The government failed to prevent Holland disease (extension)

The government has been looking for the ways to support economic growth in the country. It is hard to fill up the decline of oil incomes – the industrial sector was in negative growth. The production of the services has reached its natural limit. It seems like the new source of growth should be sought in the non-oil industry, agricultural processing and technologies. The government stakes on industrial development and first of all processing field, which constitutes about 14% of the total industrial production. The holdings have opened many agrarian processing plants. But this sector needs new solutions, which could have given an impulse to its development, for instance, meat processing. This would have given a push to the farmers. Successful talks have been conducted with the Dutch companies, which will create the agrarian complex in Beylagan region. We have a lot to learn from them.

When we speak about big plants, we come to think about oil and gas industry. Several successful ideas in the past time include manufacture of methanol, carbamide and polypropylene. These products most likely have foreign market. But the plants need raw material, which will be natural gas. There will be enough gas for the carbamide plant, which SOCAR has been building in Sumgait city. The situation with the new AzMeCo plant is more difficult, because it does not get enough gas. It looks like SOCAR is not going to build the second carbamide plant in Georgia. Georgia demands guarantees of gas supplies from SOCAR, which SOCAR cannot provide now. We talk about the plant worth $700 million. The  need in hydrocarbons must be reflected in the energy balance of the country.

The situation in the metallurgic industry is similar. Since early year Baku Steel Company has taken efforts to seize small and big enterprises in this field and it has managed to do that. But the government has decided to create the state-run company and two years ago it created closed-type joint stock company (JSC) Azerbaijan Steel Production Complex (ASPC), the shares of which are owned by the state. The program of its development includes two directions – production of raw material and final product. It is tempting to replace import in this field – annual local demand in steel and steel products in Azerbaijan – is estimated at $1.3 billion.

Baku Steel Company (BSC) placed information on one of the web sites saying that APIK creation was not advisable. At the same time the state has blocked privatization of Azerboru and Baku Poladtokme. They have been standing idle, but are still controlled by BSC. The main struggle here was for Dashkesan Filisaflashdyrma field. Four complexes are under construction in Ganja city for this field. APIK claims that despite BSC’s opinion, the ore resources in Dashkesan will be enough for at least 100 years. We also remember in the past BSC used the tram rails, which were dismantled in the city, and secondary scrap metal from the Baku plants, which stand idle, as its raw material. Therefore, the main struggle here is not for the market, but for the raw materials. Although BSC claims that it is going to cover upgrade of the equipment. This is almost the first case of competition between two big plants – state and private ones. The outcome is unknown now. Such collisions must be reflected in the State program for industrial development and evaluated in advance. In particular, the similar struggle for raw material between the cement plants has been stopped, now they all have access to raw material.

The second problem for the new industry is the customs. The industry cannot develop, if it lacks preferences for the investment oriented products. Only SOCAR and special economic zone in Sumgait have some preferences. One can hear complaints about the customs everywhere and urgent measures must be taken here. The customs is the key link in the upgrade of the industry.

The appeals to replace import are great, but only on condition if the customs’ doors are not shut. The imported products must have such a correlation of quality and price, so they will be able to withstand competition with the similar products coming from abroad. This is a potential chance to bring this product to the foreign market. This cannot be said about the Sumgait complex STP, which manufactures products for the energy sector or Gilan textile plant, which relies only on issue of products for the state orders or for the big holdings. What is going to happen when number of orders will go down?

It is also unclear why do we need the industrial plants, which work for the warehouses and counts only on the state order. The manufacture of electric appliances in the country is oriented for the warehouses. According to the State Statistical Committee, from January to April 2015 the country manufactured 788 TV sets. The number of TV sets at the warehouse reached 4454, up 5.7 times against the volume of production during one third of the year. The manufacture of refrigerators reached 753, down 21.6% against a year earlier. However, there were 968 refrigerators at the warehouses by that time, up 1.3 times against their manufacture this year.

During one third of the year Azerbaijan electric technical industry increased production by 72.1% and manufacture products to the amount of 32.3 million AZN. Electronic industry (computers and electronic appliances) declined by 43% and manufactured reduced to 8.8 million AZN. Probably, the  number of state orders went down. Mungechaur Kur plant exists exceptionally at the expense of the state orders and campaigns of sale of cheap computers in credit.

It is great to create tax-fee economic zones with ready infrastructure in the country. However, small- and medium-size businesses are not among the residents of such zones yet. There are new rules of the industrial parks and two approaches to development of commercial production. The first one is one the government “invents” new fields and second one is when the ideas come from the independent business. The second one is more preferable, but it requires a special state program, because it is risky to work in the industry, if monopolies exert pressure and there is not access to the financial resources.

Start: http://contact.az/docs/2015/Economics&Finance/060600118496en.htm#.VXgvss_tmko

to be continued