Transitional Economy of Azerbaijan - Research Paper Example

Transitional Economy of Azerbaijan Table of Contents Introduction 3 Thesis Statement 4 Economy of Azerbaijan 4 Economic Reforms and State Programs 6 Privatization 7 Land, Ownership and Trade 8 Foreign Investments and Joint Enterprises 9 Banking System, Taxation, State Oil Funds of Azerbaijan 11 Challenges and Successes Development and Transformation 13 Objectives and Approaches 14 Decrees of the Corruption, State Reforms on Bribery 14 Transparency 15 EBRD's Transition Report on Azerbaijan 2011 15 Conclusion 16 17 Works Cited 18 Introduction The transitional economy is a kind of economic system which is currently identified to witness a continuously developing phase altering from being highly centralized towards the construction of a free market structure. This transition can be identified referring to the implemented economic regulations planned for the development of an economy over a certain period of time. The transitional economic system is a complex approach that comprises stabilization of government outflows, liberalization of economic activities and personalization of the governmental organizations as well as internationalization of the economic system practiced within the nation (Babic, 2000). One of the transitional economic systems can be identified as the currently practiced structure of Azerbaijan which legitimately began with the execution of ‘Law on Basic Economic Development’ since the year 1991 followed by the commencement of ‘Cost of Liberalization’ in the preceding year 1992. This transition escorted to hyperinflation rates in Azerbaijan which was recorded to be approximately 1.66% by the end of the year 1994. Subsequently, since, 1991 to 1994, the national income of the country had to witness a steep decline from USD 35,006 millions (in 1991) to USD 1.031 millions (in 1994). The radical decline in the growth rates was further learnt to have a crucial affect on the agricultural and industrial output of the country which consequently increased the rate of unemployment within the economy (Baranick & Salayeva, 2005). Thesis Statement The objective of this paper is to focus the economic conditions prevailing within Azerbaijan with due significance to its economic reforms and state programs. Moreover, the paper will also reflect on the privatization of the organizations, land ownerships and trade facilities as well as joint enterprises of the country. The major challenges as well as successes that were witnessed by the government in the transformation period of declining national income will also be taken into the consideration in this discussion. Economy of Azerbaijan The economy of Azerbaijan was able to retain its growth since the year 1995 after witnessing a substantial decline in terms of its income level as well as its overall industrial output. The reforms in the economic conditions have taken place in the year 1995 when the government attempted to set up a widespread stabilization approach in its economic system with the support of International Monetary Fund (IMF) with respect to its Systematic Transformation Facility (STF). The increasing growth of the economy was immensely supported by the country’s persistence towards the stabilization of policies within the private and governmental institutions. As well as the IMF, The World Bank, the Asian Development Bank (ADB), and the European Bank for Reconstruction and Development (EBRD) have been identified as a few of the major prominent financial contributors in the developmental process of the economic conditions in Azerbaijan. With regards to the forecasting view of IMF towards the development of the country, it had been projected that Azerbaijan is quite likely to attain a sustainable growth rate of around 7.1% by the year end of 2012. It was also assumed by IMF that the inflation rate, likely to be witnessed by the country in its progress during 2012, would be around 10.3% (Mirzeyev, 2012). The increase in the growth rate of the economy during the period of 2006-08 was further learnt to be with the virtues of the country’s large quantity reserves of crude oil and its increasing export level. In the similar context, the other non-export resources such as, the various financial institutions including banking, construction and real estate sectors have also contributed by a large extent towards a higher growth in the Azerbaijan economy (USAID, “Country Profile”). In its economic measures, the government initiated the State Oil Fund of Azerbaijan (SOFAZ) in the year 2000 under the authority of the President being directed by his proficient committee. The primary objective of SOFAZ is identified to be directed towards the effective utilization of the resources with due emphasis towards the accomplishment of its agreements based on oil and gas development and exploration along with production distributions in the international market. It is worth mentioning in this context that despite of the fact that although the leading resources in terms of crude oil comprise the essential tool for economic development in the country, concentrating on a single trade sector can jeopardize the development of the other existing sources which in turn is likely to hamper the overall growth process within the economy. Notably, according to the present day context, the agricultural divisions are able to currently contribute only 14% in the Gross Domestic Product (GDP) measurement of Azerbaijan (International Monetary Fund, “Azerbaijan Recent Economic Developments”). Economic Reforms and State Programs The implementation of wide ranging economic reforms of Azerbaijan was taken into consideration following measured initiatives to encourage the diversification in terms of the domestic economic resources, particularly in the agricultural, telecommunication as well as the tourism sectors of the country. Notably, the considerable economic reforms were put into practice in the year 2007 and 2008 which played a crucial role to develop Azerbaijan as one of the major reforming nations by the end of the year 2009 as was declared by the World Bank (European Commission, “Development and cooperation – Europe Aid”). However, the reform process of Azerbaijan has been identified to decline since last few years in comparison to the growth rate attained during the period of 2007 to 2009 (US Department of State, “Background Note: Azerbaijan”). On the other hand, the state program with regards to development of the economic growth statistics in Azerbaijan has been identified as a determination of the economic reforms executed in the year 2007 within the country (Cambridge Resources International, “2011 Program on Investment Appraisal and Risk Analysis”). The main objective of the state program activities were concentrated on the development of the prevailing socio-economic conditions in Azerbaijan which conveyed the statistical information through the national indicator system focusing on the economic reforms being conducted within the country. It is in this context that the major executions of the state program activities since 2008 to 2012 rewarded several accomplishments to the economy such as, enhanced convenience of availing statistical information and simplicity of the method of examining growth indicators for all users It was also advantageous to motivate broader use of International Statistical Standards and development methods using of modern scientific methods in the process. It further facilitated the dissemination and storage of the social economic developments with the assistance of the modern Information and Communication Technology (ICT) along with the enhancement of the privacy standards (Aliyev, “Confirmation of the State Program on Improvement of the Official Statistics in the Republic of Azerbaijan in 2008-2012”). Privatization The privatization of the state possessions in Azerbaijan instigated with the agreement of State Program during the period of 1995-1998. The program approved a large collection of privatization movements intended towards the transfer of the enterprises’ proprietorship as state ownership of the small organizations. With this reform, it was estimated that approximately 15% of small enterprises operating within the economy were offered for sale to the privileged members, whereas, about 85% were set out in the course of auction sale. In the year 1997, the government of Azerbaijan commenced an initial step, known as Voucher Privatization, with the intention to privatize the large and medium firms of the country (Ministry of Economic Development, 2003). Moreover, the formation of Farm Privatization Project (FPP) took place in the year 1997 which certainly had an effect on the agricultural development of Azerbaijan. The FPP focused on the agricultural farm privatizations along with other supports to facilitate the rural population in order to enhance their sustainability (Thurman, 2004). Land, Ownership and Trade A radical implementation of land reforms in the Azerbaijan was identified to take place in the 1990s. With respect to its commencement of private ownership of land, the economy was considered as one of the earliest nations among the past Union of Soviet Socialist Republics (USSR). In the similar context, the policy of land ownership was also implemented with focus towards the regulation of free trade and transfer of ownership of the land along with issuing the larger part of land to its inhabitants. The commandment of privatization of lands was based upon three basic rights, i.e. ownership, lease and use of land. Furthermore, according to the recent agreement, the ‘Law on State Register of Immovable Property’ is associated with the establishment of rights in property, along with the reassignment and execution of those property rights (Consulate General of the Republic of Azerbaijan in Los Angeles, “Acquisition & Ownership of Land and Property”). In the perspective of trade activities and facilities in Azerbaijan, it can be observed that the country was able to achieve significant growth in its economic structure. The enormous performance of the export sectors of oil and natural gas also played a vital role in triggering an adequate rate of economic enlargement along with the satisfactory changes in the macroeconomic parts of Azerbaijan (Azerbaijan Export and Investment Promotion Foundation, “Land & Property”). According to its economic structure of 2011, the country has been estimated to witness a declining GDP rate of USD 57.8 billion along with a GDP per capita income of USD 13,044, witnessing an inflation rate of 8.1%. Contextually, the real GDP growth rate was estimated as 1% in 2011 in comparison to 5% in 2010 and 9.3 % in the year of 2009. The export divisions of the country majorly concentrate on the petroleum and natural gas, crude oil, ferrous metals along with agricultural products where the contribution generated from the total exports was accounted to be more than USD 26.57 billion in 2011. Based on the large contribution of exports, the major resource industries of Azerbaijan included petroleum and natural gas, oilfield equipments, petroleum products, steel products, as well as chemicals and petrochemicals. Furthermore, the efficient trade relationship with the foreign countries including Russia, European Union, United States, Germany and Italy has encouraged significantly in order to vitalize the status of Azerbaijan (US Department of State, “Background Note: Azerbaijan”). Foreign Investments and Joint Enterprises The government of Azerbaijan has formulated various significant steps to encourage the foreign investors in its massive oil and natural gas resources which have been termed as a major motivating attribute towards the investment portfolio of the foreign investors since the year 1995. The foreign investment of the country has been controlled by a number of international settlements which was entirely controlled by the government with the assistance of the enforced household legal acts such as, ‘Law on the Protection of Foreign Investment’ which was enforced in 1992 and ‘The Law of Investment Activity’ which was implemented in the year 1995. ‘Privatization Law’ in the industrial sector as well as commandments of standardizing other various sectors also played a contributory role in this regards (Bagirov, “Azerbaijan’s Oil Revenues: Ways of Reducing the Risk of Ineffective Use”). The foreign investment policies of the country consents to facilitate trade as well as any investment activities of the investors through joint enterprises including government, international organizations and foreign trading units. It is worth mentioning that the ‘Foreign Investment Law’ of Azerbaijan attempts to facilitate various forms of investment such as the opportunity to trade in a shared basis with the legal entities of the country or citizens of the Republic Azerbaijan. The regulation also facilitates the foreign investors to trade in an isolated manner. One of the major opportunities that have been provided by the commandment indicates that the foreign investments can be accomplished with the purchase of enterprises, properties, bonds and shares of the Azerbaijan following feasible laws and conditions accumulating the foreign trade policy of the country. Acquirement of the natural resources along with other right to assets through joint enterprises, have also been legalized by the legislative bodies of Azerbaijan to the foreign investors. Moreover, the agreement also assures that the foreign investors will also be able to deal with further foreign investment activities within the country (Baker & McKenzie, “Foreign Trade and Balance of Payments”). Banking System, Taxation, State Oil Funds of Azerbaijan The banking sectors of Azerbaijan have been observed to deliberately attempt towards forming a better financial structure, especially since last three decades. The modern banking system of the country focuses on the aspect of globalization preserving a vital coordination among the institutions for transparent and efficient transaction with regards to the financial activities. However, the present scenario of deregulation and internationalization in the banking systems have been observed to generate new opportunities as well as risks for the financial institutions (Asadov, ‘Banking Industry in Azerbaijan an Overview”). The modern banking system of Azerbaijan offers a broad array of financial services which majorly include investments, payments, insurances, and pension plans along with e-banking and other facilities for both national and international customers (Aghayev, & Kyrmizoglou, “The Current Structure and Problems of Azerbaijan Banking System”). Moreover, the taxation system of Azerbaijan instigates two kinds of regimes which can be identified as the Statutory Tax Regime of Governmental Tax Code and Production Sharing Agreements (PSAs). The Statutory Taxation System of Azerbaijan involves a fundamental framework for the frequent activities, such as property tax, Value Added Tax (VAT), personal income tax, profit tax, road tax and other similar tax charges. In addition, the PSAs system of the country concentrates on prevailing and required conditions of taxation rules. The PSAs also instruct taxation rules for the foreign sub-contractors who are executing or rendering products/services associated with the governmental bodies in Azerbaijan (Deloitte Global Service Limited, “Azerbaijan Highlights, 2012”). Furthermore, the State Oil Fund of the country can also be identified as one of the major taxation systems which accumulate a large percentage of revenue from the execution of oil and natural gas trade operations in Azerbaijan. The funding program was introduced in order to proficiently deal with the oil and gas trade earnings of the economy along with to empower the resources for the rapid development of Azerbaijan’s socio-economic divisions. The fundamental aims of the State Oil Fund are principally focused on the basic drivers of economic growth in the country, such as the continuation of macro-economic stability, confirmation of yearly tax guidelines, reduction of dependence on oil revenues and inspiration towards the development of non-oil sectors. Moreover, the fund also focuses on presenting inter-generational parity maintaining the results of oil exports for future development of the country (Deloitte & Touche Limited Liability Company, “Guide on Taxation and Investment in Azerbaijan”). Challenges and Successes Development and Transformation The major challenges faced in the economic expansion of Azerbaijan were majorly related to its economic downturn that can be identified in terms of real GDP rate. The real GDP rate of the country was recorded to be 5% in 2009 which illustrated a declining phase in comparison to the GDP growth rate accrued during the period of 2005 to 2008. However, the country continues a course of developing liberal market along with encouraging entrepreneurship programs which significantly assisted the economy to place itself in the world market by adopting various developmental guidelines in order to access the World Trade Organization membership. It was owing to the virtues of these developmental guidelines that the economy was able to decelerate the pace of inflation rate which in turn attributed to the declination of the commodity prices of by the year 2009 indicating another success factor of Azerbaijan (International Finance Corporation, “Azerbaijan and Central Asia MicroFinance Transformation Support Project”). Objectives and Approaches After the economy achieved its independence in the year 1991, Azerbaijan had to face several limitations in terms of fragile financial structure, lack of transparency and weak economic policies owing to the downfall of the USSR. This resulted in a massive decline of its economic growth rate by the year 1994. However, the global economic scenario in the similar period was witnessed to develop at a rapid pace with innovation and technology advancements. Therefore, in order to gain a global position in the international platform among other developed and developing countries, Azerbaijan focused on its transition. The implemented economic reforms in terms of privatization, land ownership, trade relationship, FDI, and banking were majorly aimed at developing the economy as a prospective international market. Decrees of the Corruption, State Reforms on Bribery The Republic of Azerbaijan is also identified to render immense concentration upon the various issues such as corruption and poor public administration that can have a vital impact on national economic development and construction of market economy simultaneously encouraging investment. Hence, the government has approved a number of international documents with the intention to mitigate the decree of corruption within the country. The legal framework of anti-corruption strategy has been practiced from the year 1994 which involved various legislatives and regulations to prevent illegal conducts in terms of bribery when implementing the economic enlargement programs. The declaration of “On Enhancement of Fight Against Crime and the Strengthening of Law and Order” that presents specific instructions to authorities focused on finding and taking measures against the misconducts within the country (Dumas & et. al. “Legal Assessment: Azerbaijan”). Transparency To preserve its transparency as a transition economy, Azerbaijan has been observed to function through alliances with international bodies such as, WHO and Extractive Industries Transparency Initiatives among others. Apart from implementing anti-corruption and anti-bribery initiatives in the national context, the economy is also focused on ensuring transparency in its international trade relationships. It was in this context that the economy was appraised in the global forefront as one of the first economies to commence its process of transparency providing immense significance to its transparency issues (Cornell, “Azerbaijan since Independence”). EBRD's Transition Report on Azerbaijan 2011 The market-oriented financial system of the banks operating in Azerbaijan expanded after it achieved independence subsequent to the fall of the USSR in 1991. The poor banking regulations of 1990s resulted in the fragile financial structure of independent Azerbaijan fuelling the reason of transition within the economy. The transition report of European Bank for Reconstruction and Development (EBRD) has been focused on two vital situations recently identified within the economy of Azerbaijan. The major circumstances exhibit the ‘Transition Crisis’ that took place in the year 2009 followed by the implementation of various recovery reforms in 2010. The report presents the fact that the prevailing scenario in economic growth of Azerbaijan had to witness a decline due to the diminishing performance of the oil and gas sectors of the country. A major reason for this slow-down in its transition rate, according to the report, can be identified as Azerbaijan’s significant focus on its macro-economic performances. The policy concerning the maintenance of the exchange rate of ‘Manat’ (i.e. the currency of Azerbaijan) with the US dollar was further identified to complicate the abilities of the Central Bank in controlling the inflation rate of the country which was recorded to be 8.3% by the mid of 2011. Moreover, the report published by EBRD also emphasized on the banking sectors of Azerbaijan characterized by the post-Soviet heritage along with its overall confrontation to develop competitive markets with respect to its international trade operations (European Bank for Reconstruction and Development, “Transition Report 2011”). Conclusion It has been observed that the macro-economic sector of Azerbaijan plays a major contributory role in rewarding the economy with a sustainable growth. However, the country should also focus on its micro-economic structure and other persisting non-oil sectors in order to create a balance within the industrial structure of the economy. (Commission of the European Communities, “Implementation of the European Neighborhood Policy in 2007”). The wide ranging development has played a vital role in forming the country’s regulatory effectiveness along with economic diversification focusing on its macro-economic structure and its entrepreneurial environments. However, considerable challenges remain, mostly in the implementation of complete development which is critical to the escalation of economic foundation of Azerbaijan. The country is yet identified to be facing the limitations in terms of protection of the property rights and corruption prohibition along with government obstructions on the monetary stability and foreign investment portfolios which are likely to have a significant impact over stabilizing the growth of Azerbaijan (The Heritage Foundation, “Azerbaijan”). Hence, the country should intend towards providing due consideration towards the prevailing limitations in its macro-economic structure in terms of transparency and largely flexible economic reforms concerning FDI along with maintaining a balance in the micro-economic sector as well. Works Cited Aghayev, Z. & Kyrmizoglou, P. The Current Structure and Problems of Azerbaijan Banking System. Proceedings. 2011. Web 04 June 2012. Aliyev, I. Confirmation of the State Program on Improvement of the Official Statistics in the Republic of Azerbaijan in 2008-2012. Decree of the President of the Republic of Azerbaijan 2007. 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Commission of the European Communities, Implementation of the European Neighbourhood Policy in 2007. Commission Staff Working Document. 2008. Web 04 June 2012. Consulate General of the Republic of Azerbaijan in Los Angeles, Acquisition & Ownership of Land and Property. Home, No Date. Web. 02 June 2012. Cornell, Svante E. Azerbaijan since Independence. New York: M.E. Sharpe, 2010. Print. Deloitte & Touche Limited Liability Company. Guide on Taxation and Investment in Azerbaijan. Taxation and Investment Guide. 2008. Web 04 June 2012. Deloitte Global Service Limited. Azerbaijan Highlights, 2012. International Tax. 2012. Web 04 June 2012. Dumas, C., Jones., B., LaMont, R., & Kvartskhava. K. Legal Assessment: Azerbaijan. Rule of Law. 2000. Web 04 June 2012. European Bank for Reconstruction and Development. Transition Report 2011. Country Assessments. 2012. Web 04 June 2012. European Commission. Development and cooperation – Europe Aid. Country-Cooperation. 2012. Web 04 June 2012. 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