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Azerbaijan Economic Development Term Paper


Problem Identification

The Azerbaijan economy has developed significantly since the Soviet Union collapsed, but its GPD has fluctuated in past two decades. This means that the overall economy is unstable. Azerbaijan is among the East European countries that have rich natural resources, but have failed to use this wealth to move toward modernization.

Azerbaijan’s economic development faces massive problems related to the limits of its resources (United Nations., and Economic Commission for Europe. 2003). The economy is one-sided, because it depends heavily on petroleum production and oil prices, and these are obstacles to its long-term development process. To achieve stability and improve this process, it is necessary to develop a broader economy with more diverse resources (Cornell, 2011).

Brief Topic Description

Sufficient resources are the primary asset for economic development of countries. Countries are endowed differently with the resources; some have many resources whereas others limited capacity. In addition, some of the resources are underutilized/ignored with respect to others.

This research focuses on the economic development issues in Azerbaijan. Specifically, the limitation of resources in stabilizing the economy and achieving modernization has been examined. The research also employs some of the theories of comparative politics such as the modernization and independence theories. Finally, the study uses several levels of analysis to gain a better understanding of the situation.

Significance of the Research

Study of this topic is of much significance in shedding light about the potential of diversifying resources to achieve economic stability and modernization. Resources diversification is important and an essential component of development. Therefore, this study unveils its influence in the economic development of Azerbaijan.

Research Question

This research will be guided by the following research question: Should the Azerbaijan government to diversify the country’s economy resources to achieve stability and move forward with modernization?

Hypothesis

Diversifying Azerbaijan’s economic resources is a positive mechanism towards stabilizing the economy as well as modernizing it.

Definition of Terms

The following terms will be utilized in this research;

Diversification: This is a technique of investing in a wide variety of sectors to minimize the risk involved in specializing with one sector.

Economic Stability: This is terminology describing a financial system that is experiencing very minor fluctuations in its output growth as well as maintaining a consistently lower rate of inflation.

Modernization: This is a transformational process that begins from underdevelopment status to development status.

Detailed topic description

After the break of the Soviet Union, Azerbaijan started on a transition journey from communism to market economy to enhance its stability and survival economically and politically. Azerbaijan primarily relied on its hydrocarbon resources particularly oil to achieve this goal. Development of oil resources spearheaded the country with a sustainable middle level economy. This helped Azerbaijan to combat the high poverty levels and achieve some of its development goals (Leeuw, 1998).

This was short lived because this hydrocarbon resource Azerbaijan over-relied on being limited. This posed great challenges to Azerbaijan that hindered it in realizing its objectives. Therefore, a systemic transition to market economy was required coupled with effective measures. However, this systemic transition was complex as it encompassed transitions in the political, economic and social aspects respectively (Baranick, and Salayeva, 2004).

The political transition involves creation of states as well as establishing their identities, formulation of policies both local and foreign, and establishing of democratic institutions and their governance. Relative to economic transition, it incorporates price liberalization, expenditure stabilization, privatization of enterprises and globalization of the economy. Further to social transition, this mainly concentrates on societal development (Leeuw, 1998).

Political Transition

The first few years of Azerbaijan independence were marred by inevitable chaos and uncertainties (Cornell, 2010). This political turmoil led loss of territories, damage of the infrastructure and the influx of refugees. This had a destructive impact on Azerbaijan economy making the lives of Azerbaijan citizens very difficult.

On the contrary to this, Azerbaijan witnessed significant development in democracy and other related governance issues that had not been experienced since the reign of Muslim Orient. Amongst them was an exercise of voting rights in a free and fair election where Aliyev Abulfaz Elchibey was elected the first president with a popular vote.

In addition to this, Parliament, Milli Majlis, comprised of 50 members was formed to replace the Soviet supreme legislative body. The reign of Elchibey did not last long as he was divested due to failure of bringing the much awaited economic reforms. This portrayed the country’s commitment to economic development (Baranick, and Salayeva, 2004).

Heydar Aliyev succeeded Elchibey and during his reign he managed to enhance political stability, economic recovery as well as to prevent state fragmentation. By initiating good foreign investment policies the Azerbaijan oil sector experienced massive growth enhancing economic stability and modernization.

However, most critics argued that this progress was achieved at the expense of democracy and other political liberties. This is because the reign of Aliyev was characterized more of an authoritarian than democratic. In the 1995 referendum, the Azerbaijan government centralized the all powers to the executive branch, President. The reason for this was to prevent political unrest emanating from the ethnicity based conflicts which would endanger or hinder economic development (King, 2005).

To worsen the situation, the executive branch initiated a plot to alter the constitution in order to secure more power. This was a big blow to democracy and its consequences had great damage to Azerbaijan smaller parties at the same time endangering their political existence and influence in nation building.

This attracted outright pressure from international organizations such as the Council of Europe asking for restoration of democracy. To date, the organization has been monitoring progress of Azerbaijan in developing democratic institutions that are effective and functional. For instance, in 2004, the council ordered the Azerbaijan government to initiate constitutional changes that would allow the separation of power upon which parliament was to retain more power than the executive to oversee running of government activities.

A country’s successful transition to democracy and stability depend solely on the efforts of lawmakers. Lawmakers during Heydar Aliyev reign mainly concentrated on maintaining political and economic stability at any cost including sacrificing democracy to achieve these objectives. The following government under President Ilham Aliyev, aimed to achieve political and economic stability by balancing democracy and the rule of law.

The lawmakers of this period were divided between reformers majority who are foreign trained and conservatives. These two groups conflicted about the control of distribution structure to be used in handling substantial funds from the oil business. The Azerbaijan government operated on a pyramidal structure based on patronage, nepotism and corruption strongly influenced by regional or clan.

This is one and most significant challenge facing reform process in Azerbaijan. The Azerbaijan government launched a program in 2005, the National Anti-Corruption Program to fight corruption because of the severe impact corruption has on the destabilizing economy (Baranick, and Salayeva, 2004).

Economic Transition

Similarly to other former USSR nations, economic transition in Azerbaijan involved transforming the USSR communism economic system based on heavy subsidies, state owned industries and state market domination in resource allocation and price determination into a capitalist system controlled by the market economy and privatization. This transition was formally launched in 1991 under the Basic Economic Development Law.

However, the transition period under Elchibey was marred with various challenges, the most disheartening being hyperinflation which hit the 1.664% mark by 1994. This was attributed to the price liberalization reforms employed in 1992. As a result the national income declined terribly from $35,006 million to $1.031 million, gross national product per capita also declined, industrial outputs decreased and the unemployment rate was acute.

Above all the factors that contributed to the downfall and challenges in the economy in these first years of independence was over-reliance on specialized economy instead of the diversified economy. The Azerbaijan economy solely depended on energy resources mostly petroleum oil (Baranick, and Salayeva, 2004).

Besides over-reliance on energy resources, poor economic reforms worsened the situation. As of 1995, implementation of improved economic reforms started with the government introducing a stabilized program, Systemic Transformation Facility with the assistance of the International Monetary Fund (IMF).

This enhanced recovery of the economy which persisted in the following years with continued reinforcement of stabilization policies from Azerbaijan government and its National Bank, for example, stabilization of Azerbaijan’s national currency (Manat) in1995-1996 to curb the high rising inflation.

Alongside the technical support from various financial institutions like IMF, World Bank, Asian Development Bank (ADB) and so forth, oil sector was strengthened in foreign investments. This contributed to high revenues which enhanced economic growth and stabilization. In 2003, oil accounted for 40% of Azerbaijan budget revenue and 90% exports. To date, the energy sector still accounts for the largest share of Azerbaijan’s revenue and exports (United Nations 2003).

Additionally, the government initiated an energy fund, State Oil Fund of Azerbaijan (SOFAZ) managed by a team of experts. This aimed at enhancing effective management of energy (oil) assets through exploration, development and production. As of October 2003, the fund had accumulated $800 million.

However, this faced a major downfall due to lack of transparency and accountability. High cases of institutionalized corruption were reported. The ruling elites piled up oil revenues as well as mismanaged the resource. Likewise in political transition, corruption remains the hindrance to economic development destroying the industrial base and job creation.

Despite the oil sector primarily steering economic development in Azerbaijan, relying on the one-sided economy is dangerous and may hinder development of other economic sectors like agriculture. Agriculture in Azerbaijan constituted 14.1 per cent of the total country’s gross domestic product by 2003.

Azerbaijan has a favorable climate which would ensure production of many types of crops. Of the 11 climatic zones for agriculture, Azerbaijan has 9 of them. Agriculture has also experienced a big blow by poor and inadequate infrastructure which fell into disrepair during the Soviet era.

Therefore. Azerbaijan farmers cannot export their products and they lack proper storage facilities for the products like refrigerators. On the other hand, brokers and wholesalers are scared of the poor infrastructure system. This forces farmers to sell their produce soon after production and for lower prices.

However, there are some smaller plants for food processing emerging but the power problem is a major threat. This requires a steady supply of power and good infrastructure to ensure easy access to resources and supplies. In regards to tourism, Azerbaijan has a diverse geography stretching from its broad coastline to major mountain ski resorts. Likewise in agriculture, poor infrastructure and lack of consistent power challenges tourism.

Only its capital city, Baku, has better infrastructure ranging from transportation to other sectors like health care. This also plays a part in limiting diversification of resources to other areas since all investors and companies concentrate entirely on Baku. Developing non-oil sectors and formulating favorable policies to enhance foreign investment, good infrastructure and so forth in these sectors can be a big boost in stabilizing the economy in Azerbaijan.

In this respect, Azerbaijan government in 2003 initiated policies to develop non-oil sectors to stabilize the economy by creating more jobs, improving economic conditions, enhancing transparency and effective spending. In regards to privatization, effective private sector enhances economic development.

In Azerbaijan, privatization begun as early as 1993 and is still continuing to date. By 2001, Azerbaijan government had accomplished privatization of over 29000 small enterprises but lagged behind in privatizing the big enterprises. This portrays the high commitment government has with big enterprises which mostly were related to energy (Megginson & Oxford University Press 2005).

To promote economic diversification a country’s need to develop its financial and physical infrastructure. Azerbaijan is facing a major challenge in developing reliable and modernized financial institutions. Restructuring of the existing banking system in Azerbaijan is taking place very slowly. This is attributed to over-reliance on foreign capital. As earlier mentioned Azerbaijan economy is mostly funded by international organizations like the IMF, World Bank, ADB amongst many others.

Social Transition

Democratization and nation building process requires major contribution from the government and the people. As it is described democracy is a livelihood and the capacity upon which societies develop. This is facilitated by collective understanding and stabilized social consensus.

However, the situation of Azerbaijan is filled with widespread apathy in politics, scattered opposition, non-satisfactory political dialogues and lack of cooperation between the government and the people. This makes the transition to democracy in Azerbaijan very difficult and complicated. Inequality amongst people in Azerbaijan is inevitable in respect to financial resources as well as opportunities to enhance ones capability and talent.

There have been many internally displaced people and refugees in Azerbaijan who have not been reintegrated back to the society. To the bigger majority, no progress has been made in several years whereas the minority have grown disproportionately rich. During the 2003 elections, the political unrest emerged due the dispute in election results leading to a sour relationship of Azerbaijan government and its citizens were close to about 1000 opponents were arrested (Ottaway, 2002).

Besides these obstacles in social transition, Azerbaijan people were actively fighting for democracy. Civil societies and community-based organizations emerged and teamed up with international organizations to fight for their rights. Existence of mistrust between the government and its citizens poses great harm to economic development (Ottaway, 2002).

Detailed outcome description

This research provides data to support the hypothesis and highlights the issue of economic development in Azerbaijan. It also suggests some solutions that help the economy to maintain long-term stability. In general, the outcome centers on the idea that the Azerbaijan government should diversify the economy with new resources such as agriculture, services, and tourism amongst many others.

Agriculture is crucial not only Azerbaijan but in the entire world at large. Agriculture in Azerbaijan comes second in the economy behind the energy sector. This sector has the greatest growth potential in the economy because the energy sector is diminishing. Despite agriculture being second after the oil sector, it provides more employment opportunities than the energy sector.

As of 2010, agriculture employed 40 percent of the entire Azerbaijan working population while the energy sector employing less than one per cent. This portrays the bigger potential and benefit/influence this sector can have on Azerbaijan economy. There are high poverty rates linked to lack of employment.

Additionally, above 52 percent of the country’s territory was under agriculture due to the favorable climate and the traditional influence of rural households (Zvi Lerman, Sedik, and Sedik, 2010). On the contrary, the sector’s share of Azerbaijan GDP was only 5.2 per cent as opposed to the energy sector which constituted above half of the total GDP. The exports from energy sector constituted 92 per cent of the country’s total exports.

Agricultural sector failed to make an impact in that due to over-reliance on small scale farming. In general, agriculture performed poorer in 2010 than in the previous year. This was attributed to fall in grain production as a result of the floods and the decline in the cultivated area. This shows that there were poor agricultural policies to prevent or overcome these disasters and also ensure good prices.

However, agriculture has continued to grow steadily due to the good climate and government intervention. The Azerbaijan government has reduced the value added tax on agricultural inputs, lending rates, initiated irrigation systems as well as improved the infrastructure. The Azerbaijan government considered the agricultural sector as their main priority for ensuring economic stability and modernization amongst the non-energy resources.

For this reason, it has created plans with strategic development programs to focus on the sector. This includes the Socioeconomic Development of Regions for 2009-2013, Poverty Reduction and Sustainable Development for 2008-2015 and the State Program for the reliable provision of population with foodstuffs in the Republic of Azerbaijan for 2008-2015.

Contrary to the efforts the government has invested in agriculture, agriculture still has little influence in economic development. This is because the rural population is still relying hugely on remittances. More to this, the land management practices, agricultural services and credits, agricultural inputs and privatization incentives are poor. Furthermore, the high number of refugees and internally displaced persons dealt the agricultural sector and other sectors as well a major blow in reduction of poverty.

As far as the financial system is concerned, Azerbaijan has made rapid expansion of this sector. This triggered the rise in number of financial institutions to above 200 which were further reduced to 44. Besides the reduction, only two banks, Kapital Bank and International Bank of Azerbaijan (IBA) partially owned by the state dominated controlling more than half of the oil assets in the sector.

As of 2006, a report by the European Bank for Reconstruction and Development (EBRD) indicated that the financial sector had expanded by over 60 per cent. However, the ratio of GDP to banking assets was below 20 per cent. This reflected the small contribution the sector was making in the financial growth. Although there was a rapid expansion of the system, the system remains fragmented and under capitalized.

Therefore, further reforms are required to promote efficiency and confidence to mobilize more savings for investment purposes. The low ratio portrayed that this sector had a growth potential which when well capitalized can serve the economic demands for credit especially at this moment it is diversifying away from mainly relying on oil alone.

To add on, the under capitalized banks are at the risk of collapsing in the event of economic shocks which will further destabilize economic development. Dominance by one financial institution like it is with oil is a threat to other financial institutions.

Likewise in other non-energy sectors, Azerbaijan has a big potential in the tourism industry. Azerbaijan is endorsed with many fascinating sites like the ancient cities, fortresses, palaces, mausoleums, mosques and so forth. On top of this, it mostly famous for its features of eternal fire, the “atashgehs,” for example, Yanardag-the blazing mountain in Absheron.

Over decades now, fire worshippers from Azerbaijan and even other countries mainly India has visited the place in search of the fire. Furthermore, Azerbaijan has above 6000 historical monuments. Apart from this, is also known for its favorable agricultural climate having 9 climate zones of the existing 11 worldwide.

In spite of all these fascinating sites for tourism, Azerbaijan gains little revenue from the sector which is insignificant to its economic development. The majority of this revenue was generated from domestic tourism. Nevertheless, the progress in developing the sector has been ongoing in the years since 2000.

According to the experts view, Azerbaijan can accommodate about 22 to 25 million tourists per year. In 2011, Azerbaijan had 2 million visitors which portray they is a big gap to fill in this sector (ESCAP (Bangkok) & Seminar on poverty alleviation through sustainable tourism development 2005).

Recommendations/solutions

Based on the above outcomes of the economic situation in Azerbaijan, the following solutions will speed up the process of diversification. Azerbaijan government should concentrate on implementing effective economic development programs in regards to the non-energy sector. As stated in this research, Azerbaijan has a great potential in economic and human resources, historical heritage and unique natural environment.

For instance, in agriculture, the Azerbaijan government considers the agricultural sector as their main priority in ensuring economic stability and modernization amongst the other non-energy resources. Azerbaijan has a favorable climate for agriculture satisfying 9 out of the 11 climatic zones preferred for farming.

As indicated above, major efforts have been invested in agriculture but the efforts are not enough and effective. Relative to service industry we consider Azerbaijan banking sector. This sector as indicated is comprised of many financial institutions but only a few dominate. To enhance economic development and modernization, the financial sector must also be modernized to empower the development of other sectors by providing credit and loans.

Therefore, the financial sector has to improve its corporate governance, encourage consolidation and privatization. The Azerbaijan government owned Kapital Bank and the majority shares in the IBA, 52.7 per cent. With respect to tourism, Azerbaijan has broad fascinating resources for tourism.

Azerbaijan has to develop beaches, hotels and recreation facilities along its Caspian coastline. Relative to the hotels, Azerbaijan has only 6 five star hotels and very few 3 to 4-star hotels for budget tourists (ESCAP (Bangkok) & Seminar on poverty alleviation through sustainable tourism development 2005).

Developing the above sectors and other potential sectors will ensure development of the country’s remote and peripheral areas, promotion of small and medium-sized enterprises, creation of new employment opportunities, and restoration of infrastructure.

Nevertheless, the management of the resources would require accountability and transparency using effective monitoring mechanisms both in the public and private sector (ESCAP (Bangkok) & Seminar on poverty alleviation through sustainable tourism development 2005).

With regards to oil revenues, good governance should be embraced in the distribution and use of this primary source of revenue to uplift other sectors of the economy. As mentioned above, institutionalized corruption of SOFAZ delayed development of other sectors. Another important solution to diversification, is finalizing of the privatization process especially for the biggest business.

This would eliminate monopoly in certain sectors of the economy and improve the competitiveness of goods in the domestic market. In return, this would be of much benefit to the ordinary Azerbaijan consumers. On the political scene, Azerbaijan government should initiate more clear and democratic policies to enhance good governance and relationship with its citizens.

In addition, the government should embrace effective running of the government institutions and implementation of the adopted policies. As noted, inefficiency in implementation of policies or running of government institutions was a hindrance in achieving economic stability and modernization (Bongers, McCallum, United Nations Human Settlements Programme & World Association of Cities and Local Authorities Coordination 2003).

Furthermore, the government should formulate effective social reforms to reintegrate the displaced persons and the refugees in the society. Moreover, equality should be upheld in solving the immediate needs and challenges facing Azerbaijan such as housing, employment, poverty and many more (United Nations 2003).

Comparative Analysis and Debate

This research applies theories levels of analysis to shape the debate about whether or not Azerbaijan should have a comprehensively developed economy with diverse resources in order to ensure its stability and modernization. Two theories have been applied in this research, modernization and dependency.

These theories have notable similarities and many differences as well. The theories provide valid information and explanations pertaining to development and underdevelopment. Likewise, two levels of analysis, systemic and sub-systemic will be applied in this research. These systems explain underdevelopment in Azerbaijan and need to stabilize the economy to achieve long term development (United Nations 2003).

In regards to modernization theory, the following questions are necessary in the theoretical analysis. What causes the economic stability of a country to rise, endure or fall? Does democracy evolve or diminish as a result of economic development? Democracy falls in which economic development level?

The above questions are sufficiently answered by comparing two theories, modernization and dependency relating to economic development and democracy. These questions also help to define the mechanism existing economic development and aspects of political regimes. The research about the relationship between democracy and economic development has been widely covered than any topic in comparative politics (Hauss, 2008).

The majority of these studies has shown that the levels of economic development and democracy are strongly tied. There are two different factors why this relationship is possible: democracy has a high likelihood of occurring when a country is developing economically or it may develop independent of the economic development.

However, democracy has high chances of surviving in a developed country. The first factor is endogenous whereas the second is exogenous. By comparing the two regimes, we assert that democracy occurs when dictatorship ends. Hence, the notion that democracy is dependent on economic development is similar to the saying that dictatorship in a country ends soon the country develops economically. Therefore, democracy edges out dictatorship through economic development (Przeworski, and Limongi, 1997).

Surveys conducted in different countries show that as a country develops economically, its social structure extensities-civilization, and labor, it requires considerable involvement of employees. Furthermore, other new groups and activities arise. As a result of this, dictatorship loses its effectiveness as the changes occurring empower people with autonomy, privacy and freedom. Using the endogenous factor, modernization theory takes effect in this.

This theory describes democratization to be achieved after the economy develops. Modernization involves differentiating and specializing the social structures. This is done to distinguish the two aspects from from political structures. The main goal of this process is to create democracy. These processes include industrialization, urbanization, mobilization, education, political incorporation, communication and many more.

In short, this is diversification of the economy. Therefore, according to modernization theory, democracy is dependent on economic development. It is assumed that if a country advances economically, like the developed countries, there is a higher probability of political democracy persisting (Przeworski, and Limongi, 1997).

Therefore, modernization is termed as one of the factors why economic development is linked with democracy. The sense that a country becomes democratic after developing economically portrays democracy as endogenous. That is, it comes as a result of development under authoritarian system.

This implies that a poor authoritarian country would develop and become democratic after reaching a certain level of economic development. On the contrary, an authoritarianism / dictatorship would end because of other forms of influences thus democracy would still be achieved. The majority of European countries achieved their democracies as a result of wars but not modernization.

On the other hand, other democracies fell due to the demise of their leader, foreign pressures and economic crises. Modernization theorists concentrate on the socio-political and cultural factors and impact of economic development (Przeworski, and Limongi, 1997).

Relative to the dependency theory, it looks at the interaction between developing and developed countries. This theory appears as an opposing theory of the interaction based on free market theory. It was developed to challenge the economic policies of free markets during the post war era.

Therefore, dependency theory shows that a few established countries that are supplied by the developing countries at their own expense. This implies that third world countries depend on the developed nations because they send resources, and they may or may not get compensations.

This theory holds that developed countries put their developing counterparts under pressure through tough economic forces like instituting sanctions or proscribing trading policies which are attached to loans provided by the IMF or World Bank (Johnson, Turner & Turner, 2003).

The dependency theory further posits that there is an increment in dependency as time passes. The developed nations take the advantage of the vast resources to develop unfair policies which oppress the developing countries. In addition, the developed countries avoid criticisms from the developing countries.

This strategy favors and creates economic security of the developed countries at the expense of the underdeveloped countries. Therefore, the developing countries continue to lose wealth to the developed countries. This causes poverty in developing countries, and this situation forces these countries to get loans from the developed countries.

The developing countries accumulate huge debts, and this increases their dependency on the developed countries. Generally, dependency theory emphasizes that lack of development in underdeveloped countries occurs is attributed the international capitalist system that keeps the third world countries like Azerbaijan underdeveloped.

Azerbaijan is influenced by other European countries under the Council of Europe and is dependent on loans from IMF and World Bank amongst other international financial institutions (United Nations., and Economic Commission for Europe. 2003).

As per the systemic level of analysis, it has two regimes, the post-Cold War and the post-9/11. The post-Cold War regime was characterized by the change in the international system to a capitalist system whereas the post-9/11 refers to the war on terrorism that left countries torn apart and in conflicts with one another.

This approach will evaluate how both regimes affected the development process in Azerbaijan. Regarding to post-Cold War regime, Azerbaijan suffered unrest after the collapse of the Soviet Union. Although Azerbaijan was relatively quiescent during the progress of the Cold War, it suffered conflicts with Armenia over Nagorno-Karabakh.

Apart from the political conflicts, other conflicts related to religious militancy, terrorism and competition over the limited resources intensified causing instability which further affected the international relations of these countries. Similarly to the post-Cold War, post-9/11 also contributed to political unrest and deterioration of international relations between the United States and Muslim related countries (Burnell & Randall, 2008).

Further to the sub-systemic analysis level, the phenomenon about Azerbaijan underdevelopment will be examined through its political system, political culture, leadership and decision making policies for the government. The Azerbaijan political system was under the authoritarian rule where the economy first developed and later started to fall.

This was attributed to the political culture of institutionalized corruption which affected the government. The leadership was based on dictatorship where only the class of state building elites controlled decision making (Atakishiyev, 2007).

Debate

It is necessary for the Azerbaijan economy to continue depending on the Petroleum productions and the oil prices. The country should use the wealth for development, which will help move forward to modernize. As opposed to diversification, specializing in the oil sector has proved successful in Azerbaijan.

To date, oil is the main contributor of the country’s revenue. In addition, most of the exports also come from this sector. This revenue has been used to develop the country’s economy, and a good progress has been observed for years. One sector is easy to manage effectively, unlike many sectors (Atakishiyev, 2007).

By contrast, diversification of the economy is the key in achieving economic stability and modernization. As studies have shown, countries that are developed are those with a diversified economy. In respect to Azerbaijan, diversification is highly required. Despite the oil sector being dominant in Azerbaijan economy, there is a major risk of exhausting the natural resource which will leave the country in a stalemate, destabilized and non- modernized.

On the basis of this research, Azerbaijan has a great potential of economic resources ranging from agriculture, financial institutions to tourism. Besides, the little efforts by Azerbaijan in these sectors, they have portrayed change to the economy. Therefore, by diversifying its economy, Azerbaijan would realize economic stability and modernization within a short time.

Conclusion

This research has successfully proved that diversification of economic resources is the key to achieving economic stability and modernization. Azerbaijan has mainly relied on the energy sector since independence; however, it has other potential resources which are underutilized. The outcome of this research has helped us to understand the economic development of countries which are reliant on single sector/resources like Azerbaijan.

However, over reliance on one sector has contributed to the underdevelopment of countries. This research has shown that such a system is at the risk of collapsing once the resource exhausts or due to other factors. These other factors include democracy. The modernization theory has emphasized on the impact of democracy to achieving economic stability and modernization regardless of relying on a single or multiple sectors.

Contrary to this, the dependence theory proves that the hindrance to development and modernization is dependence on developed countries which end up indebting them. In regards to levels analysis, underdevelopment of a country is as a result of local and international influence.

In systemic analysis, countries fail to develop due to external influence like war and terrorism with destroying the international relations. On sub-systemic analysis, internal influence play center role in underdevelopment of the country. On all these fronts the impact is massive on country relying on a single economic resource. Therefore, Azerbaijan should diversify its economic resources to stabilize and modernize to overcome the risk factors associated with specialization

References

Atakishiyev, M. (2007). New oil policy and economic development in Azerbaijan. Baku: Aspoligraf.

Baranick, M. J., and Salayeva, R. (2004). State-Building in a Transition Period: The Case of Azerbaijan. The Cornwallis Group X: Analysis for New and Emerging Societal Conflicts, 208-217.

Bongers, P. N., McCallum, D., United Nations Human Settlements Programme., & World Association of Cities and Local Authorities Coordination. (2003). Partnership for local capacity development: Building on the experiences of city-to-city cooperation. Nairobi: United Nations Human Settlements Programme.

Burnell, P. J., & Randall, V. (2008). Politics in the developing world. Oxford: Oxford University Press.

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Cornell, S. E. (2011). Azerbaijan since independence. Armonk, N.Y: M.E. Sharpe.

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Hauss, C. (2008). Comparative politics: Domestic responses to global challenges. Belmont, CA: Wadsworth/Cengage Learning.

Johnson, D., Turner, T. & Turner, D. J. (2003). International Business: Themes and Issues in the Modern Global Economy. New York: Routledge.

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Megginson, W. L., & Oxford University Press. (2005). The financial economics of privatization. New York: Oxford University Press.

Ottaway, M. (2002). Democracy challenged: The rise of semi-authoritarianism. Washington, D.C: Carnegie Endowment for International Peace.

Przeworski, A., and Limongi, F. (1997). Modernization: Theories and Facts. World Politics, 4(2), pp. 155-183

United Nations. (2003). Managing globalization in selected countries with economies in transition. New York, N.Y: United Nations.

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United Nations., and Economic Commission for Europe. (2003).Towards a Knowledge-Based Economy: Azerbaijan: Country Readiness Assessment Report. Washington, DC.: United Nations Publications.

Zvi Lerman, Sedik, D., and Sedik, D. J. (2010). Rural Transition in Azerbaijan. New York: Lexington Books.

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