Azerbaijan : Inclusive Growth in a Resource-Rich Economy

Abstract

Azerbaijan experienced a 'golden
 age' in the last decade, during which the average
 growth rate reached record high levels and poverty decreased
 significantly. On average, the economy grew by 15.3 percent
 per year in real terms during this period, mainly driven by
 the oil sector (21.5 percent growth per year), but with a
 significant contribution from the non-oil sector (11.1
 percent per year). As a result, poverty declined
 dramatically from 49.6 percent in 2001 to 15.8 percent in
 2008 the latest year for which household survey data was
 available when this report was prepared. This report takes
 an inclusive growth approach to investigating the ways in
 which the country's high growth was translated into
 significant poverty reduction. First chapter summarizes the
 sources of growth in Azerbaijan with an emphasis on
 structural transformation and discusses highlights of the
 inclusive growth methodology. Second chapter explores how
 growth helped to reduce poverty. Third chapter analyzes the
 sustainability and inclusiveness of the recent growth.
 Finally, fourth chapter focuses on the structural obstacles
 that constrain further inclusive growth in Azerbaijan. The
 last chapter recommends some policies to overcome these
 obstacles. The main findings of this report call for a
 careful strategy in promoting further inclusive growth in
 Azerbaijan. The mechanisms that facilitated drastic
 reductions in poverty in the last decade a strong rise in
 fiscal transfers and in the real wage were made possible by
 the oil boom. However, these mechanisms also reduced the
 pace of structural transformation in the Azerbaijan economy.
 Distorted incentives in demand and supply sides of the labor
 market have seemed to weaken the correlation between
 productivity growth and employment shares. This report finds
 that the failure to follow a fiscal rule over the past
 decade has led to excessive domestic absorption with a
 resulting barriers against further development and
 diversification in the tradable sectors (principally
 agriculture and manufacturing) and against employment
 creation within those sectors, as well as leading to an
 unsustainable growth in public expenditures, and to
 inadequate long-term public savings in the Oil Fund. Thus,
 the reassertion of a fiscal rule that constrains domestic
 absorption and promotes economic diversification is a
 necessary condition for achieving sustained inclusive growth.