Why is Azerbaijan becoming more competitive?

According to the Global Competitiveness Report (GCR) 2009-2010 recently released by the World Economic Forum (WEF), Azerbaijan rose on that organization’s list of the most competitive countries from 69 to 51 in only one year, a remarkable achievement and one far greater than any other country over the last 12 months has accomplished.  And it is especially impressive compared with the situation of other CIS countries:  Azerbaijan outranked all of them and achieved a rise in the rankings when some of them, including the Russian Federation, fell.  How did that happen at a time of international financial and economic crises? To understand why that has happened, it is first necessary to focus on how the World Economic Forum measures countries.  That organization defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country,” and it measures them in terms of 12 pillars of competitiveness that it groups in three categories: First are the basic requirements – institutions, infrastructure, macroeconomic stability and health and primary education.  Then are what the Forum calls “efficiency enhancers” – higher education and training, good market efficiency, labor market efficiency, financial market sophistication, technological readiness, and market size.  And finally what WEF defines as “innovation and sophistication factors” include business sophistication and innovation.  For each, the Forum both surveys the business community in the country and analyzes statistical data and reports by reliable institutions and rating agencies.   

 

Below is a table showing Azerbaijan’s scores and ranking in the GCR 2009-2010: 

            

Rank

(out of 133)

Score

(1-7)

Basic requirements

50

4.6

1.      Institutions

55

4.1

2.      Infrastructure

58

4.0

3.      Macroeconomic stability

27

5.3

4.      Health and primary education

96

5.0

Efficiency enhancers

71

4.0

5.      Higher education and training

72

3.9

6.      Goods markets efficiency

71

4.2

7.      Labor market efficiency

13

5.1

8.      Financial market sophistication

66

4.2

9.      Technological readiness

75

3.4

10.    Market size

78

3.4

Innovation and sophistication factors

56

3.7

11.    Business sophistication

74

3.9

12.    Innovation

42

3.5

Azerbaijan ended up in 2009/2010 with the average score of 4.3 (as opposed to 4.1 in 2008/09) and the ranking of 51 (as opposed to 69 in 2008/09).  Three factors explain this rise.  The first is methodological.  Azerbaijan experienced a jump because some of the gains it had made earlier were only registered in international reports in the last year, thus giving it a special boost.  The second is that Azerbaijan, unlike almost all other countries, has not suffered significantly from the global economic crisis.  That means that even if it had shown no absolute improvement, it would have risen relative to the others.  And third, Azerbaijan really has been making progress in many of the areas the World Economic Forum is concerned with. 

 

Indeed, according to the World Bank’s Doing Business 2009 report, Azerbaijan led the world in 2007/08 as the top reformer, with significant improvement on seven of the 10 measures of regulatory reform (World Bank 2008).  Among those are introducing efficient regulations, encouraging creation of new businesses and expansion of the formal sector; strengthening the public credit registry by eliminating the minimum loan reporting threshold, more than doubling coverage; changing the labor code thereby making it easier for businesses to create jobs; creating a second commercial court in Baku and increasing the number of specialized judges; adopting a new law giving greater protection to minority shareholders; introducing a new unified property registry; introducing a new one-stop shop arrangement for company registration; and reducing the tax burden by introducing an online filing and payment system.

 

But the World Economic Forum’s ranking also shows that Azerbaijan faces more challenges ahead.  Among factors most troublesome for doing business in Azerbaijan, as indicated by surveyed local business people, are corruption (19.6%), inadequately educated workforce (10.2), tax rates (9.8). tax regulations (9.5), inefficient government bureaucracy (8.5), inflation (8.3), access to financing (8.2), inadequate supply for infrastructure (8.1), poor work ethic in national labor force (7.8) and so on.  Some of these are short-term and technical issues, but others are rather strategic and will require some time to solve.  If Baku addresses all these issues head on, it will continue to be a leader in economic development and will see its ranking improve even more when the Forum releases its next study.

Notes

[1] Azerbaijan is followed in the report by Russia (ranked 63rd), Kazakhstan (67th), Ukraine (82nd), Georgia (90th), Armenia (97th), Tajikistan (122nd) and the Kyrgyz Republic (123rd). 

References

Schwab, Klaus (2009) The Global Competitiveness Report 2009-2010, Geneva: World Economic Forum, available at:  http://www.weforum.org/pdf/GCR09/GCR20092010fullreport.pdf (accessed 8 November 2009).

World Bank (2008) “Doing Business 2009: Azerbaijan is World’s Top Regulatory Reformer; Europe and Central Asia Lead Reform Worldwide”, September 10, available at: http://www.worldbank.org/ (accessed 8 November 2009).