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129
Journal of Life Economics, Volume/Cilt: 9, Issue/Sayı: 3, Year/Yıl:2022
An assessment of the thirty year post-Soviet
transition quality in Azerbaijan from an
economic and social liberalization perspective
Gubad Ibadoghlu1
1 Senior Visiting Fellow, Department of International Relations, London School of Economics (LSE), Azerbaijan, e-mail: g.ibadoghlu@lse.ac.uk
2 PhD candidate, Researcher, Institute of Finance and International Relations, University of Szeged, Azerbaijan, e-mail: niftiyev@eco.u-szeged.hu
RESEARCH ARTICLE / ARAŞTIRMA MAKALESİ
Corresponding Author/ Sorumlu Yazar:
Ibrahim Niftiyev
E-mail: g.ibadoghlu@lse.ac.uk
Citation/Atıf: IBADOGHLU, G. & NIFTIYEV, I. (2022). An assessment of the thirty year post-Soviet transition quality in Azerbaijan from an economic and social
liberalization perspective. Journal of Life Economics. 9(3): 129-146, DOI: 10.15637/jlecon.9.3.02
Ibrahim Niftiyev2
Volume / Cilt: 9, Issue / Sayı: 3, 2022, pp. 129-146
E - ISSN: 2148-4139
URL: https://www.journals.gen.tr/jlecon
DOI: https://doi.org/10.15637/jlecon.9.3.02
JL CO
Received / Geliş: 29.05.2022
Acccepted / Kabul: 20.07.2022
Abstract
Since the fall of the Soviet Union, Azerbaijan has faced numerous economic, political and administrative dicul-
ties. One of them has been oil dependency of the national economy. The impact of the oil industry on the macro-
economic indicators such as the Gross Domestic Production (GDP) and ination has been a popular theme in the
case of the Azerbaijan economy. However, evidence of the extractive industry’s growing inuence on Azerbaijan’s
national economy in terms of the quality of the transition from a command economy to a market economy is sparse.
In this study, we compare Azerbaijan’s transition process with other post-Soviet nations in terms of privatization,
international trade and the social sphere, despite dominance by the oil sector. Poor economic diversity is said to
be harming institutional quality and impairing long-term sustainable growth. Overall, it seems that Azerbaijan’s
transformation is not yet complete. Its pace and quality are greatly inuenced by oil prices and the domestic oil
boom: when prices are high, the Azerbaijan government eases o and focuses on spending oil cash. When inter-
national commodity markets decline, Azerbaijan’s revenue drops, and the government increases its reform ef-
forts. This approach induces economic unpredictability and underperformance and threatens its long-term growth
and development. This vicious cycle-forming tendency should alert government bodies and decision-makers to be
aware of the country’s excessive oil dependency and the need to diversify the country’s scal revenue. However,
without political will and strategic planning, this cannot be achieved.
Keywords: Azerbaijan economy, international trade, oil boom, privatization, transition process
JEL codes: O52, P27, P28, P30
Bu çalışma, Creative Commons Atıf 4.0 Uluslararası
Lisansı ile lisanslanmıştır.
This work is licensed under a Creative Commons
Aribution 4.0 International License.
130
Ibadoghlu & Niftiyev
1. INTRODUCTION
In 1991, Azerbaijan became an independent
sovereign country following the collapse of the
Soviet Union. A severe economic crisis began
soon after independence. Azerbaijan’s economy
declined by 63% between 1989 and 1995 (IMF,
1995); the cumulative real GDP declined by 61%
(World Bank, 2003); and hyperination mea-
sured by the Consumer Price Index (CPI) rose
by 1,664% in 1994 (IMF, 1995). Also, with the
beginning of independence in Azerbaijan, the
political struggle of the ex-communist leaders
(such as Ayaz Mutallibov and Haydar Aliyev)
and the new political elite formed by the Peo-
ple’s Front of Azerbaijan ignited a political and
administrative crisis, and the country was par-
alyzed by strikes and demonstrations. This led
to governmental inability to coordinate the ref-
ormation process (Swietochowski, 1999). In ad-
dition, the war with Armenia intensied, lead-
ing to territorial, human and economic losses in
1993 (Lussac, 2010). Azerbaijan suered from
the loss of territorial integrity, political instabil-
ity, severe economic recession, and short-lived
administrative governments between 1991 and
1994. Moreover, the population became aware
of how the administrative command system had
eradicated the entrepreneurial skills of the citi-
zens over the course of 70 years (Cornell, 2015)
because the transition from the socialist system
to the free market capitalistic mode of econom-
ic production was restricted during the early
years of independence. The labor markets and
labor resources did not know how best to utilize
their knowledge and skills, and the supply chain
and distribution networks were disrupted. The
transition process from the socialist system to
free-market mechanisms necessitated not only
the rejection of the Marxist-Leninist mindset
but also the harsh reforms and development of
knowledge needed to cope with the new post-So-
viet world order (Zaostrovtsev, 2016). All these
led to painful rst steps in the transition process
from the command economy to the free market
economy, and this delayed the macroeconomic
stabilization and stimulation of Azerbaijan’s na-
tional economy.
Both socialist and capitalist systems tend to in-
duce certain properties into society that become
hard to change when a transition process is inev-
itable. Kornai (2000) listed four causes of trouble
in the systemic changes. In other words, there
might be four reasons why great sacrices and
time are needed when reforms are made. First, it
is about the pre-transition level of economic de-
velopment. Clearly, both advanced and develop-
ing economies fall short of their previous levels
of economic growth following the systemic col-
lapse and the beginning of the transition. Second,
deciency in the experience of management of
market economies (innovation, institutions, new
supply and demand structures, etc.) makes the
transition process painful, but it is temporary.
Third, Kornai (2000) mentions that there are
system-specic challenges in both capitalism
(chronic unemployment) and socialism (chronic
shortage). Lastly, there are errors and misdeeds
that are being implemented by politicians, gov-
ernment ocials, political parties, etc. that lag
behind the quality of the reforms (see also Kor-
nai (2008) for the other aspects of the transition
process from socialism to capitalism). In fact, if
this is not handled well, it could make people in
the transition countries unhappy with their lives
(Easterlin, 2009). Azerbaijan’s transition was not
an exception to the above-mentioned challenges
that have been extensively discussed in the lit-
erature.
The countries in the post-Soviet space shared
similar paerns in their economic and social de-
velopment during the transition period (main-
ly between 1991 and 2005). This similarity was
mainly due to the fact that a destructive process
of economic realities where large monopolistic
conglomerates dominated domestic output pro-
duction (Burawoy, 2001). Pejovich (2003) claimed
that this is related to the so-called “transaction
costs,” which determine the success level of the
transition and transformation of Former Soviet
Union (FSU) nations. Burawoy (2001) argued
that the main reason for all the pain during the
transition period was the rapid transformation
desires of the post-Soviet nations, including
Russia. On the other hand, Central and Eastern
European (CEE) countries such as Hungary, Po-
land, and the Czech Republic have adopted a
more gradual approach to privatization, liberal-
ization and social protection. Hence, considering
131
Journal of Life Economics, Volume/Cilt: 9, Issue/Sayı: 3, Year/Yıl:2022
the experience of the other FSU and CEE nations,
Azerbaijan’s transition also shares some similar
and distinct features with them that are worth
detailed analysis.
Here, we contribute to the economic literature by
analyzing the case of Azerbaijan. We integrate
the most crucial aspects of the transition process,
such as oil-led economic growth and develop-
ment, privatization, international trade, and de-
velopments in the social sphere. The political and
economic decisions aected by the oil industry’s
dominance and role in the economic structure of
Azerbaijan strongly determined the speed and
quality of the transition process in Azerbaijan.
Guliyev (2005) argued that to graciously accept
the Western foreign direct investments for the
oil industry, the political establishment agreed
to have a semi-free press, opposition, and civil
society in the late 1990s. This fueled the early
stages of the transition process to accelerate the
transition process, but as soon as high oil reve-
nue started amassing in 2005 and 2006, interest
in privatization and international trade declined,
and this was reected in the social dimensions
of society. Similarly, Laurila (1999) argued that
the power of politics and oil are the main deter-
minants of the transition process because oil and
politics shaped the reforms and the willingness
of the government to cooperate with the inter-
national entities to help complete the transition.
Not surprisingly, the rst 10–12 years of the tran-
sition process were brutal, incomplete, and full
of explosive social divisions (Rasizada, 2003).
In this article, we argue that the transition pro-
cess in Azerbaijan has not yet nished in an e-
cient and anticipated way. Compared to the other
post-Soviet countries, Azerbaijan’s institutional
and regulatory gaps in the transition process
have led to oil-dominated industrial production,
uncertainties in regulatory frameworks, and nu-
merous barriers to integrating the country into
the international cooperations like the World
Trade Organization (WTO). The economic litera-
ture related to the transition process in the case of
Azerbaijan is still sparse. However, this topic still
needs to be discussed. To assist this process, the
analysis of the rise of the oil industry, the transi-
tion indicators provided by the European Bank
of Reconstruction and Development (EBRD), the
focus on the failures in its accession to the WTO,
and mismanagement of the social protection sys-
tem (or welfare safety net) have been examined
in this paper. An incomplete transition process
and a lopsided industrial structure undermine
the long-term sustainable growth and develop-
ment in Azerbaijan. Although various studies
have been carried out to assess the transition
process in Azerbaijan (Laurila, 1999; Siegelbaum
et al., 2002; Holley et al., 2004), the literature still
needs scholarly contributions, especially when
the share of the public sector is large, the non-oil
private share of the national economy is small,
and social welfare has not responded to the real
needs of the population even after thirty years of
independence. By focusing on the oil industry,
privatization, international trade, and social pro-
tection, the current paper addresses the follow-
ing research question: How was the quality and
extent of the transition process related to the pri-
vatization practice, international trade reforms,
and social protection against the backdrop of the
oil industry in the Azerbaijan economy between
1991 and 2020—following the collapse of the So-
viet Union?
In this study, we look at the transition process of
Azerbaijan and track economic, political, institu-
tional, and social decisions made in its econom-
ic development. In doing so, oil-led economic
development was used as an analytical back-
ground. This study is explorative in its nature,
which is based on EBRD’s transition scores and
the State Statistical Commiee of the Republic of
Azerbaijan’s (SSCRA) macroeconomic data. The
authors sought to ll the research and perspec-
tive gap by analyzing the most important themes
in Azerbaijan’s transition issues and utilizing
critical-comparative assessment techniques in a
descriptive and systematic way. Thus, some of
the other post-Soviet countries (Belarus, Moldo-
va, etc.) had to overcome similar economic prob-
lems in the transition process, and by shedding
light on the case of Azerbaijan, the authors think
that future studies may argue that the privatiza-
tion process should be the ultimate goal of the
FSU countries.
132
Ibadoghlu & Niftiyev
2. THE AZERBAIJAN ECONOMY: AN
ASSESMENT OF THE TRANSITION
QUALITY
2.1. The Rise of the Oil Industry in Azerbaijan
Prior to the start of the transition process, Azer-
baijan’s performance was lagging behind that of
neighboring Armenia and Georgia. For instance,
in 1989, the GDP per capita in purchasing power
parities (PPP) was $5,530 in Armenia and $5,590
in Georgia. From 1985 to 1989, the average an-
nual growth was 2.7% in Armenia and 2.4% in
Georgia. Although the level of industrialization
in Georgia (43%) was lower than in Azerbaijan,
the corresponding gure in Armenia (55%) was
higher than that in Azerbaijan. Meanwhile, the
GDP per capita of Azerbaijan in terms of PPP
was $4,620 in 1989; the average annual growth
was 0.8% in 1985–1989; and the share of industry
in the GDP was 44% in that period (De Malo et
al., 2011).
After the collapse of the Soviet Union, the rst
decade of Azerbaijan’s 30-year independence
was characterized by a transition economy.
During this period, the GDP declined, then re-
vived; prices rose sharply, then stabilized; and
major structural changes occurred due to an in-
crease in the share of services. The share of the
private sector in the GDP also increased; invest-
ment initially declined, then rose, and unem-
ployment and poverty increased. Azerbaijan was
not a unique country in this respect, and similar
things were documented in other post-Soviet
countries as well. However, these countries dif-
fered in the speed and format of their transition
to a market economy. So, while the initial share
of the private sector in GDP was 10% in Azerbai-
jan, 15% in Georgia, and 30% in Armenia in 1991,
this gure was 70% in Georgia, 75% in Azerbai-
jan, and Armenia in 2007 (EBRD, 2021). In 2008,
the gures for Azerbaijan, Georgia, and Armenia
remained unchanged, but the share of the private
sector in Belarus increased by 5% compared to
the previous year and reached 30%. In terms of
quantity, Azerbaijan does not dier from other
post-Soviet countries in the transition economy.
The main features that distinguish Azerbaijan
from other post-Soviet countries are the coun-
try’s rich natural resources and the fact that the
main oil and gas elds were put into operation
jointly with foreign companies on September 20,
1994. In this regard, the rst Production Sharing
Agreement (PSA) signed for the development
of the Azeri-Chirag-Gunashli (ACG) eld over
30 years ago has played an invaluable role in at-
tracting foreign investment, increasing produc-
tion and increasing export earnings (source: BP).
From the date of the signing of the PSA up to
January 1, 2021, over $95.1 billion was invest-
ed in Azerbaijan’s oil industry (source: BP). At
the same time, from the beginning of industri-
al oil production in Azerbaijan up to January 1,
2021, over 2.11 billion tons of oil and over 900
billion cubic meters of gas have been produced
(APA, 2021a) and about 40% of oil production
and more than half of gas production account
for the country’s large share since the country’s
independence. The total revenue from the ACG
eld from 2001 to September 1, 2021, amounted
to $152,893 million (SOFAZ, 2021). Oil revenues
in Azerbaijan are divided into three parts. Specif-
ically, 1) SOFAZ’s direct revenues; 2) Revenues
from foreign oil companies to the state budget in
the form of prot tax; and 3) SOCAR’s revenues
for share participation.
The inow of oil revenues to SOFAZ mainly oc-
curred in 2008–2014. By September 1, 2020, the
State Oil Fund received $149.2 billion from ACG.
From 1995 to June 30, 2020, SOCAR earned $14
billion 188.2 million from ACG. During this pe-
riod, foreign oil companies participating in the
ACG paid a prot tax of 25% to the state bud-
get, which came to $17 billion in total. Ibadoghlu
(2020) says that foreign oil companies made a to-
tal of $68 billion from the ACG eld.
133
Journal of Life Economics, Volume/Cilt: 9, Issue/Sayı: 3, Year/Yıl:2022
Hence, in 2001–2021, SOFAZ’s direct oil rev-
enues amounted to more than $165 billion, of
which over two-thirds, $112 billion, were earned
in those years (Ibadoghlu, 2021; see Figure 1
below). The development of the extractive in-
dustry in Azerbaijan coincided with the high
international oil prices, excessive government
spending, and foreign investment inows that
boosted GDP, infrastructure development, and
the accumulation of foreign currency reserves
(Ciarreta and Nasirov, 2010). The other positive
eect of the oil industry boom was less poverty
and higher pensions. However, the contribution
of the oil sector to employment was low—a mere
1%, while agriculture had a 50% share in overall
national employment—and non-oil sectors had
a low share in the generation of value added
(Ciarreta and Nasirov, 2010). Despite Azerbai-
jan’s oil boom, independent institutions have not
yet been set up to control rampant corruption,
and the business climate for the non-oil manu-
facturing sectors remains unaractive (Ciarreta
and Nasirov, 2012). This changed slightly after
the devaluation of the national currency when
Azerbaijan entered a post-boom period, but the
intended eects did not quite materialize as ex-
pected.
In panel a of Figure 2, we can see how manufac-
turing value added as a share of GDP started to
decline from 8.6% in 2003 when oil rents start-
ed to gain a bigger share of the GDP. Similarly,
oil exports had a 90% share of total exports be-
tween 2008 and 2019, while non-oil exports had
a mere average share of 7.63% between 2008
and 2019 (see Figure 2, panel b). These econom-
ic indicators tell us how Azerbaijan’s economy
became industrially lopsided. This lopsidedness
manifests itself in the transition quality as well,
because some transition quality indicators neg-
atively correlate with the oil sector’s rise, as our
analysis will show.
Figure 1. SOFAZ’s oil revenue, in millions of US dollars.
Source: Report Archive of State Oil Fund of Azerbaijan (2001-2022)
a. Manufacturing value added and oil rents as a percentage
share of GDP, 1990–2020 b. Oil and non-oil exports as a percentage share of total
exports, 1994–2020.
Figure 2. The changing roles of the oil and non-oil sectors in the Azerbaijan economy.
Source: World Bank and State Statistical Committee of the Republic of Azerbaijan
Table 1. EBRD Generalized Transition Indicator (TI). Here, a value of 1 is considered low, while a value of 5 is
considered high.
1990
1995
2000
2005
2009
2014
Armenia
1.00
2.10
2.60
3.20
3.18
3.44
Azerbaijan
1.00
1.60
2.40
2.80
2.63
2.89
Belarus
1.00
2.10
1.50
1.90
2.07
2.20
221,0
289,0
355,0
323,0
705,0
1.107,0
2.185,0
14.532,0
10.172,0
16.310,0
19.800,0
17.410,0
17.330,0
16.230,0
7.670,0
5.900,0
7.070,0
10.360,0
11.190,0
5.510,0
9.403,0
0,0
5.000,0
10.000,0
15.000,0
20.000,0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
0,0
10,0
20,0
30,0
40,0
50,0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Manufacturing Oil Rents
0,0
20,0
40,0
60,0
80,0
100,0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Oil Non-oil
Figure 1. SOFAZ’s oil revenue, in millions of US dollars
Source: Report Archive of State Oil Fund of Azerbaijan (2001–2022)
Figure 1. SOFAZ’s oil revenue, in millions of US dollars.
Source: Report Archive of State Oil Fund of Azerbaijan (2001-2022)
a. Manufacturing value added and oil rents as a percentage
share of GDP, 1990–2020 b. Oil and non-oil exports as a percentage share of total
exports, 1994–2020.
Figure 2. The changing roles of the oil and non-oil sectors in the Azerbaijan economy.
Source: World Bank and State Statistical Committee of the Republic of Azerbaijan
Table 1. EBRD Generalized Transition Indicator (TI). Here, a value of 1 is considered low, while a value of 5 is
considered high.
1990
1995
2000
2005
2009
2014
Armenia
1.00
2.10
2.60
3.20
3.18
3.44
Azerbaijan
1.00
1.60
2.40
2.80
2.63
2.89
Belarus
1.00
2.10
1.50
1.90
2.07
2.20
221,0
289,0
355,0
323,0
705,0
1.107,0
2.185,0
14.532,0
10.172,0
16.310,0
19.800,0
17.410,0
17.330,0
16.230,0
7.670,0
5.900,0
7.070,0
10.360,0
11.190,0
5.510,0
9.403,0
0,0
5.000,0
10.000,0
15.000,0
20.000,0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
0,0
10,0
20,0
30,0
40,0
50,0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Manufacturing Oil Rents
0,0
20,0
40,0
60,0
80,0
100,0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Oil Non-oil
Figure 2. The changing roles of the oil and non-oil sectors in the Azerbaijan economy
Source: World Bank and State Statistical Commiee of the Republic of Azerbaijan
134
Ibadoghlu & Niftiyev
2.2. The Quality of the Transition Process
Starting from 2008 until 2014, when substantial
oil revenue was generated, there was a slow-
down in Azerbaijan’s transition to a market
economy. The trend of transition indicators de-
ned by the EBRD given in Table 1 shows that
Azerbaijan’s position has deteriorated compared
to the Eastern Partnership (EaP) countries (ex-
cept Belarus, see Table 1).
As can be seen in Table 1 and the dynamics of the
EBRD’s generalized transition indicator present-
ed in the table, during the peak period of oil rev-
enues (2008–2014), the pace of Azerbaijan’s tran-
sition to a market economy slowed. To nd out
how and why this happened, let us look at the
structure of transition indicators for 1989–2014
prepared by the EBRD. Based on the EBRD’s
latest six-component transition assessment indi-
cators published in 2014, Azerbaijan’s position
compared to the other EaP countries is shown in
Table 2.
In Table 2, the worst aspect of Azerbaijan in terms
of the components of the transition to a market
economy is its competition policy. In this area,
Azerbaijan ranks last compared to the EaP coun-
tries. For Azerbaijan, the other weak links in the
transition to a market economy are large-scale
privatization and governance and enterprise re-
structuring, on which the Azerbaijan Investment
Holding (AIH) is currently working (more de-
tails on AIH are provided later on). This suggests
that eects in this area have been signicantly
delayed. The situation with the transition to a
market economy in Azerbaijan via small-scale
privatization, price liberalization, and the trade
and foreign exchange system is satisfactory.
Compared to the EaP member states, Azerbaijan
is only ahead of Belarus in terms of both large-
scale and small-scale privatization, price liberal-
ization, the trade and foreign exchange system,
and governance and enterprise restructuring.
This allowed Azerbaijan to aain the same level
as Moldova in 2014 in the transition to a market
economy on the last three components.
Although signicant steps have been taken in
Georgia to move from an administrative-com-
mand system to a market economy following
the collapse of the USSR, the country does not
yet have an adequate competition policy on the
Figure 1. SOFAZ’s oil revenue, in millions of US dollars.
Source: Report Archive of State Oil Fund of Azerbaijan (2001-2022)
a. Manufacturing value added and oil rents as a percentage
share of GDP, 1990–2020 b. Oil and non-oil exports as a percentage share of total
exports, 1994–2020.
Figure 2. The changing roles of the oil and non-oil sectors in the Azerbaijan economy.
Source: World Bank and State Statistical Committee of the Republic of Azerbaijan
Table 1. EBRD Generalized Transition Indicator (TI). Here, a value of 1 is considered low, while a value of 5 is
considered high.
1990
1995
2000
2005
2009
2014
Armenia
1.00
2.10
2.60
3.20
3.18
3.44
Azerbaijan
1.00
1.60
2.40
2.80
2.63
2.89
Belarus
1.00
2.10
1.50
1.90
2.07
2.20
221,0
289,0
355,0
323,0
705,0
1.107,0
2.185,0
14.532,0
10.172,0
16.310,0
19.800,0
17.410,0
17.330,0
16.230,0
7.670,0
5.900,0
7.070,0
10.360,0
11.190,0
5.510,0
9.403,0
0,0
5.000,0
10.000,0
15.000,0
20.000,0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
0,0
10,0
20,0
30,0
40,0
50,0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Manufacturing Oil Rents
0,0
20,0
40,0
60,0
80,0
100,0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Oil Non-oil
Georgia
1.00
2.00
2.90
3.10
3.11
3.50
Moldova
1.00
2.60
2.70
2.90
3.00
3.30
Ukraine
1.00
2.20
2.50
3.00
3.09
3.30
Source: EBRD (1990; 1995; 2000; 2005; 2009; 2014)
Notes: Reports on transition economy for different years; According to the EBRD Transition indicators methodology 1989-2014,
the indicator is rated between 1 and 4, and 1 is the starting point for all countries. https://www.ebrd.com/transition-indicators-
history
Table 2. EBRD Component Assessment of Transition Indicators (TI) in 2014. Here, a value of 1 is considered low,
while a value 5 is considered high.
Large-scale
privatization
Small-scale
privatization
Governance
and enterprise
restructuring
Price
liberalization
Trade
and forex
Competiton
policy
Armenia
3.70
4.00
2.30
4.00
4.30
2.30
Azerbaijan
2.00
3.70
2.00
4.00
4.00
1.70
Belarus
1.70
2.30
1.70
2.70
2.30
2,00
Georgia
4.00
4.00
2.30
4.30
4.30
2.00
Moldova
3.00
4.00
2.00
4.00
4.30
2.30
Ukraine
3.00
4.00
2.30
4.00
4.00
2.30
Source: EBRD (2014)
Table 3. Quality of transition to market economy in 2019. Here, a value of 1 is considered low, whle a value of 5 is
considered high.
Competitive
Well-
governed
Green
Inclusive
Resilient
Integrated
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
Armenia
4.97
4.82
5.78
6.22
5.72
5.11
5.97
5.88
6.40
6.56
5.45
5.83
Azerbaijan
4.39
4.30
5.79
5.61
5.35
4.83
4.94
4.92
3.97
4.34
5.59
5.70
Belarus
5.17
5.03
5.15
5.25
6.22
5.53
6.63
6.82
4.16
4.18
5.43
5.91
Georgia
4.98
5.18
6.40
6.53
5.32
4.90
5.14
4.94
6.19
6.04
6.35
6.47
Moldova
4.36
4.75
4.81
4.88
4.68
3.81
5.58
5.64
5.82
5.74
4.94
5.12
Source: EBRD (2019)
Table 4. Domestic credit to private sector, in % of GDP.
Countries
2016
2017
2018
2019
2020
Armenia
48.88
51.54
55.50
60.16
72.20
Azerbaijan
32.87
22.10
20.77
23.00
26.08
Belarus
25.72
26.24
27.61
28.77
33.11
Georgia
58.73
58.06
62.65
67.66
79.88
Moldova
25.55
22.76
23.22
24.83
27.78
Source: World Bank
Source: EBRD (1990; 1995; 2000; 2005; 2009; 2014). Notes: Reports on transition economy for dierent years; According
to the EBRD Transition indicators methodology 1989-2014, the indicator is rated between 1 and 4, and 1 is the starting
point for all countries. hps://www.ebrd.com/transition-indicators-history
Table 1. EBRD Generalized Transition Indicator (TI). Here, a value of 1 is considered low, while a value
of 5 is considered high.
Georgia
1.00
2.00
2.90
3.10
3.11
3.50
Moldova
1.00
2.60
2.70
2.90
3.00
3.30
Ukraine
1.00
2.20
2.50
3.00
3.09
3.30
Source: EBRD (1990; 1995; 2000; 2005; 2009; 2014)
Notes: Reports on transition economy for different years; According to the EBRD Transition indicators methodology 1989-2014,
the indicator is rated between 1 and 4, and 1 is the starting point for all countries. https://www.ebrd.com/transition-indicators-
history
Table 2. EBRD Component Assessment of Transition Indicators (TI) in 2014. Here, a value of 1 is considered low,
while a value 5 is considered high.
Large-scale
privatization
Small-scale
privatization
Governance
and enterprise
restructuring
Price
liberalization
Trade
and forex
Competiton
policy
Armenia
3.70
4.00
2.30
4.00
4.30
2.30
Azerbaijan
2.00
3.70
2.00
4.00
4.00
1.70
Belarus
1.70
2.30
1.70
2.70
2.30
2,00
Georgia
4.00
4.00
2.30
4.30
4.30
2.00
Moldova
3.00
4.00
2.00
4.00
4.30
2.30
Ukraine
3.00
4.00
2.30
4.00
4.00
2.30
Source: EBRD (2014)
Table 3. Quality of transition to market economy in 2019. Here, a value of 1 is considered low, whle a value of 5 is
considered high.
Competitive
Well-
governed
Green
Inclusive
Resilient
Integrated
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
Armenia
4.97
4.82
5.78
6.22
5.72
5.11
5.97
5.88
6.40
6.56
5.45
5.83
Azerbaijan
4.39
4.30
5.79
5.61
5.35
4.83
4.94
4.92
3.97
4.34
5.59
5.70
Belarus
5.17
5.03
5.15
5.25
6.22
5.53
6.63
6.82
4.16
4.18
5.43
5.91
Georgia
4.98
5.18
6.40
6.53
5.32
4.90
5.14
4.94
6.19
6.04
6.35
6.47
Moldova
4.36
4.75
4.81
4.88
4.68
3.81
5.58
5.64
5.82
5.74
4.94
5.12
Source: EBRD (2019)
Table 4. Domestic credit to private sector, in % of GDP.
Countries
2016
2017
2018
2019
2020
Armenia
48.88
51.54
55.50
60.16
72.20
Azerbaijan
32.87
22.10
20.77
23.00
26.08
Belarus
25.72
26.24
27.61
28.77
33.11
Georgia
58.73
58.06
62.65
67.66
79.88
Moldova
25.55
22.76
23.22
24.83
27.78
Source: World Bank
Table 2. EBRD Component Assessment of Transition Indicators (TI) in 2014. Here, a value of 1 is
considered low, while a value 5 is considered high.
Source: EBRD (2014)
135
Journal of Life Economics, Volume/Cilt: 9, Issue/Sayı: 3, Year/Yıl:2022
rst ve components. In the area of competi-
tion, along with Azerbaijan, there is still work
to be done in Belarus and Georgia, which makes
it necessary to strengthen antitrust policies in
Azerbaijan.
Following a modication of the transition con-
cept in 2016, the EBRD created a new method for
measuring transition progress. The new meth-
odology evaluates changes based on six charac-
teristics of a sustainable market economy: com-
petitiveness, good governance, sustainability,
inclusiveness, resilience, and integration (EBRD,
How we assess transition qualities). Therefore,
in terms of the quality of the transition, Azerbai-
jan’s position using these indicators, calculated
by the EBRD for the period of 2017–2021 on six
components, is satisfactory compared to the EaP
member countries. The recent situation for 2019
and 2021 can be seen in Table 3.
As can be seen from the table, Belarus is in front
in terms of competitive, inclusive, and green de-
velopment components among EaP countries,
Georgia is the leader in well-governed and inte-
grated development components, and Armenia
is the leader in the resilient development compo-
nent. Although Azerbaijan’s position is relative-
ly high regarding integrated and well-governed
development components, it is less satisfactory
in terms of other components, especially resilient
development. One of the main reasons why the
resilient development component is worse than
the others is its dependence on oil and gas and
the fact that the expected results have not been
achieved in 30 years owing to the failure to have
a more diverse national economy. During the re-
ported period, the share of the oil sector in GDP
in 2019 was 38.3% (SOFAZ annual report, 2019).
3. SPECIFIC CHALLENGES
3.1. The Greatest Challenge for Azerbaijan: Pri-
vatization
One of the key obstacles of the transition to a
market economy was the denationalization of
property, as well as the liberalization of prices,
trade and markets. Although Azerbaijan took
rapid and comprehensive steps in the transi-
tion to a market economy in the rst decade, the
transition in the next two decades faltered, and
sometimes it went backwards. So, although most
prices have been liberalized, there is still admin-
istrative control over some prices. At present, the
prices (taris) of goods (works, services) are reg-
ulated by the Resolution of the Cabinet of Minis-
ters of the Republic of Azerbaijan No. 178 dated
September 28, 2005, through the Tari Council,
and their total has risen to 49 in the last 15 years
(Tari Council, 2005).
Georgia
1.00
2.00
2.90
3.10
3.11
3.50
Moldova
1.00
2.60
2.70
2.90
3.00
3.30
Ukraine
1.00
2.20
2.50
3.00
3.09
3.30
Source: EBRD (1990; 1995; 2000; 2005; 2009; 2014)
Notes: Reports on transition economy for different years; According to the EBRD Transition indicators methodology 1989-2014,
the indicator is rated between 1 and 4, and 1 is the starting point for all countries. https://www.ebrd.com/transition-indicators-
history
Table 2. EBRD Component Assessment of Transition Indicators (TI) in 2014. Here, a value of 1 is considered low,
while a value 5 is considered high.
Large-scale
privatization
Small-scale
privatization
Governance
and enterprise
restructuring
Price
liberalization
Trade
and forex
Competiton
policy
Armenia
3.70
4.00
2.30
4.00
4.30
2.30
Azerbaijan
2.00
3.70
2.00
4.00
4.00
1.70
Belarus
1.70
2.30
1.70
2.70
2.30
2,00
Georgia
4.00
4.00
2.30
4.30
4.30
2.00
Moldova
3.00
4.00
2.00
4.00
4.30
2.30
Ukraine
3.00
4.00
2.30
4.00
4.00
2.30
Source: EBRD (2014)
Table 3. Quality of transition to market economy in 2019. Here, a value of 1 is considered low, whle a value of 5 is
considered high.
Competitive
Well-
governed
Green
Inclusive
Resilient
Integrated
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
Armenia
4.97
4.82
5.78
6.22
5.72
5.11
5.97
5.88
6.40
6.56
5.45
5.83
Azerbaijan
4.39
4.30
5.79
5.61
5.35
4.83
4.94
4.92
3.97
4.34
5.59
5.70
Belarus
5.17
5.03
5.15
5.25
6.22
5.53
6.63
6.82
4.16
4.18
5.43
5.91
Georgia
4.98
5.18
6.40
6.53
5.32
4.90
5.14
4.94
6.19
6.04
6.35
6.47
Moldova
4.36
4.75
4.81
4.88
4.68
3.81
5.58
5.64
5.82
5.74
4.94
5.12
Source: EBRD (2019)
Table 4. Domestic credit to private sector, in % of GDP.
Countries
2016
2017
2018
2019
2020
Armenia
48.88
51.54
55.50
60.16
72.20
Azerbaijan
32.87
22.10
20.77
23.00
26.08
Belarus
25.72
26.24
27.61
28.77
33.11
Georgia
58.73
58.06
62.65
67.66
79.88
Moldova
25.55
22.76
23.22
24.83
27.78
Source: World Bank
Source: EBRD (2019)
Table 3. Quality of transition to market economy in 2019. Here, a value of 1 is considered low, whle a
value of 5 is considered high.
Georgia
1.00
2.00
2.90
3.10
3.11
3.50
Moldova
1.00
2.60
2.70
2.90
3.00
3.30
Ukraine
1.00
2.20
2.50
3.00
3.09
3.30
Source: EBRD (1990; 1995; 2000; 2005; 2009; 2014)
Notes: Reports on transition economy for different years; According to the EBRD Transition indicators methodology 1989-2014,
the indicator is rated between 1 and 4, and 1 is the starting point for all countries. https://www.ebrd.com/transition-indicators-
history
Table 2. EBRD Component Assessment of Transition Indicators (TI) in 2014. Here, a value of 1 is considered low,
while a value 5 is considered high.
Large-scale
privatization
Small-scale
privatization
Governance
and enterprise
restructuring
Price
liberalization
Trade
and forex
Competiton
policy
Armenia
3.70
4.00
2.30
4.00
4.30
2.30
Azerbaijan
2.00
3.70
2.00
4.00
4.00
1.70
Belarus
1.70
2.30
1.70
2.70
2.30
2,00
Georgia
4.00
4.00
2.30
4.30
4.30
2.00
Moldova
3.00
4.00
2.00
4.00
4.30
2.30
Ukraine
3.00
4.00
2.30
4.00
4.00
2.30
Source: EBRD (2014)
Table 3. Quality of transition to market economy in 2019. Here, a value of 1 is considered low, whle a value of 5 is
considered high.
Competitive
Well-
governed
Green
Inclusive
Resilient
Integrated
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
2019
2021
Armenia 4.97 4.82 5.78 6.22 5.72 5.11 5.97 5.88 6.40 6.56 5.45 5.83
Azerbaijan
4.39
4.30
5.79
5.61
5.35
4.83
4.94
4.92
3.97
4.34
5.59
5.70
Belarus
5.17
5.03
5.15
5.25
6.22
5.53
6.63
6.82
4.16
4.18
5.43
5.91
Georgia
4.98
5.18
6.40
6.53
5.32
4.90
5.14
4.94
6.19
6.04
6.35
6.47
Moldova
4.36
4.75
4.81
4.88
4.68
3.81
5.58
5.64
5.82
5.74
4.94
5.12
Source: EBRD (2019)
Table 4. Domestic credit to private sector, in % of GDP.
Countries
2016
2017
2018
2019
2020
Armenia
48.88
51.54
55.50
60.16
72.20
Azerbaijan
32.87
22.10
20.77
23.00
26.08
Belarus
25.72
26.24
27.61
28.77
33.11
Georgia
58.73
58.06
62.65
67.66
79.88
Moldova
25.55
22.76
23.22
24.83
27.78
Source: World Bank
Table 4. Domestic credit to private sector, in % of GDP.
Source: World Bank
136
Ibadoghlu & Niftiyev
Since a number of steps have been taken to de-
nationalize property, which is one of the most
important reforms of the transition period, since
independence, according to ocial data for 2020,
the share of the private sector in GDP was 80.8%.
However, in 2019, 84% of the value-added was
created in the private sector (SSCRA 2022). As
the COVID-19 pandemic limited the activities of
the private sector, the share of the public sector
again increased in 2020 and 2021. In 1995, when
privatization began in Azerbaijan, the share of
the private sector was 34%. As privatization in
agriculture, trade and catering was complet-
ed by 2000, the dominance of the private sector
emerged here. In the same year, the share of the
private sector in GDP increased by 70.8%, while
99% was recorded for agriculture and it was
98.3% for trade and services. In the rst decade
of independence, the private sector had the larg-
est share in agriculture and trade due to the fact
that the process of privatization of state property
involved small and medium enterprises.
The increase in oil exports allowed the share of
the private sector to increase and reach a maxi-
mum by 2008. As most of the companies operat-
ing in Azerbaijan are private under internation-
al agreements, this has also had an impact. The
share of the private sector in the industry, which is
the leading sector of GDP, is 85.6%. This gure is
84.6% in construction, 80.8% in communications,
80% in transport and 53.2 % in social and other
services. The share of the private sector in these
areas lags behind the national average because
state-owned enterprises (SOEs) have continued
to operate in the last 30 years through subsidies,
as in the Soviet era. During this period, a reduc-
tion in credit and subsidy policies weakened the
nancial discipline at the level of these enterpris-
es, and eorts to develop corporate governance
were weak. One of the reasons for this is the poor
implementation of bankruptcy legislation and
the lack of measures to strengthen competition
and corporate governance. No signicant and
sustained measures have been taken in SOEs to
tighten budget constraints and eectively pro-
mote corporate governance (World Bank, 2017).
Due to the lack of corporate governance in SOEs,
these enterprises have not been able to lure sig-
nicant new investments at the enterprise level
and in increasing transparency and accountabil-
ity, as they face a shortage of willing nancial
investors. Thus, due to the increase in losses in
the activities of the SOEs and the continuation
of their debt obligations at the expense of the
state budget, by the Decree of the President of
the Republic of Azerbaijan dated November 5,
2020, the list of SOEs and enterprises, as well
as economic societies with a state share, to be
transferred to the management of the AIH was
approved (Aliyev, 2020a). The main task of the
AIH is to improve the management systems of
these companies and restructure them. The list
consisting of the companies under the manage-
ment of the AIH includes the State Oil Company
of the Republic of Azerbaijan, Azerbaijan Air-
lines CJSC, Azerbaijan Railways CJSC, the Azer-
baijan Caspian Shipping Company CJSC, Baku
Metro CJSC, AzerGold CJSC, etc.1 The actions of
the AIH so far have been the establishment of Su-
pervisory Boards in the above-mentioned SOEs.
Currently, 70% of employment is provided by
the private sector, and the share of the private
sector in total tax revenues exceeds 72%. The ma-
jority of new jobs are also created in the private
sector. In 2020 alone, 96.3% of new jobs created
were in the private sector. All this means that the
expected results of the eorts of the SOEs have
not yet been realized in Azerbaijan’s 30 years
of independence. Along with the privatization
of small and medium-sized businesses, the in-
crease in revenue from natural resources helped
the budget to have easy revenue and slowed the
pace of the remaining privatization programs
(Alirzayev, 2013). This discouraged innovative-
ness among the private agents of the economy,
which is quite crucial to having a smooth tran-
sition process. It has been argued that the main
dierence between underperforming and suc-
cessful FSU and post-communist nations is re-
lated to their innovativeness (Ahmadov, 2020a;
Ahmadov, 2020b). This eased the reforms and
made the rms in the manufacturing tradeable
sectors dependent on public investments (Ah-
madov, 2022a).
Although the state’s control over exports and
imports in the area of foreign trade regulation
has been largely eliminated, the policy of export
subsidies by the state has recently become more
137
Journal of Life Economics, Volume/Cilt: 9, Issue/Sayı: 3, Year/Yıl:2022
popular. On January 18, 2016, the Presidential
Order on Additional Measures to Stimulate
the Export of Non-Oil Products (Aliyev, 2016a)
and the Presidential Decree on Additional Mea-
sures to Promote Investments (Aliyev, 2016b)
were signed. “The Rules for Issuing Investment
Promotion Documents” were approved by the
Presidential Decree (Aliyev, 2016b). According
to the statement of AZPROMO, 27 million AZN
of export incentives were paid by 2021 (Azertag,
2021).
However, Azerbaijan still lacks the necessary
momentum to develop a stronger private sector.
For instance, compared to Armenia and Georgia,
where domestic credits account for 72.70% and
79.88% of GDP, respectively, in Azerbaijan this
indicator was 26.08% in 2020. Belarus and Mol-
dova in 2020 also had high levels of domestic
credit for the private sector, namely 33.11% and
27.78%, respectively. Moreover, the expected di-
versication of the Azerbaijan economy due to
increased private sector participation remained
sluggish. The World Bank’s “Doing Business
2004” report showed that starting a business in
Azerbaijan took on average 106 days, while only
25 days and 30 days were needed in Armenia and
Georgia, respectively (Doing Business, 2004).
AIH was founded by a Presidential Decree on
August 7, 2020 for the purpose of managing SOEs
and economic societies with a state stake on a
cohesive basis, enhancing their performance, in-
creasing the transparency and economic ecien-
cy of their investment programs, increasing their
competitiveness and enhancing their nancial
well-being and establishing a supervisory board
(Aliyev, 2020b). SOEs, as well as economic so-
cieties with a state share, are to be rehabilitated
(22 enterprises in total), 5 of which were subor-
dinated to the Ministry of Transport, Communi-
cations and High Technologies of the Republic
of Azerbaijan, and they were transferred to the
management of Azerbaijan Investment Holding
by Presidential Decree dated November 5, 2020
(Aliyev, 2020c).
Then, by the Order of President Ilham Aliyev
dated January 23, 2021, on measures to improve
the management of the State Oil Company of the
Republic of Azerbaijan, the Supervisory Board
of SOCAR was established to exercise general
management and control over the activities of
the State Oil Company of the Republic of Azer-
baijan. On March 30, 2021, a Presidential Decree
approved the composition of the Supervisory
Boards of Azerbaijan Airlines CJSC (Aliyev,
2021a), BakuBus LLC Company (Aliyev, 2021b),
Azerbaijan Railways CJSC (Aliyev, 2021c) and
Baku Metro CJSC (Aliyev, 2021c).
Furthermore, AIH was also ordered by the presi-
dent to help develop corporate governance stan-
dards for the management of these joint-stock
companies within six months, as well as a system
for evaluating the activities of its governing bod-
ies, in order to ensure the diagnosis of the results
of the companies’ activities in the legal, nancial,
tax, and commercial spheres. This means that the
establishment of corporate governance norms
and institutions in the companies where the su-
pervisory board is established will take at least
6 years. Afterwards, decisions will be made on
the commercialization and partial privatization
of these enterprises. However, Article 14 of the
Law of the Republic of Azerbaijan on the State
Budget of the Republic of Azerbaijan for 2021
states that the nancing of the state budget de-
cit should be carried out through privatization
and revenues from other sources. According to
the information on the implementation of the
state and consolidated budget of the Republic
of Azerbaijan for 2020, 61.5 million AZN of last
year’s state budget decit were covered by rev-
enues from privatization (Ministry of Finance of
the Republic of Azerbaijan (2021). The opinion
of the Chamber of Accounts of the Republic of
Azerbaijan on the Draft Law of the Republic of
Azerbaijan on the State Budget of the Republic of
Azerbaijan for 2021 states that the funds received
from the privatization of state property as one of
the sources of nancing the state budget decit
in 2021 amount to 111.0 million AZN, which is
17.3 million AZN, or 18.5% more than the rel-
evant performance indicator in 2019, and 49.0
million AZN, or 79.0% more than the forecast for
2020 (Chamber of Accounts, 2020). It should be
noted that, according to the Budget Envelope,
the total revenue from privatization in 2020 was
25.0 million AZN. The amounts for the follow-
ing years were 111.0 million AZN in 2021, 66.0
138
Ibadoghlu & Niftiyev
million AZN in 2022, 62.0 million AZN in 2023,
and 64.0 million AZN in 2024, respectively. The
expert opinion also says that given the measures
taken to privatize state property, which form
the basis of property reforms, the importance of
their results and the sharp dierences in the pro-
jected amounts for these revenues for 2021–2024,
they are not fully justied.
Turning these sums into economic assets de-
pends on the decision of the relevant executive
authorities, who were supposed to declare new
enterprises open for privatization in 2022 and
transfer them to the Ministry of Economy for
this purpose, carry out preparatory work, and
sell them. However, even at the end of the rst
quarter of 2021, no steps had been taken and the
work is pending.
The opinion also says that new enterprises that
may be open for privatization in other areas of
the scal policy of the Republic of Azerbaijan
in 2021–2024 include the organization of stim-
ulating measures in the privatization of state
property, increasing their eciency through the
application of advanced corporate governance
methods in state enterprises and increasing the
amount of taxes and dividends in the state bud-
get (APA, 2021b).
The main directives of the budget and tax pol-
icy of the Republic of Azerbaijan in 2021–2024
state that special aention will be paid to stim-
ulating the privatization of state property and
creating more favorable conditions for investors
next year. However, the projected revenues from
privatization in 2021–2024 (111.0 million AZN in
2021, 66.0 million AZN in 2022, 62.0 million AZN
in 2023, and 64.0 million AZN in 2024) mean that
this source will receive more funds this year than
in the next few years. The current circumstanc-
es do not provide grounds for saying that more
SOEs will be privatized this year. This can be
achieved only by the sale of state-owned shares
of the Dashkasan Filizsaashdirma OJSC, which
has over 270 million tons of iron ore reserves,
in an investment competition (State Service on
Property Issues, 2019). However, the shares of
Dashkasan Filizsaashdirma OJSC were repeat-
edly oered for investment competition but
were not sold due to their unaractiveness to
investors.
The case of the privatization of the Dashkasan
Filizsaashdirma OJSC shows that it will not be
easy to aract a healthy investor to the privatiza-
tion of SOEs in the current situation. The inde-
pendence of the courts and the judiciary, which
guarantees the inviolability of property, is not
ensured. There are no economic freedoms, and
taris (prices) and currency liberalization have
not yet been carried out. All this should pave the
way for eective privatization. Facilitating this
process depends on the speed and frequency of
the steps of the transition from regulated taris
to market prices, from unied centralized man-
agement to corporate governance accountable
and transparent to shareholders, from monopo-
ly to competition, from a stable exchange rate to
a oating exchange rate, and most importantly,
from a transition to a corruption-free and inde-
pendent judiciary (Ibadoghlu, 2021).
3.2. Reection of Transition Process on Foreign
Trade
In the transition from a planned to a market
economy, the scale of foreign trade has increased
in Azerbaijan, but numerous challenges and bar-
riers to joining international trade organizations
like the WTO remain. During the Soviet Union
era, trade was subservient to the plan. As im-
ports were a residual source of required inputs,
exports, instead of being viewed as a source of
demand, growth and foreign exchange earnings,
were considered a necessary evil to pay for im-
ports (Gregory and Stuart, 2001). The main rea-
sons for the rise of foreign trade were foreign
trade liberalization (i.e., prices of goods and ser-
vices) in the trading sector in line with interna-
tional prices, resource endowments, and open-
ness to foreign trade during the transition period
in Azerbaijan. The eect of foreign trade liber-
alization was to remove barriers to entering the
market, reduce the dependence on the Common
Independent States (CIS) market by increasing
trade ows with EU member states, Turkey and
China, and, ultimately, increase the integration
of the national economy into the world econo-
my. According to the State Customs Commiee,
the results of 2020 showed that Azerbaijan ex-
changed goods and services with 183 countries
139
Journal of Life Economics, Volume/Cilt: 9, Issue/Sayı: 3, Year/Yıl:2022
(The State Customs Commiee of the Azerbaijan
Republic, 2020). During this period, the number
of foreign trade participants was 45,462, of which
81.8% were natural persons and 11.2% were legal
entities. Only 3.23% of legal entities were in the
public sector.
Even though on June 23, 1997, the WTO Secretar-
iat received Azerbaijan’s application to become a
member and then the Commission on Prepara-
tions for WTO Membership was established by
the Order of the Cabinet of Ministers No.175 dat-
ed August 22, 2003, the country is still not a mem-
ber of the leading institute for foreign trade lib-
eralization, which includes 164 countries (WTO.
AZ). With over 95% of international commerce
governed by the WTO today, this organization
is critical to the functioning of the modern global
economy (Gasimli, 2007). Azerbaijan should join
the WTO as a robust and diverse trading part-
ner with a competitive national economy, capa-
ble of aracting foreign investments as well as
exporting its products globally (Gasimli, 2007).
However, oil-dominated industrial production
and an unstable national currency are domestic
factors that hinder the eective development of
international trade. In studies by Ahmadova et
al. (2021), Hajiyev and Rustamov (2019), and Ha-
sanov (2013), the authors stated that exchange
rate appreciation, external shocks, ination and
Dutch disease signs restrict the export capacity
in Azerbaijan, which could be resolved with ap-
propriate institutional and regulatory measures.
Instead of structural reforms to overcome the
above-mentioned issues, the government still
applies shallow measures and decisions that do
not serve to speed up accession to the WTO.
The national currency, which has an important
place in foreign trade, has a stable exchange
rate and is regulated by the state. However, the
macroeconomic and monetary conditions do not
allow for the stable and progressive role of the
national currency. Chubrik and Walewski (2010)
warned about the low competitiveness and non-
oil external trade decit that may arise from
the appreciation of the national currency. The
Azerbaijani manat has been in circulation since
August 15, 1992, and it has been the exclusive
method of payment since January 1, 1994. It was
denominated in 2006 (Aliyev, 2005), and deval-
ued twice in 2015 (CBAR, 2015a; 2015b).
The strengthening of monopolistic tendencies in
Azerbaijan since the second decade of indepen-
dence and the strengthening of dominant posi-
tions in the third decade has led to the creation
of barriers to entry into numerous markets. Mo-
nopoly or unfair competition is a big problem
that rms in the country have to face (Suleyman-
ov and Yusifov, 2014). Economic development
and eective resource usage are hindered by mo-
nopolies in several private sector domains (Su-
leymanov and Yusifov, 2014). As a result, prices
sometimes rise in a jerky manner (Suleymanov
and Yusifov, 2014). Therefore, the lack of an ef-
fective competition policy strengthens the domi-
nance of monopolistic companies in the markets,
and this restricts the capability of the national
economy to participate in global value chains.
140
Ibadoghlu & Niftiyev
The Competition Code submied by the Presi-
dent to the Milli Majlis in 2006 has not yet been
adopted (The Milli Majlis, 2009), and the State
Service for Antimonopoly and Consumer Mar-
ket Control, a state body specializing in the ght
against monopolies, was not able to rid itself of
the dependence of the central executive pow-
er during this period. Thus, from all panels of
Figure 2, it can be seen that although transition
scores improved in Azerbaijan between 1994 and
2020, it was not reected in the export shares in
specic sectors like textiles, chemicals, machin-
ery and foodstu products, as in each case, the
trendline is negative (see Figure 3).
3.3. The transition Process in the Social Sphere
When the oil boom was in full swing, both the
non-oil economy and the social system proted
from government investments of oil money. As
a result of expanded state investment policies,
access to newly created jobs has improved and
poverty has been steadily declining. However,
decreased oil prices in 2009 and double devalu-
ations in 2015 have aected not only the bank-
ing sector but also the social circumstances of
the population. According to a recent study by
the World Bank, the poverty rate in Azerbaijan
in 2016 was 30% among those living in rural ar-
eas, 16% among those living in Baku, and the
national average was 16% (World Bank, 2019).
According to independent experts, the ocial
2020 unemployment rate was 4.86%, not 16.51%
(Mashalli, 2021).
Although 30 years has been enough time for
Azerbaijan to become a prosperous state and
Azerbaijan’s economy has been secure in terms
of special and aractive resources for over two
a. Textiles
b. Chemicals
c. Machinery
d. Prepared food stuff, alcoholic and non-alcoholic
beverages, and tobacco
Figure 3. The share of exports of certain sectors (Y-axis, in %) against the transition score (X-axis, values between
1 and 4, a combination of the components such as trade, the forex system and competitiveness), 1994–2020.
Source: EBRD and the State Statistical Committee of the Republic of Azerbaijan.
-5,0
0,0
5,0
10,0
15,0
20,0
25,0
0,0 1,0 2,0 3,0 4,0 5,0 0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
0,0 1,0 2,0 3,0 4,0 5,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
0,0 1,0 2,0 3,0 4,0 5,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
0,0 1,0 2,0 3,0 4,0 5,0
Figure 3. The share of exports of certain sectors (Y-axis, in %) against the transition score (X-axis, values between
1 and 4, a combination of the components such as trade, the forex system and competitiveness), 1994–2020.
Source: EBRD and the State Statistical Commiee of the Republic of Azerbaijan.
a. Textiles
b. Chemicals
c. Machinery
d. Prepared food stuff, alcoholic and non-alcoholic
beverages, and tobacco
Figure 3. The share of exports of certain sectors (Y-axis, in %) against the transition score (X-axis, values between
1 and 4, a combination of the components such as trade, the forex system and competitiveness), 1994–2020.
Source: EBRD and the State Statistical Committee of the Republic of Azerbaijan.
-5,0
0,0
5,0
10,0
15,0
20,0
25,0
0,0 1,0 2,0 3,0 4,0 5,0 0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
0,0 1,0 2,0 3,0 4,0 5,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
0,0 1,0 2,0 3,0 4,0 5,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
0,0 1,0 2,0 3,0 4,0 5,0
141
Journal of Life Economics, Volume/Cilt: 9, Issue/Sayı: 3, Year/Yıl:2022
decades, initiatives to reduce poverty and unem-
ployment have not yet materialized. The ocial
gures on ination, unemployment, and poverty
do not fully encapsulate the real situation, and the
dynamics show that even ocial data conrmed
a sharp decrease in unemployment and poverty
in 2020. The number of people unemployed in
Azerbaijan in 2020 was ocially 376,000, which
is 125,000 or 50% more than in 2019 (SSCRA,
2022a). This meant that the unemployment rate
reached its highest level since 2003.
As for poverty, according to ocial data, while
4.8% of the population lived below the poverty
line in 2019, this gure rose to 6.2% and wors-
ened in 2020 (SSCRA, 2022b). This means that
in 2020, the number of poor people increased by
about 30%. The poverty rate in Azerbaijan has
reached its highest level since 2011.
Although Paragraph 1 of Article 15 of the Consti-
tution of the Republic of Azerbaijan (1995) states
that “the development of the economy in the
Republic of Azerbaijan based on various forms
of property serves to improve the well-being of
people”, after the amendments made during the
referendum in 2009, Paragraph 2 states that “the
State of Azerbaijan, based on market relation-
ships, creates conditions for the development
of a socially-oriented economy, guarantees free
enterprise and prevents monopolies and unfair
competition in economic relations” (the words
“socially oriented” were added to this para-
graph; E-qanun, 2009).
Azerbaijan, which has had a decentralized social
security system for 70 years, has not been able
to complete the implementation of the pension
insurance and compulsory health insurance
systems based on solidarity during its 30 years
of independence following the collapse of the
USSR (The State Agency on Mandatory Health
Insurance). Rzayeva (2013) argued that as a re-
sult of oil incentives and donations from foreign
nancial organizations, the new healthcare sys-
tem was built on the rule of a tiny elite that con-
trolled both the political and economic spheres
in the country. The new government of the new
oil economy did not perceive the necessity to
develop a large pool of workers, as the previ-
ous administration did. It was not a maer of
the people’s approval, either. It was easier to get
new loans and get international approval for the
IMF’s suggested welfare cuts than to try to im-
prove the welfare of the citizens.
A comparison of Hungary and Azerbaijan in
terms of social protection and employment re-
vealed that the universal welfare state that Hun-
gary acquired during the socialist period has
been maintained (Ahmadov, 2022b). In addition,
unemployment insurance and income assistance
were implemented to ease the socioeconomic
challenges of people aected by the transition.
Azerbaijan, on the other hand, could not aord
social protection, so most people who lost their
jobs had to take informal jobs that were risky
and did not pay much (Ahmadov, 2022b). In fact,
during the oil boom period, the social protection
system of Azerbaijan was not ecient enough
to play a major role in the total consumption of
poor households despite decreasing overall pov-
erty (Habibov and Fan, 2007). Hence, the current
situation is not much dierent when it comes
to social protection policy, and this allows us to
mention some pessimistic notes about it.
There are serious problems in the state pension
system as well, which should be based on con-
sensus. The lack of reforms in this area, as well
as the lack of a legal framework for the operation
of private pension funds for over 30 years, has
placed a nancial burden and social responsibil-
ity on the state. Currently, the government con-
siders the ratio (1.5 people in 2020) of the number
of insured and pensioners unsatisfactory (at least
3/1 is considered acceptable in terms of the sus-
tainability of the pension system). An increase in
the share of the elderly population in the long
run and the expected life expectancy, along with
the fact that the current pension regulations do
not allow for an eective replacement rate and
an appropriate increase in the amount of sala-
ries are the main challenges facing the pension
system (Ministry of Finance, 2021). All of these
point to the incomplete transition in the social
sphere in Azerbaijan when it beneted from the
large oil revenue during the oil boom period.
142
Ibadoghlu & Niftiyev
4. CONCLUSIONS
The transition to a market economy in Azerbai-
jan since its independence is not quite over yet.
Also, there is a need for comprehensive reforms
to address the challenges of large-scale privatiza-
tion, governance and enterprise restructuring,
and most importantly, competition policy. Due
to the complex nature of the post-Soviet trans-
formation, the academic literature does not cover
the issues related to this at a deeper level. Hence,
we aempted to answer the following research
question: How was the quality and extent of the
transition process related to the privatization
practice, international trade reforms and social
protection against the backdrop of the oil in-
dustry in the Azerbaijan economy between 1991
and 2020—following the collapse of the Soviet
Union?
The most obvious development of the Azerbai-
jan economy since 1991 has been oil-led econom-
ic growth and development. The oil revenue rose
in Azerbaijan throughout the commodity super-
cycle and it discouraged the government from
continuing the reforms that had been initiated
since 1995. Between 2008 and 2014, the transition
quality of Azerbaijan became weak, which coin-
cided with the accumulation of a sizeable oil rev-
enue. Compared to countries such as Armenia,
Georgia, Belarus, Ukraine and Moldova, Azer-
baijan’s private sector gets smaller credits, and
there have been no major and consistent steps to
tighten budget constraints and enhancements in
terms of the eciency in corporate management
of SOEs. Moreover, most foreign trade is mainly
dominated by oil exports, and macroeconomic
instabilities hinder the growth of domestic man-
ufacturing. This is reected in the social sphere
as well. Consequently, Azerbaijan’s large oil rev-
enue and its oil dependency have inadvertent-
ly created a socially vulnerable population that
is unemployed or lives below the poverty line.
Temporary improvements in poverty and unem-
ployment do not meet the criteria for long-term
economic growth and development, especially
when the level of well-being and the speed of
reform in Azerbaijan are tied to the price of oil.
The sustainable transition from a command
economy to a market economy, from administra-
tive regulation to social security systems based
on consensus, depends on the establishment and
operation of modern institutions in the political,
economic and social spheres. Although steps
have been taken towards institutionalization in
Azerbaijan over the 30 years since its indepen-
dence, most of them, including state bureaucracy
and courts, have played the role of pseudo-insti-
tutions and merely serve to centralize public ad-
ministration and concentrate absolute power in
the hands of a few. This suggests there is a need
for signicant and continued institution-build-
ing to gradually overcome the above problems
and challenges in the Azerbaijan economy, and
the popular opinion seems to be that the tran-
sition from the socialist to the capitalist system
is over. Further studies should be carried out to
shed more light on the quality of the transition
process in Azerbaijan in order to capture more
explicit dierences with the other post-Soviet
countries and also to document the clear nexus
between the role of the oil sector and the transi-
tion quality.
Acknowledgement
The authors would like to thank Mr. David P.
Curley (University of Szeged, member of the
MTA-SZTE Research Group on Articial Intelli-
gence) for proofreading this article and provid-
ing useful suggestions.
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