i. The context and perspectives
At its simplest, Euro-Atlantic integration refers to the accession of post-socialist countries to NATO and the EU. From the vantage point of Washington D.C., this is a process of stabilization, democratization, and alliance formation. The process in Southeastern Europe is seen as the continuation of the earlier integration of Eastern and Central Europe in the 1990s. Moreover, this trend (integration) is likely to cover more areas by for instance, adding to its list of the countries Georgia and Azerbaijan.
Azerbaijan, which plays the role of a bridge between Europe and Asia, has huge transit opportunities. The fact that routes from the East to the West and from the North to the South pass through Azerbaijan, makes the country a significant logistics hub and a junction of major trade routes between the East and the West and the North and the South.
A number of large-scale infrastructure projects have recently been carried out in Azerbaijan’s transport sector. This included the construction of the Baku International Sea Trade Port, state-of-the-art airports and roads of international importance, renewal of the railway lines in the direction of the East-West and North-South transport corridors. These projects have made a crucial contribution to the expansion of the country’s foreign economic relations.
It should be noted that Azerbaijan’s favorable geostrategic position gives it a special advantage as a center of trade as well, being able to use its auspicious position to develop strong logistics capabilities as well as industries that rely on trade logistics to exploit this competitive edge. Having a look at the logistic sector of Azerbaijan, it is plausible to drive basic assumptions that local trucks can carry cargo between Asia and Europe, and its logistics centers can support both Asian and European production networks. Agriculture is another area that Azerbaijan can develop into a long-term economic driver. The sector, which is currently contributing only 7% of GDP, can develop significantly with improvements in production, transportation, and chain logistics1. Aside from budgeting over $0.5 billion for highway improvement, Azerbaijan invests $1.5 billion to upgrade its rail system and to support the Georgian government with a $200 million concessionary loan for building the Georgia portion of the Kars–Tbilisi–Baku (KTB) railway1. When completed, the KTB railway will connect Azerbaijan’s rail system with that of Turkey to form a sea-to-sea intercontinental rail link that runs from the United Kingdom to the People’s Republic of China. The $1.5 billion rail restructuring program will include the acquisition of a new alternating current (AC) electrification system, a new signaling system, new locomotives, and new wagons, and the replacement of large sections of existing tracks.
ii. Critique of liberalization policy
The liberalization of logistics sector would turn Azerbaijan into a key transit county between two continents because of its advantageous strategic location comprehensively covered above. Such a policy plays a crucial role on achieving economic progress, but it is costly and brings a lot of challenges with itself at the same time. There are 4 main groups of stakeholders that will be affected by this policy either in a positive or negative way. These are: suppliers of logistic services, the government, exporters depending upon logistic services, and subsequently, importers relying on logistic services.
Logistic service industry is a sector with substantial growth potential, but as a result of recent policy held by government large long-term investments in logistics sector are very rare. For instance, 5% customs duty and 18% VAT raises prices for a unit of European-made truck approximately till $200.0001. Consequently, most of the cargos in Azerbaijan are carried by foreign truck companies (as Network Global Logistics (Turkey), Van der Wal Transport (The Netherlands), Hellmann Worldwide Logistics (Germany), Tuvia (Italy), Globex (Georgia), etc.2). However, there are several local trucking companies (Azərtrans, Buta Logistics Services, Forward Cargo Services, Azlogistika etc.2), but they are small proprietorships with no more than 50 trucks2. In the case of liberalization, entrance to this field will be much easier as initial cost of trucks will decline drastically. More competitive logistic sector within country will enable the advancement in logistics performance, for which Azerbaijan holds 128th place out of 150 possible3. Liberalization would be disadvantageous for already functioning trucking companies as they will face the risk of shrinking market share, but if they use first-mover advantage reasonably, they can partially eliminate these shortcomings. Simultaneously, a drawback for market newcomers is inadequate infrastructure and lack of know-how which will make cargo carriages riskier in earlier period of liberalization, but in the long term, with government making investment in roads in order to reach world standards as a part of liberalization policy, this risk will diminish.
Liberalization of logistic sector will ambiguously affect the government. In fact, oil and gas industry is the main sector where Azerbaijan has competitive advantage and represents considerably high portion in GDP of the country. But Azerbaijan is not in the position to intervene into oil and gas prices worldwide; in this case, such dependence on the mentioned natural resources will negatively affect country’s economy (here we can take the example of latest decline in oil prices, which caused noticeably increasing inflation rate within the country4 and double devaluation of the local currency, Azeri manat). Hence, the development of non-oil sector and diversification of economy are listed among the urgent aims to be attained. If government will announce complete liberalization, then there would appear the risk of negative trade balance, with imports exceeding export, potentially causing decrease in investment into country. That would be because of the fact that Azerbaijan retains comparative-disadvantage in most of the non-oil sectors, and immediate trade liberalization will lead to abrupt influx of foreign producers wielding comparative advantage in relevant fields. Another imperfection of liberalization could be the outflow of economic resources from the country.
The logistics sector is a particularly important services sector for all domestic economies and, therefore, the rewards of domestic liberalization can be especially significant. In this regard, globalization has highlighted the need for and importance of liberalization of logistics services. As a result of globalization, a vast range of products – perishable and non-perishable alike – can be sourced from all over the world. It is in this context that the “cost of time” has become a critical factor from the perspective of exporters, importers and suppliers of logistics services. The time it takes to get a product to market may determine whether or not a product gains entry into a foreign market. Furthermore, time may still affect the volume of trade, even in cases where entry into the foreign market has been achieved5. Topical studies indicate that a 10% increase in time reduced bilateral trade volumes by between 5 and 8%5. The cost of time becomes all the more pressing if the product is perishable and has a short shelf-life and/or if the product is needed for just-in-time production. Additionally, perishable products must be safe and edible to consume upon arrival in the destination market. Thus, gradual (not immediate) liberalization of realms assisting the diversification of economy, which undoubtedly involves logistics, is allowable. In order to achieve growth of non-oil sector’s proportion in GDP, giving short-term conditional subsidies to local producers is a better policy to follow for the government in incumbent (which justifies the concept of progressive liberalization, being agreed upon). After gaining competitive-advantage in selected fields, or ensuring the protected industry is mature enough, government can completely support free trade in the given sector.
In the short run, the liberalization of logistics sector will also increase governmental spending. Inadequate infrastructure, especially in roads and railways (in Azerbaijan, large sections of roadways are disintegrated with main lines, 80% of passenger wagons are over 15 years old and more than half of freight wagons are useless1) will be a root cause of this.
As mentioned above, by liberalization of logistic sector, the number of truck companies will increase, which can in turn increase government income from taxes and customs fees.
Exporters and importers dependent upon logistic services will be better off by liberalization in this sector as their cost of import/export will decrease and they will have more alternatives to choose between.
Taking into account current state of affairs, the long-term effect of the liberalization of logistics sector of Azerbaijan may turn out to be beneficial to the domestic economy.
iii. Policy options
Adherence to the liberalization of logistics sector of domestic economy will reap desirable benefits with following policy options implemented:
Market-access commitments. A compelling tool to liberalize a sector in a country is through granting the market access to suppliers from other countries, whether on a bilateral or multilateral basis. Liberalization through market-access commitments may entail the arrival of more foreign suppliers, which could transform into lower costs, but not unavoidably a drop in the number of domestic suppliers. Furthermore, the bilateral (multilateral) essence of this policy option should be strongly emphasized, so that henceforwardly both national and foreign suppliers could benefit from liberalization.
Domestic competition policy. In order to someway steer clear of sudden shrink in the number of local providers of logistics services, government should stimulate them via various means as short-term subsidies and national procurement (prior to the liberalization), non-formal tools for boosting competition (e.g., national competitions) and investment. It may also be relevant to mergers, alliances and cooperative arrangements that are to be struck between companies supplying services within and/or between segments of the logistics supply chain.
Simplification of trade control systems and relevant regulations. Azerbaijan must be vigilant in defending its competitive advantages and constantly strive to make it the most trade and transit friendly country. Reinvestment in infrastructure is a good start, but the government must reform its laws and regulations, improve its transparency and increase the competitiveness of Azerbaijan’s logistics industry. Trade in goods and services in Azerbaijan is subjected to a wide variety of government controls and regulations from different ministries and governmental bodies. These include the Ministry of Economic Development, Ministry of Agriculture, Ministry of Health, State Customs Committee, Ministry of Transportation, Statistical Committee, Ministry of Taxes, and Ministry of Ecology and Natural Resources. The complex web of government controls and regulations and the lack of transparency in the trade regulatory regime increase the difficulty in conducting trade in Azerbaijan. According to the Trade Facilitation Indicators published by the Organization of Economic Cooperation and Development (OECD)6, as of 2013, Azerbaijan still needs improvements in the fields of formalities (simplification and harmonization of documents), (internal) border agency cooperation, formalities (streamlining of procedures), fees and charges (it should be also noted that advancement in TFIs may lead to the improvement of the investment climate in Azerbaijan). Nevertheless, in appraising governmental border measures that may have an impact upon the supply of logistics services, their rationale needs to be considered particularly in light of the globalised context in which such services are supplied, where real security threats at national borders exist.
Adoption of comprehensive transport infrastructure strategy. Despite implementing trade facilitation policy reforms in recent years, such as drafting new trade laws and regulations, streamlining trade procedures, and modernizing customs, Azerbaijan does not have an integrated and separate transport infrastructure strategy. By approving one, it is possible to achieve higher returns on initial investment, ensure seamless air/truck/rail/sea (multimodal) integration, and develop multimodal cargo facilities, logistics centers as well as specifically equipped storage facilities, which may positively influence investment climate in the country.
Promoting the development of Small & Medium Enterprises, particularly engaged in agriculture, supply chain services, transportation and logistics, to further develop country’s logistical potential, and provide market for suppliers of logistics services for internal/cross-border transportation. By implementing this step, it will be feasible to maintain a market for local providers of logistics services chiefly engaged in inter-country transportations, expand a market for both national and international logistic companies aimed at international carriage of goods thus slightly mitigating the effect of intense competition, and strengthen national logistical potential.
Enhancing national logistics curriculum to create a base for sustainable development of logistics industry of Azerbaijan as nowadays the state of knowledge about the main international bodies (IRU, OSJD, etc.) and documents (CMR Convention, TIR Convention, COTIF/SMGS Conventions, and so forth) appears to be inadequate, and the realization of the global concept of 3PL (Third Party Logistics) seems to be deficient7.
1 – ADB, “Azerbaijan: Trade Facilitation and Logistics Development Strategy Report”, 2009
2 – http://www.biznesinfo.az/business/directory/transport/logistics/params/ln/ru
3 – http://lpi.worldbank.org/international/global?sort=desc&order=Logistics%20competence#datatable
4 – http://www.tradingeconomics.com/azerbaijan/inflation-cpi
5 – OECD, “Logistics and Time as a Trade Barrier”, OECD Trade Policy Working Paper No. 35, 30 May 2006, p 7.
6 – OECD, “OECD Trade Facilitation Indicators – Azerbaijan”, 2013
7 – “Куда движется рынок логистики?”, 2012, article by Zakir Salimov