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Mostly unfree economy in Azerbaijan

Politics Materials 22 January 2008 12:04 (UTC +04:00)

Country's ranking in index of economic freedom

The world practice shows that there is no country where rapid economic growth rates have been achieved with low level of economic freedom and where the economic freedom has not brought to economic growth. The economic freedom is being repressed in Azerbaijan and it presents many problems - the foreign experts have come to such conclusion, condemning the index of the economic freedom in the country.

Annually, the Нeritage Foundation and the Wall Street Journal newspaper publish Index of Economic Freedom. Determining the ranking of each country on the bases of 50 indicators, the report draws up the scale of the world economies. The past results of the studies were published last week. The moderate indicator over the world made up in 2008 made up 60.3%. Practically it did not change compared to the last year, but the global economy become 2.6% more free compared to the index of 1995.

The index of economic freedom is being assessed in points from 0 to 100 according to ten indicators: Business Freedom, Trade Freedom, Fiscal Freedom, Freedom from Government, Monetary Freedom, Investment Freedom, Financial Freedom, Property Rights, Freedom from Corruption, Labor Freedom. All countries in the ranking are being divided into five categories: free, mostly free, moderately free, mostly unfree, repressed.

Hong Kong has already been toping the ranking for the 14th time amongst 157 countries, with an index of 90.3%. Gaining more than 80 points, the first group includes six other countries - Singapore, Ireland, Australia, the USA, New Zealand, Canada.

Gaining points from 70 to 80, the list of mostly free countries named 23 countries, including Great Britain, Japan, Germany, Netherlands, Finland, Estonia. The section of unfree countries described 24 countries, including Russia, Venezuela, Belarus, Cuba, North Korea and other countries.

The category of moderate free countries described 51 countries, including Spain, France, Italy, South Korea, Israel, Georgia, Kazakhstan, Mongolia. Some 52 countries, including Pakistan, Brazil, Tajikistan, India, China, appeared as mostly unfree countries, gaining point from 50 to 60.

Аzerbaijan's economy is 55.3 percent free, according to 2008 assessment, which makes it the world's 107th freest economy. Its overall score is 0.5 percentage point higher than last year. Azerbaijan is ranked 18th out of 30 countries in the Asia-Pacific region, and its overall score is below the world average

The report provides general characteristics of the political and economic situation in Azerbaijan and determines key vectors of its economic development. Thus, the report highlights keen position of the country's government in solution of political and economic issues. The experts state that like other countries with mostly unfree economy, Azerbaijan also less follow generally accepted norms.

The 2008 ranking for Azerbaijan has been formed on the bases of statistics indicators for 2007, 2006 and earlier years. Therefore, the conclusions in the report appear as old and biased for the readers.

Business Freedom - 61.6%

The overall freedom to start, operate, and close a business is limited by Azerbaijan's national regulatory environment. Starting a business takes an average of 30 days, compared to the world average of 43 days. Obtaining a business license involves more than the global average of 19 procedures, but closing a business is relatively easy. The lack of transparent regulations and inconsistent enforcement of existing laws remain impediments to investment and entrepreneurial activities.

Trade Freedom - 78.4%

Azerbaijan's weighted average tariff rate was a relatively moderate 5.8 percent in 2005. A weak legal regime, arbitrary customs administration, conflicts of interest in regulatory matters, subsidies, export restrictions for some goods, and customs corruption add to the cost of trade. An additional 10 percentage points is deducted from Azerbaijan's trade freedom score to account for these non-tariff barriers.

Fiscal Freedom - 80.4%

Azerbaijan has a moderate income tax rate and a low corporate tax rate. The top income tax rate is 35 percent, and the top corporate tax rate is 22 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 16 percent.

Freedom from Government - 82.9%

Total government spending, including consumption and transfer payments, is low. In the most recent year, government spending equaled 23.9 percent of GDP. Privatization of small and medium-sized enterprises is almost complete, but privatization of large-scale enterprises has been limited.

Monetary Freedom - 76.5%

Inflation is moderately high, averaging 8.6 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. The government continues to control prices on most energy products and operates a number of state-owned enterprises. An additional 5 percentage points is deducted from Azerbaijan's monetary freedom score to adjust for price-control policies.

Investment Freedom - 30%

Although the government has issued some formal decrees to improve the business environment, its regulatory agencies continue to act non-transparently and arbitrarily. Poor infrastructure also has a negative effect on foreign investment, as does the bureaucratic obstacles that companies face. The government prohibits investments in national security and defense sectors and restricts investment in government-controlled sectors like energy, mobile telephony, and oil and gas. Most investment is driven by the oil and gas sector, aside from which FDI is very low. Repatriation of profits is legal, as are certain guarantees against uncompensated nationalization and harmful legislation. The Azerbaijan National Bank regulates most foreign exchange transactions and most capital transactions. Direct investment abroad by residents, including real estate transactions, requires central bank approval.

Financial Freedom - 30%

Azerbaijan's financial system is underdeveloped but growing. The banking sector is weak and burdened by non-performing loans, but its capital is increasing rapidly. The central bank, independent since 1995, has overseen a process of closures, consolidation, and privatization under which the number of banks has fallen from 210 in 1994 to 43 in 2007. The banking sector is dominated by two major state-owned banks, which together account for about 60 percent of assets; provide financing for most government departments and many of the state-owned enterprises, often at below-market rates; and stunt the growth of private commercial banks. The central bank has raised minimum capital requirements, but many commercial banks are undercapitalized. Foreign banks have a minimal presence. The stock exchange, founded in 2000, is very small.

Property Rights - 30%

The judiciary in Azerbaijan remains corrupt and inefficient and does not function independently of the executive. The poor quality, reliability, and transparency of governance, as well as abuse of the regulatory system and poor contract enforcement, significantly impede the ability of many companies to do business. Politically connected business interests benefit from their control of lucrative sectors of the economy.

Freedom from Corruption - 24%

Corruption is perceived as widespread. Azerbaijan ranks 130th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. The country remains plagued by arbitrary tax and customs administration that creates opportunities for graft, regulatory regimes that favor monopolies, and corruption at all levels.

Labor Freedom - 59.2%

Azerbaijan's labor market operates under restrictive employment regulations that hinder employment creation and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee can be difficult. The high cost of laying off workers creates a risk aversion for companies that would otherwise hire more people and grow. The overly generous unemployment insurance program diminishes the incentive to work.

Azerbaijan's ranking in 2008 ranking significantly improved compared to 2007. However, if to take into consideration the changes which took place in the economy, especially realization of 'single window' principle and measures being taken for Azerbaijan's entrance to the World Trade Organization (WTO), the country's ranking would be much better. It will be testified by the ranking in 2009.

Eight former Soviet countries, Estonia, Lithuania, Armenia, Georgia, Latvia, Kyrgyzstan, Kazakhstan and Moldova also appeared in Azerbaijan's ranking.

Post-Soviet Countries Rank and point Economic freedom
12 (77,8) Mostly free
26 (70,8) Mostly free
28 (70,3) Mostly free
32 (69,2) Moderately free
38 (68,3) Moderately free
70 (61,1) Moderately free
76 (60,5) Moderately free
89 (58,4) Mostly unfree
107 (55,3) Mostly unfree
114 (54,5) Mostly unfree
130 (52,3) Mostly unfree
133 (51,1) Mostly unfree
134 (49,9) Unfree
150 (44,7) Unfree
152 (43,4) Unfree

Source: The Heritage Foundation

Azerbaijan is above six post-Soviet countries, especially Russia which was named in the report with category of unfree country. Compare to the last year, Russia was removed from the list of 'mostly free' countries to the list of countries with unfree economy. The Heritage Foundation is concerned by the level of corruption and interference of the government in the Russian economy.

The assessment by the foreign experts should not be unimportant for us. The Nobel laureate, Douglas Nort, described the ranking on index of economic freedom as best for today, with the analytic presentation of the market economy. In addition, he highlights concrete sides of the economy which need to present to the government for achieving maximal freedom for management. However, it is significant to make own assessment for economic movement of the country. It may be repeated, but exactly avoiding hypertrophied development of the extractive sector of Azerbaijan, which depends on the world conjuncture for the raw material, should be important goal and direction of the development of the country's economy.

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