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OEO-ECONOMICS
Fariz GASIMLI
Ph.D. Student, Potsdam University (Potsdam, Germany).
AZERBAIJAN ON THE WAY TO THE WTO: LATER BUT SAFER?
Abstract
The WTO undoubtedly belongs to the leading institutions of the globalization process and it is among the most powerful and large-scale of them—most of the world states, including superpower nations, have conceded to its vast authority.1 Membership in the global trading system of the WTO (which currently includes 150 full members and 30 candidates) helps a coun-
1 See: The World Trade Organization, International Forum on Globalization, available at [http://www.ifg.org/ wto.html].
try to accelerate its integration into the world economy and into the globalization process in general. Azerbaijan is currently one of the candidates to accede to the WTO. Accession to the WTO could be one of the pivotal geoeconomic and geopolitical factors for Azerbaijan in its integration into global trade and in establishing a true market economy in the country. The article analyzes Azerbaijan’s accession process to the WTO, assessing the benefits, losses, opportunities, and threats and suggesting some practical recommendations.
I n t r o d u c t i o n
The importance of membership in the WTO is strengthened by the globalization of world trade—trade relations are simply unavoidable in today’s interdependent world. If we look at how different national economies have developed over the ages, one thing comes to mind: integration into world economy goes hand in hand with the growth and prosperity of individual state economies. Al-
most all of the more recent cases of significant economic growth, e.g. East Asia’s “4 Tigers,” China, India, etc., have displayed a partial and gradual opening up to imports and foreign investments.2 Meanwhile, it is essential to keep in mind that simply opening up to international trade and foreign investments is only part of the success story and is not enough for any significant economic development. The other “parts” of the success formula, including deliberate use of the opportunities offered by foreign trade, a domestic investment and institution-building strategy, stimulation of production, entrepreneurship, and competition, are all extremely important.
Accession of Azerbaijan to the WTO requires reform and adjustments in the national economic system and legislation as well as concessions in trade patterns. Thus, accession will be characterized by adaptation outlays and difficulties, especially in the short run. This is a natural process and the required reform will affect such areas as tariffs, customs procedures, taxation, insurance, banking, and finance.3 The liberalization of the trade regime will cause the national economy to face greater competition from foreign markets. This of course should not be grounds for skepticism among the country’s economists and politicians, since much can be gained from the reforms and competition. The aggregate benefits from joining the WTO are significant and comprise economic as well as political and social dimensions for the country as whole. The republic’s membership in the WTO will send a positive signal to foreign investors and the international community about the general business climate in the country. It will help the country to modernize its economic system, improve its access to foreign markets, and allow consumers to benefit from a larger variety of products. Consequently, it can boost investments and provide jobs, contributing to overall prosperity.
General Accession Procedure
As a matter of fact accession to the World Trade Organization is usually a complicated, demanding, and lengthy process that takes several years. For example, it took 14 years for such a big economy as China to join the Organization. The Russian Federation applied in 1993 and is still working on its full membership. Among the smaller states, which applies more to Azerbaijan, we have observed the completed accessions of Armenia, which took 10 years, Moldova—8 years, Georgia— 4 years, and Kyrgyzstan within just 2 years.4
There are currently 30 countries engaged in the accession process to the WTO. Almost all of them are developing countries and countries in transition. Azerbaijan is customarily considered to be a country with a transition economy, but it does not necessarily have to translate to the same status in the WTO accession.5
Art 12 of the WTO Agreement says that “any state customs territory having full autonomy in the conduct of its trade policies is eligible to accede to the WTO on terms agreed between it and WTO Members.”6
Accession to the WTO is essentially a negotiation process, quite different from the accession to other international entities like the International Monetary Fund (IMF), which is largely an automatic process. The entire accession process involves several stages7:
2 See: Development, Trade, and the WTO: A Handbook, ed. by B. Hoekman, A. Mattoo, P. English, The World Bank, Washington, D.C., 2002, pp. 9-10.
3 See: Asian Development Outlook, Report on Azerbaijan, 2006, p. 94.
4 See: WTO Members and Observers, The official WTO Website, available at [http://www.wto.org/english/ thewto_e/whatis_e/tif_e/org6_e.htm].
5 This issue is discussed further in an article in “The Status” section.
6 How to Become a Member of the WTO, The Official WTO Website, available at [http://www.wto.org/english/ thewto_e/acc_e/acces_e.htm].
7 The accession process is explained in accordance with the information provided by the official WTO website [www.wto.org].
(1) a formal request for accession;
(2) the presentation of a memorandum8 on foreign trade conditions by the applicant state;
(3) the determination of terms and conditions for the accessing country;
(4) bilateral and multilateral negotiations with interested members of the WTO9;
(5) the completion of an “accession package”10;
(6) the approval of the “accession package” by the WTO’s General Council; and finally
(7) the ratification of the “accession package” at a national level and the signing of a Protocol of Accession.
A so-called Working Party (WP), which is the main body to considering and processing an accession application, is established at the first stage by the General Council.
All interested WTO Members must be in agreement that their individual concerns have been met and that outstanding issues have been resolved in the course of their bilateral and multilateral negotiations. Only then does a candidate become a full member.
Status
Each applicant country enters the organization under a certain status which usually corresponds to the level of development of its economy. In fact, there are no WTO definitions of “developed” and “developing” countries.11 But when it comes to the terms of accession, the Organization differentiates mainly among developed countries, developing countries, countries in transition (CIT), and leastdeveloped countries (LDC). As to the last category, the WTO clearly recognizes as LDC those countries that have been designated as such by the U.N.12 There are currently 32 LDCs that are candidates for accession and more than 20 full members among them. LDCs are clearly entitled to use the Special and Differential (S&D) treatment provision, which envisages more support, fewer concessions on protectionism, and a longer transition term. Meanwhile developing countries and countries in transition are granted only partial S&D provisions. However, declaration of status is rather a formality. What really matters are the actual commitments and terms of accession. The actual commitments, once specified during accession, may restrict the scope of the S&D treatment provisions. For instance, if a new entrant state, which positioned itself as a developing economy, makes an explicit commitment to restrict its domestic agricultural support at a level lower than that allowed for developing countries, the commitment would be binding even if this state may want to increase its agricultural support to the level allowed for other developing economies.13
The CIS countries joined the WTO on the terms of “countries in transition,” which eventually led to too many concessions. Those concessions could have been avoided or alleviated had they acceded with a “developing” status.14 The key decision-makers in Azerbaijan already realize this. A status of LDC is not possible for Azerbaijan, since today the state economy is stronger than ever be-
8 In WTO jargon, a memorandum stands for a candidate country’s report on its foreign trade conditions.
9 Stages 3 and 4 usually occur at the same time, while all other stages occur subsequently.
10 The accession package is the documented results of bilateral and multilateral negotiations.
11 See: Effects of WTO Accession on Policy-Making in Sovereign States: Preliminary Lessons from the Recent Experience of Transition Countries, Staff Working Paper, WTO, 2002, p. 6.
12 Ibidem.
13 Ibidem.
14 See: Report for the Capacity-Building Workshop on the WTO Trade Facilitation Negotiations for WTO Members from Eastern Europe, Central Asia and the Caucasus, U.N. Economic Commission for Europe, June 2006.
fore and there is good potential for further stable development. Besides, an LDC status would have a negative effect on potential foreign investments.
Azerbaijan is interested in being acceded as a developing country.15 In so doing, the country will be able to provide 10% subsidizing for agriculture, and no country has so far objected to such an accession status for Azerbaijan.16
Status is also related to a very important issue—the country’s right to a transition period for implementing the WTO Agreements. Depending on the applicant’s status and the accession negotiations, a new entrant is granted a certain amount of time to implement the concessions and obligations in accordance with the WTO Agreements.
Azerbaijan’s Accession to the WTO: Positive and Negative Effects
Azerbaijan has the largest economy in the Southern Caucasus and is the last country in this region to join the WTO. Probably these two facts are interrelated and Azerbaijan’s more developed economy can at least partially explain its relative late entry into the WTO—accession of a new country to the WTO is a far from simple process and the larger the economy, the more complicated the process.
The country officially submitted its application in June 1997. The country’s Working Party was created immediately thereafter and so Azerbaijan became an observer in the WTO. The Working Party was first chaired by Mr. Hoeynk (Germany) and is currently headed by another German expert—Mr. Lewalter (since 2000).17 Membership in the Working Party is open to all the WTO states. In the case of smaller countries (such as Azerbaijan), the WP is made up of members of the so-called Quad. The Quad consists of the most influential WTO members—the U.S., Canada, the EU, and Japan.18 Azerbaijan presented its Memorandum on foreign trade conditions in April 1999. The stage of questions and answers to the Memorandum took slightly longer than a year, being de facto completed by June 2000. There was an additional “questions and answers” session in 2001 and finally, in 2002, the first meeting of the Working Party was held—the country started the negotiations phase of the accession. Four meetings of the Working Party have been held so far.
Azerbaijan’s accession to the WTO can be regarded as a relatively long process that has lasted for more than 10 years. However, even the most optimistic forecasts predict full membership to take no less than 2-3 years. There are some objective reasons for being late and one of them is that Azerbaijan’s economy is bigger and more diverse than those of its neighbors that have joined the Organization. Also the average time it takes to complete an accession has been steadily growing over the past decade.19 This is partially due to the growing membership, which has naturally led to slower decisionmaking and management. At the same time, the country’s accession is not among the particularly complicated or aggravated cases. Even though the work on accession is going somewhat slow, it is being done with the understanding that trade liberalization is a sensitive process for a transition economy and should be implemented step-by-step. Also now that we have four CIS countries in the Or-
15 See: “Membership in the WTO Will Not Make Azerbaijan Change Customs Tariffs on Vital Goods,” IA REG-NUM, 6 April, 2006, available at [www.putin.ag.ru/news/misc/newsang/06/04/06_124.htm].
16 Existing WTO incumbents have a right to object or dispute over an entrant’s status.
17 See: WTO Members and Observers: Azerbaijan, The official WTO Website, available at [http://www.wto.org/ english/thewto_e/acc_e/a1_azerbaidjan_e.htm].
18 See: Development, Trade, and the WTO: A Handbook, p. 61.
19 See: WTO Accession: Lessons from Experience, The World Bank, June 2005, available at [http:// siteresources.worldbank.org/INTRANETTRADE/Resources/Pubs/TradeNote22.pdf].
ganization, those still in the accession process can learn from the entrants’ experience in order to avoid mistakes and make the appropriate decisions. In fact, experts in Azerbaijan have been already doing this. It is important to remember that unlike other international economic institutions (e.g. the IMF and WB), entry into the WTO does not happen instantly. It is rather a challenge to “bargain” with the WTO over terms and conditions for prospective trade.20
At the moment, Azerbaijan already has a pretty liberal trade regime for an acceding country with an import duty of 9.4% and a bound tariff of 13.6%.21 “Azerbaijan’s proposals are so liberal. As you see, our tariffs are very close to the final tariffs,” noted Mahmud Mammadguliev, the deputy foreign minister of Azerbaijan and the head of the national WTO delegation, at a recent USAID-organized WTO workshop. Agriculture remains in the center of today’s concerns and there are negotiations over subsidies for agricultural products. Since Azerbaijan intends to join the WTO as a developing country, it is striving to receive a 10% subsidy for both specific and nonspecific products in agriculture.22 Furthermore, a number of issues are still ambiguous and undecided, including non-tariff protection and intellectual property. The former needs to be considered mainly as a possible tool for protecting domestic production, while the latter is a direct concern for accession to the WTO. Intellectual property is still a problematic area in Azerbaijan and demands attention and changes, especially in terms of enforcement.
Azerbaijan is currently at the most important and responsible stage of the accession to the WTO—negotiations.23 The country’s accession has already been approved by Turkey, Japan, Canada, Georgia, Norway, Pakistan, and others.24 The country has received considerable technical and financial support from foreign states that are helping the country to join the WTO—mainly from the U.S. and the EU states. The state has carried out a number of important arrangements designed to stimulate foreign investments.
Although opinions today vary on whether membership in the WTO is the right step for Azerbaijan, there is the predominant belief that the WTO accession will have an important effect on the country’s economy. A growing majority of researchers, scholars, and experts believe that Azerbaijan will generally gain from joining the WTO. However, a number of specific questions and issues concerning the actual effects (both short-term and long-term) of the accession still remain partially or completely unanswered. These include such macro- and microeconomic dimensions as domestic production and entrepreneurship, terms of trade, employment, consumer prices, cost of living, and others.
Accession to the WTO has both benefits and losses for a member country. Whereby the gains and losses usually vary over time—some groups may lose in the short run, but gain eventually in the medium and long run. For example, unskilled labor is likely to lose in the short run from transitional unemployment in industries that will suffer from increased import competition, but may gain in the long run if those industries are rehabilitated and become stronger than before.
Benefits of WTO membership fall into three main categories:
(1) a stronger domestic economic system,
(2) access to a dispute settlement mechanism, and
(3) increased opportunities from foreign trade.25
20 See: V. Bayramov, “Commonwealth Independent States’ Accession to the WTO: Cross-Countries Trade Liberalization Analysis,” in: International Conference on Human and Economic Resources, September 2006.
21 See: “Baku Hosted Workshop Examining Azerbaijan’s Accession to WTO,” Today.Az,, 30 May, 2007, available at [www.today.az/print/news/politics/41511.html].
22 Specific subsidies are those provided specifically to a region, an enterprise, or industry, while a nonspecific subsidy is universal.
23 See: Azerbaijan Entered the Most Important Phase of Accession Process to WTO, State Customs Committee of Azerbaijan Republic, August 2006.
24 Azerbaijan gotovitsia vstupit v VTO,” Sootechestvennik, April 2006.
25 See: Development, Trade, and the WTO: A Handbook, p. 61.
The first category refers to the required reform of domestic policies and institutions for conducting international trade. The accession will thus promote modernization of Azerbaijan’s national economic system through reforms as well as technical and financial support by international organizations and foreign governments within the framework of assistance for joining the WTO. This will contribute to the country’s further and faster integration into the global economy. Accession to the WTO is also likely to bring enhanced transparency, reduced corruption and bureaucracy, and better conditions for entrepreneurship.
The second category refers to the WTO’s function as a dispute settlement institution. Essentially the WTO is a place where member governments go to try and sort out the trade problems they face with each other. According to Peter Mandelson, EU Trade Commissioner, membership in the WTO is “a kind of protection from discrimination in economic interrelations.” Thus, as a member of the WTO, Azerbaijan will be able to enjoy fairer trade with international partners.
The third category broadly comprises benefits, which can bring liberalized trade to a country. First of all, competition, stimulated by membership in the WTO, will mobilize local producers to modernize and rationalize production, as well as galvanize innovations. As a result, consumers will benefit from improved quality, wider selection, lower prices, and enhanced customer orientation. Then membership will improve a trading environment for foreign companies, creating more favorable conditions for investors. It will send a positive signal to the international community and to business investors in particular, because membership in the WTO implies a government’s commitment to a market economy, integration into the global trade, and a safer and stable business climate. This will lead to stronger economic interest from abroad and international trust in general, implying an inflow of foreign direct investments (FDI). The increased business activity in the county will create new jobs and opportunities for the population. Furthermore, foreign markets will become more open to domestic producers, creating new opportunities for the private sector of Azerbaijan. Those managing to go international can especially gain from the scale and scope economies. Domestic firms will stick to international quality standards for exports, enhancing manufacturing and service rendering. Moreover, many of them can benchmark good quality imports, strengthening their own stances and capabilities. As a result, the reputation of local goods will rise, although prices are likely to rise as well.
Transition periods are challenging and painful, but usually lead to positive results at the end of the day. In fact, the main losses from joining the WTO should occur in the short run—some domestic producers lose because of tougher competition with imports and consequently some people will suffer due to the loss of jobs. The state will also lose part of its income from tariff on imports.
Membership in the WTO opens the gates wide for foreign markets, but if national producers are infant, weak, or do not exist at all, those gates can bring too many threats—foreign competition may damage the rudiments of infant industries and hinder the emergence of new ones. At the same time, it is important to mention that the flow of new imported products is likely to bring new entrepreneurial ideas and lead to the creation of new (whether copied, reinvented, or adjusted) domestic goods and services. The question is how this production will succeed over time and whether it will survive.
In so doing, the government should play its role and engage in the necessary actions designed first to preempt and, once the country has acceded, diminish the adverse negative effects on domestic entrepreneurs, producers, and employment. The state has obligations to protect domestic producers and should exercise them. The question is to what extent and in what form should protection be provided. There is no single answer however. The rates and forms of protection depend on the results of bilateral and multilateral negotiations with members of the WTO, Azerbaijan’s current and future trade partners, and will definitely vary for different industries and individual products.
As a matter of fact, since the current tariff rates in Azerbaijan are generally not high, accession to the WTO will not lead to a sharp drop in tariff rates, so the domestic economy should not significantly suffer from the cessation of protection.
The Changing WTO
It is also worth mentioning some of the current trends in the Organization, since they should be interesting for new entrants such as Azerbaijan.
The WTO as an organization and a nexus of rules may experience some changes in the future. One of the main reasons for this is its expansion. There are more and more members joining the Organization, some of which are influential players in the modern world with their own interests and viewpoints on the rules of international trade. These are first of all the nations representing the G20 developing nations, such as China, Brazil, India, and Indonesia. There are still more significant accessions emerging ahead, with the Russian Federation in the front line. These new big players may want to challenge and change some of the rules, shifting the whole system toward the requirements of the expanded organization and adjusting it to the newer reality. In fact this process has already started and the increased number of international disputes within the WTO, as well as arguing cases over the current fairness of the rules, is evidence of this.
According to Pascal Lamy, the director-general of the WTO, the Organization needs reform today. The existing system is no longer fully effective, since it was established when “the world was different.”26 The structure and composition of the Organization’s major players has changed and is still changing and, consequently, “the rules of the game should also be adjusted.” For this purpose, multilateral trade negotiations are being held, partially including the Doha round, which is the major WTO negotiation process designed to lower trade barriers around the world.
Recommendations for Azerbaijan’s WTO Strategy
For beneficial membership in the WTO, Azerbaijan has to follow a strategy consistent with its national economic interests and designed to advance the country into the global economy as a capable trading partner.
It is crucial for Azerbaijan to project and, once acceded, to maneuver its economic and political tools to diminish and possibly avoid negative impact on the existing and prospective industries of the domestic market. Oil and gas are not inexhaustible resources. Also being predominantly dependent on extracting and exporting raw materials is a poor way to develop a strong national economy. Azerbaijan needs to diversify its economy, promoting and developing the non-oil and non-gas industries.
The following recommendations may be practical for implementing the WTO strategy:
1. The strategy should identify national economic interests and work in consistence with them.
2. The state should support domestic producers and entrepreneurs and protect the national market whenever needed, but open it up for liberalized international trade within the framework of the WTO’s principles. This especially concerns the non-energy sectors and those with the potential of becoming exporters.
3. Diversification of the economy and the development of competitive advantages are vitally important for sustainable development.
26 “Bez Rossii VTO ne iavliaetsia mnogostoronnei organizatsiei,” Rambler Mass Media, 10 June, 2007, available at [http://www.rambler.ru/news/economy/0/10543256.html].
4. The state should attract more international class experts in international trade and specifically in “WTO Management,” as well as train the local staff of government bodies in this area. The situation today is much better than it was in the past—a number of good experts are working toward the country’s membership, but there is still room for improvement. Further technical assistance from international organizations is also important.
5. A long enough transition period should be negotiated, so that country has time to adapt before all of the WTO rules become fully valid.
6. The status of developing country with outgoing privileges seems to be the most optimal.
7. The state should maintain higher import tariffs for products of vital importance to the domestic economy. In the case of a low average duty rate upon accession, the country should maneuver rates on products according to their importance for the national economy. That is, maintaining higher tariffs for strategically important and sensitive industries and assigning lower ones for less important branches will keep the average duty rate at the required level.27
8. The leading economists should continue to study the experience of recently joined and joining WTO members, especially CIS countries, and draw the appropriate implications.
9. Protection does not necessarily have to be in the form of tariffs. There are other methods of protection, including local production28 and technical requirements which should be considered.
10. The country should remain aware of any ongoing trends and developments within the WTO.
C o n c l u s i o n
Today the World Trade Organization governs over 95% of international trade and plays a crucial role in the contemporary global economy. Azerbaijan is currently a WTO observer and, like most other CIS countries, aims to join this organization in the next few years.
There are a number of economic, as well as social, political and legal reasons for joining the WTO. The accession process itself is individual for each country in terms of both time and negotiated terms. Azerbaijan has taken a relatively longer path to full membership and should use this time to achieve more beneficial terms and conditions and prepare the domestic economy for the challenges and opportunities of liberalized international trade. Transition periods are difficult by definition. WTO accession will require many concessions, adjustments, and reforms, thus posing threats for some groups, especially in the short run.
Thoughtful and in-depth preparations for WTO membership, involving a thorough analysis of the threats and opportunities, study of the experience of acceded countries, as well as awareness of the ongoing changes and trends within the WTO, will certainly help the country to ease the transition period. Such preparative work will also maximize the prospective benefits of full membership in integrated world trade. It is also important to remember that the accession process requires outlays and thus should not last too long, since membership in the WTO is not an aim in itself, but a means to gain more opportunities.
As Azerbaijan successfully furthers its integration into the globalized world, aiming to join the multilateral trading system, it is extremely urgent for this country, with its huge untapped economic
27 See: V. Bayramov, op. cit.
28 A requirement whereby the commodity of a foreign producer should be partially manufactured in the country where he wishes to sell it.
potential, to think about its competitive advantages. It is important that Azerbaijan accedes to the WTO not just as a raw materials provider, but as a strong and diversified trade partner with a competitive national economy, capable of offering an attractive and rewarding business climate for foreign investments, as well as for its own products on international markets.
Iza NATELAURI
D.Sc. (Econ.), head of the Microeconomics Department, Paata Gugushvili Institute of Economics, associate professor, Ivane Javakhishvili Tbilisi State University (Tbilisi, Georgia).
GEORGIA’S EXTERNAL SECTOR: CURRENT STATE AND PROBLEMS
Abstract
During the transformation of Georgia’s economic system, when politics has absolute priority over economics, the external sector performs a universal func-
tion and operates as an independent factor contributing to the balanced development of the country’s economy. Such are the questions examined in this article.
I n t r o d u c t i o n
In the economic reality of modern Georgia, the most difficult and vitally important problem is how to optimize the performance of the country’s external sector.
The current importance and difficulty of this problem is due to a number of circumstances: first, the sphere of foreign economic relations, compared to other areas of the economy, is more (and in some cases totally) politicized. Second, the very subject of investigation—the external sector—is extremely multifaceted:
(1) it has macroeconomic and microeconomic aspects;
(2) it includes trade in goods and services;
(3) foreign economic relations are maintained within the framework of individual enterprises (joint ventures) and in certain territories (special economic zones), on a bilateral basis (cooperation between partner countries), within integration groupings, and on a multilateral basis with supervision, monitoring and control by international economic organizations (IMF, World Bank, WTO, U.N.);
