International Center for Human Development ARMENIA “AREAT” Center AZERBAIJAN The Strategic Research Institute GEORGIA Lost potential in the South Caucasus: Aspects of interstate trade Yerevan - Baku - Tbilisi - 2003 Lost potential in the South Caucasus: Aspects of interstate trade Yerevan - Baku - Tbilisi - 2003 Compiled and designed by the International Center for Human Development www.ichd.org The research paper summarizes the existing trends and obstacles of current economic development in South Caucasus Republics – Armenia, Azerbaijan and Georgia – during the last decade. It has been developed by expert groups of the International Center for Human Development /ICHD/ (Armenia), the “AREAT” Center (Azerbaijan) and the Strategic Research Institute /SRI/ (Georgia) – non- governmental organizations – within the framework of the “Lost Potential in the South Caucasus: Aspects of Interstate Trade” project under Friedrich Ebert Stiftung umbrella. The paper has been developed on the basis of the three ‘country studies’. Each of these is focused on one of the three South Caucasus countries’ economic situation and was developed by the same countries’ expert groups respectively. The views expressed in each topic are those of the authors of the relevant topic and do not necessarily reflect the views of the other expert groups. The ultimate goal of this publication is to identify the main ‘product groups’ for potential trade and to help the different businesses to recognize their real losses from lack of the trade. The target audience of the paper is researchers, NGO’s, policy makers and business circles of the three South Caucasus countries. 3 The Friedrich-Ebert-Stiftung (FES) was founded in 1925 as a political legacy of Germany's first democratically elected president, Friedrich Ebert. Ebert, a Social Democrat from a humble crafts background who had risen to hold the highest political office in his country, in response to his own painful experience in political confrontation had proposed the establishment of a foundation to serve the following aims: furthering political und social education of individuals from all walks of life in the spirit of democracy and pluralism, facilitating access to university education and research for gifted young people by providing scholarships, contributing to international understanding and cooperation. The Foundation, which was banned by the Nazis in 1933 and not re-established until 1947, continues today to pursue these aims in all its extensive activities. As a private cultural non-profit institution, it is committed to the ideas and basic values of social democracy. International Center for Human Development The International Center for Human Development is an independent research and public policy institution, a unique think tank, which pays close attention to research as it attempts to develop a unique vision of the main problems facing economic development and social safety. The Center’s interests include: • civil society strengthening; • regional integration and globalization issues; • social sector and poverty alleviation; • governance and public sector reforms; • free market institutions development; • assistance to local governance; • environmental issues; • cultural promotion, etc. The Center is aimed to support strengthening the democratic mechanisms and fostering free market values. 4 “AREAT” Center The “AREAT” Center was established by the political scientists, sociologists, economists and conflictologists in 1998 year. “AREAT” is an independent non- government organization. The main aim of Center is the promotion of public society and support of the democratic reforms in Azerbaijan. The Center carries out the projects in the different areas of public policy. It successfully co- operates with different international humanitarian organization such as Eurasia, AED, ISAR, UNIFEM, Open Society as well as with national and foreign business structures: BPAMOKO, SOCAR, WB. For 5 years “AREAT” has executed more than 30 projects having got the large resonance in public life of Azerbaijan. The Center is an initiator of scientifically practical conferences on problems of the transit period, publishes analytical and methodical literature. Actively participating in partner's program, the Center promotes the development of integration processes in South Caucasus and the forming of peace culture and tolerance. The Strategic Research Institute The Strategic Research Institute (SRI) is the independent think tank for policy analysis and development with mission to support the processes of conceptual and organizational development of new social system and sovereign statehood building in Georgia. SRI Supports the policy-making processes in all branches of government, political and social organizations to bring about significant policy and institutional changes, covering the issues of: • Development Policy, Social policy, Economic policy; • Analysis of conceptual and organizational problems of governance; • Change management and organizational development in state administration, social and economic institutions; • Capacity building for policy management; • Analytical support and facilitation of Business – Government – Civil Society dialogue processes; • Training programs development on public policy management. 5 Contents 1. Preface............................................................................................................................. 9 2. Introduction ....................................................................................................................12 2.1. Country overview ................................................................................................... 12 ARMENIA ................................................................................................................ 12 Geography.......................................................................................................... 12 Population .......................................................................................................... 12 The State............................................................................................................ 13 AZERBAIJAN........................................................................................................... 14 Geography.......................................................................................................... 14 Population .......................................................................................................... 16 The State............................................................................................................ 16 GEORGIA................................................................................................................ 17 Geography.......................................................................................................... 17 Population .......................................................................................................... 17 The State............................................................................................................ 18 2.2. General economic overview ................................................................................... 18 ARMENIA ................................................................................................................ 18 FSU Heritage...................................................................................................... 18 Economic recovery ............................................................................................. 20 External policies.................................................................................................. 22 Financial sector .................................................................................................. 25 Social indicators.................................................................................................. 26 AZERBAIJAN........................................................................................................... 29 FSU Heritage...................................................................................................... 30 Economic recovery ............................................................................................. 30 External policies.................................................................................................. 32 Financial sector .................................................................................................. 34 Social indicators.................................................................................................. 36 GEORGIA................................................................................................................ 37 General economic overview................................................................................ 39 FSU Heritage...................................................................................................... 40 Economic recovery ............................................................................................. 41 External policies.................................................................................................. 42 Financial sector .................................................................................................. 45 Social indicators.................................................................................................. 46 2.3. Economic reforms and institutional developments