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Exploring economic diversification in Azerbaijan

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Guest blog by Gasimli Vusal

“Leading Economic Growth” program gave us the know-how we can start implementing to promote economic growth in our city, region, or country at this difficult time. Staff ensured us that the more we invest, the more we will derive from the program. 

My country, Azerbaijan, tripled its economy during the last 15 years and aims to double its economy relying on non-oil sector in the next 10 years. In post-conflict and post-pandemic period, accelerating growth is major target of Azerbaijan’s five national priorities outlined in the country’s “2030 Strategy,” which has been based on the United Nations’ “Transforming our World: The 2030 Agenda for Sustainable Development”. After the peace agreement between Armenia and Azerbaijan in November 2020, the latter immediately set to work on the decontamination, reconstruction, rehabilitation and reintegration of liberated Karabakh, which had suffered enormous destruction over the course of the occupation over the last 30 years. Reintegration of newly-released territories and 6 percent population growth perspective by 2030 create new opportunities and challenges from growth perspectives.

As the head of the Center for Analyses of Economic Reforms and Communication, a government-affiliated “think and do tank”, I am interested in a deep understanding of the problem and addressing the growth challenge in duly way. Our Center is in charge of supporting compilation of new economic policy for 2021-2025. By the way, our Center was a platform for compile Strategic Roadmaps of Azerbaijan in 2016-2020. My institutional memory and experience stemming from implementation, monitoring and evaluation of strategic roadmaps were enriched by this course on “Leading Economic Growth”. Now it is much easier for me to bring Harvard Growth Lab’s perspective to the economic strategy of Azerbaijan.

The main target of the government of Azerbaijan is to diversify economy, which depends on the oil-gas sector. Currently, oil and gas consist of more than 90 percent of exports, 35 percent of GDP and 55 percent of state budget of Azerbaijan. My learning journey was fruitful to understand the diversification challenge from the new angle, the Economic Complexity Index. Azerbaijan should balance between low-hanging fruit and long jumps, relying on Balanced Portfolio. In other words, balance risk and reward. With few nearby opportunities, growth can be pursued by making longer jumps into strategic areas with future diversification potential. For example, Sumgait Chemical Industry Park might develop further petrochemical industry. Or Azerbaijan’s position as a crossroad might empower transport and logistics service. The atlas of Economic Complexity will help us to identify potential new industries in Azerbaijan.

This course taught us how implement the “triple A” approach, to narrow down focus along value chains, identify problems, and mobilize resources for exploration of the “adjacent possible”. High bandwidth organization is crucial to address challenges.

I learned that specialized organization for investment promotion should be converted to high bandwidth organization in two directions: 1.Forward connections – to understand needs of investors; 2.Backward connections – dealing with government agencies to respond to firm needs and investor interest.

In order to work in a high bandwidth manner in investment promotion agency context, public-private partnership is crucial. In other words, Agency shouldn’t be administered by only government. Private sector, academia and international development partners could be involved in governance of the Agency.  Like CINDE, investment promotion agency needs a network of professional attaches around the world, well-done negotiation tactics, and specific concessions to attract investment. Investment promotion agency should be well-structured, more effective, and an autonomous organization that enjoys strong ties to both the government and business community.

Why was high bandwidth organization experience important to me? Because we need to attract investment to boost our economy. According to the World Investment Report-2020, Azerbaijan is among the top 3 transition countries together with Russia and Kazakhstan in terms of FDI inflows between 2014-2019, while Azerbaijan is the second transition economy in terms of FDI outflow at the same period. Among transition countries, FDI flows to Azerbaijan are expected to fall significantly less than those to other transition economies, because Azerbaijan entered the crisis on a relatively more robust footing. Now we need to keep pace to attract investment.

Developing countries don’t need “solution driven approach”, we need Problem-Driven Iterative Adaptation. This is because not all liberal reforms accelerate economic growth.

Sometimes presented with a laundry list of needed reforms, developing countries try to pin down all of the challenges at once, without prioritizing and sequencing in optimal way. However, Brazil’s and El Salvador’s experience in the last century show that the implementation of wholesale reforms following international best practice couldn’t accelerate growth.    

So, developing nations should focus on binding constraints and focus on the “shortest slab” in order to get more bang for our efforts. Pinning down binding constraints has more effect, since they represent the biggest hurdle to growth. For example, low return on investment is a binding constraint and could be explained by government failures and market failures. Public administration reforms might address government failures and reforms on property rights and further liberalization trend might address market failures.  

Binding constraints tend to be complements more than substitutes. So without tackling binding constraint, it would be difficult to accelerate growth.

Developing countries can escape one-size-fits-all-approach trap by building their economic growth strategy around a problem diagnostic.

We learned the following in the crawling design space: ‘external best practice’ idea, existing practice, latent practice and positive deviance. I will use all these approaches in my activity.

A fruitful lesson stemming from this program is inclusiveness of economic growth. Social inequality is a challenge in the majority of countries, and it is a challenge for growth as well. Since the Economic Complexity Index of the majority of developing countries is low and they are in the “Strategic bets”, low growth rate could be forecasted for them. In future growth strategy, we shouldn’t separate inclusiveness and prosperity from economic growth rate target. Since developing countries are thriving to the repair their economic growth, they should focus on ‘good jobs’.

What open questions do I have that I wish the next course could answer? Monitoring and evaluation through digital solutions and AI could be subject for the next course. I think monitoring and evaluation are very powerful tools to measure growth, mobilize resources and motivate teams to implement strategy.

This is a blog series written by the alumni of the Leading Economic Growth Executive Education Program at the Harvard Kennedy School. 65 Participants successfully completed this 10-week online course in May 2021. These are their learning journey stories.

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