1.2 How do economists approach the world? Questionbank

Economic Developments and Challenges in Azerbaijan

1. Azerbaijan, situated at the crossroads of Eastern Europe and Western Asia, has experienced significant economic reforms over the past decade. Historically reliant on hydrocarbons—mainly oil and natural gas—for export revenues, the country has sought to diversify its production base through agriculture, tourism, and technology sectors. In 2019, oil and gas accounted for about 85% of Azerbaijan’s total exports, providing substantial government revenue but leaving the country vulnerable to global commodity price fluctuations.

2. In recent years, policymakers have introduced multiple initiatives to modernize infrastructure and reduce dependence on hydrocarbons. Between 2019 and 2022, the government invested over US$3 billion in roads, railways, and energy transmission lines, aiming to expand the country’s capacity to produce and transport goods. According to the State Statistical Committee, Azerbaijan’s real GDP grew by 2.2% in 2020 and rebounded to 4.6% in 2022, partly due to a recovery in global oil prices. However, structural unemployment persists, especially in rural areas, where older agricultural practices lag behind modern production techniques.

3. Inflation, driven by rising global commodity costs, reached 8.4% in 2022, up from 2.6% in 2019. The Central Bank of Azerbaijan responded with conservative monetary policies that have stabilized the exchange rate of the Azerbaijani manat. Meanwhile, the government introduced tariffs on certain imported agricultural goods in 2021, aiming to protect local farmers from competition and stimulate domestic production. Critics argue that these tariffs lead to higher prices for consumers, while supporters believe they create incentives for farmers to modernize and invest in capital-intensive farming techniques.

4. Foreign direct investment (FDI) centered on the energy sector remains strong, although officials are eager to attract investment in manufacturing and services. Improvements in transport connectivity—facilitated by ongoing infrastructure projects—have encouraged discussions about further liberalizing trade regulations to boost exports of textiles, food products, and tech services. Yet logistical barriers at border checkpoints persist, contributing to delays and raising costs for exporters looking to access regional markets.

5. Socially, Azerbaijan has implemented targeted measures to address income inequality, including subsidies for utilities and food staples. Observers note that the impact of these subsidies can be uneven; while they help low-income households cope with rising prices, they can also create fiscal pressure if oil revenues decline. The government has recently introduced pilot programs that tie subsidies to specific income thresholds, with the objective of reducing misuse of public funds.

6. Despite ambitious diversification plans, the oil sector continues to dominate. Economic analysts warn that reliance on hydrocarbons could impede sustainable growth, especially if global oil prices weaken or external demand slows. As part of its long-term development strategy, the government is promoting investment in green energy, incentivizing solar and wind power projects in the hope of creating new export opportunities for electricity.

7. Nonetheless, concerns about structural unemployment remain. Skill mismatches persist between job seekers and the needs of modern industries, particularly in the technology sector. Rural-urban migration has become more common, pressuring housing and public services in Baku, while leaving some villages with labor shortages. Recognizing these challenges, the Ministry of Education has partnered with private companies to revamp vocational education programs, aiming to align training with rapidly evolving market demands.

Table 1: Selected Macroeconomic Indicators for Azerbaijan (2019–2022)

Table 2: Trade and Social Indicators

Australia’s Evolving Economy and Policy Directions

Over the last decade, Australia has posted moderate but steady growth, with real GDP expanding at an average annual rate of 2.6% between 2019 and 2022. This was largely driven by robust demand for natural resources, particularly iron ore and coal, which continue to dominate export earnings. However, a gradual global shift toward renewable energy has prompted Australia to diversify its export base. Increasingly, the services sector—especially tourism and education—has become a key contributor to national income, rebounding strongly in late 2022 after pandemic-related disruptions. Meanwhile, inflation rose from 1.3% in 2019 to 3.5% in 2022, spurred partly by supply chain constraints and a strong recovery in consumer spending.

The unemployment rate dropped from 5.3% in 2019 to 4.7% in 2022, reflecting both post-pandemic re-hiring and structural shifts in the labor market. Yet certain regions and industries still face challenges due to skill mismatches and the phasing out of some high-polluting processes. To address rising living costs, the federal government introduced an updated minimum wage policy in 2021. This policy, intended to ensure all workers can afford basic necessities, is debated among economists: while advocates emphasize it can reduce income inequality, critics argue it may impose higher costs on small businesses.

Australia has traditionally relied on an expansionary monetary policy to stimulate aggregate demand during downturns. From 2020 to 2022, the Reserve Bank of Australia (RBA) maintained historically low policy interest rates in response to pandemic-related disruptions. Simultaneously, government stimulus packages offered support to households and firms. This blend of monetary and fiscal interventions aimed to sustain consumer spending and reduce the risk of entrenched unemployment.

In terms of international trade, Australia relies heavily on exports of primary commodities, although recent trade agreements have encouraged the development of advanced manufacturing and technology services. Australia’s geographical proximity to Asia provides markets for tourism, international education, and agriculture.

To tackle environmental concerns and diversify the economy further, the government introduced a carbon credit scheme in 2022. Under this program, firms meeting or exceeding emissions targets can receive tradable permits or carbon credits, which can be sold to more polluting firms. Critics note that if carbon credits become too inexpensive, they may not incentivize lasting changes in production techniques. However, supporters argue that this approach internalizes negative externalities, helping Australia balance economic growth with environmental stewardship.

Looking ahead, the economy faces both challenges and opportunities. Two of the most pressing issues are sustaining a competitive exchange rate and ensuring workforce adaptability. A rising Australian dollar, driven by higher commodity prices, can hurt sectors like tourism and education by making them more expensive for foreign consumers. In addition, skill shortages persist in industries such as renewable energy and high-tech manufacturing. Policymakers are exploring ways to boost productivity—investments in education, infrastructure, and research—to ensure the economy can remain resilient and internationally competitive.

Table 1: Australia’s Key Macroeconomic Indicators (2019–2022)

Table 2: Sectoral Composition of Australia’s Exports, 2022