Azerbaijan Economics during Soviet Union

            During Soviet Union, Azerbaijan's, which has the quality of being this country's sub part, economic organization structure and treatment mechanism took its shape through Soviet Union's economic strategy. All of the industrial facilities were made up of giant facilities that were founded according to Soviet Union's needs. In Soviet Union, there was a lean for specializing and division of labor towards central planning. In this perspective, the industry that has the quality of being Azerbaijan economics' triggering motor power has been petrol industry all along. While a very important part of the export that is made up of refined petrol products, machinery and textile products and alcohol drinks is being practiced to other republics like Russia and Ukraine, a huge part of the import is again made up of the food products, raw petrol products that are imported for exporting again after being refined that were bought from these republics (IMF, 1992, p.3).

            Once the economic documents are taken into consideration, it is clear to see that during Soviet Union, Azerbaijan had reached a certain development level. However, it is possible to say that those that Azerbaijan lost during this time are more than those it has gained. Because, in this period, the fact that economics are planned is being made from the central caused the consequence of country's economic conditions' being ignored. A lot of products were sold to the republics that are the members of the union by cheap prices either as raw materials or intermediate goods, and then came to Azerbaijan with high prices as final products. On the other hand, although Azerbaijan has always been the exporter of the products that brings the country income like petrol and petrol products, cotton, tobacco and alcohol drinks, as the income that is gained by the selling of these products is piled up in a single central, Azerbaijan does not have the right of possession of its own wealth.

            When all of this is taken into consideration, specialists pointed to Azerbaijan as one of the two republics as ready for politic independence in the respect of economics. Of course this evaluation is not only based on the rich natural resources of the country but also the perspective of the development of the country economics. For Azerbaijan's budget income is usually more than its spending, produced national income has been higher than consumed national income (EMIRASLANOV, 2001, p. 50-52). Despite this, economics in Azerbaijan had reached a development level that is high in Soviet Union's structure but it cannot be evaluated as meaningful. Especially in the last 20 years old era before the independence, the development of Azerbaijan economics did not follow a consistent period. For instance, while the average economic growth rate in the country between 1960 and 1970 was 5.2 %, between 1970 and 1980, it rose up to 7.4 %. Between 1980 and 1990, this rate showed a sharp decrease trend. The economy decreased approximately by 4.9 % between 1981 and 1985, and 5.6 % between 1986 and 1990. While the production capacity showed an absolute decrease in 1989, national income also decreased by 7 % in 1990. Especially the fact that energy sector that bears upon natural resources, intensive usage of cheap and abundant labor force was focused on, created convenient environments for economic crisis (ARAS, 2003, p. 10).

            When the purchase power parity is considered, before the Soviet Union was fell apart, the average national income per capita in Soviet Union had been 5793 US Dollars, and the distribution of the national income per capita was like this: Azerbaijan 4142, White Russia 6371, Armenia 4183, Estonia 8645, Georgia 5367, Kazakhstan 5847, Kirghizstan 2924, Latvia 7934, Lithuania 7287, Moldova 4600, Uzbekistan 3751, Russia 6656, Tajikistan 2437, Turkmenistan 3059, Ukraine 4944 US Dollars (DUNFORD, 1998, p. 88). As it is clear here, the national income per capita in Azerbaijan was below Soviet Union average.

Transition to Market Economy and the Developments in Economy

            Azerbaijan that has attained independency in 1991 went into economic reengineering period by transition to market economy with the conditions happening against it, like economic decrease in the last ten years and losing the Union markets. As raw materials, semi-products, kit-team, market, finance and management mastership subjects were organized according to old central planning, production was stopped at a lot of facilities or production remained inactive. Besides the fact that the economic ties were severed with the businesses in old Soviet Union and the country lost its market share in other countries, with the cutting of the subsidies that were supplied from the central during Soviet Union, there happened shocking collapses in production. The war in Nagorno Karabakh and the problem of Chechenia caused the export path of intermediate goods that are needed for country economy to shut down (ARAS, 2003, p. 12). As a result, economic decrease starting from the Soviet Union went on till 1996 by continuing in the first years of the transition period. In 1995-1996 that could be evaluated as the first years of the transition period, the country economy decreased by the rate of 57.2 %.

            Furthermore, as there was no clear strategy for transition to market economics, the economic decisions that were tried to be applied in these years, were disaccorded with each other.

            When all of these are concerned, it is possible to mention the negative progression that was during the first period of the transition in Azerbaijan economy.

• 1. Excessive decrease in production
• 2. High inflation
• 3. Exterior trade and budget deficits
• 4. Increase in unemployment
• 5. Destruction in the distribution of income, etc.

In 1994, with the ceasefire in Nagorno Karabakh, the government tried to prevent economic inconsistency that had been going on for years. As the result of the operations that were made, in 1996, economic growth was provided with the rate of 1.3 %, even though it is at a slight level. In 1996-2000 period that could be evaluated as the second period of the transition, they tried to proceed in the direction of the goals below (HESENOV, 2001, p. 11):

• 1. Macroeconomic consistency in the country was obtained
• 2. The country's basic natural resources reserves were made to be processed and therefore economic growth was carried out
• 3. An economic structure that is based on market principles and in the direction of liberal- democratic bases was tried to be carried out
• 4. Integration of the world economy and global and local economies was tried to be carried out

The developments that happened during this period with the influence of the decisions that were taken about structural change could generally be put in order like this (ARAS, 2003, p. 21):

• 1. By providing the macroeconomic consistency in the country economy, economic growth process started
• 2. In the direction of the strategy of activating the important natural resources in the country, especially petrol resources, big success was obtained
• 3. A new socio economic environment was built up with the help of the land's giving away to private possession in the sector of agriculture.
• 4. With the liberalization in the economy, improvement of exterior trade relationships and the making the foreign investments contribute to privatization, an important, basic and continuous source for economic development was reached.

In the period after 2000 that can be evaluated as the third stage in the period of transition to market economy, the goals that are planned to make true can be lined like this:

• 1. Making the economic growth continue
• 2. Accelerating substructure investments
• 3. Supporting the other sectors with the income that is gained by petrol industry
• 4. Strengthening the social side of the economic politics according to development level and enhancing the level of social welfare

In the period that has been going on since 2001, as the result of the increase in petrol production and petrol prices in the world, the progression below happened in the economy:

• 1. Consistency in economic growth
• 2. Employment level in the country rose up
• 3. Other sectors besides petrol freshened
• 4. Poverty level in the country decreased considerably

Current Economic Situation, the Effects of the Global Economic Crisis and Expectations about the Future

            Azerbaijan economy that transits to market economy in company with the problems that were mentioned above, is one of the countries that have the highest growth trend with the economic stability that has been set up in the middle of the 1990's and the income that has been provided from its petrol industry, which was the locomotive of its economy in 2000's. Starting from the year 1996, the realization of the seamless growth rates brought the increase of economic extent with. When we examine the data in the table 1, we see that the country reached 43 million US Dollars growing by the rate of 212.3 % with steady prices when compared to GDP's year 1991 and thus according to IMF evaluations, the country's economy went in the 80 biggest economies in the world, and besides, that the country is placed in the high position of the medium level developed countries category in the World Bank's classification of the countries according to national income per capita by GDP's reaching 4874 dollars per capita in the country.

Table 1. Macroeconomic Indicators Regarding the Country Economy (1992 - 2000)

Source. The table is set up by the help of the data in the reports of the State Statistical Committee of the Republic of Azerbaijan and IMF, Rebalancing Growth, World Economic Outlook, April 2010.

            It is possible to say that this economic extent that has been reached today is actually generally equal to the economic extent in the beginning of the 1980's. Likewise, the idea of the highest economic extent and welfare standard that Azerbaijan had reached during the Soviet Union happened in this period is admitted by the economists. As from this period, the high rate decreases in the last 10 years of the Soviet Union and the first five years of the transition period made economy collapse, which was not easy to reach the prior standards as economic growth numbers provided in the following 15 years. If we consider these realities, the decreases in the 15 years period hindered the growth of Azerbaijan economy more today.

            In these years, the sharp reducing of grape and cotton production under the name of reengineering in agriculture by force of economy policies during the Soviet Union caused the annihilation of these areas that have a significant share in Azerbaijan economy, and the coming up of Nagorno Karabakh War in this period brought almost consciously devastation of the economy and inconsistency with. In this respect, political and economic consistency in the country that has been obtained in the middle of the 1990's and has been maintained today is understood to be very important for the country's economy.

            Successful policies aimed at progress of the petrol industry that has been running in the environment of economic consistency enabled the increase of the production and income in this area. The increase in petrol production in 2000's and the increase in the petrol prices in the world markets enabled the balance of payments checking accounts to give more by increasing the export petrol income. As it can be seen from the Table 2, the checking account that has the deficit of 2589 million dollars in the year 2004, in 2005, 2006, 2007, 2008 and 2009 respectively gave 167 million dollars, 3707 million dollars, 9019 million dollars, 16453 million dollars and 10173 million dollars more. When we look at export numbers, it is seen that petrol and natural gas export have a significant share in the total export. Similarly, while total product export income happened in 2009 was 21097 million dollars, 19970 million dollars of this; in other words 94.6 % of it was made up by petrol and natural gas export income.

Table 2. Balance of Payments Indicators (mln. US Dollars)

Source. The Central Azerbaijan Bank data (www.cbar.az, 01.06.2010).

            These increases in petrol and natural gas income enabled GDP to grow in 2005, 2006 and 2007 by the rates of 26.4 %, 25 % and 35.6 % respectively. On the other hand, thanks to of the income obtained from here being used in other sectors progression and increasing exchange reserves, the country economy did not get affected much from the global economic crisis that started in the beginning of the year 2008 and has been continuing since, on the contrary to other countries. 2008 and 2009, in which decrease in country economies along the world was happening, GDP in Azerbaijan increased by the rate of 10.8 % and 9.3 % respectively (Table 1). The main reason that growth rates slew down compared to previous years was the cheapening of the petrol prices in world markets.

            Even though the negative effects of the global economic crisis are not directly experienced in country economy today, in case of the crisis becoming long term, the country economy might get affected directly. As the country finance markets are not very open to world finance markets, and exchange reserves are inadequate, struggle with the crisis in short term is easily possible in the country. However, as the cheapening of the petrol prices in world markets would reduce petrol export income, it might also cause exchange reserves to melt. This shows that a long term economic crisis would affect the country's economy negatively. The predictions about the future of the country's economy are that economic growth will be inconsistent with the effect of global economic crisis and fall down. According to the numbers that were published by IMF in the Table 3, economic growth in the country is going to be 2.7 % in 2010, 0.6 % in 2011, 3.0 % in 2012, 2.7 % in 2013, 7.8 % in 2014, and 0.7 % in 2015. Surely, it is also possible to say that these predictions that were made by taking today's economic terms in consideration may change. This might happen because of the price change of petrol in the world market. Still, if we happen to interpret the future of the country's economy in direction of these predictions, with decelerating of the economic growth, it is seen that the shares of the sectors apart from petrol is going to increase in GDP. The share that the sectors not including petrol got from GDP is going to reach 56 % by increasing, if we to express by the rate, in the year 2015, compared to the years 2006, 2007, and 2008 that it happened at the lowest degrees ( respectively, 46 %, 44 %, and 46 %). This situation, which is a sign that economy will be less dependent on petrol industry, actually reflects the consequence that the income provided by petrol industry is going to be stable or decrease, and the growth increase in other sectors apart from petrol is usually going to remain stable, between 4.2 % and 5.0 %, though it slows down compared to previous years. The decelerating of the growth in other sectors apart from petrol compared to previous years shows that the growth in these sectors actually happens with the help of petrol industry and correspondingly with it, and these sectors are being tried to develop with the income obtained from petrol industry.

Table 3. Economic and Financial Indicators (2005 - 2015)

Source. The table is created by using the data from IMF, Republic of Azerbaijan, Staff Report For The 2010 Article IV Consultation, IMF Country Report No. 10/113, Washington DC, May 2010, p. 20, and Table 7.

            Another consequence that could be drawn in the direction of the data in Table 3 is that public financial general balance (general budget) is going to get better day by day and reach important plus values. The redundancy that will come up in public financial general balance in 2015 is going to be equal to GDP's 26 %. On the other hand, when the petrol income is not considered, the result that this balance will still get better comes up. Similarly, this rate that expresses how much the public spending is met with other public income sources other than petrol income is going to reach 22.9 % of the GDP increasing day by day as a negative value in 2015. That this value is negative shows that public spending is not supported financially with any other public income sources other than petrol income.

            In an environment that there will not happen important increases in petrol income, the meaning either the redundancies that would be supplied in public financial general balance or recoveries in primary balance except petrol income implies is that in economic crisis environment, increase in public spending will not happen any more, as in the previous years. As much as this practice carries the anxiety of staying away from the negative effects of the global economic crisis, on the other hand, it should be seen as the most important cause of the decelerating that would come up in the following years in the growth of the sectors apart from petrol, which are supported with especially public spending.

The Consequence

            During the Soviet Union period, Azerbaijan that had reached an inconsistent development standard, even though it has rich natural sources and high economic growth potential, has reached a considerable economic growth in a short time by carrying out a successful economic growth policy due to rich natural resources, especially petrol and natural gas. However, though it is a fact that the country has grown by 212.3 % with steady prices when compared to GDP's year of 1991, the dependency of the country's economy on the income provided from petrol industry has even increased more in recent years. Also, with the reduction of the petrol prices in world markets, there happened a decrease in 2008 and 2009 compared to the years before and this situation is predicted to continue in the following years.

            At this point reached, it is important to improve other sectors except petrol to stay away from the effects of the global economic crisis and maintain the growth trend. Transfer of a part of the income that was obtained from petrol industry to these sectors by government in the previous years brought some important positive development with and there are also positive growth rates in the sectors except petrol. Yet, removing the dependency on petrol sector and the shifting of growth dynamics to the sectors apart from petrol requires determining the primary areas and pragmatic and efficient usage of these supports that are made by the government. Especially, as is due to the geographical position of the country, tourism, transportation and agriculture potential is high, and the investments that are going to be practiced in the direction of prolificacy principle with the spending that is going to be made to these areas might contribute to the growth more by bringing added value to the country economy.