Impact of Post-Soviet Transition on the Economy of Azerbaijan

Azerbaijan is a unitary republic situated in the Caucasus region. Given that Caspian Sea is its eastern boundary, Russia and Georgia bound the country to the north, Armenia to the west and Iran to the south. Despite the relatively small size of the country, 9 out of 11 climate zones are present in Azerbaijan.

Impact of Post-Soviet Transition on the Economy of Azerbaijan - GEOPOLITICA.info

The country has the population of 9.5 million people, of which 52% live in the major cities or towns. Contemporary history of Azerbaijan began in the late 18th– early 19th century, when there appeared numerous feudal city-states. By 1828, all of the Azerbaijani city-states were incorporated into Russian Empire. With the collapse of the Tsarist regime in Russia, Azerbaijan was briefly independent, until experiencing Russian occupation again in 1920, this time by the Bolshevik regime. Hence, the phenomenon of the “Soviet Azerbaijan” or in other words Azerbaijan SSR (Azerbaijani Soviet Socialist Republic) lasted from 1920 to 1991. In 1991 Azerbaijan celebrated its independence from the Soviet Union. From the first year of its independence, Azerbaijan faced a serious challenge regarding its territorial integrity. By inciting separatism in the Karabakh region of Azerbaijan, Armenia provoked Nagorno-Karabakh War. The devastating war was too spontaneous, and unexpected for the new state, and as a result Armenia took under its control not only the Karabakh region, but also the seven provinces around it. Armenian occupation caused ethnic cleansing on the above-mentioned territories, realized by Armenian radicals. This produced one million Azeri refugees in Azerbaijan. Armenian occupation of 20% of Azerbaijani territory that continues nowadays is without doubt illegal – it contradicts the international law. For this reason the international community has always supported the aspiration of Azerbaijan to affirm its territorial integrity, as is proven  by the UN Security Council resolutions on Nagorno-Karabakh conflict (no. 822, 853, 874, 884), as well as UN General Assembly resolution 62/243.

As result of the Karabakh War, dissolution of the Soviet system and a number of other factors the economy of Azerbaijan contracted in the first half of 1990s. Nevertheless, Azerbaijan witnessed a fast recovery of its economy during the late ‘90s, establishing its GDP as one of the fastest growing in the world during the 2000s.

With this in mind, there arises necessity to explain the phenomenon of “post-Soviet transition”. Firstly, this “transition” was not unique to Azerbaijan, but affected all of the ex-Soviet republics. Even though the fundament for this transition was laid during Perestroika period (late 1980s), the real “shift of paradigm” (borrowing this phrase from Thomas Kuhn) occurred during 1990s. In these years, Azerbaijan completed its post-Soviet transition from an agriculture-based economy into an industry-relying economy.

Modern industry sector in Azerbaijan consists of oil and non-oil subsectors. Oil industry, the more significant one of the two subsectors, has long history in Azerbaijan. Azerbaijan is the first country in the world where oil wells were drilled in the middle of the 19th century. This resulted in an oil boom more than a century ago. With the signing of “Contract of the century” between Azerbaijani government and a number of international oil companies such as BP, in 1994 Azerbaijan witnessed a new oil boom. As can be observed on, since then Azerbaijan increased share of industry in its GDP at double-digit rates: from nearly 20% in 1994 – to 57.4% in 2008. As Index Mundi puts it “according to latest estimates, Azerbaijan’s proven crude oil reserves are around 7 billion barrels, more than a ten-fold increase from 600 million barrels in 2002”. This is another illustration of the rapid development and growth rates in industry sector of the country.

Furthermore, despite the decline of agriculture sector in the post-Soviet period, it remains important source of revenue for more than 35% of Azerbaijani population. It provides earnings for most of the rural dwellers in the country today. During Soviet period, Azerbaijani agriculture was mainly driven by increasing rates of centrally planned agricultural investment, while experiencing rapid growth in the 1965-85 period. During the “post-Soviet transition” period, in other words from 1985 till 1995, break-up of old economic ties affected agricultural sector too and caused stagnation and productivity decline there. The years of independence also witnessed the wide array of reform policies.

The most impressive of reforms was the transformation of collective farms into individual privately owned small enterprises. In this case, Land Reform Act should be mentioned, i.e. the law establishing a program of agrarian reforms by the government of Azerbaijan. This law, dated 1996, led to irreversible shift from old Soviet-style collective agriculture to individual farming. In other words, the goal of land reform – creation of the new type of property, i.e. private land ownership – was successfully met. The reforms in general and the Land Reform Act in particular, caused an impressive recovery and substantial productivity improvements in agriculture.

The new policy also helped to decrease rural poverty by increasing the incomes of rural population, which relies on agriculture for a substantial part of the family budget. For instance the share of labor force employed in agriculture increased from 31.8 % in 1996 (the year when Land Reform was enacted) to 38.3 % in 2008. Moreover, it has to be noted that the agrarian transition in Azerbaijan contrasts with that in Russia, Ukraine, and Kazakhstan, where land privatization has been accompanied by policies encouraging the persistence of large corporate farms. Thus, agricultural recovery has been much less impressive in other post-Soviet states. For this reason, Azerbaijan is considered as one of the few examples of successful land reform in the entire former Soviet Union.

All in all, taking into account the above-stated thesis, it can be argued that Azerbaijan has completed its transition from an agriculture-based Soviet economy to the independent modern industrial country, with the prevalence of petroleum manufacturing industry. Of course, this process was accompanied by shrinking influence of the traditionally leading agricultural sector on the Azerbaijani society, as the sector share of agriculture to the GDP unprecedentedly decreased from around 37% of GDP in 1990 to less than 6% in 2008. However, this mechanism is not unique to the Azerbaijani case – in all of the industrialized market economies agricultural sector comprises not more than several percent of the GDP, which is a mere margin of the country’s economy. At the same time, post-Soviet “paradigm shift” was accompanied by the rapid development of the oil-industry sector. Share of oil sector in the national output increased from 34.8% in 1990 to 57.4% in 2008. Hence, nowadays, oil-industry substituted agriculture as ‘leading’ sector of economy. Since 1990-s, the third sector of economy, i.e. services sector started to flourish. Particularly, banking, telecommunication and tourism are the subsectors witnessing rapid improvement in Azerbaijan.

References List:

Azerbaijan – Industry (Industry, value added (current US$)). (n.d.). Retrieved from http://www.indexmundi.com/facts/azerbaijan/industry

Department of Agriculture and Environment Statistics of the Republic of Azerbaijan. (n.d.).The State Statistical Committee of the Republic of Azerbaijan.

Kuhn, T. (1962). The Structure of Scientific Revolutions. (3rd Ed.). Chicago: The University of Chicago Press.

Share of labor force employed in Agriculture in Azerbaijan. (n.d.). Retrieved from http://www.cisstat.com/eng/

Spoor, M. (2007). Diversity in land and Agricultural Policy Reforms. In Ten Propositions on Rural Poverty and Agrarian Transition in Central Eurasia. Barcelona: Institut Barcelona D’estudis Internacionals.

UN General Assembly resolution 62/243, The situation in the occupied territories of Azerbaijan, A/RES/62/243 (14 March 2008), available from http://www.un.org/en/ga/search/view_doc.asp?symbol=A/RES/62/243

UN Security Council resolutions (no. 822, 853, 874, 884), on Nagorno-Karabakh conflict, (1993), available from http://2001-2009.state.gov/p/eur/rls/or/13508.htm