INVESTMENTS AND TAXES IN ARMENIA (1997–2008) INVESTĪCIJAS UN NODOKĻI ARMĒNIJĀ (1997–2008)

. Present paper investigates the effect of changes in investment and taxes on the economic growth. Using quarterly data from 1997 to 2008 for Armenian economy we showed that the effect of the increase in investment and taxes on real GDP is positive or negative. The interrelation between GDP and investment is studied using the approach based on the development of VAR model. The analysis of this model allowed studying the behaviour of curves representing GDP and investment. In fact, we showed that the GDP curve is stable and oscillated and the investment curve is stable and none oscillated. Furthermore, we evaluated the impact of investment changes by 1% on the GDP growth which was equal to 0.4%. Then the model representing interrelation between GDP and taxes allowed evaluating the effect of tax changes by 1%. The findings allowed evaluating the effect of growth in investment and taxes depending on the GDP growth rate. Simultaneously, VAR system allowed evaluating the changes in GDP on the investment growth.


. Introduction
The effect of investments and taxes on the total economic growth is one of the topical problems in theoretical macroeconomics. Neoclassical and Keynessian models of economic growth allowed studying the effects of investments and taxes on the economic growth. However, for countries in the period of change these problems are to be investigated. Particularly, these problems remain unsolved for Armenian economy, especially, at the stage of transition, therefore, the need for the new area of study emerged.
The aim of study is to revise the effect of changes and increase in investment and taxes on the GDP growth in Armenian economy. The behaviour of curves representing investment rates, GDP rates, investment/GDP ratio rate and taxes is studied and the interrelation between these variables is investigated.
The task of the study is: to evaluate the effect of increase of investment and taxes on GDP in Armenian economy.
The corresponding qualitative and quantitative research methods based on econometric modelling using quarter data of Armenian economy since 1998 have been studied for the development of vector auto regression models.

Growth
The growth of the Armenian economy since the collapse of Former Soviet Union has been promising. Figure 1 represents Armenian GDP growth rate since 1997. After a strong surge in 1998 -1999 the GDP growth rate decreased in 2000 and over the following decade it recovered rapidly.  In fact, GDP growth rate per capita in Armenia has become higher since 2000, although, the downturn in early 1991-1994 didn't facilitate the economy reach the income levels of 1988. Figure 2 illustrates the rate of Armenian GDP per capita within the period of time from 1997 right up to the year 2008. However, the rate at which the GDP per capita increased in 2000 became slow in 2004.

GDP Growth Rate (Armenia 1998 -2008)
Let us denote as GDPPC -GDP per capita. The short -term volatility represents medium -term trends. The linear trend GDP per capita rate given by (1) shows that the growth rate has a tendency to increase over time.
and t-statistics of the regression coefficients is given in brackets.

Investment
As the investment rate is the key determinant of exploring the economic success of the economy we'll study the nature of the investment in the Republic of Armenia since 1997. It's known that fast -growing countries are the ones that invest substantial portion of their GDP, and countries that do not succed in their growth are those that fail the investment. According to the neoclassical growth model of Solow (1956) one of the key determinants of growth is the investment rate. Figure 3 shows that the investment rate in Armenian economy since 1996 particularly was not so low. It fluctuated, increased in 1998 -1999, experienced a downturn in 1999- 2000   Foremost we note that the growth of the investment rate arises after the overall growth rate soars and becomes positive. Above all, the investment rate reached its peak in the stated periods, when the growth rate was at record levels. Similarly, the growth in the investment rates that appears in the periods of growth of the GDP rate was the consequence, not the cause of the growth performance at the end of the second decade. Subsequently, despite the small growth in investment, investment rates can be compared with international standards.

Investment and GDP
Empirical literature devoted to the study of the investment and its impact on the economic growth implies:" in regard to the growth, it is not the overall level of investment that really matters, but its quality and efficiency". According to Doppelhoffer et al. (2002) public investment is one of the robust determinants of the economic growth rate. Following his suggestion we also studied the influence of the public investment on Armenian economic growth. It allowed studying economic consequences of the public investment.
The interrelation between LnGDP and LnInv is given in the equation (2

VAR system
Vector auto regression system representing the interrelation between GDP and investment is given in the system (4) -(5). respectively.
From (6) follows that eigenvalues of the system (6) Thus, we can suggest that from (7) follows that the GDP growth is stable and oscillated and the investment growth is stable and none oscillated.
The reforms at the end of the XX century and the first decade of the XXI century led Armenian economy in the right direction in a sense that the investment behaviour is stable and none oscillated.

Taxes and growth in Armenia
The effect of taxes on aggregate economic activity is studied in Neoclassical and Keynessian literature and following this study we could suggest that higher taxes reduce economic activity, even though there is less agreement on the exact mechanisms that generate this outcome Eaton (1981), Dotsey (1990), Kims (1998). The goal of this chapter is to contribute to the empirical side of the question and to the approach that analyses annual data from 1997 -2008 of Armenian economy. We explore the effects on income taxes and developed regression models representing the dependence of GDP on income taxes.
We start with the simplest dynamic approach that relates growth and the tax rate. This model is similar to the empirical specification in Romer and Romer (2007):

Conclusions and proposals
The Armenian economy has suffered for about twenty years of slow down in regard to growth. The economic crisis caused by the collaps of former Soviet Union generated numerous problems in Armenian economy. The downturn in the investment rate in the economy was, probably, a consequence of this slowdown. New market economy institutions and economic reforms are of great importance in order to recover the economy which persists to collapse. According to international standards the investment was not so impressive. However, the presence of public investment allowed the economy to recover and provide the gradual and positive growth. On the other hand occurrence of political, social and military conflicts throughout the region caused difficulties concerned with attraction of private international investments.
The introduction of new technologies is a significant aspect in facilitating the attraction of private international invetsments as well as in finding new ways and opportunities for the use of information technologies in the economy.
Establishment of new institutions and implementation of economic reforms should allow the economy to introduce the tax law, differentiate taxes and include the diversity in taxes. Therefore, the diversification of taxes is one of the topical problems for the country while recovering after a deep economic collapse and the slow down of the economy.