Lessons of socio-economic policy against the pandemic

The COVID-19 pandemic, which has been going on for up to 4 months, has been affecting the economy in different ways. The pandemic, which has had a negative impact on many sectors of the Azerbaijani economy, has also created new markets for certain groups of economic agents in some areas. The slowdown in the pandemic in some countries has not led to the launch of all sectors of the economy. Although different countries have carried out different programs to eliminate its negative effects on the economy and the welfare of the population, the Azerbaijani government, which has been affected by the fluctuations in world oil prices, along with the pandemic, has chosen its own path. This article looks at the path taken by the Azerbaijani government during the pandemic and presents the following important lessons and expectations of the socio-economic policy pursued to assess its effectiveness.

First, the pandemic showed that the problem of accounting and statistics in the Azerbaijani economy, especially at the level of family farms and micro-businesses, is deep and large-scale. For many years, the country has not created a reliable, accurate database of economic agents and the socio-economic status of family farms before the pandemic.

Second, the government has failed to do much to establish market economy institutions. The insurance sector does not have an effective system to protect business and the population. This system failed to meet the government's obligations to compensate for the damage to the economy, especially business. Thus, the entire financial burden fell on the government.

Third, the weak structure of the e-services portal and the information and communication system that does not meet modern requirements have failed to become a tool to mitigate the negative effects of the pandemic.

Fourth, statistics on health infrastructure and resources do not reflect the current reality. According to official data, 8,031 people infected as of July 3 with the coronavirus have been treated in 30 specialized hospitals so far and hospitals are reportedly full.[1] According to the State Statistical Committee[2], there are 563 hospitals in Azerbaijan. However, on January 22, Ilham Aliyev said at a panel meeting on "Strategic Vision: Eurasia" at the Davos World Economic Forum[3]: "We have built 16,000 kilometers of roads, more than 3,000 schools, and 700 hospitals." Official statistics show that in 2003, there were 738 hospitals. In addition to the existing 563 hospitals, an additional 5 modular hospitals have been built in the last three months, with 500 beds. According to official statistics, there are 44,000 beds in hospitals across the country. This figure is five times higher than the number of people currently infected with coronavirus and receiving treatment. The problem is that the number of beds is inflated, as is the number of hospitals. Because the funds allocated to hospitals are calculated according to the number of beds. That is why hospitals are inflating the number of beds in order to get more money from the budget. As for the funds allocated from the budget, last year's health expenditures amounted to 873.6 million AZN, and this year the budget was planned to allocate 1 billion 369 million AZN for health. The sharp increase was due to the expected introduction of compulsory insurance this year. According to official statistics, as of January 1, 2020, there were 32.5 thousand doctors and 37,630 medical personnel in the country. The number of health workers (excluding doctors), including nurses, is 54,048. So, the number of doctors and health workers is enough. So what's the problem? Apparently, the problem is in the management of resources and corruption in the health care system, and this problem arose before the pandemic.

Fifth, independent decision-making institutions at the local government level in Azerbaijan do not play a role in combating the pandemic. The main reason for this is that administrative and fiscal decentralization reforms have not been made in the country so far. Localization measures at the local level are also centrally managed, so this is not very effective. District executive powers, local executive representatives, municipalities act as executors of decisions from the center in this process. They have no authority or funding to make and implement decisions independently.

At the same time, the following lessons and expectations have emerged from the socio-economic policy pursued so far.

• The government's early opening of the economy further increased the costs of business and the population. Such that large shops, cafes, and restaurants specializing in the sale of short-term non-food products have been subjected to double damage. Although such businesses were partially reimbursed by the state when they were first closed, they were not covered by any economic support the next time they were closed. If this continues, businesses in increasingly difficult financial circumstances will likely be forced to cut some jobs, especially to reduce fixed costs. This will lead to a second and more massive wave of unemployment.
• Agriculture failed to benefit from the government's economic stimulus package because it was not included in the list of economic sectors affected by the pandemic. In fact, during the special quarantine period, the restriction of economic relations between the regions and Baku, the regions and Russia, the main exporter of agricultural products, also created obstacles to the sale of agricultural products. For example, during the special quarantine regime, the transportation of agricultural products to Baku only by trucks put family farms, who transported their products in their own cars, in a desperate situation. Restrictions on Russia's border with Azerbaijan, as well as on Russian markets, have made it difficult for agricultural exporters to sell their goods and have broken the value chain. The lack of an insurance system for agricultural producers suggests that the damage will not be compensated.
• As agriculture is the main raw material base of the food industry, the damage caused by the pandemic, especially to family farms, will create food problems in the future. On the other hand, given that up to half of the population lives in rural areas, and that agricultural producers are mainly from family farms, the loss of most of them will deepen poverty and unemployment in agrarian areas.
• The concept of lump-sum payment of 190 AZN for the social protection of low-income families during the pandemic failed to establish an adequate social protection system to compensate the poor and the unemployed. The  lump-sum payment of 190 AZN, which was provided for the unemployed in the Action Plan[4], and then provided on the basis of low-income unemployment criteria, without taking into account the size of the families, failed to provide social protection for the family. First, most of the restrictive norms applied to its provision deprived the majority of this assistance. According to the Minister of Labor and Social Protection of the Population, 635,200 people were rejected. Second, the recipients were not differentiated according to the number of family members they represented. Such that regardless of the number of family members, only one member of the family was recognized as entitled to this assistance. This cannot be an effective social protection system for large families.
• Despite the different social needs of the regions, the social protection system was not differentiated by region during the pandemic. At the same time, before the pandemic, important indicators such as the number of unemployed, the number of poor, health infrastructure in the regions were not taken into account. In particular, no distinction was made between Baku and the regions. According to the latest estimates of the World Bank, the poverty rate in Baku was 16 percent, while in agrarian regions, it was 24 percent[5]. In short, the general approach was put forward, while the specific approach would be more effective.
• Identifying and meeting the needs of the economy by sectors did not meet the requirements of the pandemic. This was also negatively affected by the fact that expectations about the duration of the pandemic did not materialize. One-time assistance to small businesses was limited to 1 month. Payments to hired employees were divided into two parts and lasted for 2 months. The coverage period of both benefits was less than the duration of the pandemic, and the scope of both benefits was less than the sectors affected by the pandemic. This will lead to the closure of small businesses in the near future, and the reduction of hired employees in medium and large businesses. This is no longer felt, as the administration of the Ministry of Labor and Social Protection of the Population has prevented job cuts in the short term. Such that employees of the ministry, who monitor the reduction of jobs through a centralized electronic system, use various means of pressure on companies to prevent it.
• During the pandemic, since the economic policy instruments of the state focused on solving a number of pre-existing problems (legalization of clandestine employment, shadow economy, improvement of tax discipline, etc.), rather than creating an “airbag” to reduce the negative impact on business and building effective social protection, it was not targeted and effective. Although about 105,000 jobs were registered in the employment system during the first period of the pandemic under the e-permit registration and periodic compensation program, this positive trend was not sustained for the same reasons. In this case, the change is expected to return to the previous level of clandestine employment.
• The Central Bank's monetary policy (accounting rates, regulation of money supply in circulation) was not linked to stimulating aggregate demand and supply. In particular, the closure of 4 banks[6] has had an impact on the withdrawal of deposits from the population, especially in connection with the emergence of new and qualified unemployed. Increased tensions and devaluation expectations in the foreign exchange market due to lower oil prices on the world market played an important role in reducing manat deposits. This, on the one hand, led to a decrease in interest income on deposits, on the other hand, led to an increase in the money supply outside banks and a decrease in the velocity of money. Such that as of March 1, the amount of cash outside banks (M0) amounted to 9,579.2 million AZN. This is an increase of 312.5 million AZN or 3.37 percent compared to February 1. Compared to the same period in 2019, this figure increased by 2,250.7 million AZN or 30.7 percent. This indicates that the potential of the shadow economy in the country is still high[7].

In conclusion, I would like to note that in the current situation, the Azerbaijani government should increase the business incentive package to reduce the negative impact of the pandemic on the economy, should expand the social protection system for the poor, taking into account regional differences, the size of family farms, and the needs of vulnerable groups, and should increase the transparency of expenditures from the state budget, especially in the direction of health.

Furthermore, the social insurance system for the unemployed should cover all the unemployed registered with the employment offices, and the need criterion should be brought to the minimum cost of living in the country. Moreover, the scope of targeted social assistance, self-employment, one-time assistance, paid and social work programs should be expanded and their transparency should be increased.

Gubad Ibadoglu

[1] https://cabmin.gov.az/az/article/920/

[2] https://www.stat.gov.az/source/healthcare/

[3] https://president.az/articles/35647

[4] https://cabmin.gov.az/az/document/4367/

[5] South Caucasus in Motion (English). . Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/614351556553124178/South-Caucasus-in-Motion

[6] https://banker.az/merkezi-bankin-inzibatchi-teyin-etdiyi-4-bank-baglandi/

[7] https://www.cbar.az/page-42/monetary-indicators