“Last year, the Gaziantep, where the earthquake took place, exported by three times more than more than the non-oil export of Azerbaijan”

During the campaign “Turkey - a single heart”, which takes place in the joint broadcasting of most leading television channels of Turkey, more than 115 billion Turkish lires were collected within one night. The campaign was attended by businessmen, artists, politicians, representatives of civil society from all over the country. The most donation was made by the Central Bank of Turkey (30 billion lire), Ziraat Bank (20 billion lire), and Vakıfbank (12 billion lire).

The collected assistance was transmitted by AFAD (Afet Ve Acil Durum Yönetimi Başkanlığı – Department to control natural disasters and emergency situations) and the “Kizilay society” (Kızılay Derneği - red crescent).

That night, the audience witnessed how Turkey’s businessmen competed in assisting. Thanks to the conditions for doing business, business people generously donated to the victims of the earthquake. And what are the conditions for doing business in Azerbaijan?

Economist Farid Mehralizade answwered question from  ASTNA on the topic.

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Question: What conclusions about the business conditions and businesspeople of this country can  be made on the basis of the “Turkey - a single heart” campaign? What lessons can be learned from the business conditions in Turkey and the situation caused by an earthquake in this country?

Answer: I believe that one of the most important conclusions for Azerbaijan is that the situation  in Turkey has discovered that the presence of a strong business environment and civil society in the country creates opportunities for providing  serious assistance to both the government and citizens. A good business and competitive environment in the country creates the prerequisites for the emergence of many companies operating in various sectors. At such moments (in the case of natural disasters and other force major – Ed.) the presence of a large number of large companies creates more opportunities for collecting assistance. But in the  countries  with unfavorable business environment, only a limited number of industrial industries can develop. This causes the creation of large companies in small quantities.

At the same time, the development of a business environment is important in terms of internal production. After an earthquake in Turkey, a large number of companies along with the provision of material assistance, began to send everything necessary to the disaster zone, including food and clothing. If there were no internal production of these items, it would take more resources and time to satisfy such a large number of needs.

Events taking place in Turkey showed what benefit the initiatives of civil society can be brought if there are conditions for their activities. After the earthquake,  civil society also did a lot of work to mobilize resources. Thanks to their independent initiatives, a large amount of assistance was collected both in the country and beyond, at the same time volunteers were mobilized in the earthquake area, and this type of activity also played an important role in satisfying the needs and needs of people affected by the earthquake.

Question: We witnessed the participation of Azerbaijani companies in a 44-day war in Azerbaijan, as well as in campaigns to assist victims of the earthquake in Turkey. But those who are connected with these companies know well that all this is done by the instruction “from the top”. Why are not  businessmen not interested in participating in charitable campaigns? Why do not they show the initiative themselves? Does the business environment play a role in this matter?

Answer: One of the main reasons of weak assistance campaigns conducted in Azerbaijan is  the large companies less than in Turkey sectors. Due to a more favorable business environment in Turkey, large companies operate in almost all industries. In Azerbaijan, the activities of large companies are visible in a limited number of areas, mainly in such as finances, energy, telecommunications, and food industry. If more attractive, competitive business environment is created in Azerbaijan, then large companies may arise in more spheres. In this case, the degree of participation and companies of this type may be higher. As for the lack of initiative, in my opinion, one of the main reasons for this is associated with disabilities. Since in such cases I expect the first step to take business councils close to the authorities. At the same time, the private sector is not interested in providing humanitarian assistance ahead of the government.

Question: What problems will the comparison of the business environment of Azerbaijan and Turkey reveal?

Answer: There are significant differences between the business environment of Azerbaijan and Turkey. One of the biggest differences is the structure of the economy. The economy of Azerbaijan is mainly based on the extractive industry. In 2022, the sale of oil and natural gas accounted for 92% of Azerbaijan's exports. That is, out of every $100 that the country receives from foreign trade, $92 is directly related to the extractive industry. Annual exports outside the energy sector amounted to only $3 billion.

This is a very small figure by the standards of Turkey. For example, at the end of 2022, the export of not only large cities such as Istanbul, Ankara, Izmir, but even some regions located in Anatolia, exceeded the non-oil export of the Republic of Azerbaijan. For example, in Gaziantep, one of the regions affected by the earthquake, exports in 2022 exceeded $10 billion. This exceeds Azerbaijan's non-oil exports by more than three. The exports of another region, Hatay, which was seriously affected by the earthquake, amounted to $3.56 billion in 2022. In general, the total export of 10 regions affected by the earthquake is more than $20 billion. This means a higher figure than Azerbaijan's income received from the sale of oil.

The main reason for these differences is due to the fact that Turkey's economy is based largely on the manufacturing industry. At the same time, we can say that the business environment in Turkey is more inclined towards exports. Another important difference is that competitive opportunities in Turkey's business environment are better, and credit resources for entrepreneurs are more accessible.

Question: The earthquake in Turkey resulted in numerous human casualties as well as serious economic losses. How will the earthquake affect the Turkish economy, given that the country's economy has been struggling in recent years without it?

Answer: The earthquake covers a significant part of the country. About 15% of the country's population lives in earthquake-affected provinces. In economic terms, this region is very important for Turkey. At the end of last year, about 10% of Turkey's GDP (gross domestic product) came exclusively from this region. In some areas, the proportion of areas affected by an earthquake is even higher. For example, about 15% of the country's agricultural production comes from earthquake areas. 11% of industrial production in Turkey is associated with this region. From this point of view, the full recovery of the production process in these regions after the earthquake will take months, according to preliminary estimates, the earthquake could cause a contraction in the country's economy by about 2%.

On the other hand, an earthquake could have an economic impact in terms of increased government spending. To date, the Turkish government has already allocated up to 100 billion lira in connection with the earthquake. These funds are intended for first aid. Much more money will be required to restore the destroyed infrastructure. In this regard, the solution of these problems for Turkey, which has been experiencing serious economic problems in the past few years, is more important than ever, and if the government does not take consistent steps to solve these problems, an earthquake could lead to an even greater slowdown in the country's economy.

Question: What steps should be taken to improve the business environment in Azerbaijan?

Answer: A good business environment in the country is one of the fundamental conditions for sustainable economic development. In this regard, one of the most important factors is equality for initiatives and the creation of a competitive environment. Unfortunately, the competitive environment in Azerbaijan is not so good in some areas. In these markets, a limited number of players have a large share of it. For this reason, small and medium-sized businesses cannot compete with these large companies. This causes problems related to both employment and wealth inequality. Administrative factors and entrepreneurial activity of officials play a role in the fact that the mentioned companies have too large a market share. For this reason, changes in both legislation and practice are needed to address this problem. For example, the Parliament has not adopted the Competition Code for more than 15 years. It is not accepted, although it is often put on the agenda. At the same time, the mechanism for declaring the income of officials does not work either. If the bureaucratic entrepreneurship is liquidated, it can improve the competitive environment in Azerbaijan.

Another important issue regarding business development is the access to favorable credit resources. Entrepreneurs in Azerbaijan often point to problems with access to financial resources. In solving these problems, a positive role can be played by an increase in the volume of concessional loans by the state, the development of mechanisms for attracting cheaper finance by banks, the development of incentive mechanisms for the inflow of foreign capital into the country, and the development of the securities market.

Another important factor regarding business development is related to the tax and customs system. According to the report of the World Trade Organization, Azerbaijan has the highest customs duties in the region. At the same time, unlike neighboring countries, Azerbaijan does not have a preferential trade agreement with Europe. In this regard, I believe that along with improving the competitive environment and increasing access to financial resources, a stimulating customs policy, and the achievement by Azerbaijan of more agreements on preferential trade in other countries can have a positive impact on the business environment of the country.

Another important issue is related to ensuring the participation of interested groups in decision-making with the ability to influence the business environment. Unfortunately, many decisions that may affect economic activity in Azerbaijan are made behind closed doors. Many changes are made to the Tax Code every year. However, the public becomes aware of these changes only after these decisions are approved in Parliament. If you remember, the decision to raise the minimum wage this year was announced after the start of 2023. Whereas many companies have already carried out budget planning for 2023. Naturally, such unexpected decisions  affect the activities of companies. In this regard, ensuring participation in economic decision-making is very important from the point of view of the effectiveness of these decisions.