A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Niftiyev, Ibrahim Working Paper Determinants of the Agricultural Exports in Azerbaijan Suggested Citation: Niftiyev, Ibrahim (2020) : Determinants of the Agricultural Exports in Azerbaijan, SSRN, Rochester, NY, http://dx.doi.org/10.2139/ssrn.3686701 This Version is available at: http://hdl.handle.net/10419/226347 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Determinants of The Agricultural Exports in Azerbaijan Working Paper No. 2 Ibrahim Niftiyev1 1 PhD Candidate, Univesity of Szeged, Doctoral School in Economics [email protected] This working paper has not gone through the final formal review and should be cited as a working paper. The main purpose of this working paper is to get ready the materials, concepts, and discussions for the final academic journal publication which is ongoing. There is no funding or official support from any organization or person. All errors and expressions are those of the author. Ibrahim Niftiyev ORCID number: 0000-0003-3437-9824 Research Gate/ Google Scholar profile: Ibrahim Niftiyev Baku – 2020 (September) Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan Table of Contents Abstract ................................................................................................. 3 1. Introduction ....................................................................................... 3 2. Literature review ............................................................................... 5 3. Data and Methods ............................................................................. 8 4. Results ............................................................................................... 9 4.1. Main Agricultural Exports ........................................................ 10 4.2. Empirical Findings .................................................................... 11 5. Discussion and Limitations ............................................................. 14 6. Conclusion ...................................................................................... 16 References ........................................................................................... 17 2 Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan Abstract Oil booming and accumulated mineral revenue contributed to the economic growth in Azerbaijan since independence but also pressurized the national currency leading to the appreciation of the nominal effective exchange rate (NEER) and real effective exchange rate (REER). An increase in export prices makes them expensive, decreasing the competitiveness of the country. Azerbaijan’s recent decreased economic performance during 2014–2015 reflected a common reality among the resource exporting countries: relying on the primary sectors might jeopardize the national economy due to the extreme price volatility. The paper investigates the extension of the relationship between NEER, REER, and other export-related macroeconomic variables and agricultural exports to identify Azerbaijan’s non-oil sub-sectoral dynamics between 2001–2018 via the OLS estimations. The main findings indicate that NEER negatively impacted potato, fresh fruit, and fresh vegetable exports. Moreover, potato and fresh fruit exports demonstrated more stable export dynamics during the economic crisis periods. Key words: Azerbaijan economy, nominal effective exchange rate, real effective exchange rate, agriculture, crop exports 1. Introduction The Azerbaijan economy demonstrated a very dynamic economic growth and transformation among the other post-soviet countries. The deep economic recession of the early 1990s resulting from the collapse of the Soviet Union was followed by the rapid catch-up period since the year 2000. Abundant oil reserves helped Azerbaijan to overcome the political instability, to rebuild the devastated society by the war with Armenia and to reestablish the collapsed economic connections. Various economic and social projects decreased poverty and boosted economic growth. Despite the considerable hardships to integrate into the global markets and to converge with the developed economies, Azerbaijan scored the highest GDP growth rate (annual percentage) in the post-soviet space – 34.5% in 2006 (World Bank, 2020a). In 2008, when colossal mineral revenue streamed into the country, GDP per capita in current USD reached 5,574.6$, which was 6.3 times higher than the indicator of 2003 (World Bank, 2020b). Despite formidable recovering period and oil revenue booming period, commodity price slumps of 2014 and 2015 created a shock effect on the economy, decreasing GDP per capita (current USD) from $7,891.3 in 2014 to $3,880.7 in 2016. Similarly, the GDP growth rate bottomed around -3.06% but recovered in 2018 to the positive value (1.41%). GDP per capita in PPP (current USD) did not show a rapid shrinkage – it faded slightly from 17,973.1 (2015) to 17,417.1 (2016) (World Bank, 2020c) but gross domestic savings (GDS) lowered to 22.8% of GDP (GDS was 40.18% in 2014), the unemployment rate started to lightly rise from 4.91% in 2014 to 5.4% in 2019 (The Global Economy, 2020a; 2020b). Oil dependency creates enormous challenges for commodity exporter countries like Azerbaijan in the form of the mentioned developments. There might be several reasons for the current 3 Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan economic structure in Azerbaijan but appreciated national currency resulting from oil booming is a common explanation to have underdeveloped non-oil sectors. Subsequently, the established body of literature illustrates the vital link between the nominal effective exchange rate (NEER) and the real effective exchange rate (REER) on the tradable sectors. Exchange rates change due to the monetary policy and international capital movements. Subsequently, monetary shocks affect agricultural competitiveness in trade relations (Orden, 2002). Agricultural prices respond to the changes and shocks in the monetary variables (Orden and Fackler, 1989). International research has been focusing on the relationship or cointegration among the trade flows, exchange rate, and relative prices to establish the conceptual background of this topic (Rey, 2006; Erdal et al., 2012). Thus, this paper seeks to answer the following research question applying the Ordinary Least Squares (OLS) estimation method: what is the impact of the exchange rate and related macroeconomic indicators on the agricultural crop exports like potato, tea, fresh fruits and fresh vegetables in Azerbaijan between 2000 and 2018? The connection between the exchange rate and non-oil sectors in Azerbaijan is a crucial one and needs to be analyzed continuously as the available data and methodologies allow us to conceptualize it in a better way. Furhermore, State Statistical committee of Azerbaijan classified potato, tea, fresh fruit, and fresh vegetable exports as main export categories which has considerably higher share in total agricultural exports. As this section outlined, oil booming in a small country like Azerbaijan brought substantial wealth to the country, at the same time, appreciating the national currency. Then, economic crises and policy changes (in 2015, the government devalued the national currency twice) rendered economic incentives for the export-oriented production process. The constructed model estimated the extension of the relationship between the export levels of potato, tea, fresh fruit, and fresh vegetable exports, which incorporated the indicators like REER, NEER, inflation, investments, employment, value-added in agriculture, Crop Production Index and economic crisis periods as explanatory variables. The findings indicated that NEER had a statistically significant and negative association with potato, fresh fruits, and fresh vegetables. NEER and tea exports were also negatively associated but insignificantly. This study also found a positive and significant association between REER and potato, fresh fruit, and fresh vegetable exports, which contradicts to some studies and general theoretical expectations related to the connection between exchange rate appreciation and non-booming sectors’ exports. Furthermore, other findings indicate a positive and significant association between potato exports and directed investments in agriculture, a positive and significant association between value-added