BAKU, Azerbaijan, March 6. Slowing economic growth in Europe is affecting Central Asia, limiting the region’s ability to converge with the income levels of the European Union and other advanced economies, said Ivailo Izvorski, Chief Economist for Europe and Central Asia at the World Bank, in an exclusive interview with Trend.
He outlined the key challenges facing the region and Azerbaijan’s path to achieving high-income status.
"The main challenge for Europe and Central Asia is slowing growth. Slowing growth in Europe affects growth rates in our countries, and as a result, convergence—the ability to reach income levels closer to those of the European Union and advanced economies—has dramatically worsened," he stated. "Integration with the global economy has continued, but since both the European and global economies have slowed down significantly, the prospects for reaching high-income status have diminished."
Despite these challenges, Azerbaijan has experienced notable economic growth in recent years, largely driven by the energy sector. "Azerbaijan has done very well in integrating into global markets on the basis of its hydrocarbon wealth. Oil and natural gas have obviously contributed to tremendous economic growth due to the utilization of oil and gas resources," Izvorski said.
However, he emphasized that Azerbaijan's reliance on natural resources alone will not be sufficient to reach high-income status in the long term. "While Azerbaijan is abundant in natural resources, it is not so rich in them that will make it a high-income country solely based on these resources," he noted. "As a result, the economy must transition into other areas of higher value-added production."
For this transition to happen, the private sector must take on a more significant role. "The private sector has to be much more vibrant and much more open to the rest of the world," Izvorski stressed. "Education must improve dramatically, and the efficiency with which both energy and non-energy sectors operate must also improve. Once these elements are in place, and as the authorities continue to work in this direction, these factors will help the country expand its economic potential and move closer to high-income status."
According to the World Bank, countries moving from middle-income to high-income status must undergo two key transitions. "The first is shifting from a model focused solely on investment to one that also emphasizes bringing in foreign technology and expertise," the chief economist explained. "We refer to this stage as 'infusion'—importing and then spreading knowledge domestically. Azerbaijan is currently at this stage of development. It is integrating into the global economy and bringing in foreign knowledge, but largely within the oil and gas sector. Azerbaijan must extend this process to the non-oil sector as well."
The next stage involves fostering domestic innovation. "Before innovation can take root, a country must first successfully absorb external knowledge, develop the necessary skills, and strengthen the capacity of its enterprises to innovate," he said. "It is extremely difficult to bypass or fast-track this stage of technological adoption."
One of the key areas where Azerbaijan can advance its economic diversification is the renewable energy sector. "Renewable energy is crucial for several reasons. First, it helps reduce the energy intensity of the economy, making energy consumption more efficient. Second, it helps lower emissions, which is increasingly important in the global push for sustainability. Third, it facilitates the adoption of newer technologies," he noted.
While renewable energy technology is no longer entirely new, it remains more advanced than many traditional energy technologies. "Once Azerbaijan integrates these newer technologies, its domestic sectors will become much more efficient and adept at using them," he added. "This aligns with the broader concept of technology infusion that we have been discussing."
Renewable energy also plays a crucial role in improving energy security and reliability. "During the construction phase, renewable energy projects require significant capital and labor, which stimulates economic activity," Izvorski explained. "Once completed, they provide more affordable, abundant, and reliable energy. Many countries in the region experience frequent energy interruptions, which create challenges for businesses and households alike. Reducing these interruptions benefits production processes, provides greater certainty to investors, and enhances overall economic stability."
According to WB regional chief economist, Azerbaijan’s shift to renewable energy will also help reduce reliance on fossil fuels. "With more secure and reliable energy sources, Azerbaijan can reduce its dependence on fossil fuels for other energy uses," Ivailo Izvorski concluded.