Armenia is slowly recovering from natural and human-caused calamities that beset it during the late 1980s and early 1990s. An earthquake in 1988 severely damaged its infrastructure. A prolonged war in Nagorno-Karabakh, which involved Armenia, led to blockades of the country’s chief trade routes. Two unusually harsh winters, combined with a lack of heating fuels because of the blockades, resulted in deaths and near-famine conditions.
Armenia was less economically prepared for independence than most of the former republics of the Soviet Union. Years of Soviet central planning had developed an industrial base in Armenia that was highly dependent upon trade with other Soviet states. Those industries also were largely dependent on imported fuels. Blockades by Turkey and Azerbaijan and political instability in Georgia effectively isolated Armenia from world markets. A lack of fuels and the inability to sell products forced most factories to close. The gross domestic product (GDP), which measures the value of goods and services produced in the country, fell by 60 percent between 1991 and 1993.
Under Soviet rule the Armenian economy was transformed from agricultural to primarily industrial; agriculture, however, remains important, accounting for about two-fifths of the gross domestic product and employing one-fifth of the labour force. Industry is heavily dependent on imports of energy and raw materials.
The massive earthquake of 1988 destroyed nearly one-third of Armenia's industrial capacity, seriously weakening the economy. In 1989 the conflict over Nagorno-Karabakh led Azerbaijan to impose a blockade, closing a vital natural gas pipeline to Armenia. The subsequent severe energy shortage—combined with the disruption of key trade routes due to civil unrest in Georgia—caused a sharp drop in industrial production, further devastating the economy. Most of the population of Armenia thus experienced severe economic hardship during the 1990s.
Under the old Soviet central planning system, Armenia had developed a modern industrial sector, supplying machine tools, textiles, and other manufactured goods to sister republics in exchange for raw materials and energy. Since the implosion of the USSR in December 1991, Armenia has switched to small-scale agriculture away from the large agroindustrial complexes of the Soviet era. The agricultural sector has long-term needs for more investment and updated technology. The privatization of industry has been at a slower pace, but has been given renewed emphasis by the current administration. Armenia is a food importer, and its mineral deposits (gold, bauxite) are small. The ongoing conflict with Azerbaijan over the ethnic Armenian-dominated region of Nagorno-Karabakh and the breakup of the centrally directed economic system of the former Soviet Union contributed to a severe economic decline in the early 1990s. By 1994, however, the Armenian Government had launched an ambitious IMF-sponsored economic program that has resulted in positive growth rates in 1995-2000. Armenia also managed to slash inflation and to privatize most small- and medium-sized enterprises. The chronic energy shortages Armenia suffered in recent years have been largely offset by the energy supplied by one of its nuclear power plants at Metsamor. Armenia's severe trade imbalance, importing three times its exports, has been offset somewhat by international aid, domestic restructuring of the economy, and foreign direct investment.
