Identify Areas of Comparative Advantage Azerbaijan and Some ECO Countries

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Identify areas of comparative advantage Azerbaijan and some ECO countries.

I.Theoretical basis of relationship between labor market and foreign trade. Every country is inclined to export products using intensively the product factors that are abundant in its production i.e. labor, capital and natural resources and to import the products using intensively the rare product factors.

Under open economy conditions, when products face to the world prices, the changes in the guarantee with the factors, that are used in the production of the products influence not on the prices of factors, but on the productive capacity. At that time depending on the prices of factors demand changes have the significant effect. So, the advantages on product factors among the countries (the difference on their quality and price) and the competition in the product markets seem objectively.

When products are imported and exported, product factors that spent on their production are also imported and exported indirectly. If there is more quality of expenditure factors of production relative to other countries, less expenditure expenses, the more advantages will gain these products in the world market competition and by this way the demand to the intensive usage of the same factors in the given sectors increases. Under open economy conditions this advantage appeared due to the advantage in factor content of trade also influences on the domestic employment, i.e. intersectorial movement of employees happens. Before (till the open economy) the stream of a considerable number of people engaged with import substitutive will happen towards export sectors which have advantages in this case. At that time any assessment of arising employment effects will be connected with the labor supply and wage changing. Here also, it is necessary to take into consideration and to state the value of the temporary unemployment factor and its effects that can be arose in connection with appropriating of profession on the export towards sectors. In here, the result of the resources re-division depends on the extent of the mobility of the labor resources.

The factor content analyses in research are used to determine the product factor for a separate country which is the source of the comparative advantage. It can also help in the first views of the export or investment possibilities. If suppose that, for instance, the main source of advantage in a separate country forms non-professional employees then we can determine other industrial sectors that use non-professional employees intensively. Factor content analyses calculate the essential source of advantage on the product factor.

Saying in a simplified way, trade factor content is used to find out the model placing on the basis of the comparative advantage. For example, factor content trainings of Great Britain and the USA laid bare that both of these countries became specialized in the product export using intensively the well educated, “white collar” employees. This is very useful in itself for a several number of purposes (settings). Factor content model can also be used to ensure the initial description of the investment opportunities. Suppose that, for example, China is specialized in the product export in which professional manual labor is used in its production. We know from the factor content model that it is not absolutely chance, because China is relatively rich in the professional manual labor.(relative to the rest countries of the world) And this consequently, is escorted by having China growth potential of new sectors which make intensive usage of professional manual labor. In this case, we can check possible (numbers) reports of those countries to determine the sectors of other countries where are intensively used the professional manual labor, but those have not found out in China yet.

Let’s note that factor content analyses can be more or less important for the guarantee of the generalization of the results. Comparative advantage is not suitable for essential measures (calculating) – it is meaningless as saying one kilo or one litre comparative advantage. Despite of it, for example, it is relevant to say that the comparative advantage of a product factor for China relative to another one has more powerful origin. The purpose is consequently to get relative results.

The difficulties in research are following:

-A few hypotheses are accepted in the main factor content model. Many of these hypotheses were used to secure to carry out the counting in a complex way due to the model;

-A number of countries generally don’t compile input-output tables or present only in a high-level aggregate way (30 sectors) which are rarely used for the factor content analyses;

- Deficiency of statistical information on the division of all kinds of professions and occupations according to the areas of the intersectorial balance in Azerbaijan;

Problem of general information in the developing countries is not having domestic input-output tables, even if they exist, they don’t fit for any real usage. Factor content model must connect in itself both imports and exports of all products for using A matrix. It is not problem for the great and developed countries, such as Great Britain and the USA, because their input-output tables have been divided efficiently to secure the information of every possible sector. For small and developing countries there is not usually the same information on the important sectors in more numbers, or in fact it’s not estimated.

It is necessary to use factor demand matrix (A) taken from other countries to carry out factor content analyses completely. For instance, for calculating real export factor content for Mexico demands Matrix A taken from the USA, Great Britain and France. It is at least, possible from the points of view of the conditions of the factor content model, i.e. the main model supposes that domestic and world Matrix A are equal.

In practice it is never completely satisfactory to use “borrowed” Matrix A, but this is often the only way to get information that is secured for the factor content model.

Development and solve of initial factor content matrix of USA and Azerbaijan (identification and ranking of net export and consumption factor content). According to practice of Great Britain, the excel file tables describing factor content matrix, factor content algorithms for USA and Azerbaijan is attached. On the first page of the mentioned file “Table 1” middle consumptions on 107 areas in Azerbaijan were classified according to the following production factors division. This is done according to the data on “Sectoral balance of goods and services production and distribution in Azerbaijan” provided by the State Statistical Committee of Azerbaijan in 2001.

1)Natural resources: forestry and fishery

2)Natural resources: fuels

3)Natural resources: minerals

4)Capital: automobile equipments and mechanisms

5)Capital: bank, financial services, credits, and benefits

6)Real estate

7)Labor

Production factors share in each general delivery can easily be seen in this matrix.

Based upon factor content matrix for Azerbaijan, advantages of country economy can be ranked as following:

1. Labor
2. Capital
3. Natural resources

Thus, share of labor factor in these areas in general delivery of the economy is high. More labor-intensive areas are (table 5):

1. labor of hired employees
2. real estate services
3. advisory services on architecture, engineering, and related technical areas
4. rental of automobiles and equipments without operators, personal belongings
5. cleaning services
6. ready weaving
7. health care and social services
8. education services
9. prepared and preserved fruits and vegetables.

These areas are mainly service sectors, weaving and fruit-vegetable processing.

More capital-intensive areas are:

1. sugar refinery
2. sand, loam, stone, salt and other materials
3. electrical equipments and apparatus.
4. mill products and starch

According to table 5 in general delivery labor payments share is 13,5%, capital – 3,8% (bank – 2,6%, financial services, credits and benefits – 0,7%, real estate – 0,5%), natural resources – 3,4% (minerals – 1,6%, fuel – 1,2%, forestry and fishery – 0,6%).

Net export factor content matrix gives opportunity to identify trade factor content differences between Azerbaijan and other countries. Ranking shows that Azerbaijan exports products and services in the production of which natural resources (1 and 2) are used amply, and in contrary imports capital and labor-intensive (transport and equipments, mechanisms) products and services.

Ranking of consumption content matrix shows that consumption factor mostly used in the country is labor and capital. Third com natural resources called minerals.

Here first place labor factor can be expressed upon two hypotheses:

1)ampleness of non-professional and cheap labor in Azerbaijan;

2)professional and expensive foreign labor

Deficiency of indicators on “Input-Output” areas of labor according to profession and occupation is the main challenge that impedes to give prevalence to one of hypotheses.

Net export factor content ratio to consumption factor content matrix gives opportunity to find out advantages of provision of country with production factors (Table 1.). This advantage in our country depends on natural resources (fuel and mineral) and labor. It can also be seen that Azerbaijan has sufficient capacity and basis for bank, financial services perspective development. Forestry and fishery devote to the middle level. But it should also be mentioned that equipments and mechanism that are significant and leading factors for improving capital are less provided in our country. This is one of the most important issues to be reviewed and solved. There is need for increasing government measures in this direction.

Table 1. Advantages of production factors provision of different countries

Production factors / Net export / consumption factor content solve ranking
Azerbaijan / USA / Great Britain
Natural resources: forestry and fishery / 5 / 1 / 7
Natural resources: fuels / 1 / 4 / 1
Natural resources: minerals / 2 / 2 / 6
Capital:
Auto equipments and mechanisms / 7 / 3 / 5
Capital:
bank, financial credits, credits + benefit / 4 / 6 / 2
Capital:
Real estate / 6 / 7 / 3
Labor / 3 / 5 / 4

It is clearly seen from the above ranking that US advantages in production factors provision depends on natural resources (forestry and fishery, minerals) and equipments and mechanisms.

Ranking shows that advantages of Great Britain in provision with production factors mainly are natural resources: fuels; capital: bank, financial services, credits, benefits; real estate (Table1.).

Preparation and analysis of professional divisionof labor according to the areas of a real balance. It should also be noted that this obstacle doesn’t impede research results. This challenge was addressed by selecting technologically similar countries. For example, labor matrix of Azerbaijan and Kazakhstan differs form that of USA as A1 and A2,because both countries are behind of USA:

Aaz = Ausa – A1

Akz = Ausa – A2

As the economy of Azerbaijan and Kazakhstan are similar, A1 and A2 matrixes are equal.

Us more detailed labor matrix is classified upon 7 group:

1)Management and administration (management, business and finance)

2)Professional and technical professions;

3)Service professions;

4)Trade and sell professions;

5)Office and public administration;

6)Agriculture, fishery and forestry;

7)Production, construction, operation, procurement, shipment.

For “full list of professions and occupations” see Annex E

Calculations related to the provision of main factor content model naturally demands for equality of measures of net export vector and labor matrix. Thus, net export vector of other countries are more classified according to data.

II. Identification of interrelations betweeninternational trade and labor market

Export areas with prevailing labor types.

During the research I could not obtain data for any ECO countries that is why I use Azerbaijan, Iran, Kazakhstan statistical data and I use Russian statisticaldata which is not included in the ECO countries.

Table 2.1. Advantages of different countries professional and occupational labor factor

№ / Professions and occupations / Russia / Iran / Kazakhstan / Azerbaijan
Ranking results
1 / Administration and management (management, business and finance) / 3 / 1 / 2 / 2
2 / Professional experts / 4 / 3 / 4 / 5
3 / Service / 6 / 4 / 3 / 3
4 / Trade and related services / 5 / 6 / 6 / 4
5 / Office and public administration / 2 / 5 / 5 / 6
6 / Agriculture, forestry and fishery / 7 / 2 / 1 / 1
7 / Production, building, operation, current repair and exploitation, transportation, procurement, shipment / 1 / 7 / 7 / 7

Table 2.1. contains ranking of professional and occupational employment of similar Azerbaijan, Russia, Iran and Kazakhstan. Among these countries professional labor-intensive professional and occupation group – production, construction, operation, current repair and exploitation, transportation, procurement, shipment – prevails only in Russia. Iran has comparative advantage on management and administration (management, business, finance).

Azerbaijan and Kazakhstan have comparative advantage on non-professional labor – agriculture, forestry, and fishery. Then according to comparative advantage on profession and occupation belongs to management and administration group in Azerbaijan and Kazakhstan, office and public administration in Russia and agriculture, forestry, and fishery in Iran.

Furthermore, Russia has comparative advantage on management and administration, Iran professional experts, Azerbaijan and Kazakhstan service group.

Results of “Current and potential comparative advantages of Azerbaijan” research implemented by EconomicReformsCenter in 2001, also proves results related to Azerbaijan. According to research results Azerbaijan, as a country mainly producing agricultural products has comparative advantage on tobacco, apple, nut-chestnut, tea, vegetable, oily seed, rough cotton, pharmacy plants. Belonging Azerbaijan to 6th category of labor can be explained that this type of labor is intensively used in above-mentioned areas of agriculture. Survey implemented with the financial support of UNDP and within “Technical Assistance in labor statistics and regional development” project also proves the results. Survey encompasses 3377826 economically active people. 44,0% of people consists of employees of agricultural sector. 62976 or 8,0% people of all 1486701 are professional, 3444 or 0,2% are mid-professional, 535542 or 36,2% are non-professional employees. Rest 884739 people neither are professional nor non-professional. 656574 of those are melon plantation, fruit and field commodity producers, 161622 people belong to stock-breeding, 5043 forestry and similar occupations, 5043 fishery and fishing.

Thus, state economic policy in Azerbaijan must be aimed at the development of agricultural sector which has relative comparative advantages in labor market. In this field, it is necessary to try to achieve the competitive gifted production and the development of manufacturing industry. To achieve this aim especially, in agricultural sector it is very important to determine the need of exact specialists and to have investment for their vocation. But this demands to be prepared larger system of indicators on labor market in the country, giving here the economical active people, unemployed and working population, the structure indicators on different marks, also demands to gather the information about age and sex composition of employees on the economic areas of activities due to the international classification, standard of wages and knowledge, specialities, demand to workers in these sectors and their level of education on concrete professions etc.

Table 2.2.Ranking bilateral factor content for Azerbaijan (Ranking shows Azerbaijan advantages relative to the given countries).

Professions and occupations / Russia / Iran / Kazakhstan
1 / Administration and management (management, business and finance) / 5 / 7 / 7
2 / Professional experts / 4 / 6 / 5
3 / Service / 2 / 4 / 3
4 / Trade and related services / 3 / 2 / 2
5 / Office and public administration / 6 / 3 / 4
6 / Agriculture, forestry and fishery / 1 / 5 / 6
7 / Prodcution, building, operation, current repair and exploitation, transportation, procurement, shipment / 7 / 1 / 1

On the other hand, being connected with the growth of oil sector labor type “Management and administration” (management, business and finance) forms the next source of comparative advantage of Azerbaijan. And this makes necessary develop refining industry of oil sector, and pay attention to the education of the requiring specialists in this line.

Figures with minus (negative) on results of bilateral factor content solve described in table 2.1. shows clear comparative advantage of Azerbaijan on relevant labor group. According to double-sided factor content model Azerbaijan has comparative advantage on agriculture, forestry and fishery. It can also be explained with the comparative advantage of agriculture products. Compared to Iran, model results show that our country has comparative advantage on 3-7 groups of profession and occupation. So, the highest advantage is on production, construction, operation, current repair and exploitation, transportation, procurement and shipment. Compared to Kazakhstan, our country has comparative advantage on 7 and 2-5 groups. The highest advantage sources are production, construction, operation, current repair and exploitation, transportation, procurement and shipment. It means that compared to Russia Azerbaijan has comparative advantage on non-professional and mid-professional, to Iran and Kazakhstan on professional and mid-professional employment.

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Table 2.1. The solve matrix of bilateral factor content for Azerbaijan relative to technologically similar countries

Group / 2004 National Employment Matrix title (USA) / Russia net export factor content (factor demand) / Kazakhstan factor content (factor demand) / Iran factor content (factor demand) / Azerbaijan net export factor content (factor demand) / Azerbaijan double-sided factor content solve compared to Russia / Azerbaijan double-sided factor content solve compared to Kazakhstan / Azerbaijan double-sided factor content solve compared to Iran
NERUS * LMUSA / NEKHAZ * LMUSA / NEIRAN * LMUSA / NEAZE * LMUSA / BRUS - BAZE / BKHAZ - BAZE / BIRAN - BAZE
1 / Managerial and administrative (Management, business, and financial) occupations / 1306911346 / 17768227 / 39072743 / -5806715 / 1312718061 / 23574942 / 44879458
2 / Professional and related occupations (paraprofessional, and technical occupations) / 1294640144 / -4395496 / -4224191 / -15900373 / 1310540517 / 11504877 / 11676181
3 / Service occupations / 53281468 / -4233882 / -19552186 / -1067579 / 54349048 / -3166302 / -18484607
4 / Sales and related occupations / 214404439 / -31987147 / -99113196 / -11186623 / 225591062 / -20800524 / -87926573
5 / Office (clerical) and administrative support occupations / 1508849043 / -19849428 / -90303090 / -19509496 / 1528358538 / -339933 / -70793594
6 / Agriculture (Farming), fishing, and forestry occupations / -232100060 / 29369656 / 5183926 / 11423744 / -243523804 / 17945912 / -6239818
7 / Production, construction, operating, maintenance, transportation and material handling / 7611764140 / -232923452 / -1649053054 / -168811044 / 7780575184 / -64112409 / -1480242010

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