CC BY
34
Ali MASIMLI
Ph.D. (Econ.), deputy of the Milli Mejlis (Parliament) of
the Azerbaijan Republic (Baku, Azerbaijan).
OPTIMIZING AZERBAIJAN’S ECONOMIC DEVELOPMENT IN THE GLOBALIZING WORLD: PROBLEMS AND PROSPECTS
Abstract
This article takes a look at the socioeconomic results of the market reforms at the current stage of globalization. Relying on copious statistical information, the author concludes that Azerbaijan’s main problem in this sphere today is that its economic development is based on the leading role of the oil factor, which in the midterm could lead to an abrupt drop in the rates of
economic and social growth. In order to maintain sustainable development in the long term, the country should transfer from the export-raw material model to an optimal model of Azerbaijan’s economic development by intensifying the economic reforms, making efficient use of the country’s human, resource, as well as integration potential, and enhancing economic modernization.
I n t r o d u c t i o n
When Azerbaijan restored its state independence in 1991, new opportunities opened up for the country to efficiently use its vast economic potential as it made its transition to market relations and integrated into the global economic system. Based on objective criteria that have an impact on dynamic and sustainable development, Azerbaijan has the following particularly significant advantages:
1. Azerbaijan possesses indisputable competitive advantages with respect to human capital.
2. Azerbaijan is rich in natural resources, particularly oil and gas, which gives the country additional advantages as the question of energy security becomes more pertinent.
3. Due to its geographical location, Azerbaijan, as the only transport hub between East and West and North and South, is becoming a center of the Great Silk Road, on the one hand, and it has more opportunities to integrate into the global economic system, on the other.
Transition from Restorative Growth to Real Development
The transition from a centralized-planned economy to market relations and integration of the Azerbaijani economy into the global economic system were very difficult processes accompanied by
a multitude of problems. Under the impact of these problems, the situation became so aggravated that in 1995 the transformation slump in Azerbaijan compared with 1990 reached its peak: the GDP dropped by 60%, industrial production by 70%, and agricultural production by 50%. Inflation increased to a level of 1,012% in 1992, to 1,229% in 1993, and amounted to 1,764% in 1994, while the budget deficit climbed to 10.3%. Between 1992-1995, the national currency exchange rate, i.e. the manat to the dollar, dropped from 18 to 4,418 manats,1 that is, 245-fold. A large number of production enterprises ground to a halt or operated at 15-20% of their capacity.
All of this had a negative influence on the integration of the Azerbaijani economy into global economic relations, as a result of which, as early as the initial stage of the market reforms and amid an intensifying crisis in the real, financial, and social sectors of the economy, the problems associated with Azerbaijan’s participation in global economic relations became even more aggravated.
Under these conditions, Azerbaijan managed to gradually overcome the problems and begin its economic ascent by consolidating its domestic potential and relying on help from international financial credit organizations. At the same time, the high rates of investments in the country’s economy, the favorable situation on the world oil market, and the reforms leading to the development of business gave rise to an increase in the GDP of 1.3% in 1996, of 5.8% in 1997, and of an average of 10% a year between 1998 and 2004.
In 2005, Azerbaijan entered a new stage of economic development. In 2005, the GDP rose by 26.4%, in 2006 by 34.5%, and in the first half of 2007 by 35.1%. In 2004, Azerbaijan occupied eighth place among the CIS countries in terms of per capita GDP, and in 2006 it had already climbed to fourth place.2
The increased demands of the world economy for raw fuel resources and the high prices of oil on the world market created favorable conditions not only with respect to accelerating economic growth, but also to developing most of the segments of the financial market.
Investments in basic capital continued to grow. In 2005, investments totaling 7.1 billion dollars were invested in the Azerbaijani economy, or 20% more than in 2004, and in 2006, they amounted to 8.3 billion dollars, which was 16.9% more than in 2005. Foreign investments totaled 5 billion dollars, or 60.9%, and domestic investments reached 39.1%.
By the end of 2006, Azerbaijan’s foreign debt amounted to 2 billion dollars, which corresponds to 9.9% of the country’s GDP. In November 2007, Azerbaijan’s gold and currency reserves constituted 7 billion dollars, or 3.2-fold more than the country’s foreign debt.3
Nevertheless, despite the extremely high rates of economic growth, it should be noted that after the profound slump of 1991-1995, it took quite a number of years, from 1996 to 2005, for Azerbaijan to make up for the losses it endured during the reforms. So, despite the fact that, compared with 1995, the per capita GDP rose from 319 dollars to 2,373 dollars, that is, 7.4-fold, it still lags behind the average world index. This in no way corresponds to the country’s vast potential. For example, in terms of this index, Azerbaijan lags behind other countries with rich energy resources, i.e. two-fold behind Russia and 1.5-fold behind Kazakhstan, which in turn is giving rise to a low level of average wages, pensions, and so on. For example, the average hourly wage in Azerbaijan is still 1.1 dollar, which is three-fold lower than the corresponding index necessary for simple reproduction of the workforce. This is having a serious effect on human capital, which is the main factor of socioeconomic progress and the country’s most valuable resource.
According to official statistics, 352,405 permanent jobs were created between 1 October, 2003 and 1 January, 2007. The average size of Azerbaijan’s economically active population in 2006 amounted to more than 4 million people, 54,000 of whom, or 1.3%, were officially registered as unemployed.4
1 See: Statistical Yearbook of Azerbaijan, Baku, 2000, pp. 28, 29, 30, 240, 271 (in Azeri).
2 See: Ibid., pp. 40-41.
3 See: Ibid., p. 352.
4 See: Ibid., p. 630.
In reality, however, the level of unemployment is still quite high and, according to the Ministry of Labor and Social Security of the Population of the Azerbaijan Republic, amounts to 7%, that is, more than 280,000 people, while experts’ estimates put it even higher. This is the only explanation for the significant outflow of migrants from Azerbaijan to Russia, Ukraine, Turkey, and other countries, the number of whom, according to official statistics, is no higher than 600,000 people. Official statistics also indicate that migrant workers transfer 700-720 million dollars a year to their families, while experts say this figure is as high as 1.5-2 billion dollars,5 that is, it constitutes a significant part of these families’ annual income.
Formation of an Export-Raw Material Development Model
Since 1994, Azerbaijan has signed more than two dozen agreements with 30 leading oil companies of the world. More than 17 billion dollars have already been invested in the development of the oil industry. Thanks to such large investments, oil production has undergone accelerated growth, amounting to 22 million tons in 2005, that is, 46.5% more than the index for 2004, and reaching 32.3 million tons in 2006, which is 44.1% more than the same index for 2005. In 2006, oil export from Azerbaijan amounted to 24.7 million tons, which is 66.2% more than in 2005. In 2005, crude oil and petroleum products totaling 6.6 billion dollars were exported, and in 2006 this export totaled 12 billion dollars. Oil exports increased by more than 1.8-fold in terms of cost. Crude oil accounted for 10 billion dollars, or 86.7% of oil exports, and petroleum products for1.6 billion dollars, or 13.3%. Azerbaijan’s profit from the export of Azerbaijani oil via the International Operating Company (AIOC) before 2006 amounted to 1.63 billion dollars, or to16.5% of a total profit of 9.9 billion dollars. In the next few years, Azerbaijan’s share in the profit of the Azerbaijan International Operating Company will reach 80%.
Putting the Baku-Tbilisi-Ceyhan oil pipeline, with a throughput capacity of 50 million tons a year, and the Baku-Tbilisi-Erzerum gas pipeline into operation is helping to increase oil and gas production in Azerbaijan. For example, according to government forecasts, oil production in Azerbaijan in 2007 will amount to 43.7 million tons, in 2008, it will reach 52.1 million tons, in 2009, 61 million tons, and in 2010, 63.4 million tons. On this basis, the export of crude oil will climb to 35.7 million tons in 2007, 44.3 million tons in 2008, 53.2 million tons in 2009, and 55.6 million tons in 2010.6 Therefore, whereas the volume of oil export in 2006 constituted 24.7 million tons, in the next few years it will continue to grow. According to the estimates of the International Monetary Fund, by 2024, Azerbaijan will receive more than 200 billion dollars in profit in the oil and gas industries.
At the same time, the analysis shows that as the unilateral development of the Azerbaijan economy intensifies, paradoxes will appear due to the surplus petro dollars. The share of the oil and gas sector in Azerbaijan’s industry is more than 72%, while the oil factor accounts for 59% of the country’s GDP and approximately 60% of the state budget revenue. So against the background of the fantastic economic growth rates, contradictory trends are developing in the country’s economy. On the one hand, the high economic growth is expanding the country’s financial possibilities, and this in turn is creating favorable conditions for positive dynamics in the social sphere. For example, in 2005, the population’s monetary revenue increased by 28% and average wages by 22%, while in 2006, these
5 See: Vedomosti, 17 August, 2005.
6 See: Documents of the Ministry of Economic Development of the Azerbaijan Republic, Baku, 2007 (in Azeri).
figures were 30.6% and 20%, respectively. However, by the end of 2007, according to preliminary data, average wages amounted to 215 dollars and to 152 dollars in budget organizations, while pensions constituted 78 dollars.7 Admittedly, revenues from the accelerated development of the oil sector significantly alleviated the severe consequences of the transformation slump and economic crisis. But this has still not led to an improvement in the population’s socioeconomic status or a reduction in unemployment.
At present, the world economy is undergoing another immense upswing. According to the results of authoritative studies and expert assessments, the peak of this cycle will arrive between 2030 and 2040. If new oil fields do not go into operation in Azerbaijan under the so-called Deal of the Century (1994), oil production can be expected to reach its peak between 2010 and 2012. On the other hand, oil’s dominating role in the energy research structure is coming to an end. An analysis of these processes shows that the country’s economic development model must be changed in order to ensure dynamic and sustainable development of the Azerbaijani economy during the global upswing.
It should be noted that Azerbaijan has already formed an economic development model based on the oil factor, trade, and service. The main characteristics of this model are the following:
1. An increase in the amount of money in circulation related mainly to investments in the oil sector of the economy, an inflow of petro dollars, and accelerated growth in state spending. After the Contract of the Century was entered, more than 37 billion dollars were invested in the Azerbaijani economy between 1994 and 2006.8 State budget spending increased by 50% in 2005, and by 77% in 2006. Beginning in 2001, money emission rapidly grew every year: in 2002 by 91.7%, in 2003 by 84%, in 2004 by 13%, in 2005 by 22.5%, and in 2006 by 187%.9
2. An accelerated inflation rate.
3. A greater increase in import over production of consumer goods. Compared with 2005, import rose by 1 billion dollars or 24.8% in 2006. During this period, the increase in food production amounted to 100 million dollars, or 3.7%, and to 0.9% in agriculture.10 In other words, the import growth rates outstrip the growth rates of locally produced foodstuffs 6.7-fold and of agricultural production 27.6-fold.
4. An increase in the national currency, manat, exchange rate.
5. A disruption in the balance among the structure-forming sectors of the economy. Compared with 2005, investments in the oil sector of the economy grew by 57.4% in 2006 (3.4-fold faster than the average investment growth rates). The share of the oil and gas industry in the investment structure amounted to 54.8%, of the processing industry to 1.6%, and of agriculture to 1%.
6. The slow resolution of urgent problems in the social sphere.
The revenue from the accelerated development of the oil sector and oil export alleviated the unfavorable trends in the social sphere to a certain extent and helped to increase wages, pensions, etc., as well as to reduce unemployment. But the social problems that have accumulated over the decades are extremely serious and are being resolved at a much slower rate than the overall economic development and oil industry growth rates. What is more, against the background of the high rates of economic development, negative trends, such as bureaucratic obstacles, which hinder progressive re-
7 Ibidem.
8 Ibidem.
9 See: Statistical Yearbook of Azerbaijan, p. 351.
10 See: Ibid., pp. 398, 424.
forms, and corruption and monopolism, which are becoming the main promoters of inflation, remain a big problem.
At present, the oil and gas industries form the fulcrum of Azerbaijan’s economic development. In today’s globalizing world, the raw mineral policy can be divided into four main models: export, import, isolationist, and balanced. Oil contract investors want the export model to predominate, in which Azerbaijani oil as a competitive form of raw material is mainly being used in the interests of the foreign market. This, as practice shows, is increasing the disproportion between production and domestic consumption, on the one hand, and bringing the macrostructure of the country’s economy closer to the export-raw material model, on the other. For example, in 2006, Azerbaijan exported 80% of the oil it produced, and according to the experts’ forecasts, this figure will reach 90.4% in 2007, while in 2010, 90.7% of the oil produced will be exported in crude form.
Implementation of the export-raw material model is having a two-way effect on Azerbaijan’s socioeconomic life. The export-raw material model makes it possible to maintain the production capacities of these industries, promote an increase in the productivity of labor, replenish the budget, reduce social tension, and so on, on the one hand, while it has a negative effect on the structural
Dynamics of Foreign Investments, GDP,
Export and Oil Production in Azerbaijan in 1995-2006 (in percentages of the previous year)
Years Foreign Investments GDP Export Oil
1995 — 88.2 97.6 95.8
1996 165.4 101.3 99.1 98.9
1997 210.7 105.8 123.8 100
1998 112.6 110.0 77.6 125.4
1999 74.1 107.4 153.4 121.1
2000 85.0 111.1 187.7 101.4
2001 117.8 109.9 132.6 106.4
2002 204.7 110.6 93.7 102.7
2003 150.8 111.2 119.5 103.4
2004 130.4 110.2 139.6 100.6
2005 106.9 126.4 120.2 146.5
2006 103.3 134.5 146.6 144.1
2007 90.6 130.6 127 135.5
2008 61.1 118.2 131.3 119.2
2009 88.3 114.1 117.4 117.6
2010 103.3 105.9 103.4 103.9
S o u r c e: Statistical Yearbook of Azerbaijan, Baku, 2007; Documents of the Ministry of Economic Development of the Azerbaijan Republic, Baku, 2007 (in Azeri).
changes in the economy, making it unilaterally more dependent on the situation on the world market, on the other.
Objective Need to Transfer to an Optimal Model of Economic Development
It is a well-known fact that if the narrow raw material integral designation of the bulk of investments acquires a mass nature and is not accompanied by simultaneous development of the entire technological chain of raw material processing and use, after a certain amount of time, as the raw material production and export rates drop, the country’s socioeconomic development rates will also decline. According to the official forecasts, the GDP growth rates will amount to 18.2% in 2008, to 14.1% in 2009, to 5.9% in 2010, and to 3.5% in 2011,11 which is clearly not enough to resolve the social problems that have accumulated over many years.
Admittedly, the Azerbaijani government is taking measures to develop the non-oil branches of the economy. In order to maintain small and medium businesses, business entities were allotted loans worth more than 100 million dollars in 2006, which is 2.5-fold more than the corresponding index for 2005. In 2007, the amount of loans used to support small and medium businesses will double and reach 200 million dollars. The funds spent on agriculture are also growing. Approximately 240 million manats, or 280 million dollars, were allotted from the 2007 budget for the development of agriculture, which is 1.4-fold more than in 2006. What is more, in order to compensate for the increase in the price of fuel, subsidies amounting to 80 million manats, or 90 million dollars, were allotted to agriculture.12 This is a significant step forward in financial support of the non-oil branches of the economy. But these funds still lag significantly behind the investment demands of these branches and are not enough to accelerate the development of agriculture, the processing industry, and other branches of the non-oil sector of the economy. For example, in 2006, 42.6% of the total amount of investments went to the non-oil sector, including 1% to agriculture and 1.6% to the processing industry. So the growth rate of foodstuff manufacture lags 12-fold behind the growth rate of the oil industry, while agriculture lags 49-fold behind. According to expert estimates, in order to achieve annual growth in agriculture of more than 10%, 500 million dollars in investments must be pumped every year into this branch for 5-6 years.13
It should also be noted that the oil companies participating in oil contracts are not rendering sufficient support to oil machine-building enterprises and other branches that are not engaged in fulfilling corresponding orders under oil contracts. While in Kazakhstan, for example, foreign investor companies are placing orders for machine-building and other production totaling hundreds of millions of dollars.
Azerbaijan, where 0.13% of the planet’s population lives, possesses at least 1% (in fact, much more) of the world raw mineral resources. What is more, it is likely that a certain share of Kazakhstani oil and Turkmen gas will be transported through Azerbaijan. This immense national wealth, as well as the country’s unique geopolitical situation, must be skillfully used not only to accelerate the growth rates in production and export of energy resources, but also to promote the development of human capital, information technology, and the non-oil sector of the economy, raise its competitiveness, and ensure economic security. Without mechanisms to ensure that it has an impact on the world and re-
11 See: Documents of the Ministry of Economic Development of the Azerbaijan Republic.
12 Ibidem.
13 See: Statistical Yearbook of Azerbaijan, p. 477.
gional markets, the prevailing raw material orientation will make the Azerbaijani economy more dependent on the external situation and weaken the possibility of diversifying the economy and ensuring comprehensive development of agriculture and the processing industries. On the other hand, a possible reduction in world oil prices could lead to a profound crisis not only in the oil industry, but also in the branches related to it: power engineering, transportation, construction, and so on, as well as in the budget in the social sphere.
In this way, the export-raw material model will ensure high economic growth from 1997 to 2009. But as oil production and the export volume decrease, so will the GDP growth rates and social indices. An abrupt drop in the GDP growth rates, and simultaneously in the social indices, could have a negative effect on the country’s overall economic situation, on the one hand, and increase social tension, on the other.
So the Azerbaijani government is faced with the following extremely important tasks:
—to prevent the economic growth rates from dipping below 10% after 2009;
—to reach a per capita GDP level that is higher than the average global level;
—to become one of the 50 most competitive countries of the world;
—to lower the level of poverty, raise the standard of living of the country’s population and become one of the 57 countries with the highest human development indices.
Main Conditions and Vectors for Optimizing Economic Development in the Globalizing World
In order to carry out the above-mentioned tasks, the country must transfer to an optimal model of economic development based on the efficient use of three factors: human capital, resource potential, and integration possibilities. This requires investments. On the whole, 4.5 billion manats, or 5 billion dollars, in foreign investments were pumped into the Azerbaijani economy in 2006, which amounted to 588 dollars per capita. This situation with foreign investments is characteristic of average economically sustainable developing countries. In countries with an average level of development, each resident accounts for 500 dollars of foreign direct investments, and in countries with a high level for approximately 1,000 dollars. According to official forecasts, per capita foreign direct investments will amount to 321 dollars in 2007, to 217 dollars in 2008, to 181 dollars in 2009, and to 194 dollars in 2010. Investment growth rates in basic capital are forecast at 1% in 2007, 5.3% in 2009, 13% in 2010, while a drop of 1.6% is expected in 2008. The decrease in foreign investment growth rates in 2007 will amount to 17.3%, in 2008 to 24.7%, and in 2009 to 19.6%. In so doing, in 2007, domestic investments will grow by 33% in 2007, by 22% in 2008, by 20% in 2009, and by 16% in 2010. These are quite high rates. But they do not compensate for the drop in foreign investments and are not enough to stop the accelerated decrease in economic growth rates. In order to achieve a 10%-economic growth rate after 2009, the average annual investment growth rate in the non-oil branches should be no lower than 15-20%.14
As practice shows, developed countries rich in energy resources have achieved prosperity and a high standard of living, regardless of oil, by means of efficient coordination of relations among the state, society, economy, business, and technology. Moreover, the human factor in society as well as real manifestations of democracy and economic freedom are of exclusive importance here. It is
14 See: Documents of the Ministry of Economic Development of the Azerbaijan Republic.
enough to recall that in Norway, where the above-mentioned principles are observed at a sufficiently high level, the per capita GDP constitutes more than 42,000 dollars. At the same time, in Nigeria, where reforms to ensure economic freedom are not being carried out, despite its rich oil resources, the per capita GDP amounts to only 875 dollars, that is, 48-fold lower compared with Norway’s equivalent index.15
This model can only be successfully implemented under conditions of low inflation, increased competitiveness of the non-oil branches of the economy, and high and sustainable rates of economic growth. This is related to the fact that if growth rates drop below 8-10%, it will be very difficult to resolve the multitude of social problems facing the country in the midterm. What is more, implementation of an optimal model of socioeconomic development insistently demands a new philosophy of economic reforms, which consists of ensuring comprehensive, balanced, and sustainable development of the economy and country’s competitiveness. Thus a modernization leap must be skillfully carried out in Azerbaijan, using its high revenues, by accelerating an upswing in the population’s prosperity. And this, in turn, requires implementing the following measures:
1. Rational thinking that meets current demands is required and an effective combination of state, society, economy and technology ensured in order to achieve real and efficient democracy and expand economic freedom over a larger geographical area. The economic reforms should be oriented toward accelerating the resolution of state and social problems, raising personal prosperity, and ensuring the population’s security. A large number of laws adopted at the initial stages of the market reforms should be enhanced keeping in mind globalization demands. More than 40 laws should be improved to meet the demands of the World Trade Organization (WTO). The contradictions in legislative acts should be removed, and when necessary new laws adopted that meet today’s demands. On this basis and in a new capacity, the government must be able to defend the supremacy of the law, human rights, and property rights, and to ensure personal security.
2. Institutional foundations must be created by reforming the already existing economic system in order to ensure the functioning of an optimal development model. As practice shows, when a raw material economy prevails, it is impossible to build an efficient state or achieve real long-term and sustainable economic and social progress without first resolving this fundamental question. The organizational structure and personnel of the management system must correspond to the demands of a democratic state, free civil society, and civil market relations. The government should function more efficiently and the quality of governance be improved; its efficiency and transparency should be raised and, of course, its competitiveness ensured.16 This requires a transfer to a new model of management based on a flexible, transparent, and efficient information system, as well as skillful synchronization of the activity of certain state structures. This requires forming a clear state policy in the state management system aimed at ensuring broad economic freedom for all strata of society.
3. An increase in investments in human capital is needed which, however, should not be technical and dependent in nature, rather be accompanied by systemic reforms. For example, fundamental reforms must be carried out in the educational system, in particular, the qualification and re-qualification of workers should be raised. Spending on education should be increased to 6% of the GDP by 2012, on health care to 5%, and on science to 2%. At the same time, in the context of the fundamental reforms and growth in investments, measures are required to raise the efficiency of investments in the indicated spheres.
15 See: Asian Agency of Economic Analysis.
16 See: L. Zevin, “Natsional’nye ekonomicheskie systemy v global’nykh protsessakh,”Mirovaia ekonomika i mezh-dunarodnye otnoshenia, No. 11, 2003, p. 21.
4. A set of urgent measures must be carried out by the state, nongovernmental organizations, and civil society to eradicate monopolism, corruption, and the shadow economy and create favorable conditions and a healthy competitive environment for the normal activity of market structures and for raising the competitiveness of Azerbaijan’s enterprises.
5. Real consolidation must be achieved in Azerbaijani society by means of its democratic modernization. This requires reforms ensuring a real consensus in society by eliminating the unjustifiably high differences in income distribution and the polarization of society, reducing poverty and unemployment, and expanding and consolidating the country’s middle class.
C o n c l u s i o n
An analysis of the positive dynamics and main problems of the Azerbaijani economy in the globalizing world shows that the possibilities of the export-raw material type of economic development will be exhausted in the midterm. As a result, the GDP growth rates will drop from 34.5% in 2006 to 3.5% in 2011, which could create certain economic and social risks.
Achieving sustainable and balanced development after 2009 will objectively require optimization of the model of Azerbaijan’s economic development in the long term. In order to carry this out, more efficient use of oil revenue is required aimed at developing human capital and promoting a modernization leap in Azerbaijan. This will require a new stage of economic reforms to achieve an effective combination of state, society, the economy, business, and technology. This model must be implemented in order to transfer to an innovative development path and raise the quality of management and education, as well as the efficiency of science and the country’s competitiveness. Only on this basis can Azerbaijan raise the standard of living of its population and become one of the 57 countries of the world with the highest human development indices.
This analysis shows that the skilful use of human and resource potential, as well as the country’s unique geopolitical situation, will lead to an increase in Azerbaijan’s competitiveness on a global scale and ultimately to an accelerated upswing in the population’s prosperity.
