Azerbaijan Systematic Country Diagnostic
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Public Disclosure Authorized AZERBAIJAN Public Disclosure Authorized SYSTEMATIC COUNTRY DIAGNOSTIC South Caucasus Country Public Disclosure Authorized Management Unit (ECCU3) Europe and Central Asia June 3, 2015 Public Disclosure Authorized i DOCUMENT OF THE WORLD BANK GROUP FOR OFFICIAL USE ONLY Azerbaijan Systematic Country Diagnostic June 3, 2015 South Caucasus Country Management Unit (ECCU3) Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ii CURRENCY EQUIVALENTS (Exchange Rate Effective January 12, 2015) Currency Unit = AZN AZN 0.78 = US$1 FISCAL YEAR [January 1 – December 31] ABBREVIATIONS AND ACRONYMS ACG Azeri–Chirag–Guneshli PI Permanent Income BEEPS Business Environment and Enterprise POS Points of Service Performance Surveys CBAR Central Bank of the Republic of Azerbaijan PISA Program for International Student Assessment CSO Civil society organization PEFA Public expenditure and financial accountability CCC Commission on Combating Corruption PFM Public financial management CPF Country Partnership Framework PIM Public investment management ECA Europe and Central Asia REER Real Effective Exchange Rate EBRD European Bank for Reconstruction and R&D Research and development Development EFTA European Free Trade Association RAI Rural Access Index EU European Union STEPS Skills Towards Employment and Productivity Survey EITI Extractive Industries Transparency Initiative SOFAZ State Oil Fund of Azerbaijan HBS Household Budget Survey SOE State-owned enterprise IDP Internally Displaced Person SCD Systematic Country Diagnostic IAB International Bank of Azerbaijan TFP Total factor productivity LFS Labor Force Survey TIMSS Trends in International Mathematics and Science Study LiTs Life in Transition Survey UNECE United Nations Economic Commission for Europe LPI Logistics Performance Indicator UMIC Upper-middle income country MSME Micro Small and Medium Enterprises WUA Water Users Association NCD Non-communicable disease WBG World Bank Group OBI Open Budget Index WDI World Development Indicators OGP Open Government Partnership WGI World Governance Indicators Regional Vice President: Laura Tuck Country Director: Henry G. R. Kerali Senior Directors: Ana Revenga/Marcelo Giugale Practice Managers: Carolina Sanchez-Paramo/ Ivailo Izvorski Task Team Leaders: Luis F. Lopez-Calva/Rashmi Shankar iii Acknowledgements The Azerbaijan SCD has been prepared by a team led by Luis F. Lopez-Calva and Rashmi Shankar, under the guidance of Carolina Sanchez-Paramo (Practice Manager), Miria Pigato (current Practice Manager), Larisa Leshchenko (Country Manager) and Ivailo V. Izvorski (former Practice Manager). The core team included (in alphabetical order) Saida Bagirli, Kimberly Blair Bolch, Dandan Chen, Ahmed A. R. Eiweida, Kimberly D. Johns, Samantha Lach, Moritz Meyer, Georgiana Pop, Mona Prasad, Angela Prigozhina, Nadir Ramazanov, Nistha Sinha and Congyan Tan. The preparation of the SCD benefitted from discussions held in the country team SCD launch workshop in Baku, country team consultations in December, and three rounds of consultations with government, think-tanks, donors, and CSOs. Inputs and comments from the country team were prepared by Aly Zulficar Rahim, Mustapha Benmaamar, Hadji Huseynov, Rufiz Chiraghzade, Elvira Anadolu, Eavan O’ Halloran, David Meerbach, Sachiko Kataoka, Sandra Sargent, Gulana Enar Hajiyeva, Carla Pittalis, Adriana Jordanova, Craig Meisner, Siddharth Sharma, Angela Prigozhina, Iuliia Mironova, Aliya Azimova, Qahir Dhanani, Nijat Valiyev, and Sadig Aliyev. The team also benefitted from comments received in a presentation to the SCD Advisory Group, and peer reviewers Donato De Rosa, Marcelo Selowsky, Tara Vishwanath and Christos Kostopulos, as well as Ana Revenga, Ambar Narayan, David Bernstein, and Jose Guilherme Reis. iv Azerbaijan Systematic Country Diagnostic Tables of Contents Executive Summary ............................................................................................................................... 1 1 Introduction ....................................................................................................................................... 14 1.1 Motivation .................................................................................................................. 14 1.2 How has Azerbaijan fared in terms of poverty reduction and shared prosperity? ................ 15 1.3 The Top-Down/Bottom-Up Assets Framework ............................................................... 22 2 Drivers of historical progress and risks to sustainability ................................................................ 27 2.1 What has been driving progress toward the twin goals historically? ....................................... 27 2.2 How sustainable is this progress fiscally, socially, and environmentally? ............................... 34 3 The top-down story: Challenges and constraints for ensuring sustainable growth ........................ 45 3.1 Challenge 1: The Strategic Use of Oil Rents for Asset Diversification............................... 47 3.2 Challenge 2: Unleashing productivity growth for greater economic competitiveness .......... 76 4 The bottom-up story: Challenges and constraints for ensuring sustainable inclusive growth ....... 89 4.1 Challenge 1: Accumulation of a diversified asset base at the household level ......................... 89 4.2 Challenge 2: Enhancing opportunities for households use assets more intensively .................. 98 5 Prioritization: Key binding constraints .......................................................................................... 109 References ........................................................................................................................................... 120 Annexes ............................................................................................................................................... 122 Table of figures Figure 1: Poverty headcount rate at the national poverty rate in Azerbaijan, 2001-2013 ........................ 16 Figure 2: Evolution of GDP per capita ............................................................................................. 16 Figure 3: Poverty shows a clear divide between urban and rural areas, 2012 ........................................ 17 Figure 4: Share of IDPs within welfare groups, 2012 ........................................................................ 17 Figure 5: Regional poverty rates in Azerbaijan: 2005, 2007 and 2012 ................................................. 17 Figure 6: Output per capita grows in the regions as well, though still a fraction of Baku’s .................... 18 Figure 7: Share of the population by welfare group, 2007-2012 .......................................................... 19 Figure 8: Share of population belonging to the national bottom 40 by region, 2012. ............................. 20 Figure 9: Growth incidence curve 2007-2012 ................................................................................... 20 Figure 10: Growth in mean consumption and consumption of the bottom 40 ....................................... 22 Figure 11: GDP growth is key for the achievements, but the relation is not one-to-one and there is great heterogeneity across ECA countries ................................................................................................ 22 v Figure 12: Azerbaijan performs well on shared prosperity, but below other resource-rich countries in the region ........................................................................................................................................... 22 Figure 13: The Top-Down / Bottom-Up Asset Framework ................................................................ 24 Figure 14: Increases in oil production prices .................................................................................... 27 Figure 15: Increases in per capita income growth .............................................................................. 27 Figure 16: Oil Fund reserves as percent of GDP ............................................................................... 28 Figure 17: Share of Oil in Total Goods Exports ................................................................................ 28 Figure 18: Consolidated budget expenditures ................................................................................... 29 Figure 19: Consolidated budget expenditures as a percentage of GDP ................................................ 29 Figure 20: Public investment growth ............................................................................................... 29 Figure 21: Non-oil fiscal balance benchmarked (latest available year, percentage of GDP) ................... 30 Figure 22: Sectoral composition of GDP .......................................................................................... 30 Figure 23: Decomposition of income poverty reduction ..................................................................... 32 Figure 24: Public sector wages and subsidies ................................................................................... 33 Figure 25: Unemployment rate and the average monthly salary, 2000-2013 ........................................ 33 Figure 26: Income sources at household level by welfare groups (Azerbaijan, 2012). ..........................