According to the International Monetary Fund's World Economic Outlook, economic growth in Azerbaijan is projected at 2.3 percent in 2021 and 1.7 percent in 2022. It should be mentioned that in a previous report of the IMF, published in October, the forecasts for 2021 demonstrated an economic growth rate of 2 percent. Executive Director of the Center for Analysis of Economic Reforms and Communication, Doctor of Economics, Professor Vusal Gasimli answered AZERTAG’s questions about the economic growth potential of Azerbaijan. 

- What prospects does the economic development strategy developed on the basis of the national priorities defined by President Ilham Aliyev promise for economic growth in Azerbaijan?

 - After the liberation of Karabakh under the leadership of our Supreme Commander-in-Chief, state-building, national economic development, and public life in Azerbaijan have entered a new stage. At the moment, the main task is to further strengthen the position of Azerbaijan as a regional power center and to create a new narrative in this direction.

Sending a person to the moon is a complicated issue, but there is a certain "recipe". Each country needs a different recipe for “economic growth”. That is why American professor Matt Andrews mentions that economic growth is a complex problem, and its solution is possible by Problem-Driven Iterative Adaptation (PDIA). That is, the first for economic growth is an accurate diagnosis of the problem and, next – the development of an adaptive strategy. Corona crisis created good opportunities for the transition to a new model of economic growth. Another scholar Kim Cameron also notes that the result of crises, not successes, justifies institutional changes. Therefore, we should view the crisis as an opportunity. There is a saying that it is in times of crisis that great government emerges, but not all crises create great governments.

Basing on the document on national priorities, it is important to deconstruct - break down into details, the problem of economic growth. It is possible to penetrate into the problem with the Japanese "five why questions" or "fish skeleton" method. These methods helped Toyota to find the root causes of the problem, treat them, and bring its production to an almost perfect level. In the 2010s, with the support of the Harvard University, Albania’s government ensured the development of the clothing industry by creating a strategy through the application of the mentioned methodology. As shown in the Presidential Decree, that is the moment when inclusion will be provided by involving all the interested parties in the development of economic strategy. From the perspective of the institutional memory created by the Strategic Road Maps, I can state that after identifying the economic growth problems, to answer the question on where to start, the 3A (Authority, Acceptance, Ability) approach can be applied. First, it is significant to have the authority to ensure economic growth. Then, all stakeholders must understand the problem and accept it, form a sense of ownership of sorts. The third condition is ability.

These working groups, acting as a deliberation council, together with state and representatives of business and civil society can reveal the value chain issues down to the details. The experience of Asian countries demonstrating an “economic miracle” proves the effectiveness of deliberation councils. In Japan, where the number of deliberation councils reaches 200, there is even a council that solves the problems of sumo wrestling. In tune with the spirit of stakeholder capitalism, working groups, which involve all interested parties, can make an accurate diagnosis of economic problems.

- Can you tell how the balance between strategic planning and flexible management will be built?

- The Prime Minister of the United Kingdom Winston Churchill said, “Plans are of little importance, but planning is essential”. Thus, not plans but the planning process itself can explain the “economic miracle” of South Korea. The reason is that the planning process covers all stakeholders leading to discussions, new ideas, examination of a situation, and more correct decisions. The establishment of working and sub-working groups to develop a strategy of socio-economic development for 2021-2025 based on national priorities, and the involvement of academics, business, and consulting representatives, as well as international partners is significant in terms of systematic planning. Park Chung Hee, the leader of economic growth in South Korea, and Lee Kuan Yew, the father of the Singapore miracle, implemented this type of strategic planning.

Along with that, adaptive and flexible approaches are necessary for development. We should build a balance between strategic planning and flexible management.

• How can you explain the basics of economic growth in Azerbaijan?

Acceleration of economic growth is a key task. Those who link economic growth to geographical determinism and path dependence cannot answer the question of how Singapore and Malaysia, which are located in the same basin, have different growth rates. In their work “Why Nations Fail?”, Acemoglu and Robinson state that the effectiveness of institutions is the core of economic growth. For example, the experience of North and South Korea, as well as East and West Germany, demonstrates that under the influence of different institutions, even the same nations living in the same geography reach different levels of development. It is no coincidence that both strategic road maps and national priorities include a wide range of reforms. However, differences in per capita income within a country with the same legal regime, currency, and macroeconomic conditions, for example, such as differences in income levels in Istanbul, Izmir, Ankara, and Kars in Turkey, make it difficult to explain the effectiveness of institutions. Harvard University Professor Ricardo Hausmann explains this issue from a different angle. According to Hausman, the core of economic growth is collective knowledge and abilities (person-bytes). The matter is that everybody has access to technologies, and the main issue is related to people who can use these technologies. Thus, countries with many person-bytes manufacture products that are more complex. The complexity index calculated by Harvard University is based on this principle. The more a country manufacture complex products, the more know-hows it will use. For example, today all countries in our region can produce fruits and vegetables, but not all of them produce complex products such as petrochemicals. The methodology offered by Harvard University lets us define that if the level of complexity of the country's economy is lower than the level of national income, economic growth will weaken. Complying with our researches, by adjusting the complexity index to the level of national income and exceeding it, Azerbaijan can accelerate its economic growth.

Thus, fundamental issues for economic growth are the following: effective institutions, technology, updating cultural codes, and the superiority of geography.

•       This brings up a question: how to increase the Economic Complexity Index?

- It is possible to accelerate economic growth by having more collective know-how, increasing the number of staff, and moving to sectors nearby to existing ones. Once we gather low-hanging fruits,  we are satisfied with low risks and income. Instead, if we want to leap into sectors that do not conform with the current economy and exceed our knowledge, we can increase our risks along with our profits. In a word, we should take a balanced position between producing such the least complex product as tomato and the most complex product as an airplane, and thus, a new strategy based on national priorities is being developed by the President's instructions without delay.

The more complex the products are, the fewer countries produce them. To reach export diversification, we should produce the goods that are less produced in other countries and more complex ones. Professor Hausmann notes that although in the 1960s Thailand and Ghana were at the same level of development, the current differences between them have increased sixfold. The matter is that Thailand was able to gradually switch to light industry, then, electronics and mechanical engineering, and Ghana did not move forward. Today, Bangladesh, which after gaining its independence in 1971 was dependent on foreign assistance and was once called a “bottomless basket” by Kissinger, has turned to the second-biggest clothing exporter after China.

We just have to accept the fact that the hydrocarbon sector, which dominates the Azerbaijani economy, is poorly connected to other areas, and the ability to apply know-how in other areas is limited. For instance, we cannot apply contemporary oil technologies and knowledge in the plastics industry. Dubai's experience shows that we can create "in advance of demand" and attract investment by offering modern infrastructure, skilled laborç, and a favorable business environment. In this way, the share of “black gold”, which made half of its economy, in Dubai has decreased to 1 percent. The position of Azerbaijan among the top 30 world countries in the Global Competitiveness Report for infrastructure and the Doing Business report for the favorable business climate indicator should be emphasized.

The experience of rich countries demonstrates that during economic growth, more preference should be given to diversification. There is a subtle issue. The narrower the specialization is, the more the economy will be diversified. Thus, specialization at the micro-level leads to diversification at the macro level and, consequently, economic growth.

• And again our conversation turns to the knowledge economy...

-There is also another issue to mention. We must not only turn raw materials into final products but also bring more knowledge to our knowledge. For example, Finland, which is rich in forests, does not benefit from wood or furniture, but more complex products. The Finns, as classical economists say, started from wood production. Then, following the logic of traditional economists, they switched to wood materials and furniture manufacturing. Finally, by working on woodcutting machines, they engaged in the machine-building industry. According to the theory developed by Growth’s Lab within Harvard University, Finland advanced their knowledge and then started producing Nokia phones. As we can see, Finland was not satisfied only by the value added to its raw materials, and diversifying its economy, increasing the number of person-bytes it turned into a developed country. That is a subtle philosophy of economic growth. In this regard, our great philosopher Nizami said that the “power is in science”. As Mr. President noted, human capital is our main asset. The experience of Germany, distinguished by a high level of education, shows that sometimes, pioneering companies, diversifying the economy, bring in brains from outside. Silicon Valley is no different in this respect. The whole world is in a "brain hunt" because economic growth is provided by person-bytes - knowledgeable and competent people. For example, foreign-born professors predominate in US universities. Therefore, we need to regulate migration policy, prevent brain drain, and rather attract brains to support economic growth, and increase our skills, competencies, and knowledge through modern education and training.

The purchase of WhatsApp by Facebook demonstrates that if it is affordable, it is more profitable to buy ready-made technology than to create it. Today, our strategic reserves of more than 50 billion dollars allow us to buy existing technologies together with person-bytes. Venture funds can do a lot in this direction. As a platform, they can direct excess funding to the realization of business ideas. A number of sovereign funds support innovative development by investing in this area.

• How should we choose directions in a knowledge economy?  

- It would be purposeful for Azerbaijan to develop applied science rather than fundamental. For example, our IT companies have more opportunities in the field of soft solutions and soft development, as well as platform creation, rather than implementing fundamental R&D, like Tesla. We should move forward to applying ready technologies. The IT companies, we met recently, have built dialogue and made proposals to the government regarding the reforms in this sphere. I can say that information and communication services in Azerbaijan showed double-digit growth in the pre-crisis period, but increased slightly last year. By creating an affiliate of the Center for the Fourth Industrial Revolution, Azerbaijan should also specialize in competitive bio, physical and digital technologies.

Using input-output and equilibrium models, the CAERC is studying multiplicative effects between spheres and products. However, it is not sufficient to revive the economy. It is also necessary to ensure the transfer of know-how from one sphere to another one. Technology has three components: the tool itself, the conduct, and the person-byte, that is, the skill and knowledge. It is easy to obtain a tool and attain rules of its conduct. The hardest part is the spread of knowledge and skills. For instance, there are almost no players from Barcelona in the Barcelona football club. The owner of the Barcelona club knows how to create a football team, and that is know-how. Knowing how to create a product - know-how, is more important for a product than a resource. Otherwise, Israel, which has limited and unfavorable conditions, would not export agricultural products to Russia – the country with territory 823 times larger than Israel’s. It is not the fish that matters, but the rod and ability to use it.

• Thus, the national priorities defined by President Ilham Aliyev complement each other ...

- Growth Diagnostics by Ricardo Hausmann, Dani Rodrik, and Andres Velasco show that reforms are successful when they are not one-sided, but complex, that is, at least when they address key issues. For example, although at the end of the last century, El Salvador and Argentina repeated the reforms in Chile, they did not experience the "Chile Miracle". The simultaneous existence of all fundamental conditions (favorable business environment, stability, fair trial, good infrastructure, human capital, access to finance, etc.) in one country at the same time can ensure economic growth, failure to meet only one of the main conditions is enough to slow down economic growth. Unsuccessful management or marker failures remain even in one sphere, the success of reforms can be jeopardized.

From this point, the instruction of the President to implement five main national priorities simultaneously is of great importance.

• How can the conditions for economic growth be determined?

- The forecasts of the World Bank demonstrate a 2.8 percent economic growth rate in Azerbaijan for this year and 3.9 percent for the next year. According to the International Monetary Fund's Global Economic Outlook, economic growth in Azerbaijan is projected at 2.3 percent in 2021 and 1.7 percent in 2022. At the same time, the IMF has updated its forecasts for the current account balance in Azerbaijan to a positive level. Thus, while the current account deficit to GDP ratio is projected at 3.6 and 4.4 percent in 2021 and 2022, respectively, the new report estimates the deficit at around 1.1 and 0.5 percent, replacing the deficit with a surplus.

First, we should determine the adequacy of economic growth. For example, the growth rate should be compared with a similar indicator in comparable countries, or the growth should be examined for compliance with targets set by the government. The national priorities aim at moving economic growth to a higher trajectory. Second, the sustainability of economic growth must be considered in terms of the balance of payments and fiscal sustainability. The balance of payments and fiscal balance in Azerbaijan have been generally satisfactory in recent years. At the same time, a new strategy envisages activities to increase the sustainability of economic growth in line with the declining trend of the oil factor impact. The third is making the economy inclusive, that is, creating conditions for all strata of a society to take advantage of economic growth. For economic inclusion indicator, Azerbaijan is among the top-three developing countries, and taking into account that UN report predicts the population growth in Azerbaijan by 600 thousand people up to 2030, maintaining inclusion is among targets. Fourth, economic growth does not have to be "expensive."

• If compared with other countries, how do you assess the economic growth potential of Azerbaijan in the post-pandemic period?

- Our fiscal space allows us to be more comfortable to ensure economic growth without exceeding the limits of external and internal borrowing, without losing strategic facilities against national security, as well as without putting the burden on the population and business by increasing devaluation and tax rates. A recent blog post by the IMF, authored by Sonali Das and Philippe Wingender, also indicates that the fiscal space is a key condition for restoring economic growth in the post-pandemic period.

Azerbaijan's strategic foreign exchange reserves, exceeding GDP by 1.2 times, and foreign debt at the level of one-fifth of the economy, as well as other government reserves, indicate a favorable scale of the fiscal space. To reach economic growth, Azerbaijan has provided socio-political and macroeconomic stability, good infrastructure, one of the 30 best business environments in the world, a high level of literacy, and a good tradition of cooperation with strategic investors.

The recent incident in the Suez Canal has further increased the capacity of land transport infrastructure in the East-West route. China's train traffic increased by 50 percent in 2020 or 7 times compared to 2016. In the first two months of this year, the number of trains from China to Europe even doubled compared to the previous year. At the time when the importance of land transport increases in Eurasia, the Zangazur corridor and the Alat International Sea Trade Port, the Baku-Tbilisi-Kars railway, six international airports, thousands of kilometers of roads and railways built by Azerbaijan become more actual, which demonstrate the wise policy of President Ilham Aliyev. Our competitive advantage in transport and logistics can have a say in economic growth.

The reintegration of Karabakh will also play an important role in economic growth. According to the CAERC’s calculations, the reintegration of Karabakh will lead to a 3% GDP increase, including agriculture increase by 10.4%, mining - by 5.3%, processing - by 4.3%, tourism - by 5.5%, transport services- by 4.9%.

F.Roosevelt once said, “The point in history at which we stand is full of promise and danger”. Recently, the Head of the IMF Kristalina Georgievna has repeated this opinion. To my mind, Azerbaijan has more opportunities.