I was lucky enough to be selected for last year’s Hassenfeld overseas immersion trip to Turkey and Azerbaijan. I was somewhat familiar with Istanbul as I had been to Turkey before, but had no clue of the rapid development in Baku, the capital of Azerbaijan. Upon arrival to Baku, I saw bustling signs of economic vitality, from a highly developed physical infrastructure such as roads, bridges, and railways to flamboyant motor vehicles, buildings and public parks. No doubt Baku is on the path of becoming one of the leading developing cities of the modern-day, underlying are serious structural challenges such as the excessively centralized political system of the country, over dependence on oil, and environmental pollution that require careful attention.
The Republic of Azerbaijan got its independence from the Soviet Union in 1991, but its history goes back to two thousand years when it was home to Zoroastrians. It is now home to about 9 million people, mainly secular Moslems. Its prime location in Central Asia, neighboring Russia in the north, Iran to the south, Georgia to the west, and the Caspian in the east, makes it an attractive geography. Over 90 percent of Azerbaijan’s exports consist of oil and petroleum products and its main trading partners are Italy, Germany, Turkey, Israel, Iran, France, USA, Indonesia, and China. During the 70 year Soviet rule, about 75 percent of Soviet oil came from Baku, and since independence, companies such as British Petroleum (BP) established oil exploration and extraction operations in Baku. Billions of dollars from oil revenues are being spent on transforming the city into the next Dubai.
Indeed the city is on the road map of becoming the Central Asian Dubai as the government is massively investing in mega projects such as the development of ports just like the Port Rashid and Port Jebel Ali in Dubai. Hotels such as the Marriott, Hilton, Four Seasons, and designer shops including Zara, Louis Vuitton, Prada, just to name a few, have already sprung up in Baku’s shopping malls and plazas. The government plans to cluster satellite cities in Baku just like the Dubai Media and Dubai Internet cities to make Baku the business hub. Completion of the Baku Flame Towers has already become the hallmark of the city. It marks the ancient linkage of Azeri people with the Zoroastrian religious rituals of fire worshiping, and is likened to the fancy Burj Al Arab building in Dubai. Another hallmark is the 57,519m^2 Heydar Aliyev Cultural Center, named after the third president whose son is now ruling the country, completed in May of 2012. The Center consists of a conference hall, library, and museum and the main motivation behind it was to promote the Azeri culture and attract foreign tourists. Other projects include the construction of islands near Baku just like the Palm Beach Islands in Dubai and the Princess Islands in Istanbul. The estimated cost of developing these islands is close to USD 100 billion.
While Baku has benefited from oil revenues, many citizens are skeptical as to whether these investments are directed towards long-term objectives. Oil dependence has resulted in an over-valued currency, slow growth of non-oil sector, and loss of competitiveness. Annual GDP growth rates of as much as 30, 40, and 50 percent in the past decade prove that oil revenues and government stimuli packages keep the economy going. Inflation has long been in double digits as a result of widening budget deficits. In 2007, the annual inflation rate was 16.8 percent. In the same year, gasoline prices surged by 50 percent, and water and electricity costs also doubled. In addition to chronic inflation, the Manat has been appreciating due to the Dutch disease that hurts the nation’s non-oil sector as currency appreciation leads to loss in competitiveness. The Manat has been increasing in value by 5 and 6 percent against the US$ in the past few years because of higher demand for Azeri oil. As a result, other sectors of the economy have suffered from the Dutch disease, mainly the agriculture sector, which grew at a rate of as low as 1 percent recently. Oil revenues have clearly not been invested uniformly across sectors, which will keep other sectors under terrible strain. Central bank independence is also another concern, as government interference in the Bank’s activities skew economic performance. Many economists are skeptical of the data that gets released by the central bank of Azerbaijan and believe those indicators’ actual values, such as in the case of inflation, are misreported.
Corruption is also a cause of concern. According to the Transparency International, Azerbaijan is ranked as low as 139 out of 176 countries on the corruption scale, 1 being the least corrupt. Ordinary citizens do not have civil liberties such as the rights to freedom of speech, expression, and free press. Inspired by the 2011 Arab Spring, Azeri nationalists made it to the streets to demand basic human rights, but were subject to brutal crackdown by police and law enforcement agencies and many of those are still in jails without any legal proceedings.
Every organization and institution we visited had multiple portraits of the Aliyevs against their walls and the people we met always praised the Aliyevs in their conversations. Azerbaijan is clearly a relationship-based economy where relationships matter more than anything else. We got the opportunity to meet with the owner of the largest foods manufacturing company called the Azersun. He was an old businessman who had fled Iran during the 1979 revolution and established the company upon settling in Azerbaijan. He had close ties with the president and informed us that his success could not have been possible without the support from the Aliyev family. Nevertheless, he gave us gift bags full of different kinds of Azeri tea, coffee, and sweets and we were very grateful to him for having us over.
While walking by the shores of the Caspian Sea, we smelled petrochemicals in the air and witnessed oil spills in the sea. Located not far from Baku, a large city, Sumgait, which we visited as well, is considered one of the most polluted cities in the world. Blacksmith institute’s study ranks, reports the Time, Sumgait as the ninth most polluted behind Chernobyl. Rankings were assigned on the basis of percentage of toxic chemicals in soil, water, and air. Oil revenues should also be invested in preventing cities and waters from becoming awash with pollution, and oil-drilling practices must be strictly regulated and monitored by the authorities.
It cannot be denied that Baku is transforming into the city of the future, nonetheless the government must address the structural problems the nation faces to ensure sustainability and spread of the Baku growth model to rest of the country. Upon visiting universities in Baku, I can easily conclude that the education standards were also not so impressive after all. In fact, universities in my own home country, Pakistan, could be much better in terms of education quality, the campus, resources, and academic discipline offerings.
English language proficiency both in and outside the universities was quite poor as well. One of the professors at a university pointed out that the government is planning to invest more in human capital and healthcare as part of its economic diversification efforts. As of now, these structural problems within Azerbaijan hold back the economy and lawmakers must address these challenges before it is too late. While Baku emerges as a futuristic city, it is nowhere near Soul, Singapore,Taiwan, or Hong Kong. The East Asian cities are far more advanced in science and technology, banking and capital markets, human capital and health services that ensures long-term economic prosperity of these cities. Baku would be better off following the East Asian growth model rather than following the Dubai model of building flame towers, geometric shaped cultural centers named after the ruling family members, or hosting international events whilst its average citizen is unhappy.
Valiyev, Anar ‘City Profile, Baku’, School of Public and International Affairs, Azerbaijan Diplomatic Academy, Azeri press article 2012
World Bank Country Profile: Azerbaijan
IMF Country Profile: Azerbaijan
Transparency International Index
‘The World’s Most Polluted Places,’ Times Rankings http://content.time.com/time/specials/2007/completelist/0,29569,1661031,00.html
‘Bloom and Gloom: Azerbaijan’s economy, drunk on oil, is suffering rapid inflation,’ The Economist 2007
‘How to Spend It: A Small Country goes drunk on oil,’ The Economist 2011 http://www.economist.com/node/21538212