In What Ways Has the Economy of Azerbaijan Been Affected by Globalization - Assignment Example

In what ways has the economy of Azerbaijan been affected by globalization? Contents Contents 2 Introduction 3 2. Discussion 3 2 Driving Forcesof Globalization 4 2.1.1. Global market Forces 4 2.1.2. Technological Forces 4 2.1.3. Global Cost Forces 4 2.1.4. Political and Macroeconomic Forces 5 2.2. Effect of Globalization on Different Sectors of Azerbaijan 6 2.2.1 Effect of globalization on Import and Export of Azerbaijan 6 2.2.2 Effect of Globalization on non-oil sector of Azerbaijan 8 2.2.3. Effect of Globalization on Scientific Research and Technology 10 3. Conclusion 10 4. Reference List 11 1. Introduction Globalization is a process of interaction among governments, corporate and other entities of different nations in order to aid international trade and investment and expedite global access of information technology. Globalization has been initiated in 1980s; since then, rapid progression of globalization has changed the shape of world economy. Incidents such as collapse of Union of Soviet Socialist Republics, financial crisis and great recession of 2008, the political movement famous as “Arabic Spring” etc has changed the demand supply equilibrium of the economies across world. Accordingly, the capital and financial market interactions in terms of exchange rate, interest rate, inflation and unemployment etc are also altered. Globalization has enormous effects on the economy of Azerbaijan as well. Azerbaijan is the Contiguous Transcontinental Presidential Republic situated in Caucasus region (United Nations, 2003). The economy of this province is characterised by inefficient public administration, high inflation and unemployment rate. In this paper, how globalization affects the economic sectors of Azerbaijan such as energy, import and export, transportation as well as science and technology will be critically analysed. 2. Discussion Azerbaijan gained independence in the year of 1991. Since independence, the economy of the country has been transformed from centrally planned economy to a free market economy. Overtime, the country started establishing diplomatic relationship with other countries. Presently Azerbaijan is having steady trade relationship with 160 countries of five continents (United Nations, 2003). Naturally, occurrences related to globalization largely impact the economic sectors of Azerbaijan. Initially, the economy encountered a lot of problems such as high inflation and unemployment rate, unstable currency and very low GDP growth (International Monetary Fund, 2012). After 1995, particularly after joining treaties with foreign enterprises for oil supplies, the country started experiencing rapid growth. Such economic growth facilitated the economy to privatise a number of state enterprises; the national currency Manat became stabilised (The Economists, 2015). As the economy approached towards stability, many foreign investors got attracted and companies started investing foreign capital in order to tap lucrative business opportunities lying in the economy (International Monetary Fund, 2012). Hence, import-export accelerated. Inclusion of foreign direct investment helped the Azerbaijan economy to gear up its development process as well. 2.1. Driving Forces of Globalization 2.1.1. Global market Forces Tremendous growth potential of the foreign emerging markets has resulted in an increasing demand for the products of small and medium scale manufacturing companies of Azerbaijan. Such increment of demand has necessitated the companies to expand their operations internationally and to establish and develop global network in the manufacturing based markets. Apart from that, with rapid development in technologies such as e-Commerce systems and advancement of transportation systems, the suppliers and manufacturers are becoming capable of successfully addressing the global demand of all major markets. Hence, the demand from Azerbaijan of the global products are also been addressed as a result of globalization. For instance, globalization has enabled British Petroleum (BP), an UK based Oil and Gas Company to operate from Azerbaijan market and supply oil and gas to the markets of multiple countries in the world such as Canada, France, USA, Turkey, India etc. (Rauch and Trindade, 2003). 2.1.2. Technological Forces Technological forces have facilitated the companies to diversify their product basket and accordingly initiated cut throat competition in international level. Such competition has expanded the scope for import and exports, reducing the trade barriers across borders. Expansion in export has increased the demand for many low cost manufacturers in Azerbaijan (Rauch and Trindade, 2003). 2.1.3. Global Cost Forces As a result of expansion and globalization, competitive priorities changed in production and manufacturing industries. Relative emphasize on quality improvement, delivery reliability, customization have forced the companies to reprioritize their cost considerations in their global business strategies. Companies have also understood that though product designing, quality inspection and workers’ training increases initial business costs, such efforts tends to optimize the cost in the long run. Implementation of Total Quality Management and Just-in-Time has accelerated the speed in business management; however integration of such methods in business operations leads the companies to consider the initial cost associated with that. Hence, the companies tend to operate in such economies where cheap labour is available along with required raw material and sustained market. Hence, the economy of Azerbaijan gained importance (The Economists, 2015). Figure 1: Driving Forces of Globalization 2.1.4. Political and Macroeconomic Forces Unexpected economic phenomenon, unreasonable currency devaluation in currencies of foreign countries, volatility in real and nominal exchange rates have influenced the investors to invest in small and potential economies such as Azerbaijan to expand their business operations globally. Azerbaijan economy is less affected by the adverse consequences of Mexican currency crisis or great recession in 2008 and the condition of the economy is relatively stable as compared to the big economies which are largely affected by global financial downturn. Hence, more and more foreign companies are trying to establish and expand their business in the potential economy of Azerbaijan. For instance, observing the demand for automobiles and currency position of Azerbaijan, Russian automobile company VAZ tends to produce their sedan car VAZ 2107 in Azerbaijan. When the national currency of Azerbaijan was undervalued from 2005 to 2008, the Russian company took that opportunity and started exporting the manufactured cars that had made their business cost effective. 2.2. Effect of Globalization on Different Sectors of Azerbaijan 2.2.1 Effect of globalization on Import and Export of Azerbaijan Import and export is the major consideration that integrates the Azerbaijan economy with global economy. Azerbaijan is responsible for exporting crude and refined petroleum, petroleum gas, energy, minerals, raw sugar and fruits mainly in Italy (29%), India (6.7%), Indonesia (5.9%), France (6.9%) and Israel (6%). The company imports jewelleries, cars, wheat, tobacco, planes and helicopters mainly from Turkey, Germany, China, Russia and the United States (The Economists, 2015). Figure 2: Level of Export and Imports of Azerbaijan (European Commission, 2014) European Union which constitutes for approximately 42.4% of the Azerbaijan’s international trade is the most important trading partner of the country (European Commission, 2014). As oil supply dominates the international trade of Azerbaijan, any changes in the demand supply balance of oil in global framework deeply affects the export of the country. Figure 2: Demand supply and price of Oil as on 2014 (Oilprice.com, 2014) During 2000, the oil prices had shown a sharp increase due to a number of reasons. During that period the price of oil increased due to excessive demand especially from China, but the countries involved in oil supply failed to satisfy such huge demand, resulting in huge price hike of oil. In 2008, price of oil reached the peak. However, financial crisis in 2008 which had caused for slowdown of economic activities of the whole world had drastically decreased the price of oil. Such international phenomenon had serious implications on the oil export of Azerbaijan (Standlea, 2012). Figure 3: Oil Price fluctuation (1985-2015) (Oilprice.com, 2014) 2.2.2 Effect of Globalization on non-oil sector of Azerbaijan The major part of non-oil sector of Azerbaijan constitutes of agriculture, transportation, tourism and infrastructure. As a part of economic development curriculum complex, oil and gas refineries and petro chemical factories were established. Such establishment necessitates further investment for advancement in infrastructure, strengthening scientific-technical potential and to introduce utilization of alternative energy in Azerbaijan (Thoenig and Verder, 2003). As a result of rapid development of market infrastructure, application of modern economy and management systems, expansion of industrial enterprises on the basis of locally available raw materials many foreign investors get attracted to Azerbaijan economy for implementation of petrochemical complexes, steelworks, fertilizer factories, oil and gas refineries, shipyards and cement plants. With the establishment of first aluminium production chain in 2008, Azerbaijan economy became exposed to the global sphere of non-oil export. As the economy started experiencing more Foreign Direct Investment, technology transfer also became prominent to stimulate the foreign industry expansion. More Special Economic Zone and industrial estates such as Balakhani for producing aluminium and Sumgayit for processing of petrochemical products were situated (Rauch and Trindade, 2003). Figure 4: GDP Growth of Azerbaijan since Independence (Worldbank, 2015) Stimulating mechanisms to intensify local and foreign investment in the country’s non-oil sector, to encourage intellectual activity, create favourable conditions for investment in innovation and creativity, ensure the sustainable development of a creative economy based on intellectual property and increase its share in the country’s GDP (Rauch and Trindade, 2003). As the economy tends to stabilize, tourism industry started gaining attention. Hence, in order to capture the potency and attract global consumers, efforts have been taken to meet the international standards of tourist services and increase competitiveness of this sector in order to boost up the GDP. Emphasis has been given in this regard to augment the tourism prospective of Caspian Sea region. With the aid of international stimulus, special attention has also been given to the agricultural sector apart from the capital intensive sectors. As a result, enhanced productivity in agrarian sector, especially of wheat and fruits, improved the income level of rural population and facilitated export of such agrarian products. Experiencing positive effect of expansion of agriculture to the global arena, preventive measures and scientific support such as deterrence of soil erosion, melioration etc. has been adopted for increasing fertility. Warehouses were created using modern technologies influenced by international standards. All such applications of globalization in agricultural sector have resulted Azerbaijan economy to weaken the regulations on seasonal prices, prevent the loss of harvests, protection of domestic markets and gear up the level of exports (Baylis, Smith and Owens, 2013). 2.2.3. Effect of Globalization on Scientific Research and Technology Soon after liberalization, the economy of Azerbaijan understood the viability of sustainable economic development and establishment of knowledge based economy. However, sound extension of scientific research and technology would never have been possible without the assistance of global economy. The scientific infrastructure will be improved, the material technical basis of science will be modernized and the digitalization of information support systems in this domain will be guaranteed. At the same time, along with state funding, the financing of science from other sources will be stimulated, and this will ultimately strengthen the social protection of those engaged in scientific activity and prevent “brain drain” (United Nations, 2003). 3. Conclusion Understanding the evolution and expansion of Azerbaijan economy, it is evident that the economy has been able to establish its existence in international market, only with the positive effect of globalization. 4. Reference List Baylis, J., Smith, S. and Owens, P., 2013. The Globalization of World Politics: An Introduction to International Relations. Oxford: Oxford University Press. European Commission, 2014. Trade. [Online] Retrieved from: [Accessed 12 February 2015]. International Monetary Fund, 2012. Republic of Azerbaijan: Selected Issues. [PDf] Retrieved from: < http://www.imf.org/external/pubs/ft/scr/2012/cr1206.pdf> [Accessed 12 February 2015]. Oilprice.com, 2014. The 2014 Oil Price Crash Explained. [Online] Retrieved from: [Accessed 12 February 2015]. Rauch, J. and Trindade,V., 2003. Information, International Substitutability and Globalization, American Economic Review, 93(3), pp. 127-138. Standlea, D. M., 2012. Oil, Globalization, and the War for the Arctic Refuge. New York: SUNY Press. The Economists, 2015. Azerbaijan. [Online] Retrieved from: [Accessed 12 February 2015]. Thoenig, M. and Verder, T., 2003. A Theory of Defensive Skill-Based Innovation and Globalization. American Economic Review, 93(3), pp. 153-182. United Nations, 2003. Managing Globalization in Selected Countries with Economies in Transition. New York: United Nations Publications. Worldbank, 2015. Azerbaijan. [Online] Retrieved from: [Accessed 16 February 2015]. Read More