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Role of the Diasporas in Transition Economies: Lessons from Armenia

Lev M. Freinkman
The World Bank


Paper presented at the 11th Annual meeting of the ASCE.
Coral Gables, August 2-4, 2001.


INTRODUCTION

In the second half of the 20th century several world economies have
benefited considerably by capitalizing on their links with national
Diasporas. China and Israel seem to be the best-known examples of
countries that received a major developmental push from their nationals
located throughout the world. While in most countries the main
Diaspora-related benefit for the domestic economy was and still is
associated with private transfers (including remittances), sent by
members of Diasporas to their relatives and friends at home, China and
Israel managed to complement this traditional financial support by much
more active involvement of the Diaspora in their economic
development. In these countries, Diaspora investors and entrepreneurs
played a critical role in attracting FDI, setting up joint ventures,
promoting export of domestic companies, etc. In short, these examples
confirm that traditional ethnical and cultural links could be
instrumental in facilitating integration into the international economy
as well as transferring of new professional and managerial skills.

Efficient utilization of the Diaspora's potential is rather relevant for
several economies in transition. This is because on the supply side many
countries of Eastern and Central Europe do have large (relative to the
size of their population), well-organized, highly educated and broadly
successful Diasporas. Armenia, Lithuania, and Serbia may be mentioned as
the most obvious examples. But, this is also relevant for Poland, other
Baltic countries and former Yugoslavian republics. One may also expect
that the Cuban Diaspora (Cuban exiles) have the potential to play a
prominent role in the future market transition in Cuba.

Even more importantly that on the demand side, as the experience of the
first decade of transition has shown, most economies in transition face
a significant shortage of skills and resources, over which many
Diasporan communities have much better control and/or access. This
relates to many core components of financial, human, and social capital,
which, if well mobilized, could accelerate the entire dynamics of the
transition process.

This paper develops additional economic arguments to emphasize the
potential importance of the Diasporas' contribution to economic
transformation of former socialist economies. At the same time, it
argues that so far this potential has been grossly underutilized,
especially in the economies of the Former Soviet Union (FSU). Based on
the analysis of such underutilization, the paper provides a set of
simple recommendations on how to rationalize the Diaspora's involvement
and assistance to home countries in the course of transition.

The paper is organized as follows. The first section suggests a general
framework to analyze the Diaspora's role in economic transition. The
second section provides an in-depth review of the Armenian experience
with mobilizing the Diaspora's assistance in the 90s. It argues that
from the transition perspective, support provided by the Armenian
Diaspora to independent Armenia since 1991 has been rather inefficient.
The third sections summarizes differences between Armenian and Israeli
settings and argues that these could explain a considerable part of
observed differences in the efficiency of the Diasporas' mobilization.
The final section presents a set of recommendations which intend to
balance political and humanitarian objectives of Diasporas with their
contribution to economic development of home countries. These
recommendations may be used for developing a strategy to be played by
the Cuban exile community in the future Cuban transition.


1. ECONOMIC VALUE OF THE DIASPORA FOR TRANSITION ECONOMIES:
GENERAL FRAMEWORK

Albert Hirschman (1958) once noted that development is not so much about
allocation of existing resources but rather about mobilizing resources
that are hidden, scatted or badly utilized. The traditional practice of
the relationship between Diasporas and their countries of origin
strongly supports this idea. Financial contributions of many Diasporas
around the world to respective domestic economies is well documented and
very significant. Several South Asian nations received more than US$2
billion in remittances a year (Castles, 1999). According to the IDB, in
six Latin American countries, annual remittances exceeded 10% of GDP
(Inter-American Development Bank, 2001).

As a rule, financial transfers of expatriates to their families in home
countries constitute a major part of these financial flows. In several
cases, private transfers are complemented by financial flows initiated
by Diaspora NGOs to support various public and quasi-public initiatives
at home. What is common for these flows, however, is that they are used
almost exclusively for subsistence, consumption, and philanthropic
purposes rather than for productive investments and development in a
broad sense. Overall, the development impact of Diasporas as well as of
returned migration, while not well documented, varies considerably
between countries. For instance, Turkey is a known example of the state
where mass emigration to Western Europe in the 60s and 70s produced
little development benefit (Castles, 1999). From this perspective, what
makes the experience of both Israel and China so successful is the fact
that they managed to divert a considerable chunk of expatriates'
resources into a source of investment finance, export expansion, and new
technology.


LESSONS OF TRANSITION

Experience accumulated during ten years of transition in Eastern Europe
brought some gradual adjustment to the initial transition paradigm.
Among the lessons from the practical transition experience, I would like
to underline just two:

  a.. Economic growth has been coming mostly from newly-created
      companies (both domestic and foreign), not from privatized
      inherited state enterprises;
  b.. Speed of change in management culture and business practices
      is a critical factor of growth.

When compared to the original understanding of challenges in transition,
the current thinking seems to pay much less attention than in the early
90s to the speed of privatization and tightness of monetary
policy. While these are indeed important pre-requisites of successful
transition, it is understood now that it is other factors that make a
real difference in the medium term between countries' transition
paths. Those are the factors related to the quality of investment
climate, proximity to established markets, speed of transfer of new
managerial skills, simplicity of access to existing access, including
land, etc.

>From this perspective, economies in transition (and developing countries
in general) that have large and economically influential Diasporas may
have strong comparative advantages. In short, the Diaspora could
accelerate closing the gap that inevitably exists between the
post-socialist economy and the rest of the world as well as provide a
strong backing for integration of the home country into the global
market. While expansion of new companies in transition economies is
often constrained by lack of market knowledge and the high costs of
entering new markets, Diasporas accumulated considerable business,
networking and marketing skills. In most cases there are also business
and professional Diaspora associations that could be instrumental in
developing and implementing specific project initiatives.

At least potentially, the home countries could use their cultural links
with the Diasporas to:

  a.. extract additional support in forms of FDI and management
      training to facilitate the creation and expansion of new
      companies;
  b.. accelerate building new business partnerships between local
      and international companies to advance transfer of skills
      and technologies;
  c.. provide advice to governments of home countries with respect
      to improvement of investment climate and deregulation.

Especially attractive is the idea of Diasporan investors being the
"first movers", i.e. investors, which could come first to an emerging
market of the home country, and by doing this could change market
expectations and advance an inflow of more conventional FDI. The concept
of "first movers" is important to understand the dynamics of early
transition, in a situation that is characterized by great uncertainty
and excessive economic risks.  First movers or market leaders are
critical to get the economy moving in such an unattractive
situation. They provide behavioral models for the rest of the economic
agents. They consolidate reform coalitions that push the Government to
undertake further reforms, including those related to fare competition
and reduced administrative barriers.

When compared to an average economic agent, Diaspora businessmen and
professionals face a lower risk of becoming the first movers. They
benefit from a specific informational advantage: common cultural
background and established social links between Diaspora and local
entrepreneurs help them to reduce transaction costs of new entry and
building new partnerships. And by being the first movers Diaspora
representatives have a chance of becoming leaders, mentors, partners and
godfathers of the local private sector.

Still, there is not much positive experience worldwide. Diaspora
networks as a source of development expertise and business linkages are
underutilized and existing activity is fragmented and idiosyncratic.


DEVELOPMENT SCENARIO: DIFFICULT AND CONTROVERSIAL TRANSITION PATH

For the purposes of this paper, we are concentrated on the transition
scenario, which is characterized by reform complications, uneven speed
of transformation in different sectors, strong anti-reform opposition,
and significant economic losses at the initial stages of reforms. This
is not an unavoidable scenario, but it is not uncommon either. It
happened in most of the countries of the former Soviet Union (FSU) as
well as in places, to mention a few, such as Romania and Albania.

There is an obvious reason why I am not interested in reviewing a more
successful transition path: if transition goes smoothly, there is not
much for the Diaspora to contribute to. Private markets and the local
public sector would be generally capable of addressing primary
challenges of transition. In cases like Poland and Slovenia, which in
the first years of transition featured an explosion of local
entrepreneurship, supported at a later stage by significant inflows of
traditional FDI, the Diaspora's contribution could be only marginal.

This paper deals with a much less favorable transition setting. Its main
characteristic rests on the fact that old communist elites are replaced
only partially, and the new political establishment contains a good
chunk of communist bureaucrats, security service offices, and managers
of large SOEs.  This first generation of post-communist elite in this
scenario is much less democratic and liberal than the leaders of the
Czech velvet revolution. This elite does push aggressively for economic
liberalization and privatization, but does it in a way that allows the
elite (especially enterprise managers) to "privatize" major benefits of
reforms. This type of political leader is broadly suspicious about the
Diaspora. While they welcome economic and political support from the
Diaspora, they don't want to see an increased representation of
Diasporan activists and investors in the home country.  They see and
treat the Diaspora primarily as a source of potential political and
economic competition.

At the same time, quick liberalization and elimination of traditional
socialist subsidies brings a major shock to the domestic economy. Many
traditional industries collapse, and average household incomes plummet.
Pre-transitional savings evaporate. It all leads to a fiscal crisis. The
regime goes bankrupt, while the elite flourish and the economy features
a major concentration of economic wealth. The country is facing a
challenge of reindustrialization and finding its new place at global
markets, but it doesn't have the necessarily skills and resources to
deal with these challenges. The international community initiates an
assistance program to address humanitarian concerns and helps to deal
with at least some of the development challenges.

What should we expect from the Diaspora in this kind of setting?



2. ARMENIA: EXPERIENCE OF THE 90s.


Pre-transition characteristics

One may argue that Armenia had quite a beneficial starting position for
transition. Back in the early 90s, it demonstrated many similarities
with Israel of the 50s. The territorial conflict in Karabakh has
mobilized Armenians worldwide, greatly strengthened ethnical identity,
and advanced national consolidation. At the same time, one may think,
based on Israeli experience, that future Armenian transition to the
market would be rather successful.

Soviet Armenia was the most educated and most industrialized republic of
the FSU. It was considered a Silicon Valley of the Soviet Union, with a
major concentration of high tech industries. Its expected successful
transition would be also backed by quite a developed infrastructure and
traditionally strong labor morale of Armenians.

And of course, Armenia expected to be supported by the Diaspora. For
such a small country like Armenia (about 3.5 million inhabitants in
1990) the Diaspora presents an extraordinary source of development
resources. It is believed that more than one million Armenian live in
the USA, and at least another million in Europe, Middle East, and Latin
America. This is a very successful national group elsewhere, both
economically and professionally.  It is also well politically and
socially organized, with the established track record of successful
political and humanitarian mobilization. In addition, Armenians could
rely on a good will of its traditional partner Russia -- Russian
Armenians (more than 1.5 mn) have been traditionally quite influential
in the Kremlin.

While Armenia also had serious economic disadvantages, such as
landlocked location, the impact of the 1988 Earthquake, and loss of
traditional markets after disintegration of the FSU, in sum the country
seems to have a great development potential and a major chance of
becoming a transition success story.


After 10 years of transition

The outcome of 10 years of Armenian transition has been quite
disappointing.  While the Armenian economy has been growing since 1994,
its GDP in 2000 amounted to just two-thirds of the pre-transitional
level. And the prevailing growth patterns are considered to be
unsustainable: the economy shows too little of new private entry and job
creation, low investments, and weak export capacity.

Armenia currently belongs to a group of the poorest nations in the World
(so called IDA countries), its nominal annual GDP per capita amounts to
about $US650. 55% of the population lives in poverty, and about 30% of
the labor force is unemployed (World Bank, 2001).

It is also estimated that about 20% of the Armenian population has
emigrated during these 10 years, with most of them moving to Russia
(Poghossian, 2000). While there is no systematic analysis of this
population outflow, piecemeal evidence suggests that at least 30% of all
migrants have college degrees. This clearly constitutes a major brain
drain, which deprives the country from its major long-term development
resource. At the same time, in the short term this new emigration
provides a considerable income support for the Armenian population. As
estimated, recent emigrants contribute up to 65% of total private
transfers received by Armenia.

Weak export performance should also be considered as a surprising
outcome.  Even though Armenia has one of the most liberalized trade
regimes in the CIS, its merchandise export amounted in 2000 to 16% of
GDP, among the lowest in the FSU. For a small country which is heavily
dependent on import of raw materials and which has an economy that
historically was closely integrated with its neighbors, the existing
level of export is abysmally low and creates a major macroeconomic
risk. While traditional markets in FSU collapsed, Armenian enterprises
have faced serious difficulties with penetrating new markets. Given the
standard perception of Armenians as established international traders,
this indicates that transferring of trading and marketing skills from
the Diaspora to Armenians in Armenia has not been successful yet.

The inflow of Diasporan investments has been also much below
expectations.  In total during 1995-99, Armenia received on average less
than $30 of FDI per capita, while Slovenia and Lithuania attracted more
than $100 per capita, and Estonia, Hungary and the Czech Republic - more
than $200. And a surprisingly large part of Diasporan investments came
from Russia but not from the West, where Armenian communities have more
business experience and a larger overall investment potential.


What went wrong?

In Armenia, the first post-communist regime has evolved under strong
influence of the military establishment, which is not surprising given
that the country was involved in the open military conflict. Also, from
the very beginning, the military leadership has established its own
substantial business interests, arguing that these business ventures
help to finance the war effort. The Karabakh war also caused an extreme
mobilization and significant authoritarian features in the organization
of the Armenian society. This over-mobilization of the early 90s had a
serious impact on the subsequent political developments (Bremmer, 1996),
and it has been detrimental to the reform process through the following
channels:

  a.. In public administration, it supported establishment of an
      excessive control and inspection structure, and more generally
      delayed deregulation of the business environment.
  b.. In policy making, it limited opportunities for public
      participation in discussions over reform priorities; lack of
      dialogue between main stockholders made it much more difficult for
      the Government to maintain public support for reforms and created
      additional problems with implementation.
  c.. In the economic area, close links between existing leading firms
      (both recently privatized SOEs and start-ups) and power ministries
      and influential politicians became a major source of
      non-competitive behavior and barriers for entry. There has been
      little room for small and medium businesses to operate
      independently from political clans.

At the same time, the Armenian Government managed to establish a nice
liberal fagade, stop inflation, and advance various market-oriented
reforms (such as privatization, liberalization, and introduction of
market-friendly legislation). From the macroeconomic perspective, after
1996, the Armenian macroeconomic environment has contained little
distortions associated with for instance Government regulations, nominal
tax regime, and budget subsidies. Conventional indexes of reform
progress suggest that by 2000 Armenia has become a leading reformer in
the CIS.

However, at the microeconomic level no real liberalization happened.
Traditional centralized socialist regulations were largely replaced by
various decentralized regulations and controls, imposed by sectoral
ministries, local authorities, and influential business groups that did
not want competition. The state has no capability (and little
incentives) to enforce the favorable macroeconomic and legal framework
and support formation of a decent business environment. While the
economy remains in the hands of semi-independent business elite with
close tiers to key political figures (Suny, 1999, p. 2), the emerged
investment climate has been rather hostile to any independent new entry,
including to investors from the Diaspora. ".Despite their outspoken
support for investments, the Armenian Government has been mostly
interested in receiving humanitarian aid and long-term unrestricted
loans - sources of funding they can control much more easily than direct
investments" (Bremmer, 1996, p. 32). And because state officials benefit
so much from imports, which remains the most lucrative business, many
have a reason to oppose an influx of investments that could substitute
imports by domestic production.

In addition, soon after the cease-fire was reached in 1994, the national
consolidation of the Armenian society started to evaporate. The
political elite, which led the country's independence movement and its
war effort, was affected by serious internal conflicts and fights for
leadership.  Fragmentation of the political elite had its manifestation
in the high turnover of Armenian Governments. Since 1991, Armenia had 10
Prime Ministers. While these personnel changes in most cases produced
very little change in economic policy, they contributed considerably to
investors' perception of economic uncertainty and instability.

The Armenian Diaspora reacted to this situation by:

  a.. Providing a major inflow of humanitarian aid and private
      transfers;
  b.. Successfully lobbying the US Government for expanding official
      assistance to Armenia;
  c.. Providing strong and basically non-conditional political support
      to the changing Armenian Governments.

In all these areas the Diaspora was largely successful. Armenia became a
leading global recipient of international assistance. In 2000, it
received about US$240 million (11% of GDP) in total official assistance
through a combination of official transfers and concessional loans or
about US$75 per capita. In addition, Armenia benefits from considerable
amounts of humanitarian and technical assistance that is not reflected
in the budget.  In the USA, the Diaspora lobby succeeded in extracting
from the Congress a disproportionally large amount of US assistance to
Armenia, which has amounted to $90 million a year, and at the same time
blocked similar assistance programs for Azerbaijan.

Armenia continues to benefit from the considerable inflow of remittances
and private transfers (currently at 8-9% of GDP a year), which are
mostly coming from relatives who either recently emigrated or who are
temporarily working abroad. According to household surveys, not less
than 15% of families were recipients of regular private transfers. And
for about 8% of households such transfers represented a major element of
income support in 1999.

At the same time, Diaspora representatives remained disengaged from
active day-to-day participation in economic and political life in
Armenia. The Diaspora's attempts to invest mostly failed due to the
hostile attitude of insiders. But major Diasporan organizations have
never tried in a systematic way to protect their members from business
abuse in Armenia. As a strategy, the Diaspora tends to limit its public
criticism out of concern for the government's reputation. There is also
no intention to do a serious evaluation of results achieved through the
massive international assistance of the previous 10 years. The act of
giving seems to be more important than the actual effect.

Thus, while the regime in Yerevan has been heavily dependent on
Diaspora's support, the Diaspora did not use this dependence for
"buying" for itself a more active role in Armenia's development
process. Just the opposite, the Diaspora accepted an unconditional
character of its support. In real life it meant that the Diaspora
provided a considerable chunk of financing and political backing to the
regime that did not want to see a growth in economic/political influence
of the Diaspora, and actually has been blocking the Diaspora's attempts
to expand productive investments.

This kind of Diaspora an response, in my view, represents a major
underutilization of the Diaspora's potential. It does not contribute
adequately to strengthening the Armenian private sector and the
country's growth prospects. Even in the cases (still limited) when the
Diaspora is involved in business projects, it operates mostly a source
of financing and much less as a source of market information and
expertise, not a knowledge bridge. This is because the Armenian-Armenian
dialogue is still focused primarily on fostering cultural and
humanitarian links.

As it was established in Soviet times, rules for Armenia-Diaspora
interactions are still defined in Yerevan. With respect to prospects for
Diaspora's investors in Armenia, the remark by Amirkhanian (1997) seems
to be rather indicative. In his very interesting account of the
complexity of the relationship between the Armenian Government and the
Diaspora, he underlines a demand side of the investment process:
"Significance of the Diaspora will come down to whether the local
Armenians can afford to share their limited resources and opportunities
with the outsiders" (p. 21). So far, there is little evidence that the
political elite in Yerevan is ready for such a sharing. However, as this
paper argues, it may stay this way for a long time, if its Diasporan
partners remain passive and agreeable to the formula "Give us your money
and go home".

Meanwhile, there are reasons to believe that the Diaspora's involvement
in Armenia in its current form has gradually become part of the Armenian
development problem, not a source of solutions for its transitional
challenges. The Diaspora's money and political support help to take the
pressure out of the system and therefore they undermine demand for
further domestic reforms, especially for improvements in the business
environment.  The ruling elite gets additional resources for survival
that provide a breathing space for delaying necessary reforms despite
extreme poverty and emigration of the most skilled.



3. WHY IS IT SO DIFFICULT FOR ARMENIANS TO USE ISRAELI EXPERIENCE?

Despite many similarities between recent Armenian history and that of
Israel after its independence, there are also striking differences that
could at least partially explain such a contrast in the efficiency of
the Diasporas' mobilization.

First, most Diaspora Armenians have no historical connection with
Armenia as currently constituted. They are Western Armenians from the
region that is currently a part of Turkey. For most of them, Armenia is
more of an idea than a real country that may be considered as a place of
potential residency. Second, 70 years of socialism in Armenia created a
cultural divide with its non-FSU Diaspora that has no parallel for
Israel. This divide is largely responsible for the fact that the
Diaspora has very limited cultural affinity with Armenia. Third, and the
most obvious difference is that in contrast to Israel, the Armenian
Diaspora does not have an ideological foundation for supporting Armenia
as there is with Zionism. It is sometimes suggested (Goldenberg, 1994,
p. 146-47) that this explains why the Diaspora's support for Armenia is
less institutionalized and is less "strategic" but more individualistic
and project-specific.

It is also important to remember that in contrast to other Diasporas
(e.g.  Ukrainian and from Baltic states), creation of an independent
Armenian state has never been a part of the traditional agenda of the
mainstream Diaspora in Soviet times. The opposite view was the most
popular " .that Armenia could not become an independent state in face of
dangers of pan-Turkism" (Suny, 1999, p. 3). As a result, the Armenian
Diaspora was ideologically quite unprepared to deal with the independent
Armenia. And, as it seems, after 10 years of independence it is fair to
say that it failed to switch (or at least to complement) from its
traditional "cultural and nationalistic" agenda to a new agenda of
supporting the formation of a new independent national state.

While all the issues related to the Genocide and restitution are of
major historical and humanitarian significance, it is still an agenda of
the past, while the nation, engaged in building its statehood from
scratch, is in dire need of a positive agenda related to its
future. This difference in perspective suggests that interests of the
Diaspora are often different and sometimes in contradiction to those of
the Armenian state (Dadwick, 1993, pp. 278-80; Amirkhanian, 1997,
p. 21). For instance, the Diaspora in the US has never tried to use its
political leverage to push Turkey for opening the border with Armenia:
while this is a major development issue for the Armenian state, it has
never been high on the Diaspora's list. Moreover, a very tough position
of the Diaspora on the Genocide (while emotionally understandable) made
inter-governmental relations between Armenia and Turkey even more
difficult and dramatically reduced chances for opening the Turkish
boarder for Armenian goods and services.

In addition, internal political divisions in the Armenian Diaspora seem
to be a surprisingly important constraint for developing a consolidated
Diaspora strategy for supporting a new Armenian development
agenda. These political divisions are to a major extent based on
tradition and much less on real differences in current policies. The
dividing line for most Diaspora Armenians is still a policy towards
Turkey (Goldenberg, p. 150-51).



4. LESSONS FROM ARMENIA AND HOW THEY COULD BE APPLIED FOR THE FUTURE
CUBAN TRANSITION

At the initial stage of transition it may be difficult for people
outside of the country to make an accurate assessment of the depth and
direction of ongoing transformation. People could be biased in their
desire to see more changes than actually take place. It is
understandable: in the case of Cuba many exiles have been waiting for 40
years for a window of opportunity.  Thus, there is a risk that the
Diaspora may overestimate the actual reform effort, and over-commit its
support to the first post-communist Government.

This paper argues that it is important to be cautious in making an
initial assessment. The scale of humanitarian needs in the home country
as well as the beauty of political statements made by Government
officials, are insufficient to reach a reliable conclusion. The litmus
test of post-communist liberalization relates to economic liberalization
and introduction of a level-playing field for established and de novo
businesses.

The principal lesson from the Armenian experience is that a massive
program of humanitarian assistance, not complemented by an active
business support and investment program, is not sustainable. It
eventually fuels emigration and concentration of economic power. It does
not help (but just delays) resolution of the most important challenges
of transition. If the Diaspora community is not allowed to do serious
business in the home country, it does not make sense to support the
respective government politically and economically. If the Diaspora is
wealthy and powerful to be capable of mobilizing considerable resources
in support of the home country, it should make sure that a good portion
of the entire envelop is channeled for needs of business development and
the private sector.

Providing a massive humanitarian assistance suggests that the Diaspora
community takes serious responsibility for the current state of the home
country. The same responsibility requires playing a more active role in
its economic development. In other words, humanitarian assistance
without investments proved to be an irresponsible strategy.

What would be main features of the alternative strategy for the Diaspora
in the scenario of "non-entirely democratic and liberal" transition?
Those may include:

  a.. Do not be shy to criticize the regime: no non-conditional
      political and financial support;
  b.. Demand that political liberalization should be followed by
      policies that promote economic liberalization at the micro level;
  c.. Disseminate the idea that the creation of new businesses and new
      jobs is a critical dimension of social progress in transition;
      these are ultimate indicators that democratic/liberal reforms have
      been done right;
  d.. Do not overkill the country with soft money: without investments
      humanitarian aid will solve no problem;
  e.. Support organizations of new local private businesses that are not
      linked to the political structure of the rolling elite: these
      organizations will become a main engine of further domestic
      reforms;
  f.. Support practical business and managerial training of new business
      owners and managers in new companies: they will be main business
      and political partners of the Diaspora.

It may happen that the initial conditions of transition would be too
tough for Diaspora representatives to make any rational individual
investments. If it is the case, the Diaspora leaders may think about
collective investment instruments to share risks, such as a seed equity
fund and a Diaspora development bank. Such institutions may be rather
useful to support new entry, first movers. They are also important
instruments for outsiders to have first-hand knowledge of business
realities and monitor patterns of economic liberalization. Finally,
collective investment instruments could trigger a transformation of the
inflow of humanitarian assistance into real sector investments.

Another lesson to be drawn from the Armenian experience relates to the
utilization of international assistance, first that of assistance
provided by the US Government. While the Armenian Diaspora managed to
generate record amounts of US assistance for Armenia, they were
participating neither in designing specific assistance projects nor in
general monitoring of how the money is spent. I would argue that the
Diasporan organizations and Diaspora activists have to insist on playing
a very active role in implementation of US Government-funded
projects. This may be done at the level of professional organizations of
Diaspora that would become contractors of the USAID and alike, or at
individual levels, when people could go to the home country to become
advisers in local NGOs, Government agencies, and restructuring firms.

Also, the Armenia experience and other FSU states suggests that some
forms of technical assistance are much more productive than others, and
which unfortunately are still popular. In line with other parts of this
paper, I would argue in favor of very practical, business-oriented
interventions, such as:

  a.. Short-term internship for new business owners in foreign firms -
      instead of traditional undergrad training in the USA;
  b.. Direct support to new organizations of the private sector -
      instead of financing import of numerous new tiny NGOs engaged in
      environment protection and human right activism;
  c.. Public work programs (e.g. infrastructure rehabilitation) --
      instead of free food;
  d.. Careful selection of TA recipients in the public sector: avoid
      pushing for creation of too many and too advanced institutions
      (e.g. Securities Market Regulator), be more practical
      (e.g. building an independent Statistical Service usually is an
      immediate priority).

Another important element of the Armenian experience relates to finding
a proper balance between important issues of the past and those of the
future.  The Armenian Diaspora and its intellectual leaders, it seems,
were and still are too pre-occupied with unresolved historical issues,
while less attention is given to looking at the development agenda that
confronts the modern Armenian state.

Cubans are likely to be exposed to a similar major risk of "demons of
the past". This is because the Diaspora's claims in the future for
restitution of assets nationalized after the revolution. Restitution is
both economically and emotionally important, but its resolution can not
be found over night. It will take time, during which the debates over
restitution should not block Cuba's economic life and the overall
transition process.

Finally, being an accidental observer of some (maybe not representative)
discussions about future problems of the Cuban transition, I got the
impression that a considerable part of questions raised are based on the
assumption that Cuba would go through a perfectly smooth
transition. There is always a possibility that this could be the
case. Then indeed many of the following questions would become of
immediate importance: How many Cuban exiles will decide to return to
Cuba? Would this return be disruptive to the Cuban labor market? Should
the inflow of foreign capital to Cuba be regulated in the early
transition to prevent excessive purchases of domestic assets by
foreigners at depressed prices?

One of the objectives of this paper was to show that the Cuban-American
community should be aware of a different transition path, which would
make another set of questions more practical: What could be done to ease
emigration pressures in early transition, especially among the young and
the most skilled? How to encourage an inflow of foreign capital,
technology and skills in the hostile business environment? How to
transform the flow of humanitarian assistance and remittances into
productive investments? How to promote business cooperation between
local and Diasporan businesses? And how under these unfortunate
circumstances to make the overall strategy of the Diaspora community
balanced and rational?



REFERENCES

Amirkhanian, Allen G. 1997. The Armenian Diaspora and their Contribution
to the Socio -Economic Development in Armenia in the Soviet and
Post-Soviet Periods. Background paper prepared for the World
Bank. (March 1).

Bremmer, Ian. 1996. The Political Economy of Banal Authoritarianism: The
Case of Armenia. Background Paper prepared for the World Bank.

Castles, Stephen. 1999. The Impacts of Emigration on Countries of
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the World Bank.

Collier, Paul. 2000. Consensus-Building, Knowledge, and Conditionality.
Annual World Bank Conference on Development Economics (April 18-20).
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Djankov, Simeon and Peter Murrell. 2000. The Determinants of Enterprise
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Goldenberg, Suzanne. 1994. Pride of Small Nations: the Caucasus and
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Hirschman, Albert. 1958. Strategy of Economic Development.

Inter-American Development Bank. 2001. Remittances as a Development
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Perez-Lopez, Jorge F. 2001. Pazos' Economic Problems of Cuba During the
Transition: Return Migration of Skilled Persons and Professionals. Paper
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Pogossian, Gevork. 2000. Migration in Armenia: Case Study. Background
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Rauch, James B. and Trinidale, Victor. 2000. Ethnic Chinese Networks in
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Suny, Ronald Grigor. 1999. Who's in Charge here? The Armenian Political
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No. 22111-AM.  Washington, DC. April 25.


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Lev Freinkman is a senior country economist in the World Bank,
where he has been working on economies in transition since
1992. He has been covering Armenia since 1998. Before joining the
World Bank he held positions with several academic institutions in
Moscow, Russia. He has a degree in economics from the Moscow State
University. The earlier draft of this paper was presented at the
11th annual meeting of the Association for the Study of the Cuban
Economy (ASCE) in Coral Gables, August 2-4, 2001. The views presented
in this paper are those of the author and do not necessarily reflect
those of the World Bank".
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