Azerbaijan: A Tale of Two Entrepreneurial Environments

This is a tale of two seemingly different countries that is actually one -- Azerbaijan. One recently released report, prepared by a leading international financial institution, pronounces Azerbaijan to be one of the world's most business-friendly nations. Another report, prepared by a leading corruption watchdog group, asserts that graft is deeply entrenched in Azerbaijan and growing worse. The sharply different depiction of business conditions in Azerbaijan is stoking debate in Baku.

First, the good news: a report prepared by the International Finance Corp., the private lending arm of the World Bank, titled "Doing Business 2009," rated Azerbaijan 33rd overall in a survey of the business climates in 181 countries. Each country was ranked in 10 categories relating to "the ease of doing business." The survey covered the period of April 2007 through June of this year.

The report, released in early September, shows that Azerbaijan made significant strides in seven categories -- starting a business; employing workers; registering property; getting credit; protecting investors; paying taxes; and enforcing contracts - good enough to move up 64 slots from its overall ranking in 2007 of 97th. Azerbaijan's ranking of 33 places it among such countries as France and Israel, and significantly ahead of such European Union members as Spain and Portugal.

The survey cited Azerbaijani government reforms to streamline the procedures for starting a business. Under simplified rules introduced this year, an entrepreneur can start a venture in only three days, going through five registration procedures. Prior to the changes, it could take over two months and 15 registration steps before a business could officially open.

The new system has stimulated a business growth spurt, according to official figures. From January-June of this year, according to the Ministry of Taxes, the number of newly registered companies increased by 30 percent compared with the number of start-ups during the first half of 2007. State statistics show that roughly 10 new businesses opened each day of the first half of 2008.

Anecdotal evidence supports the IFC findings. Alesker Mammadli, 39 years-old Baku-based lawyer, says he's noticed a change for the better in the country's regulatory framework. "The situation there [in tax department] has improved seriously. You do not go through several rooms, and do not need to bring many documents. All you need now is your local ID card and two pictures," Mammadli told a EurasiaNet correspondent. Mammadli added that new online procedures for filing income declarations help to reduce opportunities for bureaucrats to engage in corrupt practices.

President Ilham Aliyev, in the midst of a re-election campaign, cites the IFC report to tout his reformist credentials. "It shows great appreciation of our reforms by [one of the] largest international finance institutions," Aliyev said at a September 26 rally, referring to the IFC's report. "We are keen to continue economic and social reforms." While the IFC's findings on Azerbaijan are certainly welcome news for the incumbent, Aliyev's re-election in the October 15 presidential election has never seemed in doubt. [For background see the Eurasia Insight archive].

The IFC report paints a starkly different picture of Azerbaijan than the one depicted by Transparency International (TI), which on September 23 published its annual corruption perception index. Azerbaijan's corruption score this year went from bad to worse, dropping to 158 out of 180 this year, whereas the country ranked 150th out of 179 in 2007. Among former Soviet states, only the Central Asian nations of Kyrgyzstan, Turkmenistan and Uzbekistan ranked lower than Baku in 2008, according to the TI survey.

Unlike the IFC report, the TI corruption index did not receive any publicity from pro-governmental broadcast outlets in Azerbaijan. However, Aliyev did not hide his dissatisfaction with the TI version of Azerbaijan's corruption performance. In his September 26 campaign speech, Aliyev indirectly criticized Transparency International. "The World Bank is the largest International finance institution and its opinion is important. It is not an opinion of some unknown non-governmental organization," he said.

A vigorous debate among independent economic analysts is now swirling in Baku over which report is more on target. For many, there are perhaps more questions than answers. Azer Mekhdiyev, head of Economic Initiatives Assistance Center, Baku-based NGO, expressed doubt that the business climate had improved as much as the IFC said it had. "I do not understand how the country could be one of the world's top reformers when the Transparency International corruption index [score] deteriorated," Mekhdiyev said in an interview with EurasiaNet.

Mekhdiyev and others question the objectivity of the IFC report. They say its methodology seems flawed because it only focused on regulatory changes, and did not attempt to gauge how legislation is being actually implemented, or the pervasiveness of corruption.

Zohrab Ismayilov, chairman of the Public Association for Assistance to Free Economy (PAAFE), a Baku-based non-governmental think tank, said Azerbaijan had shown genuine improvement only in one area covered by the IFC report -- starting a business. In the other six categories that showed improvement under IFC criteria, Azerbaijan's reforms were mainly cosmetic, Ismayilov asserted.

Beyond corruption, Mekhdiyev cited several areas of concern for the business environment, namely a weakening of property rights, monopolistic practices and the lack of independent judiciary. Amendments adopted in late 2007 gave the government the ability to compel a private property owner to sell his or her property "if necessitated by public need."

Members of Azerbaijan's entrepreneurial class appear divided about the state of the business climate. In its own survey, released September 8, the Baku-based Entrepreneurship Development Foundation reported that only 40 percent of the 1,000 entrepreneurs polled expressed satisfaction with the overall business climate. When asked if business conditions were improving, 63 percent said 'yes." At the same time, 51 percent said entrepreneurs said they still felt compelled to skirt the law on occasion and 30 percent reported feeling vulnerable to pressure from bureaucrats.