WB proposes Azerbaijan to reorient economy to new growth model

The World Bank (WB) is proposing Azerbaijan to reorient its economy towards a new growth model, with the help of which the country will be able to achieve national goals of doubling its GDP per capita by 2030, Report informs, citing the Azerbaijan Systematic Country Diagnostic Update (SCD) for 2022, conducted by the World Bank Group.

"Rebalancing the economy toward the new growth model is the first critical challenge. Changing economic and geopolitical environments that have emerged since 2015 highlight the need for a new growth model through which Azerbaijan can achieve national goals and the World Bank's twin goals," reads the report.

"Intensified risks from climate change, declining oil and gas reserves, uncertainties arising from the heightened geopolitical tensions in the wider region, and the need for the recovery and reconstruction of post-conflict areas are among the most significant structural headwinds that require changes in the growth model."

The new growth model thus puts more emphasis and urgency on the need to enhance diversification from an economy driven by the hydrocarbon sector and physical capital accumulation to an economy led by the private sector characterized by the larger contribution from the nonhydrocarbon sectors and human capital accumulation.

Greater integration into the global economy through trade in the nonhydrocarbon sector—for example, by unleashing the productivity of the agricultural sector, embracing the benefits of digitalization, and rebalancing spatial development, supported by effective fiscal management—represents the channel to restore Azerbaijan's full growth potential and build resilience to external shocks. The government and stakeholders should also take advantage of the unique potential of the country to become a regional transit and transport hub because of its location.

The new growth model requires a dynamic private sector, with the state's role shifting toward that of a facilitator. Fostering private sector growth that is dynamic, innovative, and competitive both domestically and globally is thus the second challenge. In Azerbaijan, public spending has been the major channel for the state to share the wealth of the hydrocarbon sector, enabling drastic poverty reduction and enhanced shared prosperity, especially during the period of rapid growth.

However, this is not sustainable in the longer term. Although the private sector outside hydrocarbons has played a limited role in Azerbaijan's growth, the sector has great growth potential if the business environment is improved. Continued efforts through financial and banking sector reforms as well as better integration of Azerbaijan's economy into international trade are key to enhancing the opportunities for private sector growth. The role of the state remains critical but will need to be shifted from the state as an active investor and driver of growth to the state as an enabler of growth by ensuring macroeconomic and financial stability and easing the constraints on private sector growth. A dynamic private sector has the potential to increase productivity and generate better quality jobs.

Other important reforms proposed to build a dynamic private sector include improving access to finance, particularly among small and medium enterprises (SMEs); ensuring that the supply of skills meets changing labor market demands, especially in the formal sector; addressing issues related to market competition, including the widespread dominance of state-owned enterprises (SOEs) and the informal sector; developing a stronger competition regulation; developing an institutional framework to enforce implementation of the regulations; encouraging innovation and entrepreneurship; and improving the investment climate, according to the report.

"The transition to the new growth model should be accompanied by an increase in human capital accumulation, which is the third major challenge facing Azerbaijan in achieving inclusive and sustainable growth. Because labor is the main asset of the population, enhancing labor productivity through investment in human capital is the best way to ensure inclusive growth in the longer term. Given the potentially huge impact of human capital accumulation on growth, the government and stakeholders could seize the opportunity to invest further in human capital, that is, the knowledge, skills, and health that people accumulate over their lives. Building a competitive human capital base will not only improve productivity and support private sector growth but will enable Azerbaijan to compete in the global economy," the WB noted.

"This competition requires modern knowledge of digitalization and preparation of the population to anticipate and adapt to a rapidly changing environment. Closing the gap in the access to quality services and enhancing the opportunities to use the accumulated human capital will be essential if Azerbaijan is to achieve greater geographic and demographic inclusion. Enhancing the inclusion of vulnerable groups, such as women and internally displaced persons (IDPs) would improve equity and the productivity of labor and help the country achieve sustainable growth. Policy priority areas that need attention include improvement in the quality of basic education through modernization of the curricula and improving teacher competence; greater access and relevance in higher education through closer coordination with the labor market and by building capacity of higher education institutions to gain academic and financial autonomy; addressing the dual burden of malnutrition among children and noncommunicable disease among adults; and confronting the gaps in the access to health services, while reducing the catastrophic risk of impoverishment because of service payments."

The global renewed sense of urgency to accelerate the transitions to greener economies will create new opportunities to overcome the limits of the current fossil fuel–dependent model and build long-term prosperity in a sustainable and inclusive way. Accelerating a climate-resilient and green transition is the fourth major challenge for Azerbaijan in the face of this global shift. The past decade has seen an increasing global tension between shorter-term concerns over energy security and the longer-term impacts of climate change, leading to international commitments to green growth and acknowledgment of the need to move away from dependence on fossil fuels.

This analysis is based on the findings of the first SCD in Azerbaijan, published in 2015, and also updated taking into account the events that have occurred since 2015 to the present day. The SCD is also playing a critical role in providing the analytical basis for the Country Partnership Framework (CPF), a document that will guide the direction of the World Bank's partnership with the Azerbaijani government over the next four to six years.