DEVELOPMENT CHALLENGES
Azerbaijan has emerged as a relatively stable country following independence in 1991. Strong and consistent GDP growth since 1996, peaking at 30.5% in 2006, was propelled by oil and natural gas production, large investments in infrastructure, and new laws regulating the business environment. This impressive performance has enabled Azerbaijan to graduate from “lower-middle” to “upper-middle” income status very recently: the country’s GNI per capita increased from US$2,710 in 2008 to US$5,080 in 2010. Azerbaijan also has a “high” Human Development Index (HDI) of 0.700 and is ranked 91st of 187 countries. Nevertheless, GDP growth has slowed since the onset of the financial crisis, decreasing to 5% per annum in 2010, and development challenges are still present in the country.
Poverty and inequality
According to official figures, the proportion of the population living in poverty has plummeted from 49% in 2001 to 11.2% in 2009. Yet incomes are unfairly distributed spatially and among population groups. Rural poverty is twice as high as urban poverty (except in the suburbs of the capital), with around 30-35% of rural dwellers living under the poverty line and 10% living in extreme poverty. Regional disparities also exist. Women are more vulnerable to poverty, with half living below the poverty line, as are refugees and internally displaced persons (IPDs).
High unemployment and labour migration
Though decreasing, official unemployment still accounted for 6.1% of the total workforce in 2008, but only about one-fourth of the unemployed are registered. Women’s unemployment is also higher than that of men (6.5% compared to 5.6% in 2008), and women are more likely to receive lower relative wages than men. As decent employment opportunities have become scarcer, a significant portion of the population has emigrated to the Russian Federation and other countries in search of work. Remittances from these migrant workers amounted to roughly US$1.2 billion in 2008, representing a significant contribution to the economy.
Skills gap
Given the country’s strong youth sub-population, education is particularly crucial for Azerbaijan. Although the country has achieved nearly universal adult literacy and primary school enrolment rates, enrolment rates in preschool and higher education are low. Access to education is much lower in rural areas than in urban areas at the preschool level (8.6% compared to 27.6%) and at the secondary level for women. Women and children from poor families also have higher dropout rates. Furthermore, there is inadequate teacher training and compensation, and despite significant progress in improving physical infrastructure, adequate learning spaces and essential materials are in short supply. Finally, educational programmes and job market requirements are not aligned, resulting in a pronounced skills gap accentuated by globalization.
Unresolved conflict
Social and economic development has also been hindered by the conflict with Armenia over the Nagorno-Karabakh region. Still unresolved, this conflict can potentially flare up again any time. By increasing political tensions in the region, the conflict has considerably diminished the human capital and social cohesion of the country. Moreover, the conflict contributed to increasing social exclusion and inequalities by generating over one million IDPs and refugees, who are most vulnerable to poverty and unemployment.
Underdeveloped public administration system
Azerbaijan has made significant strides in developing its public administration system, with decentralization beginning in 1999. However, in practice, the country still faces some implementation and transparency challenges. There are ambiguities and gaps in legislation governing the decision-making power of local authorities, as well as a lack of funds and capacities to carry out their responsibilities effectively. Efficient policy implementation is also hindered by the lack of clarity on the division of functions between ministries and different governance levels. Rent-seeking behaviour is also prevalent and undermines the ability of public institutions to fulfil their obligations, while reinforcing existing power relationships and inequalities. As a result, the delivery of basic services is undermined, uncertainties in the business environment are created, and social and economic dimensions of poverty are amplified.
KEY TRADE ISSUES
Overreliance on energy resources, weak competitiveness and low productive capacity
The economy of Azerbaijan is overwhelmingly dependent on the oil and petroleum-based industries, with hydrocarbons, coal and electricity making up over 90% of total exports. However, the country’s oil reserves are declining rapidly, and it is predicted that extraction will reach its peak in 2014. Despite this pressing need to develop other sectors of the economy, non-oil sectors have grown much less rapidly, and they are concentrated on low-productivity jobs, mainly in agriculture, due to the weak productive capacity of enterprises in non-oil sectors. The share of non-oil exports even decreased from 8.8% in 2001 to 3.0% in 2008. As a result of this high product concentration, Azerbaijan is extremely vulnerable to unstable commodity prices and international energy shocks.
Market concentration and WTO accession
The country’s market destinations are also very concentrated: even if commodities are sold to around 140 countries, 60.2% of exports go to only five markets (Italy, United States, France, Israel and the Russian Federation). Non-oil products are mainly exported to the Russian Federation. There is a pressing need to finalize the WTO accession process (which began in 1997), in order for the country to become better integrated into the world economy and diversify its market base.
Underdeveloped physical infrastructure
The remoteness and landlocked situation of the country, which is located far from seaports, limits access to international markets and presents an obstacle to the movement of goods. This situation is further amplified by the poor condition of Azerbaijan’s trade-related infrastructure, including transportation, telecommunications, freight terminals and border crossing facilities, despite increases in infrastructure investments. Moreover, enterprises still use obsolete industrial and agricultural technologies that harm the environment.
Underdeveloped institutional and quality management infrastructure
In terms of institutional infrastructure, the network of trade support institutions (TSIs) is little developed, and existing TSIs have limited capacities to provide the services necessary for enterprises, in particular SMEs, to increase their international competitiveness. The quality management infrastructure is also little developed, leaving few possibilities for local exporters to ensure and to demonstrate the conformity of their goods with international standards.
Limited access to finance
The banking sector is small and little exposed to foreign markets, which has caused a lack of liquidity. High collateral requirements and interest rates, inadequate guarantee schemes, and lack of microcredit hinder access to finance, especially for non-oil-producing SMEs. A large share of financial flows is concentrated in the energy and energy-related sectors. Despite an increase of foreign direct investment (FDI), from net outflows amounting to 14% of GDP in 2007 to net inflows of 1% in 2010, FDI is largely directed at the oil sector and selected non-oil sectors such as construction, telecommunications and services.
Burdensome regulatory and business environment
Ranked 66th of 183 economies for its “ease of doing business”, Azerbaijan faces a need to strengthen implementation and reform of policies and regulatory frameworks to better underpin private sector development. Excessive bureaucracy, inadequate transparency and uneven enforcement of laws characterize the business environment, especially in non-oil sectors. Export/import procedures are also long, cumbersome, complicated and costly. Azerbaijan is among the ten most difficult countries in obtaining customs clearances, which results in long delays and increases the difficulty and risk in conducting foreign trade operations.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the United Nations Development Assistance Framework for Azerbaijan 2011-2015; the 2009 United Nations Country Team in Azerbaijan Country Analysis; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2010 UNDP Aid for Trade Regional Review for the Countries of the United Nations’ Special Programme for the Economies of Central Asia (SPECA): Trade and Human Development; and the 2011 OECD book on Development in Europe and South Caucasus: Armenia, Azerbaijan, Georgia, Republic of Moldova and Ukraine.