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[DEVELOPMENT ECONOMICS] [LEONARD BURGER | 2012]


Š 2012 All rights reserved to the author. Front page designed by author, background image source Wikipedia. The author takes no responsibility for any injury or damage sustained by using information from this report. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form of by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written consent of the author. Neither the author nor the University of Westminster is to be held responsible for any false information provided in this paper. The University of Westminster does not necessarily agree or supports the opinions portrayed in this paper. Please note that referencing has been updated which might have incurred incorrect alterations, please accept the author’s sincere apologies and please inquire for rectification. Recommended citation: Burger, L., 2012. Development Profile of Azerbaijan, University of Westminster: London, United Kingdom.

April 2012 Country Development Profile Azerbaijan

University of Westminster Westminster Business School Development Economics BEQM608

Karen Kufour

London, United Kingdom Leonard Burger 137248672

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TABLE OF CONTENTS

TABLE OF CONTENTS .............................................................................................................. 3 1.0

INTRODUCTION ............................................................................................................. 4

2.0

SECTION A: COMPARATIVE DEVELOPMENT INDICATORS............................................. 4

3.0

SECTION B: AGRICULTURE IN AZERBAIJAN ................................................................. 6

4.0

APPENDIXES ................................................................................................................. 8

BIBLIOGRAPHY ...................................................................................................................... 10

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1.0

INTRODUCTION

Azerbaijan, after the Russian Empire collapsed during World War One, enjoyed a brief period of independence. First being part of the short-lived Transcaucasian Democratic Federative Republic, which dissolved in May 1918, thereafter becoming de Azerbaijan Democratic Republic (ADR). During this independence the ADR made significant reforms in order to develop. Being the first Muslim parliamentary state granting women and men equal political rights (i.e. suffrage to women), herein even preceding the UK and the USA. (Swietochowsk, 1995; Kazemzadeh, 1951; Schulze, 2000) Furthermore it established its first state University (Kazemzadeh, 1951), the Baku State University, making a great step towards investing more in Human Capital. This independence was of short-lived nature, however, as the Soviet army marched straight through the country to conquer its capital Baku, establishing the Azerbaijan SSR and making a ‘Russian re-conquest’ complete on the 28th of April, 1920. (Pope, 2006) After 71 years, in 1991, as Azerbaijan finally became independent once again its economy had suffered during the disintegration of the USSR. The war over the Nagorno-Karabakh region exhausted even more resources, resources utilitarian and much necessary for economic and social development. (De Waal, 2004) Nonetheless, after the shocks of the Soviet disintegration had passed and the war in the landlocked region of Nagorno-Karabakh had stabilized in 1994, the journey to development could begin. During the nineties, although haunted by coup d'états en some political unrest, the country enjoyed sustainable development due to its abundance in oil and gas. Hereby, the country had a significant advantage in comparison to other emerging economies. It is the allocation of the revenue from these resources that has been subject of much debate, whether or not it has been used to develop the country to its full extent, and whether or not it has been utilised for the benefit of all Azeri people. In this paper, key development indicators will be used to assess the development of this scarred resource abundant country, concurrently an analysis is made of its Agricultural sector. 2.0

SECTION A: COMPARATIVE DEVELOPMENT INDICATORS

In the late nineties after most of the commotion on its independence had past, Azerbaijan pursued a stabilisation programme for its economy which proved successful as the annual economic growth rate exceeded 10% in the period 2000-2008. Because of this growth the ranking of its economy soared. Furthermore, in the wake of prosperity, the poverty rate fell from 49% in 2001 to 15,8% in 2008 with an further reduction to 9,1% in 2010 and to 7.6% in 2011. In research on the development of Azerbaijan one will find a lot of positive numbers. These numbers show that the country’s economic development has proceeded in a high pace especially during the 2003 to 2008 period. (Data: World Bank, 2012) The country’s economy showed a double-digit real GDP growth rate during these years. This growth was for a great deal driven by the oil and gas production and its exports. But spill-over effects from this sector to the construction- and logistics sector plus an increasing FDI over the years also contributed to its growth. The company responsible for its rich resources is the state-owned SOCAR. Growth in the non-oil sectors, including the previous mentioned construction and transportation, was also significant during these years; output in these sectors portrayed similar double-digit numbers. On average, during this period, the output of these sectors rose by 15% per year. However in the years 2009-2010, with the global crisis having an effect on the economy of the country, growth slowed down. The most important reason for this was the faltering of the oil industry, which on itself has discernable reasons for faltering during any global economic crisis. The main impact of the crisis can be seen in the major reduction in FDI in these two years. Nevertheless, inflows have been rising again since 2011, by 3,2%. At present inflows have not reached the heights these had during the precrisis ‘years of prosperity’.

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Since the oil sector is of great importance for the overall government’s revenue, and the country’s GDP for that matter, the government’s focus is mainly set on this sector. Nonetheless, next to the oil sector the agricultural sector plays an important role in the country’s economy (and its development). The agricultural sector does show a lot of potential, mainly because of the wide variety of climates which can be found spread over the country. Although the sector might not be as important to the government as the oil- and gas sector, as can be seen in its attention to the sector, about half of all Azeri households depend on farming as their primary source of income. Moreover it employs over 37 percent of the workforce in the country. The sector could grow but poor investments have led to a relatively low output of cultivated land. Furthermore a shift in focus of the government is unimaginable since the agricultural sector only makes up 6 percent of total GDP. As mentioned in the previous paragraph the agricultural sector is accountable for the incomes of about 50 percent of Azeri households, so what more can these numbers portray. Firstly, the GNI per capita rose from 720 in 2002 to 5.330 in 2010 (both amounts in current US $), which is an increase of almost 740 percent in only 8 years. Although growth in GNI declined since 2008, it continued growing significantly with about 10 percent in 2010. However GNI per capita at its current level is still lower in comparison to the amounts in the neighbouring countries Kazakhstan (by sea) and Turkey, both emerging economies as well. When comparing it to some of its export partners, the United Kingdom, The Netherlands and France, it shows that it still has a long road to cover to be considered a developed nation. In Graph 2.1 (below) the nominal GNI per capita in US $ is shown next to the GNI per capita (PPP) with the current international dollar in mind, using these indicators a comparison between Azerbaijan and other emerging economies can be made. The Azeri people have, in comparison to the people of its developed export partners, a better GNI when it comes to purchasing power. As the UK and The Netherlands show a lower GNI per capita in terms of PPP against its nominal counterpart, Azerbaijan has a GNI per capita in terms of PPP of 9.280 against the previous mentioned 5.330 in nominal terms. Therefore we can state that the purchasing power of the Azeri population is higher than that of a citizen of the UK or The Netherlands. Furthermore, when you compare it with the more known developing country China both nominal GNI and PPP GNI are higher. Important when reviewing the income of countries is reviewing the distribution of the income over the population (i.e. income distribution). Considering the equality of this distribution one takes into account the GINI coefficient. Azerbaijan has a relatively equal income distribution for a developing country; their GINI coefficient is 0,34. (World Bank, 2008) Better than compared to their neighbour and fellow emerging economy Turkey with a GINI coefficient of 0,43. In appendix 4 figure 2.2 shows the Lorenz curve for Azerbaijan in 2008, which has been extracted out of the compiled data that can be found in table 2.2.

GNI per Capita (nominal in $) GNI per capita, PPP (current International $, 2010)

Graph 2.1: GNI per capita: Nominal v. PPP Source: World Bank

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3.0

SECTION B: AGRICULTURE IN AZERBAIJAN

In section A it is mentioned that agriculture is important for the people of Azerbaijan, in terms of the country’s GDP it is the third most important sector after the oil and construction sector. In terms of employment it is the most important sector. It needs to be stressed that this sector generates the primary source of income for half of all households in Azerbaijan, it employs a considerably larger part of the population compared to the oil sector; about 40% against 2%. (Oblitas, 2011) Graph 3.1 GDP structure of Azerbaijan in 2009

The sector has enjoyed large privatizations during the past two decades, being that in the Soviet era all farms were public, resulting in 99,98% of farms being private as of 2006. By doing this the government made an important step towards a more commercialized and free farm market. (Shikhaliyev et al. 2011) Attention of the government for this sector has grown since 2005; however it is still relatively abaft in comparison to the oil sector in terms of public investments. The government’s focus slightly adjusted when the global crisis (i.e. the Great Recession) hit the developed world, having a large impact on the oil sector stressing the importance of non-oil sectors (e.g. the agricultural sector) for the development of the country’s economy. In order to make its economic development more sustainable, it is clear that the country should make a transition to rely more on the agricultural sector. Bearing in mind that the agricultural sector employs most of the Azeri work force, this sector combined with the Agri-business sector are of great importance to this sustainable economic development. Next to the influence of the global crisis and the fact that the agricultural sector supplies a lot of labour, oil and gas reserves are not likely to last forever and the yields of this sector will inevitably decline. Therefore, this particular sector could take over and play a greater role in the future development of the country. (Oblitas, 2011; Shikhaliyev et al. 2011; Sutton, 2005) In 2009 the Agricultural sector together with the agro-industries sector accounted for 35% of non-oil value added, furthermore it had a 30% share in non-oil exports. An important fact as well is that due to agricultural growth poverty rates declined over the past two decades, especially in rural areas. (Oblitas, 2011) Agriculture has a lot of potential and could be generating a greater portion of the country’s GDP. Yields have improved over the past decade, but are still relatively low and have a good scope for increase. Further potential is found in the wide variety of climates available in the country; on top of that it still has a great portion of land which could be used for a wide range of cultivating crops. Diversification from food crops to higher valued cash crops, like fruits and vegetables, has already begun since a couple of years. Yields in the horticultural sector have increased. The horticultural sector (producing fruits and vegetables) has a great comparative advantage over its neighbouring countries; however it is yet to be living up to its full potential. The potential of this sector is constrained, however. After the privatization a lot of farms, about 870.000, and new farming families came to play. These so-called neophyte farmers had insufficient knowledge, being used to a collective system, on cultivating a diverse range of crops. On top of that the access to credit and a lack of agricultural advisors at the start of this new free agricultural sector

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have led to this constrain. (Sutton, 2005) In order to develop properly all these services needed to be created and this takes time and significant investments, by the government or by foreign investors. Since the government did not focus on investing in this sector sufficiently, as it had the oil-sector, especially in the years preceding the global crisis. Only 3, 5 % of the state budget was invested in the sector in the years 2005-2006. The sectors was relatively left behind by the government and although FDI was flowing into the country these investments were primarily focused on the oil-sector as well, with only 1% of FDI being invested in the agricultural sector in 2006. (Oblitas, 2011) Since these investments were far from satisfactory a further inflow of FDI in the agricultural sector even declined during the years 2008-2010. The positive effect of the global crisis, however, was that the government realized more and more the need for stable non-oil sectors like the agricultural sector. Having to worry about the declining share of GDP of the oil sector it shifted the focus to this sector. Another constringent is seen in the poor economic infrastructure in large parts of the country. The lack of quality infrastructure and only recently developing agricultural services since the beginning of the 21st century is still holding back the progress of agricultural firms. Besides the insufficient investments of the government in both the agro-sector as in economic infrastructure, a clear agricultural policy has been inappropriate over the years. A recent policy set out by the government in 2008 puts limits on discussions on an appropriate strategy and is mostly directed on the supply side of the sector, not on investing in knowledge for farmers and other necessary aspects. Furthermore this most recent policy does not prioritize or connects utilitarian actions for sustainable development in the sector. Once produced cash crops need to be exported for a great part, however also export over borders is made hard by complex government procedures and regulations. In order to export a product a frim needs to complete nine documents taking up to 43 days to process. Furthermore the cost of one container is about $3.000. (Oblitas, 2011) Because of these complexities opportunities for rent seeking are created. The products of agriculture are vulnerable to these barriers to trading over borders. In order to create a more competitive advantage over neighbouring countries, like Turkey for example, who has a flourishing export market for agricultural commodities (both organic as wel as conventional agricultural commodities) since the 1980’s. (Burger, 2012) In the case of Azerbaijan, the export of agricultural commodities will need to be simplified (i.e. extortion of these trading barriers) in order for the sector to live up to the role of being a shoulder in the future forty-fold increase in non-oil exports of the country in order to make up for the declining oil revenues. Which indicates that the developing this sector is a critical need for the development of the economy of Azerbaijan. In order to develop properly there are solutions that need to be brought to the table [of the government] in order to boost productivity in the sector. Solutions are necessary in general with creating a better and more active policy for the sector. New actions within this policy could consist of an increase in Agricultural education for Azeri farmer families. Further actions could be found in simplifying exports of the commodities, thereby leading to higher export revenues for agricultural commodities. Evidently, investments in adjacent sectors like agri-business and economic infrastructures are of equal importance. The World Bank has made up a project plan which could be implemented in the country in order to enhance productivity which will lead to a more developed agricultural sector. (World Bank, 2008) Solutions brought forward by this plan are, next to the previous mentioned solutions in other words, focusing and monitoring the current lending program; facilitating investments both from the government as from foreign investors. In conclusion, this sector could mean a lot to the country’s economy, both now and in the future. Once the necessary changes are made to policy’s and a clear action plan is set up, the sector could flourish and become one of the most important sectors for the country’s GDP both now as well as in the future.

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4.0

APPENDIXES

Appendix 1

Table 0.1: Relevant numbers

Relevant Development Indicators: Azerbaijan 2006

2007

2008

2009

2010

2011

34.5

25.1

10.8

9.3

4.3

1.8

20,981.9

33,049.4

48,851.3

43,019.9

52,098.1

53,018.4

8.4

16.6

20.8

1.5

5.5

6.0

Exchange rate (per US$)

0.89

0.86

0.82

0.80

0.80

0.80

Lending rate

17.9

19.1

19.8

20.0

20.8

-

Life expectancy male (years)

69.6

69.7

70.0

70.4

70.6

70.9

Life expectancy female (years)

75.1

75.1

75.3

75.6

75.8

76.0

9.7

9.6

9.4

9.0

8.7

8.5

99.3

99.4

99.4

99.5

99.5

-

HDI

-

-

-

-

0.730

0.731

HDI Ranking (Category: High Human Development)

-

-

-

-

76

76

GDP (% real growth) GDP (US$ millions) Inflation (% change)

Infant mortality (deaths per '000 live births) Adult literacy (%)

Appendix 2

Table 2.1: GNI per capita: Nominal (in $) v. PPP (in international $)

Table: GNI (2010)

GNI per Capita (nominal in $)

Rank

Azerbaijan China France Kazakhstan Iran* Netherlands South-Africa Turkey Turkmenistan United Kingdom *2009 Data

5.330 4.270 42.390 7.590 4.520* 49.050 6.090 9.890 3.790 38.370

96 107 25 78 103 14 89 68 114 30

Leonard Burger

GNI per capita, PPP (current International $) 9.280 7.640 34.440 10.770 11.490* 41.900 10.360 15.176 7.490 36.410

Rank

81 93 20 77 70 9 79 54 94 18

Source: World Bank

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Appendix 3

Table 2.2: Income Distrubution Data (2008)

Income Distribution Azerbaijan 2008 Lowest Second Third Fourth Highest

% Population 20 20 20 20 20

Appendix 4

% income 7.99 12.09 16.16 21.68 42.08

Income/Population C % Population

C% of Income

0.3995

20

7.99

0.6045

40

20.08

0.808

60

36.24

1.084

80

57.92

2.104

100

100

Figure 2.2: Lorenzcurve Azerbaijan

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BIBLIOGRAPHY Burger, L., 2012. Organic Agriculture in Turkey, Netherlands Agri-Business Support Office: Izmir, Turkey De Waal, T., 2004. Black Garden: Armenia And Azerbaijan Through Peace and War, pp. 286.New York University Press: New York. GlobalEdge, 2012. Azerbaijan. [Online] Available at: <http://globaledge.msu.edu/countries/azerbaijan> Accessed on: 28 March 2012 Indexmundi, 2012. Azerbaijan â&#x20AC;&#x201C; Income Distibution. [online] Ava Oblitas, K. R., 2011. Promoting Azerbaijanâ&#x20AC;&#x2122;s Agricultural Productivity, World Bank: Washington D.C. Pope, H., 2006. Sons of the conquerors: the rise of the Turkic world. pp. 116 The Overlook Press: New York Schulze, R., 2000. A Modern History of the Islamic World. I.B.Tauris: London, UK. Shikhaliyev, K., Ismayilzada, O., Khalilov, S., 2011, Agricultural Sector of Azerbaijan, ISE Tbilisi State University, Tbilisi, Georgia Sutton, W. et al, 2005, Azerbaijan Agricultural Market Study, ECSSD & The World Bank, Washington D.C. Swietochowski, T., 1995. Russia and Azerbaijan: A Borderland in Transition. pp. 69, 133. Columbia University Press: Columbia, USA. Todaro, M.P., Smith S.C., 2011, Economic Development, 11th Edition UNDP, 2012. Human Development Report: Azerbaijan, United Nations Development Programme, HDR country series, [online] Available at: <http://hdrstats.undp.org/en/countries/profiles/AZE.html > Accessed on 26 March 2012. World Bank, 2008. Helping to Transform Agriculture in Azerbaijan, [Online] Available at: <http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20068171~menuPK:3536984~ pagePK:34370~piPK:34424~theSitePK:4607,00.html> Accessed on: 26 March 2012

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Development profile of Azerbaijan - 2012  

A brief profile of the development of Azerbaijan, with a short analysis of its agricultural sector. Prepared for the Development Economics m...

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