INVESTMENT PROMOTION

Given the significance of investments in the development of any economy in the world, countries demonstrate the increasing competition for attracting them and liberalisation of national economies to stay ahead of competitors. Azerbaijan is also one of the main contenders interested in increasing the volume of investments. Moreover, the main accent in this issue is placed on the regions of Azerbaijan, with the development of the non-oil sector of the national economy becoming the main objective of the state economic policy over the last decade. The return of the occupied territories in Garabagh has become a powerful incentive boosting the promotion of the country's investment potential.

Driver of development

The UN Conference on Trade and Development has recognised investments as a driver of development in developing countries. To attract these investments, it encourages the creation of a favourable business environment in these countries. The aim of economic measures initiated by President Ilham Aliyev since 2016 is focused on fulfilling this mission and maximally simplifying and facilitating the process of investors' involvement in local projects. Thus, the first of the four target indicators identified in the Strategic Roadmap for Perspectives of the National Economy of Azerbaijan until 2025 is "bringing the share of foreign investment in the non-oil part of GDP to 4%."

In general, it is possible to achieve this goal. According to the State Statistics Committee, the volume of direct foreign investments in the Azerbaijani economy in 2020 increased by 5.9% reaching $4.5 billion (about ₼7.8 billion), while the forecast for the next 4 years suggests that their share in national economy will exceed ₼22 billion.

However, there is a caveat – 69% of this volume of investments, that is, 2 of every 3 manats, is in Baku and the Absheron Peninsula. In parallel, it is the state authorities that govern all investment process in the regions of Azerbaijan, with the central executive authorities acting in the foreground of this process. But local executive authorities mostly (at least until recently) limit themselves only to trying to fulfil the tasks set by the central government. President Ilham Aliyev drew attention to this moment during the reception of the newly appointed heads of local executive authorities, noting that they should work on issues of investment in the regions and make necessary efforts to succeed.

Indeed, the potential for attracting investments to the regions of Azerbaijan is quite high: in recent years, Azerbaijan has made a huge leap forward in infrastructure development and the implementation of large transportation projects aimed at redirecting global transport corridors through the country. The construction of the new Baku International Sea Trade Port, the Baku-Tbilisi-Kars railway and modern airport infrastructure in every economic region allows the cities and regions of Azerbaijan to easily join the global export chain.

Unfortunately, our expectations are yet to come true. Why? According to experts, the main problem is that the regions do not provide investors with a detailed development strategy. There are no online resources providing information and data on spheres and projects open for investment. One can also hardly find any information about the organisation of information tours or presentations, which would explicitly demonstrate the potential of regions to investors. This is called PR in the modern world, and in this regard, the gap between the regions and Baku is still very wide open.

Obviously, this makes it difficult to reduce the economic gap between the regions and Baku, to encourage the backward migration of population from Baku to provinces. Meanwhile, according to the prominent economist Ruchir Sharma, if a ratio of population between the capital and the second city of the country in developing countries is three to one, this can create an imbalance and hinder the economic development of the country in the future.

Thus, one of the urgent tasks of regional executive authorities is to build a competent policy to promote the economic potential of districts they govern, to explain all the advantages of investment in them in comparison to Baku.

From quantity to quality

The objective of the Azerbaijan-2030: National Priorities for Socio-Economic Development program approved on February 2, 2021 by the decree of President Ilham Aliyev is to ensure sustainable economic growth in the country by increasing the quality of the national economy. In other words, the current period of transformations urgently requires increasing the value of human resources more than increasing the number of available jobs.

In fact, at the first stage of economic development, the main goal of Azerbaijan was to ensure internal food security by increasing the capacity of the agricultural sector, and massive creation of jobs. By 2020, Azerbaijan could successfully achieve this goal. However, the introduction of innovations in agriculture increases productivity but does not have the same effect on the value of labour force. Therefore, the main focus of the new economic model after 2021 will be the creation of a production chain in the non-oil industry. In particular, the construction of modern industrial infrastructure, including industrial and agricultural parks, makes it possible to expand production from the export of raw materials to the export of semi-finished and finished products.

World Bank studies also show that increasing production chain participation by 1% will lead to the same level of increase in per capita income. In general, if we look at the history of all post-war economies, their successful development was possible thanks to the creation of a network of plants and factories, which gradually influenced both the quality and the value of human resources. In other words, a production process started simply by sewing clothes contributes to the gradual emergence of knowledge-intensive areas and the expansion of the export basket, while simultaneously increasing their economic value. The creation of deep industrial zones favours the faster development of cities, which ultimately improves the quality of financial, insurance and service sectors in them. This is essential for building an inclusive society.

The outflow of foreign investments to the regions of Azerbaijan will create a serious competitive environment for expanding production and attracting labour. For example, in the 1920s, Henry Ford significantly increased the salaries of his employees. He did this not because he was too rich or a kind person. Back in the day, there was an outflow of labour from Ford enterprises to competitors due to the accelerated pace of industrialisation in the United States. As a result, Ford had to raise salaries in order to protect his own production chain. In this sense, the expansion of production in parallel with increasing its intellectual potential in the new economic model encourages companies to compete more intensively not only for sales markets, but also for labour markets.

Participation in common production chain

One of the main goals of Azerbaijan in the new stage of economic transformations is to bring the level of economic development in regions of the country closer to the level of development in Baku. In general, all regions of Azerbaijan have a chance to contribute both to the national economy and to the global economic chain.

In this context, it is not only the economic potential of a particular region, but also its participation in the global value chain that will play an instrumental role in defining the priorities. For example, the Moroccan government could attract the French company Renault to the country, while Poland brought in investments of the Korean company Hyundai. Of course, the key factor here is the proximity of these countries to large markets. This model of attracting investment can be successfully implemented in the regions of Azerbaijan as well. Thus, Azerbaijan is also close to a huge market with a population of 350 million people, which provides foreign investors with favourable market opportunities. In other words, the regions of Azerbaijan have great potential for organising a production chain focused exclusively on foreign markets.

Recently, one of the transnational corporations producing world-famous soft beverages invested $30 million in the Ismayilli district of Azerbaijan, which shows the readiness of foreign investors to invest in any region of the country. This is the first time in Azerbaijan’s history when a transnational corporation has invested in the non-oil industry in the region of Azerbaijan. This shows that Azerbaijan already has the opportunity to join the global value chain in the future.

Garabagh is the key incentive

Yet another key point is the integration of agricultural regions of Azerbaijan into the production chain. Over the past several years, agricultural products have been a favourite of the monthly reports published by the Centre for Analysis of Economic Reforms and Communications, which provide an overview of export activities in the country. These products are mainly supplied to the Russian market as-is, in the raw form. However, the main strategy assumes expanding the production chain to the final product. ABAD centres (Ailə Biznesinə Asan Dəstək - Affordable Support for Family Businesses) can well be a role model in this area, demonstrating the best example of how they can make life easier for rural farmers. Therefore, local executive authorities can accelerate the development of micro-entrepreneurship in regions by carefully studying this example and creating separate local brands.

In short, the new economic system of the Azerbaijani economy tends to transform it into global trends. But the success of this transformation is possible only with the active participation of all regions.

The 44-day Patriotic War, which put an end to the long-term Armenian occupation of the Azerbaijani territories and completely restored the sovereignty of the country, opened a new page in the regional development of the national economy. Authorities have repeatedly stated that they would ensure the most comfortable and attractive conditions for investment in this region. There are indeed many opportunities for investment in the liberated territories. As President Ilham Aliyev recently stated, “we have big plans for reconstruction and would be glad if banks would help foreign and local investors to implement projects in the liberated territories instead of providing direct financial support to Azerbaijan, which we do not need”.

According to Vusal Gasimli, Executive Director of the Centre for Analysis of Economic Reforms and Communications, “state investments will boost the development in Garabagh and make it attractive for non-state investments. We currently observe an inflow of investments from Turkey, Italy, UK, Pakistan and Israel to restore the liberated territories."

Thus, the integration of economic regions of Garabagh into the overall economy of Azerbaijan will accelerate the transformation of new economic priorities and management models into reality.