Economy Experiencing Stagnation Period

-Rovshan Bey, how do you assess the current situation of the Azerbaijani economy?

-Speaking the language of the theory of economics, the current situation of our economy can be characterized as follows: the economy is experiencing a period of stagnation. This is a period when there is no growth in the economy, or it is very small. That is, the capacity growth does not exceed 1-1.5 percent. According to the results of 7 months of this year, economic growth in Azerbaijan amounted to 0.2%. The fact is that this economic phenomenon lasts for 3 years. After the devaluation, the economy of Azerbaijan does not grow. In 2015, economic growth was about 1%, in 2016 - 3.6%, in 2017 - 0.1%. If we take into account that the growth of about 1% in 2018 will look very real, then according to the results of 2015-2018, real GDP in Azerbaijan is even lower than in 2014. Nevertheless, according to the results of the 7th month of this year, the budget revenues of this year increased by 28%, and expenses - by 19%. And this is mostly due to oil revenues, because the market price of oil in the budget is counted at $ 45. However, the average price of oil is within 70 dollars. This is a rather high figure, and in view of the dependence of the budget on oil, since 60% of the budget is filled at the expense of oil revenues, the current price of black gold does not create problems for budget execution. However, the lack of economic growth, the stagnation of the economy indicates the presence of serious problems in the country's economy. The stagnation of the economy means that both business and households are stagnant. The economy is based on three different entities, which are households, business and government. Households must earn well, they must have high profits, they must work, spend money and produce. This, on the one hand, determines the development in the consumer area. The second important column is a business that must expand, sell products on the domestic market, export goods abroad, take profits, send part of the earned profit as capital to the economy, another part to wages and to the household in the form of social insurance, fulfill tax obligations before the budget, and pay to individual economic entities for raw materials and services received. This, on the other hand, causes the expansion of the production sphere of the economy. That is, if the economy cannot develop, then business and households will stagnate. Characterizing our economy under these conditions, a rather paradoxical situation appears: the two main actors, which are the fundamental pillars of the economy, cannot expand and grow. But the third subject - the government feels very comfortable. And according to the state of the budget, it is clear that the government is best suited, because unlike business and households, the government has a source of income. The government can receive unearned money without spending any effort. It's about petrodollars. Oil, regardless of the will and policy of the government, becomes cheaper and more expensive due to various geopolitical and geo-economic factors in the world. The current price is therefore in the hands of the government, and the manat was twice devalued. If manat were not twice devalued, the current price of oil would not be favorable for Azerbaijan. For example, only in 2018 the government plans to spend about 12 billion manat through the Oil Fund. This is $ 15 billion in accordance with the previous rate of the manat. At an average annual cost of a barrel of oil of 70-75 dollars the annual income of the Oil Fund is about 7-7.5 billion US dollars. Due to the loss of the manat value by more than 2 times, the government has fully insured itself against the risks and problems in the budget and the Oil Fund with funds earned from the devaluation, and now it feels absolutely normal. However, the damage caused by this devaluation after 2015 to business, the banking sector and households is still ongoing. Our current economy has still not been able to recover from the severe blows of 2015 and still is in prostration.

-Experts say that Azerbaijan's economy is built on oil. However, we once witnessed that oil is not a sustainable product. Despite this, why does this tandem continue to take place? Why is the economy still built on oil?

- Here the reason is not economic, but political. Diversification of the economy, elimination of dependence on resource incomes and transfer of a dominant role in the economy to a non-resource economy by resource economy, requires the development of free business and entrepreneurial initiative. Free enterprise is an economic concept, in its essence is an economic institution. However, the institutional conditions required for its development are political. That is, in countries where there is no free political competition, where the government is formed in the absence of alternate, successive elections as a result of free elections competing with one another in the competition of political institutes, in the complete absence of a political system, the development of free enterprise cannot take place. Second, in the period and subject to the presence of political autocracy in the economy, the rapid development of oligarchy elements begins. Pay attention, in Azerbaijan there is practically no medium and small business. The best embodiment of this is the National Fund for Entrepreneurship Promotion. Funds allocated from this Fund in recent years, at best, 10-15% go to small and medium business, and 85-90% - to large-scale entrepreneurship. The share of small and medium-sized businesses in important economic indicators (budget revenues, GDP, etc.) is no more than 3-5%. All these indicators are formed at the expense of large business. This indicates that the national economy is formed at the expense of large business. One reason is this. That is, the government and the oligarchy has never perceived small and medium business as a competitor and did not even feel it necessary. This is not taken from historical books, but seen and experienced. At first this process took place in the system of tourism, trade, construction, and recently this process is going through agriculture. The creation of large agricultural holdings is a vivid example of this. The process of disabling small and medium-sized businesses has always taken place and, in essence, it is a political issue. Because small and medium business is the social base of the middle stratum of the population. Such political regimes as we are, are never interested in the development of the middle stratum, because in the countries where it exists, tough political regimes cannot be formed. They do not allow the development of autocracy due to their resources, and they constantly keep the population ready. The money they earn also goes to the development of civil society through opposition channels, to support households, to eliminate the dependence of people on a rigid political regime. In tough political regimes, free enterprise is impossible. Free enterprise requires a free political system. These are related questions. We have the strengthening of the oligarchy and the existence of a harsh political regime, and this does not let small and medium-sized businesses and free enterprise develop. In a country where such conditions are not available, it is impossible to diversify the economy or develop business based on a non-resource economy.

-The country opens factories and plants. At least, we know about the opening. Or the government takes measures in the agrarian sphere - for example, in cotton growing. Then why cannot we see the results of the measures taken, or see them in the economy?

-If the solution of the issue was so easy, and if it was possible to solve all the problems by opening factories and plants, then there would be no poor in the world, there would not be backward development of the countries. Everyone would solve problems in some form - somebody would find a loan, and somebody would be an investor. It is important that the extent to which new businesses and workplaces open up have competitive ability and productivity. It's not just about the domestic market. The global economy is globalized. Enterprises that are designed for the local market may fail. Someone might think that closing the borders, you can fill the local market with products, because there are no competitors. But how could we close the borders at this level of globalization of trade? Then others will block access to our products, and we will not be able to sell oil to anyone. First of all, we must understand whether we have the opportunity to compete with similar products in the world market. There are two important questions. The first, competitive products can be produced by competitive employees. That is, highly professional, knowledgeable and relevant to the contemporary requirements - we are talking about the formed workforce. If we compare today's labor force in Azerbaijan with one of the European countries, can it prove to be competitive? The question is rhetorical and the answer is known. If you postpone the issue of quality and consider the issue of quantity, today in Azerbaijan only 14-15% of the labor force have a higher education and about the same number have secondary specialized education. A total of two-thirds of the workforce or 70% is with secondary and incomplete higher education. In today's world, this standard is very high. For example, in Israel and South Korea every second employee is a highly skilled worker. The second issue is high technology. Competitive products are formed due to high technology. To create and form this in the country there is a need for a highly specialized employee. Our high technologies must be created by high-level engineers. Our export, together with oil, is about 15 billion. Of these, at least two-thirds must be formed not at the expense of resources, so that our economy will develop and stabilize. We cannot even generate 1.5 billion of exports for a non-oil account. And its significant part is made up of agricultural products that have not been processed and do not have high added value. According to EU standards, products are classified into 4 groups - high technology products, medium high technological products, medium low technological products and low technological products. To date, Azerbaijan can not produce products corresponding to the first two classifications. We belong to the two lower classifications, in particular, to the low technological group. These opening plants should set themselves the goal of producing products corresponding to the first two classifications. It is necessary to study the experience of the oil countries well. In recent years, we often mention Nigeria. Is there still a question - to follow the path of Norway or Nigeria? For example, in Nigeria in the late 80's and early 90's a very large metallurgical complex Aykanut cost USD 5 billion, given the purchasing power of that time. However, the lack of high technological capabilities and not taking into account the potential of competition in the world market led to the collapse of this complex. The economy cannot develop at the expense of enterprises and factories, which at first hold themselves at the expense of state resources and then begin to work inertly for the warehouse. From this point of view, I believe that we must invest in human capital. If the government of Azerbaijan had a pragmatic grasp, then it would have to invest oil revenues entering the country into the economy, engineering, high technologies, and annual training of 1,000-2,000 students in the field of medicine abroad. If this happened, then Azerbaijan would at least export scientific research, computers, and health services to regional markets. The economy of Georgia is three times smaller than ours, but it exports the same number of services. I do not take into account commodity exports. Georgia exports education and health services for almost $ 100 million a year. But Azerbaijan has become a country that imports educational and health services in the region. Our citizens go to Iran, Georgia, or Turkey for training and treatment. And after all, we could invest in human capital from the proceeds of oil, as a result of which we could diversify the economy and advance considerably. Unfortunately, we left a big stage behind, giving up a chance to develop human capital.

-Maybe it's not too late? Maybe we can raise the economy of Azerbaijan ...

- In total, it's never too late. The problem is different. When opportunities are missed, more resources are needed to return them. For example, we could become the main regional market for the export of products and services - whether it's manufacturing companies, or whether it's maintenance companies. However, it seems Georgia has outstripped in this role. In Georgia, work is underway to establish large industrial enterprises. That is, nothing is too late. When we miss our chances and opportunities, they are not missed by others. Then we are experiencing difficulties to correct the situation. We had opportunities in 2005-2014. When the oil revenues amounted to 150 billion dollars, we could turn Azerbaijan into a country with the highest and most developed human capital in the region. Unfortunately, we preferred not "unique" human capital, but "unique" high-rise buildings, and we are proud with the latter and not with the former achievement, and we are also proud with "unique" new roads and the construction of "unique" new bridges. Yes, of course, infrastructure is important and necessary. However, priorities must also be identified. The first place should be for human capital. The government, spending 1 billion on infrastructure, was supposed to allocate 2 billion for education. However, today we see the opposite, including in health care. After all, speaking of human capital, we mean not only education. If a person is not healthy, then it interferes with creativity. Human capital has two sides: a healthy person and a person with knowledge. These are the opportunities we have missed. But I'm not saying it's too late. It should be borne in mind that such opportunities may not exist. Because everyone witnessed how much the price of oil fell. However, there are more pessimistic forecasts for the near future.

-And what do you propose as an alternative? What can be done to break the economy of Azerbaijan from the current situation?

-Our prescription is political. I would like to correct the economy, but the reasons are political. First and foremost, political institutions should develop and a free political system must be created on a mandatory basis, which would be able to accept free enterprise and accept "restricted" for granted. That is, it should be a free political system that creates opportunities, but does not take them away from people. First, there must be an effective executive power in the country. Second, there must be a parliament in the country that controls the executive power and is formed by the people's votes. Third, there should be a free judicial system that would ensure the rights of entrepreneurs and citizens, not oligarchs. If these three wings of power are formed, then a free economic system will be created in the country, and free enterprise will develop. Those who think that under a harsh political regime it will be possible to maintain such a political regime and create economic development with help of a magic wand are mistaken. Do not even look for this magic wand, because there is not any in the world. Sometimes China is mentioned as an example, and this is a gross mistake. First, China is overpopulated - its population is six times that of the US, but the economy is smaller than in the US. The power of the US economy is created by a smaller population. On the production of GDP per capita, the difference between the US and China is 5 times. Second, development in such a tough political regime, as they have in China, has a limit. China has reached that limit. Now the whole question is whether the economy will be liberalized in China or not. For greater development of China's economy and its competitiveness with the US economy, liberalization is necessary. Large profits from oil also came to our country and there was appearance of development - everyone called it development, but in fact it was just growth. We do not make a difference between growth and development. Economic growth is one thing, more characterized by a quantitative indicator. You let big money into turnover as an investment and achieve growth in a short time interval. However, growth does not always mean development. Development is an indicator of quality and measuring its results is an easy process. If the economy develops, this is reflected both in the level of education and in the health of the population. How much highly specialized labor can we put on the world market and how much has the share of high-tech products in our production and exports increased? In economic development, all this should be seen. In the political system, reforms must be carried out, and the conditions must be completely changed. In the customs and tax systems, reforms should be implemented, tax collection mechanisms should be simplified as much as possible, and the tax load should be facilitated. Entrepreneurs should know that if their rights are violated, civil society and media will stand behind it. Business people should be calm before the court, knowing that anyone encroaching on their property will be exposed by civil society and the media. Only in this case, economic development is possible, otherwise you should not waste time searching for a magic wand.