Azerbaijani Economy Worse Than It Was in Azerbaijan SSR

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The Azerbaijani government issues optimistic indicators and forecasts. The President of the country at the meetings talks about the rapid development of the economy. However, simple comparisons of statistics with similar ones in other countries, even with the performance of Soviet Azerbaijan, are simply depressing. This is our interview with the candidate of economic sciences Shahmar Agabalayev.

- State economists claim the annual growth of the non-oil economy. Is it real, when compared with a sufficiently long previous period, so as not to be fooled by short-term success?

- Before answering your question, we will do a brief analysis to back up our conclusions with numbers. We will take the starting point in 2014, the beginning of the crisis. We will look at the further state of industry over the past 5 years. In economic science, this period is considered the most optimal for evaluation. We used the indicators in dollar terms, so that it was convenient to compare with other countries.

Independent experts at the beginning of the oil boom warned of the onset of the Dutch syndrome in our economy and predicted its negative consequences. The government, having an insurance pillow in the form of foreign exchange reserves, considered the situation stable enough and made no effort to change the situation. After the outbreak of the 2014 crisis, with the help of financial reserves, it was possible to keep the situation under control for only one year. Then we had to use unpopular methods to overcome the crisis and look for ways to reduce the dependence of the economy on the oil sector.

Our analysis shows that industrial production in 2018 decreased by 31.5% compared to 2014. At the same time, a 64% decrease was due to a decrease in oil and gas production. But in the last 3 years there has been growth. Compared to 2016, it amounted to 56.3%, and compared to 2017, 19.5%. Accordingly, 86.7 and 90.4% of the growth was due to an increase in oil and gas production. As you can see, over the study period, the decrease and growth occurred mainly due to the oil sector.

If we consider the structure of industrial production, the picture will become clearer. While in 2014 the share of the extractive industry was 68.5%, then in 2018 it was 73.3%, including oil and gas production, respectively, 65.3% and 65.9%. As you can see, the share of these industries has increased, and the processing industry has decreased from 25.1% to 22%, including food production from 7.3% to 6.4%, oil products from 8.9 to 5.9 %, and electricity from 5.7% to 4.1%.

The picture becomes more depressing if we compare the indicators of the 1990 USSR with 2018. The mining industry accounted for 5.3% (in 2018 - 73.3%), oil and gas production 4.8% (65.9%), but the processing industry was at the level of 90.1% (22%), food production - 24.6% (6.4%), tobacco products - 3.2% (0.1%), textile industry - 14% (0.52%), clothing production - 3.8% (0 , 21%), oil refining - 6.9% (5.9%), chemical industry - 5.3%, (1.1%), building materials - 3.2% (1.5%), metallurgical industry - 3.7% (1.3%), production of computer products - 0.9% (0.18%), electrical equipment - 2.4% (0.4%), machinery and equipment - 9% (0, 36%), furniture production - 6.5% (0.23%), and electricity - 4.1%, (4.1%). In parentheses are the data for 2018.

Comparisons show that during this period only electricity production has maintained its position. In other industries, the loss is from 1% to 32 times. We were not even able to increase the share of oil refining. Some types of gasoline have to be imported. We process less oil than Belarus, which has no oil fields. Comparisons show that the industrial structure of Soviet Azerbaijan was several dozens of times better than today. Having increased oil production, we ignored other industries.

-Maybe the situation is not as alarming as we describe? Isn't it more correct to compare the data of the Azerbaijani economy with those of countries similar to us in the Soviet past?

- Consider the indicators of neighboring Georgia and another post-Soviet country - Estonia, whose starting positions were weaker than ours. Here we will use quality indicators since these countries are inferior to us in terms of territory, population and natural wealth. In 2018, Georgia produced $ 1,172 per capita of industrial output, while we without oil and gas produced $ 956. In the processing sector, Georgia produced $ 910 per capita, and we, including oil processing, produced $ 1,046, which is 15% higher. The advantage is not that big considering that oil refining makes up 27% of the processing industry. In Georgia, the processing sector accounts for 77.5% of the industrial structure, which is 3.5 times higher than our level. That is, without oil, we lose to our neighbors.

Now let's compare some figures with the indicators of Estonian industry. The choice of this country is not accidental. It is considered a development leader among post-Soviet countries. And on this example we can show the lost opportunities. In Estonia, 6,836 dollars of industrial output were produced per capita, while we, taking into account oil production, produced 2,804 dollars, which was 2.4 times less. The structure of Estonian industry is more balanced. The share of mechanical engineering is 22.5% (Azerbaijan - 0.36%), woodworking and paper industries - 20% (0.28%), food industry - 16.5 (6.4%), chemical industry together with metal processing - 11% (2.2%), and light industry - 8% (7.9%). If we compare with our indicators (indicated in parentheses), it can be seen that only light industry has parity, while in other sectors the difference is 64%, 71%, 2.5 and 5 times, respectively.

It is best to evaluate the development of the economy by labor productivity. The higher the productivity, the better the availability of funds, the use of advanced technologies and the innovative nature of the economy. In 2017, labor productivity per worker throughout the economy was $ 4.46 per hour, while in Russia it was $ 26.5, and in Estonia - $ 38.4. As we can see, we are even behind the neighboring Russian Federation - 5.9 times, and from Estonia - 8.6 times. It did not help us either that in the extractive industry this indicator is equal to $ 151.6. That is, in other industries this indicator is so low that a high level of oil industry, unlike quantitative indicators, is not capable of correlating qualitative indicators. For example, in agriculture, productivity of ore is $ 0.60, in the processing industry - $ 3.7, and in construction - $ 5.5.

Wages depend on this indicator. The more a worker produces, the higher his salary. Our employee produces $ 802 worth of products per month, while wages may amount to 35% of the value produced, which is $ 281 or 477 manats. In Estonia, one employee produces products per month for $ 6,912, and respectively, wages will be several times higher.

Summarizing the above, we can conclude that the fluctuations in our economy come from being too dependent on the oil sector. The level of production, the price of oil on the exchanges, and changes in the dollar exchange rate strongly affect the gross indicators of the oil sector. That is, in part, the level of the economy is determined not on the domestic market but on international platforms. The volume of production of new enterprises is not yet able to compete with the oil sector. Therefore, with the growth of jobs, a decrease in the total volume of industry may be observed. This is already well understood in the government. This is evidenced by the statement of the Deputy Minister of Economy that the government is dissatisfied with the structure of the economy. Everyone knows that at the present stage, the government rating is strongly tied to economic indicators. For example, the loss of the ruling party of Turkey in large cities in municipal elections and the fall in the rating of power in the Russian Federation occurred due to the deterioration of the situation in the economy, despite the fact that both countries are successful on the foreign policy front. Therefore, recently we have seen a radical change in government and new parliamentary elections started. This can be considered the initial stage of reform. Since the reform itself implies a change in the rules of the game in the market. This will probably happen after the parliamentary elections. We hope that the newly formed young team will be able to change the situation dramatically.

- An illustrative example is with bicycle factories in Ismayilli. A workshop was built with pomp; the President participated in its opening. Then the plant fell silent, and recently it became known that the plant in the Ismayilli district exported 138 units of sports bikes in the third quarter of this year, 53 of which were delivered to the UK. Turan was told about this in the State Customs Committee.

- It is gratifying that our country is increasing the export of finished products in the form of bicycles to the EU. But the volumes are not able to influence the change in the overall picture.

Let's take a closer look at export performance for the study period. Since 2014, this indicator has been systematically declining. In 2015, the decrease was 45.0%, in 2016 - 56.6%, in 2017 - 48.6%, and in 2018 - 9.9 billion dollars or 32.8%. If you look at the structure of all Azerbaijani exports, we will see that it is 92.1% composed of oil products. Dependence on oil exports decreased by 0.4% compared to 2014. And this is despite the fact that during this period, oil production decreased by 8%. That is, for five years we could not produce export products that would partially replace the loss of oil exports. The proportion of other export products is so small that I do not want to concentrate on it. Just note that in the remaining sectors it ranges from 0.1% to 3%. The second line - 3%, is occupied by crop production.

Non-oil exports are only $ 1.6 billion, which is negligible considering the export of neighboring Georgia ($ 3.4 billion). Even if we subtract the export of mining products from Georgian exports (since we subtracted oil production from ourselves), we still get 2.9 billion dollars, which is 1.8 times more than our non-oil exports.

The structure of Georgian exports is more balanced than ours. There 15.3% are mining products. Alcoholic beverages - 14.1%, 13.5% - re-export of automobiles, metallurgy - 12.2%, tobacco and the substitutes - 4.8%, pharmaceutical products 4.8%.

If these figures are divided per capita, then our lag will be more striking, since we surpass Georgia in the population more than two times. Over the years, we have not been able to create products that would be associated with our country. In this matter, we are lagging behind Soviet Azerbaijan, where we had our own recognizable face besides oil. These were BC air conditioners. BC service centers were in 54 cities of the world, taking into account the cities of the USSR, and even in distant Australia. This plant was built in conjunction with Toshiba, an advanced Japanese concern. And now we are investing in the production of cars together with Iran, models of 20 years ago. We are not working creatively, even compared to the Soviet period. At the same time, Georgia is producing, together with an Israeli company, spare parts for Boeing, Airbus and Bombardier aircraft. In addition, they agreed with the Chinese to build an electric car factory. 30% of products of which will be exported to the EU. We are inferior, both in volume and in creativity.

This will be even more clearly seen if we compare it with the indicators of Estonia. Estonia's export is $ 14.4 billion. Of this volume, 29% belongs to machinery and engineering, 13% to wood products, 10% to metals, 8% to food products, textiles - 5%, chemical products - 4%. Estonian exports equal 77% of our oil exports. They achieved this with a population of 1.325 million.

Estonians per capita export $ 10,867 worth of products, while we export $ 2,029, or 5.3 times less. They export food in the amount of $ 1,152 million, and we export it in the amount of $ 90.7 million. It seems that we are a southern country and there should be at least some parity in this segment. Compared to 2014, we have a 3.5-fold decrease in this area. More than 70% of exports are to EU countries, which indicates the high quality of Estonian goods. In Soviet times, there were a lot of jokes about Estonian slowness. But they proved to everyone that they are not like that. Let's also prove that we are really hot guys.