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Azerbaijan’s economic policy in the post-petroleum era

Baku steel company

With extremely unfavourable foreign economic and political conditions, Azerbaijan has the task of developing and carrying out a scientifically-proven, scientifically-based economic policy. The dependence of the national economy on world prices for carbon-fuel resources and the weak export potential of the non-petroleum economy make it vital that professional economists and specialists discuss this issue with the aid of members of the economic component of the Azerbaijani government. After these discussions, the main components of a state economic policy for the short- and long-term can be formulated. In other words, they can do what is done in many countries: create a step-by-step plan of action with several variations that would match the projected budget.

In this environment there are several measures that could help step up the activity of the core elements of economic policy.

Among these, the following can be singled out: supporting export and the replacement of imports; attracting investments for high-priority sectors of the economy; the privatization of state property; supporting small- and medium-sized businesses; supporting effective employment of the population; increasing the effectiveness of the banking system and stabilizing the national currency; decreasing inefficient expenditures; compensation for inflation-related expenses to the most vulnerable categories of the population (families with many children, pensioners, etc.)


Replacing imports

If one looks at Azerbaijan’s import reports for 2014, among food products the largest share is taken by wheat (293.9 million dollars) and sugar (205.2 million dollars) – products that are very important for the people. For example, Iran’s experience shows that a large part of agricultural subsidies go towards wheat, which is considered a strategic commodity. It is no secret that fluctuations in the price of bread affect not only a country’s economy, but its political life as well. For this reason deliveries to the country’s emergency grain reserve are completely subsidized, as are deliveries to the army, hospitals, and schools. Subsidies are given to flour-milling enterprises, as well as to bakeries that bake common bread. The level of subsidies for sugar is quite significant – 50.7 per cent, with half of the sugar consumed in the country being completely subsidized (sugar that goes towards the needs of the army, that is sold through retail networks of urban trade and through the stores of rural co-operatives).

It is crucial that positive foreign experience be used in Azerbaijani agriculture. First and foremost, in addition to subsidies, tax incentives, and low-interest loans, state-set procurement prices and harvest insurance should be introduced.

To support Azerbaijan’s exports, it is crucial to introduce a state practice of providing pre-export and export loans, as well as export insurance.


The finance issue

The situation is such in global economics that in times of crisis it is quite difficult to reach one’s goals without additional financial resources. In those years when the situation in foreign markets was favourable, and oil prices were high, revenue from the export of carbon-fuel resources went to the State Petroleum Fund (GNFAR). One of the fund’s primary goals was to increase the national economy’s resistance to external shocks, among them lowered prices for carbon-fuel resources. The current global economic environment makes it crucial that these reserves be used. They will help to get Azerbaijan through these difficult times and stimulate the country’s economic growth. GNFAR’s reserves should be used for the future transformation of the economy – more specifically, to develop industrial and transportation infrastructure and small and medium businesses.

State investments are capable of creating a chain of demand. If they are directed towards such areas as industrial and transport infrastructure, this will multiply the effect as much as possible; the money will go through the entire economy and, crucially, demand will increase all along the chain – in the production of metal structures, building materials, etc.

High-priority branches of the national economy for accelerated growth are the agricultural-industrial complex, machine building, the chemical industry and pharmaceutics, and the development of transport and telecommunications infrastructure. These are all basic elements of the economy, which together create a reliable economic shield from the external challenges of globalization, promising long-term economic development for the country.

To support the above-mentioned branches of the economy, it would be advisable to use the mechanisms of leasing. It is also crucial that leasing legislation be brought into line with contemporary demands – it must be to entrepreneurs’ advantage to use leasing. In other words, leasing must cost entrepreneurs less than loans.


A parking zone for industry

Additional domestic and foreign investment will be encouraged by the creation of various types of free trade zones (industrial zones, industrial parks, incubators, tech parks, etc.) in Azerbaijan.

At the turn of the twenty-first century clusterization has become an effective form of developing industrial production. Clusterization is the concentration of industries and enterprises in one particular and rather compact location. At the moment in Azerbaijan, besides the creation of tech-parks, there has been adopted a policy of forming simpler cluster-type structures – industrial districts.

An industrial district is a property that has the necessary infrastructure to carry out business activity that is used by small- and medium-scale entrepreneurs to make products and render services. In industrial districts the entrepreneur does not spend money on creating the infrastructure for his business, since particular parts of industrial districts already provide for the creation of ready-made facilities so that entrepreneurs can set up production lines and begin production. Industrial districts also provide certain incentives for entrepreneurs.

It is advisable to set up industrial districts first of all in Azerbaijan’s major regional centres. Industrial districts should serve certain fields or territories: they should produce products that are unprofitable in the context of large production facilities, provide services, etc. Efficiently functioning industrial districts should later become the core of small industrial zones.

Responsibility for carrying out the project lies on the Azerbaijan Investment Company, which needs to increase its activity. The executive authorities of raions should take immediate part in the organization of industrial districts.

In addition, creating free trade zones is also on the agenda. There is talk of creating a free trade zone based on the port being built in Alat. It is crucial that the Ministry of Economics directly handle the issue and consider positive foreign experience. The incentives for investors that have so far been voiced by the ministry are insufficient.

An important avenue of Azerbaijan’s economic development is the creation of modern transport and logistical infrastructure. Azerbaijan should become a transport hub with efficient Europe-Caucasus-Asia and North-South international corridors. The framework of the hub’s infrastructure will be made up by highways, railroads, and shipping lanes. Developing the export of transport services is just as important an element of Azerbaijan’s national production as the export of goods.

Additionally, if modern industry is to be developed, it is crucial that qualified workers be systematically trained. The pitiful state of post-Soviet professional technical education demands a radical reconstruction or, to be more exact, to be created all over again.


A new stage of privatization

The privatization of state property also has a significant part to play in economic development. Although a large part of government property has already been privatized, there are industrial objects of strategic importance to the country that are not to be privatized. However, there is also another category of industrial sites and state property – those that currently do not appeal to entrepreneurs because of their inappropriate auction value.

A business can be sold for one dollar, and have been around the world. If a privatized business is running inefficiently, then the government puts it up for sale at the token price of one dollar. At the same time, the authorities are careful to select a buyer who is required to set up production such that the business begins to bring in a profit, and along with that pays taxes, pays out salaries, carries out modernization efforts, and preserves jobs. Cases of this type of privatization have taken place in a number of post-socialist countries (Poland, Hungary).

With foreign experience as a guideline, Azerbaijan too can introduce the practice of privatizing property for one manat, but with the stipulation that the buyer carry out an investment program. If the investment program is not carried out, then the enterprise could be returned to the government.

An analysis of privatized industries revealed that with a certain number of such facilities 30 per cent of shares went unbought and remained state property. A large part of them were enterprises located in the provinces and agriculture-related. For these enterprises prior debts – which are written off only after all of the enterprise’s shares are bought – remain an unbearable burden. This factor also prevents the formation of full-fledged cooperation with foreign partners and investors. It should also be noted that as the shareholder of a privatized property, the state in no way participates in the activity of the enterprise – the entrepreneur solves his own problems himself.

Current legislation allows the owner of the majority of the shares to buy up the state’s remaining thirty-per cent share. However, when one takes into account the economic difficulties associated with setting up private businesses in the post-privatization period (repayment of debts, technical renovation, development of the production base, among others) the owner of the controlling stake cannot always do this, even if he wants to. Under these conditions it is advisable that the government’s shareholdings be given over to the owner in exchange for him carrying out the investment program to develop the enterprise. In this way the enterprise goes from mixed ownership to private, with all of the attendant consequences, and with that privatization achieves its logical culmination. To develop entrepreneurship in the provinces, legislation on privatization should be revised wherever it specifies the possibilities and conditions of transferring the state’s shares to entrepreneurs.


Small and medium business as an engine of economic growth

Small and medium businesses could play a significant role in the country’s economic development. To make this happen, the amount of credit given to small and medium businesses by the Fund for the Support of Entrepreneurship should be increased. The importance of the Fund giving microcredit to small businesses should also be noted.

It is advisable to simplify all administrative processes dealing with the operations of small and medium businesses, as well as introduce tax legislation that provides “financial holidays” for new business in high-priority branches of the national economy. In the provinces taxes affecting small-scale entrepreneurship should be eliminated.

It should be noted that abroad small and medium business are an effective shock-absorber for crisis-related economic issues. The share of small and medium business in the GDP of the US and Germany ranges around 50 to 52 per cent, while in France it is 55-2 per cent, in Japan 52-55 per cent, and in Russia 19-20 per cent. The share of people employed in small and medium business out of all people employed is 54 per cent in the US and France, 46 per cent in France, 78 per cent in Japan, and 25 per cent in Russia.


The rebirth of national industry

Contemporary Europe, striving to overcome the expenses of the global crisis, has turned to a strategy of “new industrialization” and the rebirth of national industry instead of cultivating the service sector and models of the “office economy” that have put a number of EU member states on the brink of bankruptcy. The example of China, which has been able to minimize the crisis’s effects by switching its production from the crisis-stricken American market to its own domestic one, is also very illustrative in this regard. Much can also be learned from the case of Poland, a country whose economic “weight” is much more modest; sixty percent of its industry was oriented towards the domestic market, which allowed it to avoid the expenses that are characteristic for Spain and Greece, which are more dependent on global markets. Finally, the earlier successes of Singapore, Malaysia, and South Korea speak to the importance of an active state industrial policy in the face of profound and qualitative economic transformations.

The economic policy carried out by the Azerbaijani government is appropriate, modern, and exact. The political responsibility that the government has taken upon itself and the decisions that it has made have been the right ones.

The government of Azerbaijan is carrying out a counter-cyclical economic policy intended to provide positive GDP growth, diversify the economy and develop export-oriented sectors, support domestic demand, and prevent an increase in unemployment. In the current economic climate it is crucial that exchange of opinions among academic economists, politicians, and Azerbaijan society be increased and directed towards solving problems resulting from crises in the global economy.


By: Rufat QULIYEV, Doctor of Economic Sciences, Deputy of the Milli Maclis Baku

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