Assessment of economic regions of Azerbaijan Republic
with Cobb- Douglas production function
In modern period, socio-economic condition of world countries is constantly developing. As in case of absence of tendency towardseconomic development, country not only will stay in its place, but also it will lose its current post. This is related to the occurrence of gradual changes. World countries carry out various analyses and evaluations for assessing its existing economic condition and implement forecasts on this basis. Various types of economic assessment methodologies are used for the analyses and reviews of such economic processes and conditions.
As we know, world countries are divided into two parts according to the socio-economic development condition: Developed countries, developing countries. Developed countries differ from their competitors not only for their economic power, but also they are different from the developing countries according to the social status of its population. This development difference is that the richness of the country should be noticed in the living rate of population.
It should be taken into consideration that economy is just formed by people. Taking into consideration the aforementioned, it should be concluded that social status of country should be developed on an upward trend along with country’s economy.
If we look at the experience of some countries, we can see that mainly capital cities and regions around capital develop. However it should be taken into consideration that country is not consist of only capital city, main part of country’s population lives in regions and currently the place of human resource in the country’s economy is undeniable. Using this efficient labor force, it is clear that in which pace of development the country will reach. So here the conclusion is that development of country maximally depends on its regions along with its capital and other cities.
We will assess the condition of the economic regions of Azerbaijan by means of Cobb – Douglas production functions for 1995 -2012 in this research work. Cobb – Douglas production function was developed by American economist Paul Douglas and American mathematician Charles Cobb (“Production Theory”) in 1928. Firstly, an attempt is made to empirically bring out effect of capital and labor resources to the product output in USA economy in this research1.
______
1 “Сборник Научных Работ” Национальный Банк Кыргызской Республики Бишкек - 2012стр-20
2 E Theory of production” The American Economic Review, Vol. 18, No. 1, Supplement, Papers and Proceedings of the Fortieth Annual Meeting of the American Economic Association (Mar., 1928), pp. 139-165
At first this model is established for 1899-1922 years. Along with results obtained for this period, authors were interested in other direction that this was also a note as an addition to the obtained results after the fulfillment of research work. Here main objective was to analyze the effect of quantitative changes to the results, as well as, the effect of qualitative changes (mainly in the field of labor work). Of course, it would not be right to compare the productive labor of that period with today’s’ productive labor. At present when we say labor it means labor field equipped with technological innovations. That’s growth of labor resources in 1890s affected results in its turn, but in today’s modern period one person can implement the work of tens of persons done by manual labor in some hours by the help of production equipment. For this reason, the requirements of modern period should be absolutely taken into consideration in the development of this model1. Although various fields of Azerbaijan economy were assessed for many times by means of this production function, but as we mentioned above, as the economy is constantly in action, constant implementation of this economic - mathematical assessment will help to determine the development directions of economic activity. Mainly in the last years the revival occurring in non-oil sector has strengthened the development of production activity in non-oil sector along with oil sector of economy. As well as in the last period, by analyzing the condition until and after the adoption of state programs for the development of socio-economic condition of Azerbaijan Republic, it can be clearly seen that which positive results were obtained by these programs. It became apparent while analyzing the indicators of Cobb-Douglas production functions in this research work that we will use regional gross product output instead of it as there was not given Regions’ Gross Domestic Product (GDP) indicator among the indicators of Regions of State Statistics Committee. So let’s mathematically review Cobb-Douglas production function.
Cobb-Douglas production function analyzes quantitative characteristics between Labor force (L) together with production volume (Y) that affects it and the amount of Capital (K):
Y = AKαLβ
Y- production volume, A- aggregate productivity of production factors, K- amount of capital, L – labor force, α – elasticity of production volume for capital, β - elasticity of production volume for labor
Here,
- α and β doesn’t act as negative values, as there is always direct proportional dependence between costs of production factors and output volume;
- if α and β amount equals to one, this means the permanent effect from production scale (Y increases in the same proportion as with K and L);
- if α and β amount is greater than one, in this case, it means the function has increasing effect from production scale (this means that when K and L increases in some proportion, in this case Y increases in greater proportion).
- if α and β amount is less than one, in this case it occupies decreasing effect from production scale (Y increases in smaller proportion in comparison with the K and L).
α + β = 1
Measures are continuously being taken by the leadership of country in order to provide the future development of our country. For this purpose, we can name development conception of “Azerbaijan 2020: Look into the Future” approved by the Decree dated on December 29, 2012 of the President of Azerbaijan Republic. If we will look at some main points related to the development of regions, we can see that the main purpose is the development of both capital Baku, and industrial cities also regions in the same level.
It is envisaged to establish logistics centers in the regions of the country and provide the development of transit and transport services by effectively using strategic- geographical condition of the country for the purpose of turning Azerbaijan into the trade center of the region. All of these, at the same time, will open the way for the increase in the attractiveness of the country as production and investment center and the establishment of new business and employment opportunities. Taking into consideration the regional development priorities, infrastructure and investment policy of the state in regions will be coordinated with the investment strategies of business and it will prioritized mainly in terms of economic efficiency.
(carrying out cost – income analyses). Existing differences between economic regions of the country according to life standards and quality, product output per person and volume of investments will be reduced. Flexibility of local authorities will be increased in the adoption of economic decisions within the modern approach framework. Special projects will be implemented in the direction of the development of villages and measures for the improvement of infrastructure and social services will be continued. Road problems in regions, as well as, in the villages will always be in the center of attention and relevant steps will be taken for the purpose of meeting the demand for transport sector. Improvement of infrastructure provision in the regions of the country, strengthening the application of information technologies, taking into consideration the competitive advantages of each region, territory- production clusters on priority areas of economy, tourism and recreation zones, establishment of new regional development centers will accelerate the socio-economic development of the regions. Regional development centers will stimulate the provision of the balanced socio-economic development in the regions, and this will lead to decrease in the regional inequality, elimination of sharp differences in the structure of trade turnover on economic regions and to the slowdown of the concentration of economic resources mainly in central cities. 1
Our country Azerbaijan consists of 10 economic regions. It is known that in which economic growth rate we will rich by getting benefit from our rich natural resources, mild climate and economic power of our regions, highly professional staff. Therefore, development of regions should be important for us. Taking into account that the objective set is for the increase in the share of non –oil sector, we can do this at the expense of the increase in the total product and service output in our regions. So today the issue of the development of regions occupies its substantive place.
______
3Development Conception “Azerbaijan 2020: Look into the Future” approved by the Decree dated on December 29, 2012 of the President of Azerbaijan Republic
Independent Azerbaijan Republic founded in the mid-90s of 20th century began to pursue its independent economic policy since that time.
Works done in this direction is yielding its results. There was a need for strengthening non-oil sector for economy’s not being dependant on oil sector. As we know, Azerbaijan is rich both with its climate and also mineral resources, in a word, with all natural resources and human capital. In recent years, the Republic of Azerbaijan turned into economically stable country known in the world level by using natural resources and effective management methods. Of course, for the development of non-oil sector, it is necessary for regions’ maximum and effective economic indicators to be developed on constantly growing line.
For this purpose, “State Program on Socio-economic development of the regions of Azerbaijan Republic” (for 2004-2008) was approved by the President of Azerbaijan Republic by the decree dated on February 11, 2004 of the President of Azerbaijan Republic. There were signed orders in addition to this Program for the acceleration of socio-economic development of cities and regions including in Guba – Khachmaz, Shaki – Zagatala, Upper Shirvan, Lankaran, Aran, Ganja – Gazakh and Upper Karabakh economic regions.
Along with the socio-economic development of regions, “Action Program on the acceleration of socio-economic development of settlements of Baku city on 2006-2007” was approved by the “Order No. 1338 dated on February 27, 2006 of the President of Azerbaijan Republic for the purpose of reconstruction of surrounding settlements of Baku city and provide more efficient use from their resources”.
High results were obtained from the programs adopted in 2004-2008. During these periods, real volume of Gross domestic product (GDP) reached to 38 billion manat being 2.6 times increased and the nominal volume of GDP per person was 4440 manat being 5 times increased. Non –oil sector was increased 1.8 times, according to the results of 2008, the share of non-public sector in GDP was 84,5 %. Volume of the investments put in non – oil sector increased 6,2 times in the least five years and its special weight in the structure of total investments reached from 26,8 percent in 2003 to 69 percent in 2008. There was increase 2,5 times in country’ s economy and 25,2 percent in the agriculture. In comparison with 2003, income of population increased 4 times in 2008. During this period, average monthly salary of employees increased as 3,5 times and prevailed the inflation level as 1,7 times and reached to 268 manat. 1
Since September of 2008, the limit of minimum amount of salary and pension reached to 75 manat. At present, the minimum salary is 105 manat. Poor people at the end of 2008 was totally 13,2 percent.
Volume of investment put in the main capital at the expense of all financial resources for the development of the country’s economic was 33,5 billion manat for the last five years. During 2004-2008, there were opened more than 766 thousand new, as well as, 547, 5 permanent workplaces and this helped for obtaining maximum benefit in the fight with poverty. More than 27,5 thousand new enterprises were established in the country. And 40 % percent of this belongs to the share of regions. At that period, serious results were obtained in agriculture. Assortments of agriculture products were increased, preferential loans were given to farmers and individual entrepreneurs, the conditions ofleasing of agricultural equipments were simplified. For this purpose, techniques were brought to country from abroad and maximum beneficial condition was provided for farmers. Infrastructure was replaced by new one in some countries taking care once more for farmers. Continuity of provision of electrical energy and natural gas was ensured in some regions. Thousands of artesian wells were drilled in dry areas, canals were restored. During this period, it should be specially emphasized that Oghuz- Gabala – Baku water pipeline was constructed that would provide the population of Baku city with water. Reconstruction of roads between regions, even laying an asphalt coating for roads between villages and settlements has special importance in the life of region and this helps to farmers for easy transportation of the manufactured products. Construction of cold storage facilities meeting modern requirements has begun in regions for the protection and prevention of loss of manufactured products and hundreds of such storages have been already given for use in the regions. In this period, quality of communication service of population has been increased, even access to internet has been provided in the most remote villages. For this purpose, some old telephone units were provided with new electronic type units.
______
4 “Action Program on the acceleration of socio-economic development of settlements of Baku city on 2006- 2007” by the Decree No. 1338 dated on February 27, 2006 of the President of Azerbaijan Republic
It would be particularly appropriate to state one case in the improvement of social infrastructure of regions. Construction of new hospitals, diagnostic centers, libraries and schools in regions is a good example of these programs serving to the improvement of wellbeing of the population of Azerbaijan. Successful implementation of these programs is fulfilled directly under the supervision of the leadership of the country.
After these successes, the President of Azerbaijan Republic, Ilham Aliyev approves “State Program on socio – economic development of the regions of Azerbaijan Republic for 2009-2013”.
Adoption of this program is to achieve in the high development of socio-economic condition of both regions and all country and to help not only to economic development, but also to achieve in sustainable and continuous socio-economic development.
One of the main places in this program was the increase in government support for the establishment of fair competitive environment that has main importance. For this purpose, urgent action plan for the protection of both rights of manufacturers and also consumers was developed in a short time and it was successfully implemented both in capital Baku and in the regions. It was simplified to be state registered as an assistance for entrepreneurs and fully “a window” system was introduced. In addition to this, the amount of credits for small and medium entrepreneurship was increased and as a result of it, there was created a basis for the development of entrepreneurship. Main credits were directed into non-oil sector and as a result, the share of non-oil sector in GDP increased in many times. VAT (Value – added tax) for seed plants brought into country was removed for support to agriculture. Government didn’t denied its attention and care for making easier bringing out agricultural techniques to the country. Trainings with foreign specialists and farmers were organized in regions formany times and as a result of it, the productivity of agriculture increased and the loss decreased. Thousands hectares of land areas that are not suitable for planting were made drainage and were given to the use of villagers and farmers in a suitable condition. In addition to this, thousands of breeding cattle species were brought to the country and interest- free loans were given to farmers.
At that period the transport sector of country was not remain without attention. Infrastructure of roads of thousands of kilometers was re-established and asphalt coating was provided for the old roads according to international standards. During these years, one of the main changes in the transport infrastructure was the completion of the construction of roads, new bridges and transport structures. These bridges, transport transmission roads almost solved the problem of traffic jam of Baku city. One of the issues that should be emphasized is the establishment of center for intellectual management of transport. And this in its turn will directly serve to the comfort of passengers and revive the condition of roads in every moment.
Reconstruction and restoration of railway was successfully implemented, old railway lines of hundreds of kilometers were renewed, new trains were bought and this will enable the visit to regions be more easy and take shorter time.
New power stations, substations were constructed to provide the continuity of electrical energy both in capital Baku and also in regions mainly in winter and the old ones that needed to repair were re – established. And this in its turn provided continuous supply of electrical energy even in the most remote village of the country. Along with this, restoration and re-construction of telecommunication lines in regions are continued without interruption. Establishment of Emergency service (112) in regions and in Baku city is appreciable. And by means of this, the population of both capital and regions can benefit from the help of center established by state by calling to this center in case of any emergency situation.