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THE CAUCASUS & GLOBALIZATION
Rasim HASANOV
D.Sc. (Econ.),
professor at the Azerbaijani State Economic University
(Baku, Azerbaijan).
MANAGEMENT IN TRANSITION ECONOMIES: AN AZERBAIJAN REPUBLIC CASE STUDY
Abstract
This article takes a look at the problems and difficulties in managing transition economies that arise during accelerated transformation development. The author bases his interpretation of the genesis of Azerbaijan’s economic development on the real situation in the country and highlights several specific situations and prob-
lems of the current stage and their correlation both with the consequences and the special features of the transition period. The article also reveals several undesirable but possible consequences that could arise during the ongoing transition period based on the example of the progressive development of Azerbaijan’s economy.
I n t r o d u c t i o n
Transition economies1 in many post-socialist countries have two main aims: to create an integrated and structurally stable economic system and to transform the management mechanism from directive-centralized to liberal-market. The transitivity of the economic systems requires a synchronized solution to these essentially very complicated tasks and is potentially capable of giving rise to many new problems. These tasks form the fulcrum of the state’s economic policy and its participation in regulating the transition economy. At the same time, it cannot help but reflect on the state and development of economic science in recent years. This branch of science has become more flexible with respect to practical management issues. This situation has arisen, first, due to the changes in the nature and components of the development of the global economy. Reform has become a universal and frequently applied tool of economic policy. Second, for objective reasons, a unified, efficient, and effective reform model has not yet been created that is suitable for solving the numerous tasks that appear in different conditions. Third, many are judging the efficiency and applicability of a particular model of development based on its short-term results, which provides an inadequate assessment of the choice of methods and the long-term economic policy tools.
The uniqueness and individuality of economic reform models are primarily manifested in the nature and structure of the socioeconomic potential and level of social development of the individual countries. Solving tasks relating to the country’s current development is also important here since
1 The etymologic meaning of the word “transition” comes from the Latin transitus—transient. This term applied to the economy implies transition processes that retain features of the previous economic system.
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they are a component of the state’s entire macroeconomic policy. Thus we can conclude that the problems of economic transitivity objectively form a new range of tasks for state economic policy and scientific research.
The experience of the past 12-15 years shows that the Azerbaijani model of development is no exception in this context. Despite the great potential and achievements in the systemic transformation of economic relations in Azerbaijan, there are still problems and questions that are generated by the ongoing transition period.
These problems and weak spots are manifested in many different ways and differ quite significantly from each other. So we believe that Academic Abalkin is absolutely right when he claims that “a transition economy is not so much reform of economic policy and management methods as transformation of the system of socioeconomic relations.”2
The specific questions of economic development generated directly by the transition period can be divided into two groups:
—problems relating to conceptions or targets, priority choices, and the coordination and implementation of specific reform programs and economic policy;
—problems relating to the acceptance and support of reform measures by the active strata of the population, including the huge army of civil servants and private businessmen. Practice shows that the way economic processes are managed, including by means of state regulation, in transition countries is the main cause of the various problems that arise and determines the dynamics of their development as a whole.
Management Aspects Pertaining to the Transition Period
The most important characteristic of the contemporary approaches to the transformation processes is that they are interpreted as the key factor in accelerating development. Nevertheless, complex ideas about the transformation of economies have always customarily dominated in development conceptions, keeping in mind the priority of management factors. From a so-called major jolt to balanced growth, from the “Washington consensus” to “reform of the second generation,” the emphasis has always been placed on large-scale changes in economic development and management methods.
But it should be noted that significant efforts aimed at changing the institutions and methodological foundations of state economic management also prevail among the priorities in almost all conceptions of “integration” and “management.” Such priorities can be clearly traced in the conceptions of the Washington and post-Washington consensuses, in the conceptions of shock therapy, and in gradualist and hetero-orthodox theories of reform. Integrated management is a priority in the Chinese reform model. This vector also forms the backbone of many documents of international organizations.
But some scientists and specialists uphold other views. For example, well-known American scientist Albert Hirschman believes that any country that is able to carry out integrated programs cannot be economically backward. So the potential for economic growth is not as limited as the complex theories claim.3 According to Albert Hirschman, the imbalances characteristic of a low level of
; See: L.I. Abalkin, Kurs perekhodnoi ekonomiki, Moscow, 1997, p. 49. ; See: D. Rodrik, “Mnogoc able at [http://www.akipress.org].
2 <
3 See: D. Rodrik, “Mnogochislennye retsepty ekonomicheskogo rosta,” AKIPress Information Agency, 2008, avail-
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economic development create favorable possibilities that can be used in economic policy for accelerating and raising its efficiency and productivity.
World practice shows that Hirschman’s main ideas about development proved correct. The lessons of recent years show that the efficiency and productivity of economic policy largely depend on how well it achieves its strategic and integrated aims. The stimulation of economic growth requires achieving correct aims and not implementing everything at once. After defining priorities and identifying possibilities, efforts should be made not to achieve one integrated breakthrough, but to foster consistent and cumulative changes. As Professor Rodrik notes in the above-mentioned article, countries encounter problems if they do not use periods of high rates of economic growth to strengthen the institutional foundations of sustainable, stable, and equal development. Summing up the above, we can ascertain that at the current stage it is precisely these goals and tasks that should become the main reference points for countries undergoing accelerated development during the transition period. The achievements reached in recent years in Azerbaijan’s economic development (mainly due to successful implementation of the oil strategy) have already made the above-mentioned reference points the main components of the state’s economic policy. The Azerbaijan Republic is carrying out a well-balanced and responsible economic, including energy, policy. President of the Azerbaijan Republic Ilham Aliev notes that “energy policy, energy philosophy, if we can put it that way, means that energy should bring the people together rather than separate them... We have never used and will not use energy resources for other purposes.”4
Achieving macroeconomic stability, reducing the poverty level, eliminating the disproportions of regional development, striving for structural equilibrium, intensifying mutually advantageous international cooperation, and so on, are the leading elements in the State Economic Strategy being carried out in the Azerbaijan Republic. Over the past five years, the country’s GDP (more than 85% of which is generated by the private sector) rose 2.5-fold. Industrial production is growing at the same pace. According to its economic growth rates, Azerbaijan has ranked first in the world for four years in a row. Much is also being done to reform the country’s economic and political life. The World Bank’s business climate report Doing Business-2008 recognized the Azerbaijan Republic as a reforming country. An important feature of these results is the fact that they were achieved at a time when 20% of Azerbaijan’s land was occupied by Armenia and when the country had approximately one million refugees and forced migrants.5
At present, the regulation of socioeconomic development of transition countries seems to have acquired a new management paradigm. The role of governments in this process is changing since the higher level of different types and designations of foreign resources is decreasing governments’ ability to influence the economic processes.
However here it should be noted that despite the objective component of the designated trend many of the managers directly responsible for the productivity of the regulating decisions have begun using these circumstances in their own, at best, narrow interests.
On the other hand, the intensified democratization of society is accompanied by greater generalization and internationalization of economic relations, which is raising the importance of public control over all the participants in the economic processes, including over the government’s activity.
It should be noted that use of the new managerial paradigm began de facto with the development of new institutionalism, the main research target of which is analyzing the managerial decision-making process. The approach that has become popular in recent years to assessing the degree of efficiency of the “state-economy” system of relations in terms of the transparency and accountability of government actions serves precisely these aims. This approach presumes an analysis of
4 Bakinskii rabochii, 14 January, 2009.
5 See: Ibidem.
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managerial decisions at the macro level throughout the entire range of regulation-making-direct participation in economic and management activity-control and regulating activity. We believe that in this analysis assessment criteria should be formed based on the pertinent tasks and special features of state economic regulation, since the practice of the transition period shows that the mission of state regulation in transition economies is very different from its requirements during periods of standstill.
The Role and Tasks of State Economic Policy during Transition Periods
The state’s participation in the economy has a long history that began with the establishment of capitalism. The famous slogan declared by French economist Jean Claude Gournay in 1785 at an assembly of physiocrats, “Laissez faire, Laissez passer,” essentially meant the demand for free economic action and the removal of obstacles on the path toward a competitive market economy. As L. Abalkin justly pointed out, “It was generated by absolute faith in the might and efficiency of the ‘invisible hand of the market,’ the comprehensive substantiation of which was given two decades later by Adam Smith.”6
But, as we know, Adam Smith merely gave the state the role of “night watchman,” called upon only to protect private property and freedom and create and ensure the necessary legal framework for them. Instead, world practice showed that contrary to the spread of the liberal idea in society, the state did not become a night watchman. The state, due to various circumstances, took part in different ways in the socioeconomic life of its country. The degree of interference of the state in the economy was essentially determined by the state of the country’s economic well-being, and the demand for its interference particularly grew during crises and depressions.
When talking about the need for the state’s interference in the economy almost everyone refers to two symmetrical theories: “failure of the market” and “failure of the state.” World practice shows that in general both are right. The experience of the economic development of certain countries shows that state interference is becoming an ubiquitous universal tool of support or salvation in the face of a crippling economic crisis regardless of the reasons it appeared. It is quite understandable that in transition conditions the role of the state’s participation in the economy significantly grows and becomes intensified. In such conditions, the state primarily acts as the backbone and creator of the necessary conditions and corresponding legal base for the transition to market relations.
According to M. Pivovarova, the efficiency of state regulation in transition countries must be defined as an integral sum of economic, social, and adaptive efficiency.7 The economic efficiency of state regulation is determined by the degree to which the obtained result (with the least outlay) corresponds to the set socioeconomic goal. In the social respect, rational solutions must always be found between economic efficiency and a comprehensive understanding ofjustice. A more difficult and uncustomary component of the concept of efficiency is its adaptation dominant. The thing is that the last twenty years of world development are distinguished by the fact that the dynamics and intensity of the changes in economic relations, as well as in the world economic environment, are several steps ahead of the reaction of the economic entities and level of methodological preparedness of the regulating structures. Experience quickly loses its value and problems become more
1 See: L.I. Abalkin, op. cit., p. 108.
6 !
7 See: Gosudarstvennoe regulirovanie rynochnoi ekonomiki, ed. by I.I. Stoliarov, Moscow, 2001, p. 48.
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complicated, which is directly related to the emergence of essentially new tasks accompanied by the interdependence of all the entities. The ambiguity and degree of risk in economic management are growing at an accelerated pace. This is also the reason for the rise in all kinds of local and global crises in the world economy in recent years. Keeping in mind the above, we believe that the strategy and policy of state regulation should have adaptive capabilities in the narrow and broad sense. In the narrow sense, adaptation is the reaction to the events and changes going on in the economy. While in the broad sense, adaptation presumes exerting active influence in order to prevent the emerging problems.
Recently, much attention has been given to analyzing the efficiency of state regulation in economic science and practice. They occupy a central place in the theories of public choice (James M. Buchanan, Gordon Tullock), rational expectations (Robert Lucas), and others. The advocates of these theories claim that the effectiveness of economic policy largely depends on correctly defining goals or the target function. In their opinion, the most sensible thing is to form a correct target function based on chosen preferences. We believe that this approach is especially beneficial for transition countries. First, in such countries, the present circumstances have a great influence on politics, in the conditions of which governments are sometimes forced to act by means of trial and error or in firefighting conditions. On the other hand, according to Jan Tinbergen’s well-known analysis of inequality, the number of goals should never be higher than the supply of economic political tools at the state’s disposal. It should be kept in mind that in practice the number of development goals usually correlates conversely to the level of the country’s development. But practice shows that an attempt to reach many goals at the same time requires the activation of different regulators that have contradictory effects on the processes and could lead to dispersion of the resources at the government’s disposal. So we believe that in transition countries a more balanced approach should be taken to the choice of goals in the current policy. When defining the goals of economic policy, we should not forget that any regulating measures have a lag effect that can have different durations. In transition countries the time factor for drawing up and implementing economic decisions is especially important. Knowing how the lag effect works makes it possible to avoid frequent delays in making macroeconomic decisions, which is characteristic of transition countries. When evaluating the efficiency of economic policy, we should also keep in mind the so-called multiplication potential. This quality of the economic system was discovered and activated by John Maynard Keynes. It means the existence in the economy of transmitting mechanisms under the effect of which the final result is much higher than the original momentum in any element of the mechanism. World practice knows of an entire system of multipliers that embrace the most diverse goals and tools of economic policy, the effect of which differs in the short and long term.
The above interpretation of tasks, goals, and properties of the state regulation mechanism shows that its effect in each specific case largely depends on the compatibility of the different elements used and, naturally, on their correlation to the current economic environment. But the state’s interference in economic processes is also accompanied by negative side effects. The state’s “failures” or defects are its inability to ensure the efficient distribution of resources and correlate socioeconomic policy with the idea of justice customary in society.8
It should be kept in mind that the state’s failures or defects cannot, first, be premeditated, and, second, are not always and cannot be predetermined for everyone. They mainly appear due to erroneous economic and political precepts, absurd conceptions, faulty conclusions, and misconceptions. These failures and the reasons for them are often discovered after the fact. In world practice there are numerous examples of such gross failures when the best of intentions backfired. For example, German academic Horst Siebert describes what is known as the Cobra Effect. When the British ruled India, they found a huge amount of snakes there—mainly cobras. The British were in fear of these
See: Gosudarstvennoe regulirovanie rynochnoi ekonomiki, p. 57.
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animals and hoped to decrease the population remarkably. So they offered a reward to everyone who would bring them the head of a cobra. But the Indians started breeding cobras to earn a living from it. So the solution against cobras resulted in even more of them. During the oil crisis in 1992-1994, the government of Venezuela wanted to reduce the consumption of petroleum products within the country in order to increase their export. Since, for political reasons, it could not raise the price of gasoline, it chose instead to restrict road traffic: cars with even license plates could travel around on even days and those with uneven license plates on uneven days. But the Venezuelans began buying two cars, one with an even and the other with an uneven license number.9
In this way, the above-mentioned features, interpretations, and examples show that the formation of a stable and efficient economic strategy and policy is rather problematic. It stands to reason that the Azerbaijan Republic is not insured against such problems in economic policy either. Whereby it should be noted that the difficulties of developing and implementing a universal and rational economic policy are reflected in the example of Azerbaijan’s economic development of recent years.
Special Features of Transitivity and the Difficulties They Cause in the Management of Azerbaijan’s Economy
Since the beginning of the 1990s, the formation and activity of state management institutions in Azerbaijan unfolded and continue to remain under the influence of the transition state of economic relations. In so doing, it should be noted that in the present-day conditions in Azerbaijan, financial flows as a whole and the budget system in particular are the most important manifestations of the transformations in the economy’s macro regulation. The short-term nature of transitivity in Azerbaijan essentially shows that the special features underlying it have to a certain extent also given rise to possibilities of a “Hirschman nature” in economic policy.
The most important feature of transitivity is the economy’s mixed institutional system. In transition economies, including in Azerbaijan’s economy, the institutional system is, first, in a state of permanent change, in search of an optimal model; and second, the old institutional structures are continuing to function in this system along with the progressive, market elements. The main thing is that these structures interact and interrelate with different flows of material and financial resources. It is understandable that in such conditions, due to the absence of a homogeneous management environment, it becomes extremely difficult to carry out efficient regulation for the sake of strategic development.
The next group of special features characterizing the transitivity of Azerbaijan’s economy is to some extent the “fetishization” of certain market myths. For example, the absence of a vertical-directive management system is perceived by many as absolute independence, right down to entire sectors or functional vectors of the economy. This violates such fundamental principles in management of the country’s economy as an integrated and synchronically coordinated economic policy and management flexibility. In addition, managerial decisions made in different power institutions are often unsynchronized both in terms of time and in terms of priorities and goals.
On the other hand, this is becoming the main reason for the methodological diversity of the regulative actions and the immense discretion of the regulating standards. For this reason, the higher
9 See: H. Siebert, Der Kobra-Effekt: Wie man Irrwege der Wirtschaftspolitik vermeidet, Deutsche Verlags-Anstalt, Stuttgart, 2001.
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state power structures often receive asymmetrical information on the actual state of the economy, which is extremely undesirable when making managerial decisions.
The third group constitutes dynamic changes in financial flows. Transitivity essentially means that the rates and proportions of the economy’s reproductive structure are not stable and in constant flux. In Azerbaijan, these changes are positive since reproduction of the economy is on the up and up, as a result of which in recent years the channels of state income and spending are constantly growing. For example, implementation of a successful oil strategy has essentially created a multiplication effect in Azerbaijan’s economy. But there are still a great many disproportions in the correlation between the producing and processing sectors; in the development of the oil and non-oil sectors; in the development of the regions, and so on. Although investments in the non-oil sector and regions of the republic are growing along with the increase in direct oil revenues. On the other hand, it should be kept in mind that new resource possibilities are also opening up for entities of the state sector along with the increase in the state’s economic might and intensified liberalization of the economic mechanism in the country.
The formation of a “state—property” system of interrelations should be considered an important element in establishing a national economic system and introducing market management principles in Azerbaijan. The tight privatization conditions and incomplete activation of the securities market led to an abrupt decline in the efficacy of privatization and hindered the formation of a free and competitive market in the country as a whole. Nevertheless, world practice shows that the concentration of property is the most popular approach to organizing “inefficient” corporate management in countries with a transition economy. In conditions of an indefinite or unstable institutional framework in such countries, companies prefer to have financial flows end with them or with the structures affiliated with them, which promotes the formation of large nationwide financial-industrial conglomerates.
The next group of special features of the transitivity of Azerbaijan’s economy, in our opinion, is related to the manageability of state finances and the truncated designation of the state budget. The system for managing state finances seems to consist of separate blocks. The state budget is mainly aimed at performing fiscal and social functions. The regulative function of the budget is unfortunately poorly activated.
Large flows of state finances exist outside the budget. Almost all large economic, industrial-transport, and infrastructure state companies independently dispose of all their material and financial resources. In addition, some of them still manage to obtain large budget assignations for different purposes.
So it turns out that the spheres of influence of the “extended government” (in terms of world practice) and its potential and actual financial flows go far beyond the framework of the state budget. Admittedly, the Law of the Azerbaijan Republic on the Budget System in effect since 2003 introduced the concept of a “consolidated budget,” thus taking an essentially significant step toward establishing a fuller system for creating and using state finances. Nevertheless, there are still differences relating to the equivalency of the functional-administrative and financial-budget management systems, which are leading to an intermingling of the powers and responsibilities of some state management structures.
We relate another group of special features of the transitivity of Azerbaijan’s economy to measurability, accountability, and stimulation mechanisms. In Azerbaijan, one of the important tasks of the radical economic reforms was defined from the beginning as the introduction of an international system of accounting and statistical reporting. But this transfer has not yet been completed. Statistical accounting is also still being carried out in a mixed form. For example, the “primary” measurement of economic development is still the gross domestic product index and its derivatives which in the conditions of a significant foreign “presence” cannot be barometers of the trends or prospects of the state budget. Nor is the accounting mechanism in our economy providing any feedback or acting as an efficient lever of necessary control.
In our country, as in many others, certain forms of “tax holidays” are used to create additional incentives. For example, during the past ten years agricultural production has been exempt from all
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types of taxation. Although in world practice it is the manufactured product, that is, the real results, and not the industry or an entire production sector that is exempted from taxes.
Another important group of special features of Azerbaijan’s economic development, in our opinion, consists of the practice and quality of law-making. Our legislation has a great many overlaps, contradictions, and ambiguous regulations and concepts. Amendments are frequently made to the current laws. An analysis of our economic legislation in keeping with the international method shows that this state, by lowering the transparency and sustainability of the economic mechanism, also leads to deterioration in accounting.
The next aspect of the transitivity of our economy is state control. The special features listed above largely complicate the tasks of this control. But we believe that in this case the absence of a single methodological base and integrated institutional system of state control is more important. The analytical conclusions show that efficient control would make it possible to successfully resolve many problems of the transition economy.
C o n c l u s i o n
So having analyzed the nature and genesis of some of the transition problems at the current development stage of Azerbaijan’s economy, we can conclude that many of them are subjective. On the other hand, world practice shows that they can be quite successfully resolved by means of targeted improvement of the management system, including the mechanisms of state regulation and of the formation of current economic policy. In Azerbaijan’s conditions, these tasks are not that hard to solve since the country’s leadership has the political will to do this, aimed at supporting the modernization of society and the economy at all levels.
