to sustain fundamental research and promote innovations. However, the total volume of scientific work dramatically decreased as compared with the late 80’s and the early 90’s. Similar to engineers, many of Armenian scientists emigrated to western countries or found employment in business and trade. During the 90’s, Armenian science survived only due to the strong historical traditions and enthusiasm of scientists that continued their work in extremely difficult conditions. Though the Armenian science is still exposed to serious difficulties, the situation in the area of fundamental and applied research is at present relatively stable, and even some positive tendencies are being observed.

The total number of scientific organizations formally operating in Armenia is 88, including universities and small-scale laboratories. The total state budget funding science in 2000 was 1,519.1 million drams, which is equivalent to 2,618,960 USD . The number of scientists and their support staff working in Armenian scientific organizations was 7,3094 in the year 2000. The total volume of scientific and technological research carried out in the year 2000 amounted to 2,649.1 million drams, which is equivalent of 4,816,545 USD, of which for:
Research and development: 2,491.7 million drams (4,530,363 USD)
Technological services: 157.4 million drams (286,181 USD)

The main weakness of the Armenia scientific and innovation systems is the absence of links between the scientific institutions and businesses. Meanwhile, the existing scientific system of the Republic of Armenia does not encourage utilization of scientific research. In fact, the funding system of science in Armenia has not undergone substantial change. The absence of scientific priorities and of an effective funding system based on competitive grants, does not stimulate the growth of technological innovations and the utilization of scientific results. The lack of efficiency in the organization of scientific and technological research results in the underutilization of the potential of the scientific foundations of the country. The absence of a legal framework encouraging local philanthropy is also a serious gap in the Armenian scientific system. Lack of philanthropic traditions and of motivation of enterprises to invest in scientific and technological research also results in lost opportunities for the country’s innovation system.


7. National Major Initiatives

One of the main initiatives aiming at enhancing the development of the ICT industry in Armenia is the Business Incubation Project. The project is implemented with a World Bank loan and aimed at training emerging ICT companies in management and marketing, assisting them in developing their marketing policies and enabling their access to capital and foreign markets. As it was mentioned above, the ICT business incubator is an important component of the ICT Master Strategy and the governmental Action Plan. WB activities for the development of the country’s information system include the assessment of the telecommunications regulation system, and the development of recommendations for the introduction of effective approaches in this field.

A number of important initiatives in the area of education and Internet policy are sponsored and implemented by the Open Society Institute – Assistance Foundation Armenia (OSI). The OSI sponsored project aimed at providing the Armenian academic community with access to a virtual library is an important initiative for the purposes of sustaining science and education in Armenia and of providing the country’s academic system with updated information. OSI provides grants for different Internet policy related initiatives and supports the development of local Internet contents.

Valuable contribution to the development of ICT education is expected from the European Commission. According to the preliminary agreement between the Government of Armenia and the European Commission, approximately 1.5 million euros are to be allocated to the development of an ICT educational system, as well as to the improvement of the related legal framework and public policy. The main recipient of the ICT education project planned by the EC is to be the French University of Armenia, one of the institutions offering ICT-related education.

UNDP plays an important role in building the country’s information system. The Freenet project implemented by UNDP in Armenia provides wide categories of the population with free e-mail services and access to local Internet resources. The UNDP Country Office in Armenia implements a pilot project aimed at the establishment of an electronic government system in one of the districts. It also coordinates activities of different donors and foreign organizations involved in the process of the creation of an information society in Armenia.

Significant financial assistance to ICT-related initiatives is provided by the Eurasia Foundation (EF). EF has supported the establishment of certified training centers of leading soft- and hardware companies. The Eurasia Foundation also supported a cycle of projects aimed at commercialization of scientific achievements, thus facilitating innovations in different technological areas. The Foundation provided financial support to the Union of Information Technologies Enterprises for the ICT enterprise survey and the assessment of the ICT market in Armenia. The Eurasia Regional Cooperation Program has recently supported an initiative of partner organizations from Armenia, Azerbaijan and Georgia, aimed at the study of the telecommunications sector of the South Caucasus and the development of relevant recommendations for the integration of the countries’ telecommunication systems.

Activities of USAID, one of the major donor organizations in Armenia, covers different areas of ICT development including, but not limited to, the formation of ICT policy and legislation, the development of the education system, the reform of the regulatory system regarding telecommunications, an improvement of the business environment, and the support of other initiatives contributing to the development of the ICT industry, education and policy in Armenia. The US State Department provides valuable assistance to the Armenian society mainly through a support of the initiatives of US NGOs (IREX, Project Harmony) that assist the development of local information resources and the provision of student and school children with access to Internet.


8. Conclusion

Armenia is one of the countries having significant traditions in high-technology production and education, which, however, need to obtain a new, solid foundation, before a vigorous knowledge-based economy and information society can develop. However, historical advantages, skillful human resources and the unique potential of the Diaspora could be lost, unless they will be turned to building a background for economic growth and social development. The ICT Master Strategy, the Programme of the Development of the ICT Industry, and the ICT Development Action Plan are powerful instruments for the development of an ICT industry and an information society in Armenia. However, a more pro-active attitude of government, and well-coordinated activities of donors are important preconditions for the realization of these strategic documents. The following are key requirements in this context

1. The Armenian institutional regime requires considerable changes in the regulation of the telecommunications market. The establishment of an independent regulator, the development and adoption of service quality standards, and the liberalization of the market are the most urgent tasks to be accomplished by the Armenian government.
2. Business legislation does not sufficiently encourage investments and support the development of the ICT elements of e-commerce, e-government and e-education. A liberal tax regime would also be an important success factor.
3. In spite of the existence of skillful human resources, the further development and introduction of effective educational and scientific systems are to be ensured in order to protect human capital and preserve the country’s academic traditions.
4. Armenia needs to introduce an effective innovation system creating a reasonable balance of fundamental and applied research. A legal framework promoting local philanthropy as an alternative source of funding of research and innovation should be adopted in a short period.
5. Further coordination of the activities of different governmental institutions and donor initiatives is required in order to avoid overlapping and duplications. Additional funding and staff is required for the ICT Council Secretariat, which obviously lacks resources for carrying out its functions.