Current state, development prospects for Azerbaijan's economy

Yuzhnyi Kavkaz, a regional analysis journal, N8, December 2003

A rapid economic growth began in Azerbaijan in 1997 after seven years of recession. Inflation decreased substantially, and made 2.2% last year. The exchange rate of the manat with respect to the US dollar became relatively stable. However, Azerbaijan's current socio-economic state does not match its potential. The political, legal, economic, institutional and social effect of reforms is quite low. Private property became reality in Azerbaijan in the course of transformation processes. While the share of the private sector in GDP was 15% before the reform, in 1991, it provides 75% of the nation's GDP presently. However, the private sector is so far unable to meet requirements of the economy and the population. A substantial part of products manufactured in Azerbaijan are noncompetitive. More than two-thirds of consumer products are imported.

Official statistics say the GDP in the rich country such as Azerbaijan is just USD850 per head. In this respect, Azerbaijan is ahead of Georgia and Armenia, but behind Russia and Kazakhstan. The 1990 GDP was 43% of the average world figure, while it is just 13% presently. Today, the GDP per head in Azerbaijan lags 3.5 times behind the pre-reform period and is at the level of 1964; an average monthly wage lags 3.8 times behind the pre-reform period and is at the level of 1960. The middle class made up more than 50% of Azerbaijan's population before the transformation, the poor were about 34% and the rich exceeded 10%.

After twelve years of reforms, there was a substantial turn toward impoverishment among the key groups of the population segment with average incomes that plays the role of a locomotive and social stabilizer in normal societies. Half of Azerbaijan's population is near the poverty line, according to official statistics. However, analysts estimate the unit weight of the poor to have grown 2.5 times higher between 1992 and 2003, so it currently exceeds 80%. Official statistics register unemployment at 1.3%, but in reality 25-30% either work in the "informal" sector where wages are paid without tax deductions or are unemployed by international standards. Although last year's economic growth rates (8-11%) in Azerbaijan proved to be very impressive and even the best comparing with many CIS states, positive results and trends were not able to cut down unemployment and increase wages of state sector workers at least to subsistence level. State spending is just USD170 per head currently. In conditions of such limited state spending, it is practically impossible to develop the economy and social sphere. Poverty that is still developing in Azerbaijan and crisis in the social sphere, science, education, healthcare, etc. threatens the nation's future.

The extant situation in the economy and social sphere is on the one hand linked with objective difficulties of transformation, problems generated by the Nagorno-Karabakh war and so on, while on the other hand it is linked with the substance of the current regime and government policy. For six years already, the government has been keeping a protective position in macroeconomic balance maintenance. Reforms are very slow or immobile in other areas. Lop-sided policy results in Azerbaijan's economy resting chiefly on energy resources. The government cherishes hope for oil export revenues to solve numerous social and economic problems. The share of the oil sector in total foreign investment is 60%, and it was 85% in 2003.

Capital investments of USD60 billion are expected in order to carry out oil contracts. These huge investments in Azerbaijan's oil sector are forecast to enable it to export 12 million tons of crude in 2005, 45 million tons in 2010 and 60 million tons in 2015. This will lead to the value of exports, thanks to foreign oil companies' investments, exceeding Azerbaijan's 2003 GDP in six or seven years. Incoming "huge oil dollars" will reinforce the national currency, manat. In such conditions, on the one hand, it will be difficult to stimulate export, and on the other hand, imports will grow cheaper and ensure tougher competition for local manufacturers.

Promising branches in the non-oil sector can develop and provide the population with required goods and jobs only if they can compete with imports, in the first place. Ensuring competitiveness of the nation's non-oil sector and its integration with the world economy should therefore become the government's priority.

If the government proceeds with its current policy based on the oil illusion and high risks, Azerbaijan will become hostage of the so-called "Dutch syndrome." The bitter experience of Nigeria, Venezuela and other nations shows increased oil export leads to stagnation or even decline in the industrial and agricultural sectors if this serious factor is not taken into account. In this case, Azerbaijan will lose unique opportunities and an impulse for quick and sustainable development and will eventually rank among hopelessly backward nations. However, the experience of Norway and a number of other countries shows vividly that competent policy and the correct use of "huge oil dollars" can help avoid negative side effects. This is the key one among new problems that is currently the most urgent as regards Azerbaijan's future.

The biggest flaw in the government's current policy is that it has lost orientation, which makes reforms meaningless. Economic growth is currently chiefly based on momentary factors, the oil factor being the key one, foreign investments linked with it and increase in oil prices. Suffice it to say that oil and oil products account for 90% of Azerbaijan's export. About half of the nation's budget is made up by oil revenues. This clearly shows Azerbaijan's dependence on the state of the world oil market. If oil prices are higher than USD20 per barrel, Azerbaijan goes through an economic upsurge, if they are lower than USD20, it's crisis. The danger here is quite serious. Azerbaijan therefore needs economic growth not only as an end in itself, but as a result of comprehensive development of the national economy as a whole. This is the type of economic growth that can provide resources required to solve existing acute economic, social and demographic problems. This is the type of growth that can give Azerbaijan a chance to turn from an object into a subject of globalization.

To accomplish this epochal task, Azerbaijan must enter the next stage of economic transformation. Improvement of the quality of economic growth and social state of the nation must be this period's priority. To solve this problem, the government should work out and implement a long-term comprehensive development program for the non-oil sector - industry (primarily those branches that are little exposed to global competition), agriculture, infrastructure, services, and so on. Regional target programs should become an important element in this program. Drastic changes in economic policy are needed to solve this fundamental problem. There is a need to switch to the implementation of an optimum model of Azerbaijan's economic development. The main target functions of such a model consist in effective use of human and natural resources and integration potential proceeding from Azerbaijan's unique geopolitical position between the East and the West. The implementation of this model requires taking comprehensive measures, including the following, especially important tasks:

1. More attention in economic policy is presently paid to oil export and financial stabilization, less to social development. However, this policy should be changed for that of simultaneous combating of crisis trends in the financial, production and social areas.

2. As is known, the nation's focusing on mineral resources export and its integration with the world economy in the form of mineral resources export and technology and consumer products import leads to inefficient foreign trade and a chronic setback to economic development. Further steps to expand reforms should therefore include continued provision of a macroeconomic balance, as well as achievement of substantial results in the area of structural reforms. Experience shows resolute steps in stabilization and structural reforms facilitate better quality of economic growth, which Azerbaijan needs as air and water.

3. The more widespread is corruption, bribery and abuse of power, the longer is transition and the lower are living standards. To speed up solution of the nation's pressing economic and social problems, an effective mechanism should be created to implement the law on corruption.

4. Azerbaijan's level of economic freedom ranks 106th in the world, according to international analysts, yielding to Armenia (44th) and Georgia (91st). The majority of the population does not benefit from economic adjustments. In this respect, comprehensive measures are required to expand economic freedoms in the country. Economic freedom should apply to all members of society.

Proceeding from prospering states' experience, one can say acceleration of Azerbaijan's withdrawal from the existing situation, improvement of the welfare of the population, reduction of unemployment, restoration of the middle-class, and so on require, on the one hand, wider democratization of society, increased efficiency of the court system, guaranteed functioning of laws, the population's trust in government, elimination of the state's administrative interference in the economy and abuse of power on the part of officialdom, and comprehensive support to business; on the other hand, there is a need to take into account the nation's historic, cultural, traditional and psychological properties in the process of stepping up reforms. Hope for a more prosperous future will then become the key result of transformation in Azerbaijan.

Published in December 2003