Accelerating Non-Oil Diversification for Azerbaijan- A Policy Dilemma (Research Brief)

The urgency of diversifying Azerbaijan’s oil-fired economy is undisputed and has been the subject of numerous plans and initiatives by the government as well as bilateral and multi-lateral development agencies. The current emphasis is on continuing the nation’s successful reform, institution building, and infrastructure efforts as key to creating a more welcoming business climate for domestic and foreign investment. This paper makes the case for adding to these vital tasks more explicit diversification initiatives along the lines of the increasingly discussed “new industrial policy”. As described by Professor Dani Rodrik and others, economic theory and experience of successful developing countries call for substantive government coordination and support to lower the risks and increase the rewards to firms willing to innovate with new products and markets. In addition, this paper suggests that Azerbaijan focus such efforts on a few priority sectors. The dilemma of such an approach is that it contradicts the entire thrust of post-Soviet transition. Given the risk that such a policy would result in a replay of old-style top-down planning rather than a newer style collaborative approach, we experiment with applying objective criteria as a basis of selecting key sectors for accelerated diversification. Using existing data, four criteria are developed: linkage to other sectors, labor-intensity, two measures of export potential, and import-substitution potential. There is striking agreement among these criteria on five potential manufacturing sectors. Sectors within agriculture have high trade potential but uncertainty as to their labor intensity. In contrast some service sectors rank high in job-creation and linkages, but trade potential could not be easily measured. The conclusion suggests applying such an approach by refining the criteria measures to select target sectors and experiment with the type of collaborative approach already described in the literature. Accelerating diversification of Azerbaijan’s oil-based economy will require not only substantial progress on reform and institution building but more focused coordination of public investment and development policy.

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George E. Wright, of the University of Washington, was a 2010-11 Embassy Policy Specialist (EPS) fellow.