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Development phases III. Topical tasks

Business Materials 27 November 2015 12:01 (UTC +04:00)
The author sees two positive scenarios for Azerbaijan’s development in the post-oil period.
Development phases III. Topical tasks

Expert Farhad Amirbayov

The author sees two positive scenarios for Azerbaijan's development in the post-oil period.

The first scenario: The country's elite manages to define the main vectors of development in a short time and to ensure the country's specialization within the world division of labor. In this case, Azerbaijan remains an independent player on the international arena.

The second scenario: If it turns out that the country's elite is not able to take the responsibility to form and realize the first scenario, Azerbaijan will have to find a partner country or a group of states with common economic interests. For example, following the collapse of the USSR, the European Union became such a partner for Central and East European countries. This choice was made taking into account such factors as history, similar values and common borders.

Given Georgia's unsuccessful experience of integration with the EU and NATO, as well as the lack of common borders between Azerbaijan and the countries participating in the western development project, as well as the lack of the sea border ensuring the access to the World Ocean, Azerbaijan has three vectors for realizing this scenario: integration (but not amalgamation!) with Iran, Turkey or Russia. Moreover, it is necessary to take into account that the political priorities in the world are gradually moving from the economic to the security sphere.

With Russia's joining the war in the Middle East, Azerbaijan found itself in the strategic rear of its three great neighbors. As a result, the Azerbaijani elite faced time shortage.

Another factor accelerating the developments is the dramatic decline in oil prices and decrease in its production in Azerbaijan. The foreign exchange reserves accumulated in the State Oil Fund of Azerbaijan are running out.

Apparently, it is impossible to fulfill the topical tasks of Azerbaijan only within the economic discourse. There is a need for public discourse, consensus among the elites, business and society in new realities and decisions that will create opportunities to start the new long-lasting cycle of economic growth.

This growth can be low, but sustainable and most importantly, it should change the country's specialization on the world market of labor division.

To realize both of the scenarios, the country will need capital considerably exceeding the total volume of capital of the State Oil Fund and the population's savings.

There are two main options for resolving the problem with capital shortage:

1. Borrowings

2. Investments

In the first case, the state and national companies borrow resources in foreign currencies on foreign markets and invest them in Azerbaijan. Foreign creditors will require a guarantee from the government for repaying the investments. Foreign creditors understand that the allocated loans are secured on government reserves and the total export revenues. This strategy can be implemented. However, it implies that the debt burden will rapidly grow and there will be need to give the government even more economic and administrative power. In this case, the economic efficiency of investments will be questionable.

In the second option, the reserves of the Oil Fund cover part of the risks from the foreign investors which make investments in Azerbaijan's economy (5-50 percent of the volume of investments). Thus, we will get a multiplier effect, so-called leverage that will enable to attract investments to the country in the volumes several times higher than the funds of the State Oil Fund. It is a way of sharing the risks between the two partners - government and business. In turn, the investment process will become more intense in Azerbaijan and the non-oil export demanded on the world market will grow.

When choosing any of these two options, it is necessary to create preliminary conditions for the business. This set of rules is known as the "favorable business climate". In fact, Azerbaijan has no large transnational corporations. The domestic consumer market is very small, therefore, there is no point to pursue the protectionist policy for protecting the national producer. Consequently, Azerbaijan needs to attract foreign corporations which will not only create jobs, but also enable the country to get into the international labor division without increasing the competition.

Meanwhile, many corporations have grown and in fact, have become political actors. They will not only bring new jobs, but will also ensure the growth of export in Azerbaijan. Once they emerge, the foreign politic and economic risks will decrease. Corporations are the guarantors of stability in the country where they operate.

State's role in economy

State's role in the economic life is too big in Azerbaijan. During the period when the state had economic opportunities, when it was actively investing in petrodollars, the state could afford itself to participate in all spheres and to interfere in all issues by controlling, regulating, taxes, licensing and so on.

Yet, it was possible to put up with it. However, the situation has radically changed. The state's economic base has shrunk, therefore, it is not able to ensure high level of investments.

The state's role should change both in the regulatory and taxes sphere and in the financial sphere. For instance, with such expensive and "short" manat (here we mean the cost and term of the available loan in the national currency), it is impossible to start the new investment cycle.

The Central Bank should stop to scare itself and others with the threats of high inflation and create normal credit mechanism for refinancing banks, to saturate the economy with money, thereby changing its oil model into modern and postmodern model (see the previous articles) and, consequently, reduce lending rates and extend the loan terms.

The current financial system doesn't match the economy, where the demand for investment capital is formed. Figuratively speaking, we can't afford the expensive manat.

The global financial crisis has been going on for more than seven years. Low interest rates on foreign markets and a steady decline in revenues from the production and sale of oil, have devalued the principles and restrictions that were the basis for creating the State Oil Fund and other state funds.

Apparently, it is worth of thinking about consolidating the funds and assets of the State Oil Fund, the State Investment Company and the National Fund for Entrepreneurship Support in a single fund in order to attract foreign investment and improve the quality of corporate governance in the national private companies.

State economic authorities can't and shouldn't deal with the issues related to the economic growth and diversification of economy. It is the field of competence of business.

It is time for radical changes in the economic policy and it is time to change the paradigm of the country's development. Meanwhile, the time is ripe for changing the principle of "dependence of the society and business on state" into the principle of "mutual dependence of society, business and state".

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