Azerbaijan: Scapegoating Adam Smith 

Azerbaijan’s president, Ilham Aliyev, has finally acknowledged that the energy-export-dependent country is in the grips of a severe recession. But in a major policy speech, the Azerbaijani leader shifted blame for the fiscal woes from his administration to an economic theoretician who has been dead for over 225 years.

In a sign that confidence in Azerbaijan’s economy is rapidly evaporating, commercial banks felt compelled in late August to halt sales of foreign currencies. Speaking in the provincial city of Sabirabad on September 17, Aliyev trod gingerly around the issue of the government’s finances, not offering specifics. But he nevertheless provided a big hint that the decline in global energy prices had delivered a big hit on the state budget, which for more than a decade has been dependent on oil and natural gas export revenue.

Azerbaijan

“As everyone knows, in connection with the fall in the price of oil in the world, our revenues have contracted,” he said. “If the [oil] price has fallen by 75 percent, then our revenues contract by 75 percent.”

Aliyev did not criticize the government for its handling of the economy. Instead, he bemoaned the vagaries of market economics.

“It was thought we had a market economy that self-regulates and balances everything out. But life shows us that that is not the case,” Aliyev said. “Having a market economy does not mean that everything will go according to expectations.”

Those comments seemed to pin responsibility for the Azerbaijani economy’s reversal of fortunes on flaws in the theories espoused by Adam Smith, the pioneering political economist of the 18th century who posited that an “invisible hand” works to correct imbalances in a market economic system.

Smith’s theories, however, pertain to free societies, in which individuals have the broad ability to use their own initiative to pursue economic opportunities. Since the Soviet collapse in 1991, Azerbaijan has evolved into one of the most closed societies in Eurasia, where the flow of information and free speech are tightly controlled, and economic opportunities tend to be monopolized by political elite groups.

On September 22, Michel Forst, the United Nations’ special rapporteur on the situation of human rights defenders, asserted that civil society in Azerbaijan “has been paralyzed” by repressive measures carried out by the government.

“Access to information for civil society is restricted in Azerbaijan, despite existent legislation on access to information,” noted a statement, which was issued after Forst completed a nine-day fact-finding mission to Azerbaijan. “The traditional approach by authorities to the requests for information is that of rejection.”

Azerbaijani officials duly rejected Forst’s statement as “biased,” even as the rapporteur praised the government “for its excellent cooperation and efforts to ensure that I could make the most of my visit.”

Aliyev’s administration has long recognized the economy’s over-dependence on the energy sector. In his inaugural address following his re-election in 2013, Aliyev claimed that the government had succeeded in diversifying the economy. “I think that giant strides to diversify the country’s economy have been taken over the past decade, and this policy will continue,” he stated. “We must strive to ensure that our non-oil economy will double over the next 10 years. This goal was set a year ago and I think we have the capacity to achieve it.”

The depth of the current crisis, along with the government’s apparent restricted means to stimulate growth, suggests that Aliyev’s diversification claims were vastly overblown.

In his Sabirabad speech, Aliyev seemed to pin hopes for turning the country’s economy around on the revival of the cotton sector. He noted that the cotton sector had experienced a precipitous decline during the post-Soviet era: in the 1970s, about 300,000 hectares were under cotton cultivation, whereas today cotton is grown on only about 52,000 hectares. Yields have fallen correspondingly, going from about 1 million tons annually in the 1970s to about 30,000 tons in 2015, according to Aliyev.

Aliyev studiously avoided blaming the government for the sector’s collapse, adhering to his line that the country had been burned by its trust in the market.

The president painted an optimistic future for cotton in Azerbaijan, predicting that the yield would be about 100,000 tons this year, while setting a target of 300,000 tons for 2017. He also pledged that the state would invest roughly $100 million to build plants that could turn raw cotton and wool into finished products, according to a report distributed by the Russian news agency Sputnik. Aliyev indicated that government investment would focus on two areas – the city of Ganja and the Mingachevir Region.

What Aliyev did not specify was where the government will get the money to realize its development plans. The state budget does not have the cash to spare. Officials could dip into the State Oil Fund, which reported this summer that its assets totaled over $35 billion.

The lack of a clear-cut plan to achieve the dramatic increase in cotton production in the coming years has some rights watchdogs worried that gain will be achieved through the use of forced labor, in which the government mobilizes state employees to gather the harvest. Such practices are common in Central Asian cotton-producing states, especially Uzbekistan.

Kirill Boychenko, the coordinator for the Cotton Campaign, a watchdog group that tracks rights abuses in Uzbekistan’s cotton sector, said the organization intended to “keep an eye” on developments in Azerbaijan.

Aliyev made no secret that higher cotton yields were urgently needed to replenish Azerbaijan’s greatly diminished state coffers. With energy prices expected to languish, Aliyev’s administration is hoping that expanded revenue from cotton cultivation can raise employment levels while plugging budgetary gaps.

“It’s necessary to facilitate the flow of foreign currency into Azerbaijan,” he said. Thus, the production of goods for export has special significance.”

“I am sure that from now on cotton farming will grow at a rapid pace and reach a vast scale,” Aliyev continued. “As I mentioned before, both the people and the state will benefit as a result.”