.

How Can Azerbaijan
Diversify Its Economy
Away from Petroleum
Dependence to More
Sustainable Economic
Development?
June
2012
By Nurana Mammadova*

It is known that the "black gold" is the main supplier for the state budget of the
Azerbaijan Republic. Approximately 74% of the state budget derives from the proceeds of oil and petroleum products, and therefore the economy is almost entirely based on the oil industry.
All this warns us against a very disastrous problem. If we have abundant oil resources, it does not mean necessarily that we should generally use only them. After all, the rest of industry, agriculture, services, and so on remain on the sidelines. At the same time, there is potentiality for the development of other economic sectors, namely the agriculture, industry and other sectors. The problem is that as a result of Azerbaijan's economy dependence on oil, we did not pay much attention to the comprehensive development of our economy. And this in turn is negative for the economic development: that’s the reason why Azerbaijan is not able to be classified as a more developed country. In addition, it is known that the GDP index is the economic indicator for the development of a country. In the eventuality that a large part of the
GDP derives from the exploitation of natural resources, this country can hardly be considered as developed. For example, Saudi Arabia's per capita GDP is almost higher than the U.S.’s, but
Saudi Arabia is not included in the list of developed countries. The reason for that is the fact that the overwhelming proportion of its gross revenues comes from oil and its economy is largely one-sided. A similar situation can be seen in Azerbaijan.
It is impossible to deny the fact that there is no attention on this issue. Let us think about the last two years: oil production declined by 9% and the contribution to the state budget did decrease, still representing a very big proportion. This is already a noticeable progress towards solving the problem, but that does not mean that we will be able to fully develop our economy in a short time and gradually reduce the dependence on oil.
In this world nothing is forever, everything comes to an end. Now the "black gold" of
Azerbaijan is able to finance all costs of the country, and we can be not so interested in the development of the rest of the industry. But this will not always be the case, since oil will not last eternally: it is exhaustible natural resources and for its regeneration it needs hundreds of thousands of years. What happens when oil will run out? This would be comparable to losing the family breadwinner. It seems that it portends the future financial difficulties, of course, if we do not take action on time. Our first thought should be about the future of the country's economy. After all, every country is strong, if it has a strong economy that affects its stability as well.
World is governed by money, and money is managed by economists. Economists also build the economic base of the country. So, to solve this problem, much depends on them and they should carefully handle the topic and submit their suggestions for improving the current situation. Before moving on to some ways to solve the existing problems, this essay tries to sketch out its consequences and benefits for the society. This is mainly to prevent public anxiety about the future and present situation of the country. More precisely it is argued that the development of new sectors of the economy would certainly reduce the unemployment rate to a low percent. A successful implementation of the policy could also result in a dramatic increase in the level of education among the population. The benefits for the population may also include higher quality, healthy, environmentally-friendly food. Society would probably provide a wider range of choice of products and services. It is possible to create the conditions thanks to which people would have the right to create new industry sectors, in order to realize their business ideas. At the same time it would improve the environmental situation, which is one of the major factors promoting a healthy society. With a decrease in oil production, the
Caspian Sea environmental conditions would improve, therefore creating the conditions for

breeding more different species of fish. An example: before the intensive extraction of oil, the
Caspian Sea was famous for a large variety of sturgeon.
In this light, we can draw the following conclusions: the measures would increase the employment rate and in addition would contribute to increase equity among the members of society. It should also be emphasized that Azerbaijan could become less dependent on goods and products imported from foreign countries, since we would be able to provide our community with enough goods, products and services. The most important step for the society is to eliminate the "Dutch symptom" in the field of oil production.
This reflects not only the general interest, but it would have the full support by the entire society as well. It's time to move on solving this problem and improving the current situation. This essay presents few suggestions on this issue and they supplement each other.
One of the most important decisions is to give greater attention to the agricultural economy. Looking at the past we should remember that Azerbaijan has been a leader in the wine, cotton, tea sectors and so on. Currently, we do not have enough modern technology, experts and interested people for the development of the agricultural sector. From this point we must begin to address the existing barriers: it is necessary to introduce modern technology, to attract specialists, and to create interest in the field of agriculture among the population. For the first task, the modern agricultural technology that we already have could be used. Secondly about the need for specialists: of course for taking over the experience of developed countries, we could firstly rely on foreign experts, but in the future these experts would come from
Azerbaijan. By closing the large income gap between rural and urban population, it would be possible to create new interest in agriculture among the former population. In order to attract their interest, we must first equip them with the technology they need, not with cash, but with means for agricultural activities. What could they be? Quality seeds, various chemicals and fertilizers, capital goods and other necessary materials. In addition, it is important to issue long-term loans with low rates. State insurance against the possible risk also plays a significant role in this process. We may also implement the Household Production Responsibility System
(HPRS) where families lease land from the collectivity: boosted production incentives this would encourage farmers to reduce costs, push them to take risks and enter new lines of production. This system is used in China.
With all these measures Azerbaijan would be able not only to meet the domestic demand, but also to enter in the global market with raw material supply and finished products, as, for example, does Canada. Azerbaijan, as a developing country, should learn from the experience of both countries with mixed economies and gradually increase its own level of development. Such methods could widely and fully develop the agricultural sector, where revenues in the future would be a normal share of the state budget and would serve as a basis for the comprehensive development of the national economy.
The suggestion is to turn the oil capital in human capital. For example, Japan has no such natural resources, but still it is one of the most developed countries in the world. All this is due to the high-qualified specialists of the state. Almost the entire population with their mental and physical activity contributes to the development of the country, and Azerbaijan can have a similar human capital. It is necessary to invest in training talented students abroad, but on condition that they would then return to their homeland and serve for its full development.
Currently, more than 5,000 Azerbaijani students are being trained in various universities around the world thanks to the government economic support. Many of them, after being returned, do not know where and how to invest their knowledge and experience. The state itself should be in charge of controlling their skills and to make full use of the available human resources, in order to attract such specialists where required.

Finally, the development of services and their maintenance: for this purpose, Azerbaijan has all the necessary conditions and resources, since it is quite ready to welcome a huge number of tourists and to serve them with the highest standards. Let us think of the United
Arab Emirates, which is a country with huge reserves of oil; despite that, it foresees the imminent exhaustion of these resources and understand that it should urgently think about something else. Although being in a difficult position because of not having any soil or climate conditions, they found a way out of this difficult situation: they decided to build a tourist center, a recreation center called Palm Island. The revenues coming from the Palm Island are fully sufficient to fund all costs of such a vast country like the UAE. Azerbaijan should not build more tourist attractions, because there are already many places of interest, natural beauties and recreation centers that meet modern international standards. But perhaps the current prices are not fully satisfying for foreigners or the advertising policy is not fully developed. In any case, solutions are there, with the necessary tools, and it is advisable to use the existing terms and conditions fully.
Currently 17% of the budget comes from the customs duties. This can be considered both as a positive and a negative factor. The Republic of Azerbaijan is not yet a member of the
WTO (World Trade Organization). If it will enter the WTO, it needs to get the status of a developing country (Georgia and Armenia are in the WTO with the status of developed country and they have a 5% customs duty). It is very important for Azerbaijan to obtain this status, because it would then have many privileges, such as 10% customs duty, additional subsidies for the development of the agricultural sector, and some incentives to attract investors for the development of many other industries. As a result, the WTO itself would gradually reduce the dependence of Azeri economy away from oil, toward an economy that can limit the oil production and develop other non-oil sectors. The following indicators are very important for entering the WTO with this status: the big dependence on oil resources, and, secondly, the
Armenian occupation of 20% of the territory of the Republic of Azerbaijan that has certainly a negative effect on the economy. Mainly for these reasons, Azerbaijan has the right to obtain the status of developing country for joining the WTO. The benefits for Azerbaijan would be summarized in the creation of a free market, and reduced prices, an improved products quality, a wider range of products, the creation of competition in the domestic market. This will impact positively and accelerate the steps of economic development.
Of course everything seems easy, but it actually represents a difficult task. Other areas can be shacked since, with a decrease of oil exploitation and the implementation of the above mentioned methods, the state would firstly go through financial difficulties, but these will last only until the full development of other non-oil sectors. This situation is most clear if
Azerbaijan will join the WTO, since the organization would put strict limits on oil production.
On the other hand, in this organization the country would lose partially its independence on economic management, since the WTO will have the general right to intervene in this field.
As a rule, the entry in the WTO entails not only benefits but also some losses for the country. The effects would vary over time: the same players could lose in the short run, but win in the long run. For example, unskilled workers may experience temporary unemployment that would emerge in the industry sectors if affected by intensified competition from outside, but in the long term they can win if the same industry will be able to rehabilitate and become stronger than before. The benefits of a WTO membership are generally divided into three categories: 1) the strengthening of the national economic system, 2) the access to the mechanism of solving trade disputes, and 3) new opportunities from international trade. (CA&CC Press®AB, Sweden
1998-2010)
All the methods proposed in this essay are interconnected and in order to achieve an effective result in a short time, it is better to apply all of them. But before any steps toward

reducing economic dependence on oil, Azerbaijan should use its oil revenues to create the foundations for the future development of other industries. In a nutshell, the state should create a gradual transition from the oil sector in non-oil sector, in order to avoid "shock therapy".

References CA&CC Press®AB, Sweden 1998-2010, AZERBAIJAN ON THE WAY TO THE
WTO: A LATE, BUT SAFER, 2012 (http://www.ca-c.org/c-g/2007/journal_rus/c-g-
3/05.shtml, access data May 2012)