Analysis and Estimation of the Regional Policy in Azerbaijan
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ANALYSIS AND ESTIMATION OF THE REGIONAL POLICY IN AZERBAIJAN By Jamila Mammadova Submitted to Central European University Department of Economics In partial fulfillment of the requirement for the degree of Master of Arts in Economic Policy on Global Markets Supervisor: Professor Attila Ratfai CEU eTD Collection Budapest, Hungary 2013 ABSTRACT The research analyzes the ongoing regional policy in Azerbaijan and conducts the OLS estimation of its effectiveness for the regional development. The most used tools in the regional policy of the country are constructional investments and support of small and medium enterprises; the effectiveness of which are estimated in the thesis. The results show that the strongest effect of the regional tools is achieved by the support of small and medium enterprises, whereas large and medium constructional investments are the least effective ones, and need to be reconsidered. The other important finding is that the regional policy does not affect the real wage in regions. At the same time, an establishment of higher educational entities in regions has a high potential for regional development, which needs to be considered by the government. Also, the policymakers shall consider diversification of the regional policy, like introduction of program approach, improvement of the institutional framework, and investments in technological advancement. Keywords: regional development, regional policy, regional inequality CEU eTD Collection i ACKNOWLEDGEMENTS I would like to thank my supervisor, Professor Attila Ratfai, for his important advices during the research. I would also like express my warm gratitude to CEU for giving me an opportunity to study here. I would also like to express deepest thanks to my parents and close people without whom my education would be impossible. CEU eTD Collection ii Table of CONTENTS INTRODUCTION ............................................................................................................................2 CHAPTER 1. OVERVIEW OF REGIONAL INEQUALITY IN AZERBAIJAN ...............................................6 1.1. Economic regional division ...........................................................................................7 1.2. Economic, structural, social, and demographic differences among the regions...............8 1.3. Measurement of inequality and its dynamics ............................................................... 16 CHAPTER 2. REVIEW OF THE LITERATURE ON REGIONAL INEQUALITY ........................................... 19 2.1. Regional inequality in theory and empirics...................................................................... 19 2.2. Regional policy in theory and practice ............................................................................ 23 CHAPTER 3. REGIONAL POLICY IN AZERBAIJAN ........................................................................... 29 3.1. State Program on Socio-Economic Development of Regions of the Republic of Azerbaijan for 2009-2013 years ............................................................................................................... 30 3.2. The other state programs announced by the country ........................................................ 37 3.3. The main characteristic of the regional policy in Azerbaijan ........................................... 38 CHAPTER 4. ESTIMATION OF THE MODEL ..................................................................................... 41 4.1. Data Description ............................................................................................................. 44 4.2. The methodology and the model ..................................................................................... 47 4.3. The results of estimation ................................................................................................. 48 POLICY IMPLICATIONS AND CONCLUSIONS .................................................................................. 52 APPENDIX 1 ............................................................................................................................... 57 APPENDIX 2 ............................................................................................................................... 60 BIBLIOGRAPHY .......................................................................................................................... 64 CEU eTD Collection iii List of ABBREVIATIONS AzStat – The State Statistical Committee of the Republic of Azerbaijan NFES – National Fund of Entrepreneurship Support under the Ministry of Economic Development of Azerbaijan Republic FDI – Foreign Direct Investments R&D – Research and Development GDP – Gross Domestic Product OLS – Ordinary Least Squares CEU eTD Collection 1 INTRODUCTION “What are we having this liberty for? We are having this liberty in order to reform our social system, which is full of inequality, discrimination and other things, which conflict with our fundamental rights.” B.R. Ambedkar Since 2009 Azerbaijan has been implementing a state program that aims at reduction of the regional inequality within the country. The reason to launch the program was the persistence of the regional disparities that have not been mitigating significantly over time. The regional investments have been made by the government even before the program as the regions could not develop otherwise. According to statistics, the economic center of the country has been its capital city, and there is no other area in the country that is at least half as developed in terms of regional output per capita. The aim of this research is to analyze and estimate the regional policy in Azerbaijan. The research adapts the approaches of two analyses by Vedran Dulabic (2011), and Zhang and Fan (2006), who study the regional policies in Croatia and China, respectively. The former contributes to the current research with his qualitative analysis of the Croatian regional policy, and by pointing out the main aspects of the evaluation of the regional policy. For Azerbaijan, these aspects are slightly different from the Croatian case; and these aspects are administration, components and effectiveness, transparency and efficiency approach, and institutional system CEU eTD Collection and monitoring of the programs. The latter work influences the current research through its approach to estimating the effectiveness of a regional policy through an econometric model that captures the effect of contributing factors on the regional growth, and includes the major policy 2 tools. Nevertheless, the methodology applied for the econometric model of the current research is different. In order to perform an estimation of the policy and get some conclusions about the effectiveness of the program, I follow the standard approach to policy evaluation, which means I identify key policy instruments and exogenous non-policy influencing factors (Eric McVittie, 2003), and then run a regression. The econometric model of the current research estimates the effects of investments, discounted loans, education, and structure on the regional growth indicators. Out of these four contributing factors, the first two are of our interest as they are the most used tools by the state program. The estimation is made by the Ordinary Least Squares (hereinafter referred to as OLS) regression of the panel data with fixed effects. Regional inequality represents one of the most broadly discussed issues in the economic circles today. The issue of geographical disparities embodies underlying causes of negative economic consequences on the national level since underperforming areas slow down a country growth, cause political concerns, and make an economy volatile. Some economists estimate that regional inequality is accountable for a third of the inter-personal inequality (Yemtsov and Elbers et al. (2005) as cited in Lessmann, 2011). The problem of regional inequality is complicated by the fact that it tends to worsen over time in case of absence or insufficient intervention. Global experience shows successful cases of the fight against the regional inequalities like that of Great Britain (Armstrong and Taylor, 2000) or Ireland (Nicholas Rees, 2006). However, the world practice has also less positive examples like the case of Italy, where governmental help and subsidization did not bring significant positive outcomes or brought them CEU eTD Collection in a very low weight (Barnier, 2003). This suggests that the analysis and estimation of effectiveness of regional programs and determination of the sources of the regional inequality are crucial for the regional policymaking. 3 The importance of the research is clear, and the two supporting arguments can be stated here. Firstly, the research provides policy implications for the regional policy in Azerbaijan. Currently, the Ministry of Economic Development of the Republic of Azerbaijan is an administrative unit that is responsible for the coordination of the regional policy; and it claims that the country has not conducted any similar research and does not possess any. Given this fact the material provides a valuable study of the ongoing regional policy program for the Azerbaijani policymakers. At the same time, it is important to estimate the regional policy since the public spending on the regional development has to be efficient and effective, and the whole society bears losses otherwise. Secondly, the research and estimations of a regional policy is a relatively fresh field in economics, and the importance