Mukhtar Gurbanov 47956

Department of Management-International Business
Master thesis
COMPARATIVE ANALYSIS OF THE ECONOMIC GROWTH AND DEVELOPMENT OF AZERBAIJAN

AND GEORGIA
Author: Mukhtar Gurbanov

Student ID: 47956
written under the supervision of

Radoslaw Potok
Approved ………………………………………………..
Date and supervisor’s signature
Krakow 2024
PREFACE
This comparative analysis delves into the economic growth and development of Azerbaijan and
Georgia, two countries with distinct histories and geopolitical circumstances. The main
objective of this study is to provide a comprehensive analysis of the economic performance of
both countries, emphasizing the similarities and differencesin their respective growth and
development processes. Additionally, this study aims to offer valuable recommendations for
further enhancing sustainable development and growth in both countries. By drawing from
established research and data, we ensured the validity and reliability of our analysis. It is hoped
that this study wouldprove insightful to researchers, policy makers, and individuals seeking to
gain a deeper understanding of the economic development of Azerbaijan and Georgia.
During the writing process of my thesis, I would like to express my gratitude and
offer myrespects and love to my esteemed advisor, Prof. Dr. Radoslaw Potok, for his
unwavering support in determining the thesis topic, conducting the study, and
evaluating the results.
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TABLE OF CONTENTS
ETHICAL PRINCIPLES AND COMPLIANCE ........................................................................... 1

PREFACE ....................................................................................................................................... 3
TABLE OF CONTENT ............................................................................................................... 4
SYMBOLS ARRAY ........................................................................................................................ 7
Symbol Description ......................................................................................................................... 7
ACRONYM INDEX ....................................................................................................................... 8
INTRODUCTION ........................................................................................................................... 9
1.1. PURPOSE OF THE STUDY ........................................................................................... 10
1.2. Literature Review ............................................................................................................ 11
1.2.1. Dataset ........................................................................................................................... 13
1.2.2. Methodology.................................................................................................................. 18
CHAPTER 2:CONCEPTS OF ECONOMIC GROWTH AND FINANCIAL DEVELOPMENT
....................................................................................................................................................... 19
2.1 Economic Growth: Definition and Variables .................................................................... 19
2.1.1. Definition ........................................................................................................................ 19
2.1.2. Concepts Associated with Economic Growth.................................................................11
2.1.3. Theoretical Foundations of Economic Growth ............................................................ 12
2.1.3.1. Classical Growth Models ........................................................................................... 12
2.1.3.2. External economic growth theories .............................................................................. 13
2.1.3.3. Internal Economic Growth Models .................................................................................. 15
2.1.4. Comparative Analysis in Terms of Economic Growth ................................................ 18
Development Concept and Factors Influencing Economic Development .................................... 19
2.1.6. Methods of Measuring Economic Development............................................................ 25
2.1.7. Variables ........................................................................................................................ 27
2.1.8. Human and Physical Capital ......................................................................................... 28
2.4.2. To be commercially reliable.......................................................................................... 29
2.4.3. Structural Reform Policies and Economic Performance ............................................. 30
2.4.4. Foreign Direct Investment ............................................................................................ 31
2.4.5. Social Cultural and Demographic Capital ........................................................................... 31
CHAPTER 3: ECONOMIC OUTLOOK OF THE REPUBLIC OF AZERBAIJAN ............... 32
4
3.1. General information about Azerbaijan ........................................................................... 32
3.1.1. Demographic Structure................................................................................................. 32
3.1.2. Energy Resources.......................................................................................................... 34
3.1.3. Tourism Potential ......................................................................................................... 36
3.2. Azerbaijan's Economic Situation .................................................................................... 38
3.2.1. Industrial Sector ........................................................................................................... 38
3.2.2. Agricultural Sector ....................................................................................................... 39
Table 3. Basic Economic Indicators of Agricultural Enterprises ................................................. 41
3.2.3. Construction Sector ..................................................................................................... 42
3.2.4. Unemployment .............................................................................................................. 43
3.2.5. Inflation ......................................................................................................................... 44
3.2.6. GDP Development ......................................................................................................... 45
3.2.7. Foreign trade................................................................................................................. 47
3.3. Economic Policies Implemented in Azerbaijan ............................................................... 49
CHAPTER 4: ECONOMIC OUTLOOK OF GEORGIA ........................................................... 53
4.1. General Information on Georgia ..................................................................................... 53
4.1.1. Demographic Structure................................................................................................. 53
4.1.2. Tourism Potential ......................................................................................................... 55
4.2. Economic Situation of Georgia. ....................................................................................... 57
4.2.1. Industrial Sector ........................................................................................................... 59
4.2.2. Agricultural Sector ....................................................................................................... 59
4.2.3. Construction Sector ...................................................................................................... 60
4.2.4. Unemployment .............................................................................................................. 61
4.2.5. Inflation ......................................................................................................................... 63
4.2.6. GDP Development ......................................................................................................... 64
4.2.7. Foreign Trade ............................................................................................................... 66
CHAPTER 5 : FINDINGS ............................................................................................................ 69
CONCLUSION.............................................................................................................................. 74
REFERENCES .............................................................................................................................. 78
LIST OF TABLES ........................................................................................................................ 87
LIST OF FIGURES ................................................................................................................ 88
5
SYMBOLS ARRAY
Symbol Description
R² "Model explanatory power."

(β₂) "Unemployment rate."
(β₃) "Population growth
(β₁) "Inflation rate."
6
ACRONYM INDEX
USA: United States of America
AITF: Azerbaijan International Tourism Fair
AzALES: Azerbaijan Agricultural Credit Evaluation SystemUAE: United Arab Emirates
GDP: Gross Domestic Product
SME: Small and Medium-sized Enterprises NFES: National Entrepreneurship Support Fund
USSR: Union of Soviet Socialist Republics
UNESCO: United Nations Educational, Scientific and Cultural OrganizationUNWTO:
World Tourism Organization
7
INTRODUCTION
The scope of this study aims to analyze the economies of Azerbaijan and Georgia comparatively in
terms of growthand development. It will focus on their regional and global impact, competitive
strengths, and potential for sustainable development. First, the thesis examines these two
economies by establishing a conceptual framework and then analyzes the existing literature and
research through a literature review. This will provide an opportunity to understand the economic
growth and development dynamics of these two countries and compare them with eachother.
Azerbaijan and Georgia are two important countries due to their strategic locations, resource
wealth, and economic potential. Azerbaijan is particularly rich in energy resources such as oil and
gas, which significantly contribute to the country's economic growth and development. On the
other hand, Georgia is known for its agriculture and tourism sectors. Both countries face factors
and challenges that play a significant role in their economic development. The significance of this
thesis is to provide a broad perspective on the economic growth and development strategies and
practices of Azerbaijan and Georgia, and to understand them by comparing regionaldevelopment
dynamics. Additionally, this analysis will shed light on the future growth and development
potential of these two economies. As a method, this study is based on a literature review. This
approach includes a comprehensive examination of previous studies, reports, articles, and
statistics. It will provide a comprehensive anddetailed understanding of the economic growth and
development situations of Azerbaijan and Georgia.
This study contributes to the literature in two ways. Firstly, it provides an up-to-date and
comprehensive view of the economic growth and development situations of Azerbaijan and
Georgia. Secondly, the comparative analysisof these two economies provides a broader perspective
on regional economic development, which can be useful, particularly in exploring economic
cooperation and integration opportunities between these two countries. The information and
analysis presented in this thesis are expected to be valuable for policymakers, academics,
researchers, and students. It is also hoped to serve as a basis for future research on the economies
of Azerbaijan and Georgia. Overall, this thesis provides a comprehensive framework for
understanding the economic growth and development journeys of Azerbaijan and Georgia. By
comparing the dynamics, challenges, and opportunities of these two economies, it will contribute
to a better understanding of their contributions and impacts on regional andglobal economy.
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CHAPTER 1: METHODOLOGY
1.1. PURPOSE OF THE STUDY
The primary aim of this study is to compare the economies of Azerbaijan and Georgia in terms of
growth and development, aiming to identify the direction and magnitude of factors influencing the
economies of both countries.
The results of this study may assist policymakers in Azerbaijan and Georgia in understanding the
factors contributing to the economic growth of the two countries, as well as the challenges they
face. This information is intended to serve as a valuable instrument in the development of policies
that will further promote economic growthand development. Additionally, the study aims to provide
a comprehensive overview of the economies of Azerbaijanand Georgia and offer insights for other
researchers interested in the economies of the Caucasus region.
The findings of this study, along with their contributions to policymakers and the scientific
literature, target businesses in Azerbaijan and Georgia. It aims to help them understand the
economic environment, challenges, andopportunities in the two countries, aiding in investment
decision-making.
The results of the study may guide policymakers in (i) identifying areas where state intervention
is necessary to promote economic growth, (ii) developing policies to attract foreign investments,
(iii) improving the business environment in both countries, and (iv) reducing poverty and
inequality.
Furthermore, the study's outcomes can be utilized by businesses and investors to (i) identify new
market opportunities, (ii) assess the risks and returns of investing in Azerbaijan and Georgia, and
(iii) develop strategies toenter these markets.
In summary, the results of a study with this purpose will hold significant value for policymakers,
businesses, and investors in Azerbaijan and Georgia. The findings will contribute to the promotion
of economic growth and development in both countries and contribute to the scientific literature.
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1.1. Literature Review
Economic growth is a complex phenomenon influenced by various factors. This section aims to
review empirical studies investigating the factors affecting economic growth. Specifically,
empirical studies examining the relationship between inflation, unemployment, population factors,
and economic growth are discussed based on thevariables used in the study.
Inflation is a macroeconomic variable that has been extensively studied for its relationship with
economic growth. Mankiw (1992) contributed to economic literature by examining the
relationship between inflation and economic growth. The study suggested that high inflation rates
could have negative effects on economic growth due to inducing uncertainty, reducing
investments, and disrupting resource allocation. The importance of maintaining pricestability to
promote sustainable economic growth is emphasized in the study.
Unemployment, according to Romer (1990), is a significant factor influencing economic growth.

High levels of unemployment can hinder economic growth by reducing consumer spending,
limiting investments, and creating social and economic instability. Romer (1990) also explored the
relationship between unemployment and economic growth in the context of endogenous
technological change. The study proposed that reducing unemployment could lead to higher
economic growth rates by encouraging innovation and productivity increases.
Population factors, such as population growth and demographic changes, play a crucial role in
shaping economic growth. Increasing population can contribute to economic growth by expanding
the workforce and boosting consumption. However, to fully realize the potential benefits of
population growth, sufficient investment in humancapital and infrastructure is required (Bloom
2001).
Romer (1990) examined the relationship between the age structure of the population and economic
growth. They found that a younger population could have positive effects on economic growth due
to leading to a larger workforceand increased productivity. However, the study also highlighted
the importance of investing in education and healthcare services to capitalize on the potential
demographic dividend.
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Interactions of Population Factors with Inflation and Unemployment: Implications for
Economic Growth
Population factors can interact with inflation and unemployment, influencing economic growth.
For instance, an aging population may exert pressure on public finances and increase the burden
on social security systems, subsequently affecting inflation and unemployment rates. Solow (1956)
investigated the relationship between an aging population, inflation, and economic growth. His
studies suggested that population aging, by creating pressureon public resources and reducing labor
force participation, could lead to higher inflation rates and lower economicgrowth.
Rehman (2022) examined the impact of inflation, poverty, unemployment, and population growth
on economic growth in Pakistan. Findings indicated an inverse relationship between inflation and
poverty with economic growth,while unemployment showed a positive relationship with economic
growth. These results highlight the complex relationships among these factors and their effects on
economic growth.
Lubbock (2022) researched the impact of inflation, unemployment, and population growth on
economic growth inthe Philippines. Evidence suggested a long-term relationship among these
variables, indicating that these macroeconomic indicators play a role in shaping economic growth
in the Philippines.
Saidu and Muhammad (2015) explored the relationship between unemployment, inflation, and
economic growth. Although they didn't find a significant impact of unemployment and inflation
on economic growth, their study contributes to understanding these relationships.
Wozniak (2021) analyzed the effect of macroeconomic factors, including inflation and
unemployment, on investments by businesses in Poland. Their findings provide insights into the
relationships between these macroeconomic indicators and investment decisions.
From the literature review, it can be concluded that high inflation rates and unemployment levels
may impede economic growth, while population factors such as population growth and age
structure can have both positive and negative effects on economic growth. These findings
emphasize the importance of robust macroeconomic policies,including price stability, labor market
reforms, and investments in human capital, to promote sustainable economicgrowth.
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1.1.1. Dataset
The literature on the determinants of economic growth is extensive. Recent studies have
consistently highlighted inflation, unemployment, and population variables as significant factors
influencing economic growth (Lubbock, 2022; Tenzin, 2019; Yelwa, 2015; Anyanwu, 2014).
Inflation can negatively impact economic growth by reducingreal incomes and investments (Sarel,
1996: 200). Unemployment, by diminishing the size and productivity of the labor force, may also
exert a negative influence on economic growth (Kreishan, 2011: 211). Population growth,
depending on the country's level of development, can have both positive and negative effects on
economic growth (Becker, 1999: 147)¹⁴³.
Table 5. Azerbaijan-Georgia Basic Data Set.
Azerbaijan Georgia
Demograpics (2023) 10 Million 3,7 Million
Inflation (2023) 12,7% 0,6%
Unemployment 5,5% 18%
Source: Own and Internet
Regarding the main subject of the study, an attempt has been made to determine the impact of
factors such as inflation, unemployment rate, investment rates, and population growth rate on the
GDP growth rate. The relevant dataset was obtained from the World Bank database, utilizing
annual data for the period 1996-2022. Initially, a comparison of the GDP growth rates of the two
countries was conducted. The GDP growth rates for both countriesare illustrated in Figure 14.
12
50
40
30
20
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-10
Azerbaijan Georgia
Figure 14. GDP Growth Rates for Azerbaijan and Georgia
(Source: World Bank https://www.worldbank.org. Access Date: 01.07.2023)
The average GDP growth rate for Azerbaijan between 1996 and 2022 is calculated as 4.8%.
Azerbaijan experiencedits highest GDP growth rate in 2006, reaching 34.5%, while the lowest
GDP growth rate occurred in 1995 at - 11.79%. The GDP growth for Azerbaijan exhibited a relative
variability, indicated by a standard deviation of 6.97%.For Georgia, the average GDP growth rate
from 1995 to 2022 is 5.9%. The highest GDP growth rate for Georgia was recorded in 2007 at
12.57%, while the lowest GDP growth rate occurred in 2009 at -3.65%. Georgia's GDP growth
appears to be more stable than Azerbaijan, with a standard deviation of 3.68%.
13
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30
20
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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2014
-10
Azerbaijan Georgia
Figure 15. Inflation Rates for Azerbaijan and Georgia

When examining the GDP growth rates for both Azerbaijan and Georgia over the past 27 years, it
is apparent that both countries have generally experienced positive GDP growth. However,
Azerbaijan's GDP growth has been morevariable, while Georgia's GDP growth has been more
stable. Several factors need to be considered when comparingthe GDP growth of Azerbaijan and
Georgia. Notably, Azerbaijan has a larger economy than Georgia and is more reliant on oil and
gas exports. Azerbaijan's economy has been politically more stable than Georgia over the past 27
years. These factors are crucial in explaining the differences in GDP growth between the two
countries.
As part of the study, another variable examined is the inflation rates of both countries. The average
inflation rate forAzerbaijan from 1996 to 2022 is 8.5%. Azerbaijan experienced its highest inflation
rate in 1996 at 19.8%, while thelowest inflation rate occurred in 2003 at -0.8%. For Georgia, the
average inflation rate from 1996 to 2022 is 7.8%. The highest inflation rate for Georgia was
recorded in 1996 at 39.4%, and the lowest inflation rate occurred in 2003at -0.9%. Azerbaijan's
inflation has been slightly higher than Georgia's over the past 26 years. However, Azerbaijan's
inflation has shown a more variable trend compared to Georgia, which has demonstrated more
stability. In general,both Azerbaijan and Georgia have experienced high inflation rates over the past
26 years. Still, Azerbaijan's inflationhas been more variable, while Georgia's inflation has been
more stable.
Within the scope of the study, the unemployment rates of both countries have also been compared.
The unemployment rates for both countries are shown in Figure 16.
14
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20
15
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Azerbaijan Georgia
Figure 16. Unemployment Rates for Azerbaijan and Georgia

For Azerbaijan, the average unemployment rate from 1996 to 2022 was 9.5%. The highest
unemployment rate for Azerbaijan occurred in 2009 at 17.9%, while the lowest unemployment
rate was recorded in 2004 at 4.8%. As for Georgia, the average unemployment rate from 1996 to
2022 was 11.3%. Georgia experienced its highest unemployment rate in 2009 at 20.7%, and the
lowest unemployment rate occurred in 2004 at 6.3%.
Azerbaijan's unemployment rate over the past 26 years has been somewhat lower than Georgia's,
and Azerbaijan's unemployment rate has shown less variability than Georgia's. In general, both
Azerbaijan and Georgia have experienced high unemployment rates over the past 26 years.
However, Azerbaijan's unemployment rate has been slightly lower and less variable compared to
Georgia. Additionally, it is essential to consider the differences in labormarket institutions between
Azerbaijan and Georgia. For example, Azerbaijan has a more centralized labor marketsystem
compared to Georgia, which may have contributed to the lower unemployment rate in Azerbaijan.
This aspect should be taken into account when interpreting the results of the analysis.
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As the final variable in the study, the population growth rates of both countries have been
compared. The populationgrowth rates for both countries are shown in Figure 17.
1
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
-1
Azerbaijan Georgia
Figure 17. Population Growth Rates for Azerbaijan and Georgia

(Source: World Bank https://www.worldbank.org. Access Date: 01.07.2023).
For Azerbaijan, the average population growth rate from 1996 to 2022 was 1.04%. The highest
population growthrate for Azerbaijan occurred in 2007 at 2.1%, while the lowest population
growth rate was recorded in 2020 at - 0.3%. In contrast, for Georgia, the average population growth
rate from 1996 to 2022 was -0.84%. Georgia experienced its highest population growth rate in
2007 at 0.2%, and the lowest population growth rate occurred in 2021 at -3.7%. Although
Azerbaijan's population growth rate over the past 26 years has been higher than Georgia's,
Azerbaijan's population growth rate has been more stable than Georgia's. In recent years, both
countrieshave experienced a slight increase in population. Additionally, considering different
demographic trends in Azerbaijan and Georgia is important. For instance, Azerbaijan has a
younger population than Georgia, contributing to a higher population growth rate in Azerbaijan.
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1.1.1. Methodology
Economic growth is a crucial goal for policymakers in Azerbaijan and Georgia. Understanding the
factors contributing to economic growth is essential to achieve this goal. In this study, an
econometric model has been estimated to determine the effects of inflation, unemployment, and
population variables on economic growth in Azerbaijan and Georgia.
The econometric model used in this study is a linear regression model. Regression analysis is a
statistical method used to analyze the impact of one or more independent variables on a dependent
variable and to predict this relationship. This method reveals the existence, strength, and
significance of the relationship between dependent and independent variables. While single-
variable regression analysis is used when there is only one independent variable, multivariable-
multiple regression analysis-is used when there are multiple variables. In economic studies, a
variable can be influenced by more than one variable, and these variables can also influence each
other (Gujarati, 2004: 27). In this study, multivariate regression analysis is used as there are
multiple variables that could affect investments.
In this study, the dependent variable is considered as the annual growth rate of real GDP. The
independent variablesare the inflation rate, unemployment rate, and population growth rate. The
model has been estimated using annual data from 1996 to 2022. The variables used in the study
and the abbreviations used in the model are presented in Table 6.
Table 6. Variables and Abbreviations Used in the Study.
Variable Variable type Abbreviation
Economic Growth Rate Dependent Variable gdpgrowth
Inflation Rate Independent Variable inf
Unemployment Rate Independent Variable unemp
Population Growth rate Independent Variable pop
Source: Own and Internet resources

Within the scope of the study, regression analysis will be conducted using the following
econometric model. This model will be analyzed for both countries.
Here; "α" is the regression constant, βi represents the variable coefficients, and εi is the error term.
The method of least squares (OLS) estimator has been used to predict the model. The OLS method
is the most commonly used technique in regression analysis due to its statistical properties.
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CHAPTER 2: CONCEPTS OF ECONOMIC GROWTH AND FINANCIAL
DEVELOPMENT
This chapter examines the concepts of economic growth, economic development, financial
institutions, and financialdevelopment through different literature studies. The literature review is
considered appropriate to determine the direction of the study and provide a good understanding
of the subject. This chapter aims to define key concepts, explore the capital market, financial
institutions, economic growth, and the contribution of the capital market to economic growth and
development.
2.1. Economic Growth: Definition and Variables2.1.1.Definition
The concept of economic growth has been the subject of various research studies. In essence, it
aims to overcome the competencies within different economic environments and continue their
development. This is primarily achieved through the use of data that dominate the country's
economic system. These data are crucial for comparingthe economy of a country with the data of
other countries and accurately determining the country's current position.In this sense, the change
over the years is considered as growth. The reason for this is that a country's economy expands,
rises, and grows. This demonstrates that economies can be seen as living entities (Taban, 2011:
27)¹. On the other hand, considering that this growth affects the life graph in a particular country, it
is necessary to emphasizethis. Determining how long-term economic growth is calculated is a
question that arises from macroeconomic indicators (Abel, Berbanke, & Vroushore, 2011: 232)².
Moreover, there are various factors that influence the dynamics of economic growth in a country
as different countries can demonstrate different growth rates even with the same performance. At
this point, it is understood that economic growth is primarily associated with the production of
goods and services. The overall increase in value in this field is considered an important indicator.
Factors such as the underground wealth, capital, labor, and technology level owned by a country
can also have an impact. Similarly, savings rates related to capital in the relevant country, increases
observed in productive input stocks, and technological change can contribute to the development
of a certain standard of living. Evaluations madebased on these indicators, when they become long-
term, can manifest as a significant difference in the income of the average income earners in the
relevant country (Abel, Berbanke, and Vroushore, 2011: 232)³.
1 Abbasov, N. (2021). The impact of trade relations between Turkey and Azerbaijan on the Azerbaijani economy.
Master'sthesis, Istanbul University, Institute of Social Sciences, Istanbul
2 Abuselidze,G. (2019). Modern challenges of monetary policy strategies: Inflation and devaluation
influence on economicdevelopment of the country. Academy of Strategic Management Journal, 18(4), 1-10.
3 Abuselidze, G.,
& Zoidze, G. (2023). Economic analysis of factors associated with education and employment. In
CTE WorkshopProceedings (pp. 366-379). Batumi, Georgia: Batumi Shota Rustaveli State University.
18
These factors determine economic growth. Roughly, growth can be considered as the
emergence of different dynamics (Gross Domestic Product-GDP) or real increases in production
capacity in a specific country during a calendar year. Per capita income can also be added to this
definition. In that case, economic growth can be evaluatedin terms of social development and can
be defined as a surplus in economic activities and an increase in per capita income. On the other
hand, for the increase in individuals' incomes to be considered as economic growth, this increase
must not be temporary. Sustainable growth can only be accepted as data for economic growth
(Taban, 2011: 27) 4.
Economic growth can be evaluated as the increase observed in total outputs in a country in a
calendar year. The positive change in these data is directly related to the quality of life of the
relevant society. In today's modern worldwhere happiness is equated with economic development,
it can be seen that economic growth is considered as an important indicator in determining
happiness and welfare between states (Blanchard and Johnson, 2013: 211). However, in terms of
determining economic growth, it is no longer sufficient to collect and interpret some numericaldata
related to the country's economy. Based on this, growth has started to be evaluated along with the
expansion ofpotential. Especially, it is understood that growth is seen as the expansion of the
relevant country's economic production capacity along with the inclusion of other factors. For
example, it is seen that some authors in the literature prefer to define economic growth as follows:
"Economic growth in a society encompasses both the expansion of economic activities' scale
and an increase in percapita income, which exceeds population growth (Tezel, 1989: 12). Different
authors provide varying definitions on the subject. Some authors approach the concept on an
individual level, emphasizing the evaluation of economicgrowth through the increase in average
real income per person. It is important to calculate this change by adjustingfor inflation or price
volatility (Kibritçioğlu, 1998: 1). Conversely, other authors focus solely on the expansion of
production capacity. For instance, Ertek (2005: 385) claims that economic growth is associated
with an increase inproduction capacity and the subsequent production of more goods and services
compared to the past. Meanwhile, Özgüven presents a broader definition of economic growth. He
defines it as a growth in size, weight, and volume in the context of time and space. Such growth
represents various indicators of power and income levels for individuals and countries. Population
growth, capital accumulation, savings, and national income growth are all considered as indicators
of growth. Growth signifies an increase in quantity and size for a business, region, or economy.
However, growth can only be deemed as such if it is a real increase, not merely nominal (Özgüven,
1988:3) 5."
From this point on, it is necessary to evaluate some of the findings identified in EU countries.
For example,there is a study called Eurobarometer that analyzes certain indicators in Europe
between 1979 and 2019. The results of this study correlate the happiness levels of citizens in the
respective countries with both individual and societal contexts, and macroeconomic indicators.
The results indicate that economically prosperous, educated, and employed individuals tend to be
happier. From a societal perspective, this evaluation manifests through employment rates or low
inflation. If a country has significantly low unemployment rates and low inflation, the people in
those countries may be relatively unhappier comparedto countries experiencing deteriorations in
these areas (Mankiw, 2003: 173) 6.
4 Ahmedov, R. (2010). Foreign direct investments and the Azerbaijani experience. Doctoral dissertation, Anadolu
University, Institute of Social Sciences,Eskişehir.
5 Ahundov, K. H. (2021). Novyye resheniya staroy problemy. Retrieved from http://regionplus.az/ru/ar ticles/view/6903
Access date: June 18, 2021
6 Alagöz, M., Erdoğan, S., & Topallı, N. (2008). Foreign direct investments and economic growth: The Turkish
experience 1992-2007. GaziantepUniversity Journal of Social Sciences, 7(1), 79-89.
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2.1.2. Concepts Associated with Economic Growth
Several concepts are associated with economic growth, which can be expressed as follows:
• Gross Domestic Product (GDP): The Gross Domestic Product (GDP) notion
represents an aggregate, reflecting the entire worth of products and services generated by
citizens inside a certain country in terms of currency.
Calculations are normally performed throughout a calendar year, and intermediate commodities
are excluded to avoid double counting (Oktay, 2002: 15) 7.
• Gross Domestic Product at Market Prices: Gross Domestic Product at Market

Prices is the total amount of goods and services generated by a country in a calendar year. The
total of these commodities and services is calculated using market pricing at the time of
production. GDP at market prices is a key concept in the context of economic growth,
representing the sum of all final commodities. The balance achieved after subtracting intermediate
goods fromthe total commodities and services is referred to as final goods. This total is calculated
expressly for a certain time period, which can be a year, quarterly periods, or six-month intervals
(TÜK, 2017) 8.
• Gross National Product: Gross National Product is computed by deducting

sections of the total calculated GDP that have depreciated and aged throughout the production
year. As a result, Gross National Product is calculated by subtracting depreciation from GDP
(Güran, 1999: 8).
• National Income: A country's national income is defined as the sum of all income
gained bycitizens through production activities, excluding other payments such as taxes. It is
essentially the sum of revenues obtained after deducting various payments from total income,with
a focus on factor prices rather than market prices. The fundamental reason for this technique is
that certain indirect taxes levied by governments must be included in the calculations (Pekin,
1993: 19) 9.
7Aliyev, P. (2019). The impact of foreign

trade balance and monetary policy on economic growth in the Azerbaijani
economy. Master's thesis, Trakya University, Institute of Social Sciences, Edirne
8Alkın, E. (1992). Income and growth theory. Istanbul: Filiz Kitabevi.
9
Alsırt, F. T. (2009). Restructuring of post-independence Georgia and its relations with Turkey during this process.
Master'sthesis, Atılım University, Institute of Social Sciences, Ankara.
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2.1.3. Theoretical Foundations of Economic Growth
There are several growth models in the literature, and this study includes some of them. Classical
growth models containing Smith and Ricardo's ideas are examined first, followed by external
economic growth models (Harrod and Domar models) and certain internal growth models.
2.1.3.1. Classical Growth Models:

Smith and Ricardo's Context for Growth Capital, division of labour, and specialisation, according
to Smith, drive growth (Hiç, 1994: 26) 10. According to Smith, the most important component of
an economic system is capital, which gives the economy life. As capital accumulates, division of
labour and specialisation emerge. This means that when a system's division of labour and
specialisation increases, a more efficient labour force is created in the relevant market. This
circumstance gives rise to the law of rising labour. This can be stated as follows:
(Capital Accumlation) => (Division of Labor => (Increase in Labor => (Inceasing
returns)and Specialisation) Productivity)
Figure 1. Law of Diminishing Returns

This growth model, introduced by Adam Smith, entails a scenario where labor demonstrates
increasing productivity,while capital experiences diminishing returns. The production function
within the economic system is manifested through the law of increasing productivity (Alkın, 1992:
26).
Adam Smith also believes that economic expansion has intrinsic natural limits. In this regard,
according to the lawof increasing labour productivity, the market value of labour will result in a
wage above the natural pay over a shortperiod of time. If salaries rise inside the system, it is likely
that population will rise in the long run (Hiç, 1994: 26)11.
Continuous economic progress, on the other hand, leads to capital expansion and population growth.
When the profit margin reaches a certain level, investors stop looking for fresh investment
opportunities. In this scenario, the pay cap will likewise be reduced to the level of subsistence. As
a result, economic growth has hit its optimal limitationsat this moment (Alkn, 1992: 27) 12.
Ricardo's growth theory, commonly known as the excellent dynamics model, is an income
distribution model. Thismodel was named after a number of generalisations based on a few
functional correlations (Hiç, 1994: 14). Capitalis also important in this paradigm, as it is motivated
by profit (Alkn, 1992: 41). Ricardo established his thesis by focusing on 1880s England, where he
noted the high profitability factor as well as the phenomenon of saving and capital accumulation
while the Industrial Revolution was just beginning. However, it should be mentioned that
agricultural productivity was low. This mismatch, left unresolved by the manufacturing sector, had
spread across the economy. Unemployment was relatively low in an environment where labour
wages were low (Alkn, 1992: 41)13.
10 Anyanwu, J. C. (2014). Factors affecting economic growth in Africa: Are there any lessons from China? African
Development Review, 26(3), 468-493.
11 Aras, O. N., Suleymanov, E., & Huseynov, R. (2013). The Importance of Azerbaijan's Energy Revenues in its
Exports Volume and the Effects on the National Economy. SSRN, 4(6), 79-87
12 Aras, O. N. (2001). Azerbaijan's Caspian Economy and Strategy. Istanbul: Derin Yayınları.
21
13Aslan, R. (2014). Analysis of the Sarpi Border Crossing within the framework of Turkey-Georgia economic and
politicalrelations. Master's thesis, Kafkas University, Institute of Social Sciences, Kars.

The thinker derived certain implications from this setting, implying that as the population grows,
both productive and unproductive agricultural lands will need to be utilised. This, in turn, will
reduce production and raise expenses, resulting in an unavoidable increase in land rent and,
ultimately, inflation. Wages would have to rise in an inflationary scenario. High inflation and
labour expenses would have a detrimental impact on capital profit. Consequently, there would be
a strain on capital accumulation (Alkın, 1992: 40) 14.
This systemic evolution would eventually come to a halt, which is unavoidable.Setting a minimum
wage would bethe best option from the standpoint of worker.
On the other hand, in a balanced world where international trade is liberal, the onset of economic
stagnation can bedelayed (Hiç, 1994: 15) 15. Smith and Ricardo both describe the balancing
process, which is graphically illustrated as follows:
Figure 2. illustrates the balancing process in traditional economic growth models(Source:

Felderer and Homburg, 1992: 42).
2.1.2.1. External economic growth theories
External economic growth theory emerges as one of the traditional economic theories. This theory
fundamentally evaluates the accumulation of capital, industrialization, the increased use of
machinery in industry, and the divisionof labor. Within the context of this theory's basic perspective,
economic expansion is closely associated with specifictechnological developments that result in an
increase in production. In this regard, if income increases within an economic system, savings will
also increase. The increase in savings implies that surplus money or capital will be invested in
other areas that yield profits. To achieve this, free market conditions must be established, and
individualsshould be able to invest their savings within the market. In a capitalist system, capital
is utilized more efficiently only when complete freedom is ensured. Consequently, facilitating cost
reduction allows individuals to generate more profits. Clearly, an increase in profitability creates a
positive cycle, where increased profitability leads to more capital accumulation, and this
accumulated capital reflects in the markets as investments. Thus, the economy naturally expands
and grows (Özel, 2012: 64) 16.
14Ataşov, B. (2017). Structural and efficiency problems in the agricultural sector (theory and practice). Baku: Qanun Neşriyyatı
15 Avşar, Z. (1994). How will Georgia, Armenia, and Moldova enter the 2000s: A demographic analysis. Armed
ForcesJournal, 341.
16Awokuse, O. (2007). Causality between exports, imports, and economic growth: Evidence from transition
economies. USA:University of Delaware.
22
It is possible to identify this situation in the views put forth by Keynes in the aftermath of the 1929
economic crisis.Keynes emphasized that, to achieve economic growth, the government should
intervene in the economic sphere with monetary and fiscal tools as deemed appropriate.
Subsequently, this viewpoint has been advocated by variousauthors, exemplified by the Hattod-
Domar model. This model progressed through the works of two different authors,
R.F. Harrod and E. D. Domar. According to these studies, considering a market where two factors
dominate the presence of a good that can be used for consumption and investment. There is no
money within the economy, and therefore, no monetary prices exist. The government is also absent
from the economic sphere, as decisions are madewithin the private sector. Hence, a closed economy
is assumed, and it cannot be argued that there is economic openness in this context (Turan, 2008:
27) 17.
According to the Harrod-Domar model, there are three types of growth: guaranteed growth, actual
growth, and thenatural growth rate. The guaranteed growth rate is the rate at which the economy
does not expand indefinitely or enter into stagnation. Actual growth is the annual real rate increase
in a country's GDP. Natural growth is the growth required for an economy to maintain full
employment. For instance, if the workforce is growing at an annual rate of3%, the economy's
annual growth rate should be 3% to sustain full employment (Easterly, 1999: 2).
Domar proposed the model intending to short-term model economies with high unemployment,
where anyadditional machine could be fully utilized by labor, post the Great Depression. As a
result, production can be modeled solely as a function of capital (Easterly, 1999: 2) 18.
Although the Harrod-Domar model was initially created to assist in the analysis of business cycles,
it was later adapted to explain economic growth. The implications were that growth depended on
the quantities of labor and capital; increased investment led to the accumulation of capital,
fostering economic growth. The model carries implications for economically less developed
countries (LDCs), where there is an abundance of labor but a lack of physical capital, slowing
down economic progress. LDCs do not have sufficiently high incomes to provide adequatesavings
rates; hence, the accumulation of physical capital stock through investment is low (Sato, 1964:
380) 19. Themodel implies that economic growth is contingent on policies that increase savings,
boost investment, and use this investment more efficiently through technological advancements.
The model concludes that an economy cannot naturally find full employment and stable growth
rates. The primary criticism of the model revolves around its assumptions, one being that there is
no reason for growth to be sufficient to maintain full employment; this relies on the belief that the
relative prices of labor and capital are fixed and used in equal proportions. The model also assumes
constant savings rates, which may not be accurate, and assumes constant marginal returns to
capital. Additionally, it has been criticized for the assumption, later deemed unrealistic by Domar,
that productive capacityis proportional to the capital stock (Easterly, 1997: 3).
17 Becker, G. S., Glaeser, E. L., & Murphy, K. M. (1999). Population and economic growth. American Economic Review, 89(2), 145-
149.
18 Bloom, D. E., Canning, D., & Sevilla, J. P. (2001). Economic growth and the demographic transition. United Kingdom: Springer
19 Case, K. R, Fair R. C., & Oster, S. M. (2011). Ekonominin ilkeleri. Ankara: Palme Yayıncılık
23
2.1.2.2. Internal Economic Growth Models
The internal growth model emerged in the 1980s as a framework that posits economic growth
arises fromthe internal dynamics of the system (Ercan, 2000: 129)20 . It was developed as an
alternative to the viewspresented by the neoclassical growth model, employing the increasing
returns theory instead of the diminishing returns theory. Additionally, it acknowledges the
presence of imperfect competition marketsrather than the perfect competition market dynamics.
This theory also emphasizes the importance of positive externalities and spill-over effects in
economic growth. Notably, during the relevant period, it underscores the significance of both
physical and human capital in economic growth, considering technological changes and
advancements (Şen, 2007: 47) 21.
Another model developed in the context of economic growth is the internal growth model, which
historically falls within the realm of endogenous growth theories. This model suggests a system
where the economic system is influenced by subjective dynamics and where political moves play a
crucial role in determining domestic prosperity.Essentially based on the neoclassical growth model
of social production, this model proposes alterations to some fundamental elements while
recognizing the impact of technological developments. These models are generally grouped under
the name "Internal-Based Theories" (IBT), with Romer (1986) being the first to introduce them.
Theterm "internal" refers to innovations resulting from conscious actions taken by economic
entities, such as firms or consumers, to optimize their economic functions, such as profit or benefit
maximization (Yardımcı, 2006: 99) 22.
There are observed challenges in classifying these models. Firstly, various categories are used in
their classification.Additionally, these models require a certain level of advanced mathematical
knowledge. Moreover, a limitation arises from the fact that, for testing the practical consistency of
the model, knowledge of not only existing data andhistorical data but also future data is necessary.
In the context of the internal growth model, there are factors that stimulate economic growth, as
outlined by Ehrlich(1990: 3-4) .
• According to some authors, the accumulation of human capital is considered the first and
foremost factor inthis regard, with scholars like Becker, Murphy, Tamura, and Rosenzweig
supporting this perspective.
• Technological development emerges through entrepreneurial decisions guided by market
forces, as assertedby authors such as Romer.
• The role of the public sector in economic growth should be examined as an independent
variable, accordingto scholars like Barro, King, Rebelo, Jorgenson, and Yun.
20 Çakmak, H. K. (2003). The evolution of the concept of development in the literature of development
economics. Hacettepe University Journalof Economics and Administrative Sciences, 21(2), 49–68.
21 Demir, A. F. (2003). Southern Caucasus from the perspective of Turkish foreign policy. Istanbul: Bağlam Yayıncılık.
22 Demir, M. A. (2013). Analysis of the Turkish economy in the planned period within the framework of
development theories. Doctoraldissertation, Dokuz Eylül University, Institute of Social Sciences, Izmir.
24
Within the framework of this model, it is essential to first examine authors who emphasize human
capital. This viewis primarily based on a study conducted by Becker and others in 1990. The
fundamental claim in this model is thatthe fertility rate, identified internally, will yield returns in
proportion to the increase in the human capital rate. Therefore, the decision to increase fertility is
tied to economic considerations, specifically influenced by price levelsand income. Human capital
is expected to be more effectively utilized and innovative through the knowledge accumulated in
the previous generation, coupled with education and development opportunities. Hence, the focus
should not be solely on having children, as investing in oneself is more profitable in developed
and prosperous countries than merely increasing the quantity of individuals. Consequently, a
significant distinction exists in this regard between developing or poorer countries and developed
nations (Ercan, 2002: 131). From the perspective of human capital, an individual enhances their
own productivity, thereby positively contributing to the efficiency of other factors (Lucas, 1988:
25)²³.
Another perspective suggests that technological advancements are linked to entrepreneur decisions
driven by the market. This viewpoint primarily emerged with Romer. According to Romer, market
actors aim to maximize profits by directing investments toward technology. This indirectly
influences economic growth, highlighting technologicalinnovations as a fundamental dynamic of
economic expansion (Yeldan, 2010: 221; Romer, 1986: 1002). Companies investing in
technological innovations on a subjective level can increase their market shares in the sectors they
operate, leading to a significant rise in profitability. The widespread adoption of such practices
contributes to overalleconomic growth. This model not only focuses on technological innovations
but also emphasizes the utilization of knowledge, particularly in conjunction with human capital
(Besci and Wang, 1997: 51).
On the other hand, different authors examine the behavior of the public sector. Barro, for instance,
assertsthat public expenditures are an independent factor triggering economic growth. He argues
that the privatesector does not have the same potential as the public sector to establish tools for
resource efficiency in economic dynamics. However, research and development (R&D) policies
supported by the government, along with infrastructure projects in areas like education, healthcare,
and other potential state involvements, should reach a socially acceptable level through state
investments. In this context, a transparent governmentis established through political moves that
exclusively serve the public interest, are non-profit, aim to positively impact economic growth,
and seek to provide optimal benefits to the representative population (Ercan, 2002: 134-135). Such
policies positively affect economic growth and contribute to social welfare.However, it's worth
noting that public expenditures can have negative effects on the economy, particularlythrough
taxation. Exceeding a reasonable level of taxation can lead to adverse movements in individual
savings (Ercan, 2002: 135) 24.
23Dikkaya, M. (2015). Post-Soviet transformation in Georgia and the political economy of relations with Turkey. Retrieved from
https://www.researchgate.net/publication/316322457 Access date: December 12, 2019
24Easterly, W. (1997). Economics. USA: World Bank Development Research Group.
25
Acceptance of the data in this model is driven by various reasons, with the first premise being the
necessity to include different factors beyond the input-output elements offered by traditional
models. Notably, modern technicaladvancements and technological developments have become
prominent, requiring consideration of elements beyond what traditional models present. For
instance, in a traditional market economy, a product, once produced, becomesa competitor to itself.
However, in today's world, the rapid circulation of information and the internet have made it
feasible to easily replicate relevant technologies. In this scenario, it can be argued that there is
insufficient data to encourage companies to invest appropriately in these areas. This encourages
companies to achieve these results through consciously placed investments. This inevitably
necessitates deviating from competitive market conditions and adapting to imperfect market
conditions (Yardımcı, 2006: 100) 25.
To discuss the manifestation of internal growth within a system, attention is drawn to certain
points, asoutlined by Kibritçioğlu (1998: 215) 26 :
- Information is used among consumers without rivalry and exclusion.

- All economic entities benefit from technological developments, and the degree of this utilization
is significant.
- Technological advancements produce some externalities, leading the private sector not to
engage in this area as itdoes not see significant profits, resulting in market imperfections.
- There is a significant relationship between human capital and physical capital in technological
development.
- Human capital plays a crucial role; it is determinant for both the development of
technological investments andresearch and development (R&D), as well as learning by doing27.
25Ehmedov, E., & Hacıyev, M. (2004). Azerbaijani economy. Baku: Seda Publications.
26Eldaroğlu, E. (2001). The Azerbaijani government wants to solve poverty problems. Azerbaijan National
Democratic FoundationAzerbaijan Bulletin, 32.
27Əliyev, A. (2003). Azerbaijan's economic policy. Azerbaijan's foreign trade-economic relations. Baku: Qanun Nəşriyyatı.
26
2.1.3. Comparative Analysis in Terms of Economic Growth
Turkey The average of emerging economies The world average OECD average
Figure 3. Economic Growth Data Based on Comparative CountryData Using Gross Domestic
Product (GDP)
(Source: Sodevmonitor, 2020) 28.
Determining economic growth in a country using Gross Domestic Product (GDP) data is
fundamentally one of themost frequently employed methods. This approach manifests itself based
on the economic transaction volume occurring within a country. Regardless of the extent to which
these transactions are widespread, measurements aremade over a total. At this point, it is understood
that countries, particularly during economic crises (such as the 2009crisis), experience disruptions
in economic performance. Therefore, economic growth, focusing solely on economicrelations, can
be directly affected by crises, wars, or natural disasters 29.
As evident in Figure 1, OECD countries rank at the bottom in terms of growth, while developing
countries stand out in this regard. The reason for this can be attributed to these developing countries
not having reached a volume to fully realize their economic potentials yet.
(Note: Since Figure 1 is mentioned but not provided, I used the reference to it as context for the
comparison betweenOECD countries and developing countries in terms of economic growth).
28Ercan, Y. N. (2002), “Internal growth theory: A general overview”. Planning Journal, 129-138.
29
Ertek, T. (2005). Introduction to macroeconomics (With Examples from the Press). Istanbul: Beta Publications.
27
Development Concept and Factors Influencing Economic Development
Definition and Purpose
The concept of economic development is observed to be less defined compared to the concept of
economic growth.At this point, it is understood that economic development essentially represents
data and falls into the belief group.However, in the doctrine, especially in the last half-century, it
is one of the most frequently mentioned concepts. Nevertheless, its rare definition results in the
ambiguity of its content (Başkaya, 2000: 16). Economic growth denotes a quantitative increase
in economic tools and means of production, whereas the concept of economic development
implies their efficient and effective utilization. Therefore, it involves not only an increase in
productionbut also an enhancement in the quality of production. Hence, the crucial aspect is not
just the influx of a larger amount of capital into a country's system but also its transformation into
increased welfare in a meaningful way (Karagül, 2002: 1) 30.
For economic development to occur, it can be argued that the intellectual foundations of
developed countries need to be adopted. This entails some structural reforms, requiring profound
changes in economic and administrative terms, as well as the reorganization of the economic and
social sphere. Additionally, some ideological and behavioral changes need to take place,
necessitating the establishment of a national income and national economic plan. This emphasizes
the influential role of market functioning in economic development (İşgüden, 1982: 233) 31.
Fundamentally, it is understood that the concept is significant for developing or less developed
countries and represents a goal to be achieved. This is because it addresses elements such as
increasing material well-being, realizing human potential, and ultimately improving human life.
This situation implies, to some extent, systemic improvement and fair distribution of income.
Thus, the difference between economic growth and development manifests itself in the
humanitarian aspect. Development inherently involves a humanitarian dimension, considering
how the surplus income positively reflects on human life and whether better educational and
healthcare opportunitiesare available (Kar and Taban, 2003: 3) 32.
In the literature, it is observed that Hirschman (1958) likened development to a puzzle.
He indicated different dimensions of development and believed that only when each
piece is put together, developmentcan be considered complete. The completion of one
development criterion makes it possible to achieve therealization of others, as placing
each piece correctly facilitates finding the remaining pieces 33.
31Esen, B. (2011). Country report on Georgia. Ankara: Republic of Turkey Prime Ministry Undersecretariat of Foreign
Trade, ExportDevelopment Center

32 Eyyubov, M. (2001). Transition to market economy and industrial complex. Baku: Meşveret.
33 Felderer, B., & Homburg S. (1992). Macroeconomics and New Macroeconomics. Germany: Springer-Verlag
Berlin Heidelberg.
28
Development can be considered to have some internal purposes, primarily categorized under six
headings:
- Technology and Production: One of the goals of economic development is for humans to
dominate nature anddesign it in a way suitable for human life.
- Human Dimension: Creating the necessary conditions for individuals to live in better
circumstances.
- Employment: Economic development should encompass reducing unemployment, creating
new jobopportunities, and improving the conditions of existing and new job prospects.
- Dominance: In the context of international competition, economic development should
serve the protection ofnational interests and the enhancement of the country's competitiveness.
- Environment: Economic development, given the environmental degradation caused by
current economic relations, has paved the way for the development of the green development
approach. Today's development shouldbe environmentally harmless.
- Freedom: Economic development should be approached in a dimension that not only

enhancesindividuals' well-being but also improves their freedoms in all aspects (Source, 2007: 59)
34 .
Currently, the overwhelming majority of the world's population (75%) lives in less developed
countries. It is crucial for these countries to ensure their own development to provide better living
conditions for their people 35 . While it is stated that a significant portion of these countries falls
amongless developed ones, there is no doctrinal consensus on what underdevelopment entails.
Nevertheless, some evaluations can be found in the literature. The situations of these countries are
considered important in terms of increasing the supply created by relatively limited factors and
elements affectinggrowth, as well as developing an economic usage model that increases social
net income to the maximum (Turk, 1992: 221)36.
İ. (2016). Foreign economic policy of Georgia since gaining independence: Estonian

34 Gogorishvili,
Discussions onEconomic Policy. SSRN, 24(1), 1- 20.

35Golob, J. E. (1994). Does inflation uncertainty increase with inflation?. Economic Review-Federal
Reserve Bankof Kansas City, 79(1), 27-27.
36 Greene, W. H. (2003). Econometric analysis. India, Delhi: Pearson Education.
29
2.1.2. History of the Concept of Economic Development
The term "development" in foreign literature is synonymous with the term "kalkınma" in Turkish.
This concept is also expressed as progression or improvement. Initially, the concept was
considered on a biological basis, signifyingan individual's adaptation to living in harmony with
nature. As individuals began to use production tools, the conceptof development evolved to
represent shaping natural resources according to their own interests. The concept of development,
initially used in the theory of evolution (1862) 37, began to be employed to describe economic
growthin the early 20th century. Economic growth fundamentally signifies achieving a better
standard of living for society(Peet and Hartwick, 2009:1) 38. It can be stated that the development
of industry played a significant role in this regard. With the concept of development influencing
a large part of social strata and an increase in production associated with industrial development,
interest in this direction began to grow. Initially, in 1939, in the UK, the term was formally used
in an economic context through a legal arrangement called the "Colonies Development Act"
(Sachs, 1992: 6). Since then, it is understood that the concept has taken on various perspectives
(Table 2).
Table 1. Theories of Economic Development
Years Perspective Meaning of development

1800s Classical Political Economy Solutions for Development
1850 > Colonial Economy Resource Management and
Trusteeship
1870 > Latecomers Industrialization
1940 > Development Economics Economic Growth and

Industrialization
1950 > Modernization Theory Growth, Political, and Social

Modernization
1960 > Dependency Theory National Capital Accumulation

1970 > Alternative Development Human Development
1980 > Human Development Capacity and Options Expansion

1980 > New Liberalism Economic Growth, Reforms,
Environmental Privatization,
Liberalization
1990 > Post-Development Authoritarian Engineering
2000 Millennium Development Goals Structural Reforms

37 Gujarati, D. N., & Porter D.C. (2004). Basic econometrics. India, Delhi: Prentice Hall. Fifth Edition
38 Güran, N. (1999). Macroeconomic analysis. Izmir: Anadolu Printing House.
30
During the period after 1945, the concept underwent a transformation, particularly in conjunction
with liberal economic policies. Economic backwardness was associated with experiencing
political instability, especially in regions where the United States held hegemony. To address this,
a program called the Fourth Point Program was implemented. These initiatives constitute a
program encompassing the concept of development. In this program, theconcept of development
was transformed by the United States into a lever used to propagate capitalist economy worldwide.
In the late 1940s, Truman articulated the purpose of development during this period by stating,
"We areinitiating a new program for the progress and development of less developed regions based
on our scientific and industrial potential. Unlike before, our program does not have a colonial
purpose. Our aim is to initiate a new development program with foundations in fair trade and
democracy" (Pieterse, 2000: 183) 39.
During this era, development was not evaluated within the context of social dynamics. Its content
was commodity-based, with an emphasis on economic indicators. Therefore, it cannot be said that
there was a meaningful distinctionbetween growth and development during this period. Plans were
made regarding aspects such as increasing production capacity, consumption, and per capita
income (Ana, 2008: 4)40. However, the World Social Situation Report (1952) published during this
period indicated evaluations emphasizing the need for data from less developedcountries to include
social services in the context of development. On the other hand, by the 1960s, social
improvements and welfare issues were increasingly incorporated into the scope of development.
The United Nations Economic and Social Council, for instance, considered both social and
economic aspects together (Çetinkaya and Kopuz, 2020: 325). However, the general tendency
remained to use growth and development interchangeably.
It is evident that steps towards associating development with social welfare and essentially aligning
it with the concept of a welfare state began to emerge from the 1970s. This period witnessed intense
criticisms of the capitalistperspective, which became more widespread in the 1980s. Countries
such as Brazil, where there was nominal economic growth but no improvement or momentum in
literacy or health, exemplify this trend. Conversely, in certain regions of the world, like India and
Sri Lanka, evaluations suggested an increase in welfare and education despite the absence of
significant economic growth or economic advancements (Szirmal, 2005: 6)41.
39 National Statistics Office of Georgia (2023). Access address: https://www.geostat.ge/index.php/ka Access Date:
July 01, 2023.
40 HDR. (2023). Access address: https://hdr.undp.org/data-center/human-development-index#/indicies/HDI Access
Date: July 21, 2023
41Heydarov, N. (2021). Effects of the century contract on the Azerbaijani economy and Azerbaijan's strategy for oil
and natural gas afterthe contract. Master's thesis, Bandırma Onyedi Eylül University, Institute of Social Sciences,
Balıkesir.
31
In the 1990s, the concept of development was revisited in a different form due to universal crises
generated by neo-liberal policies in the 1980s. This is evident in the capacity or feasibility theory
developed by Amartya Sen. The Asian thinker explores not only the amount of economic tools or
capital in a system but also the capacity of this capital to be used by wide segments of society.
According to him, the ability to measure poverty in a society is notdetermined by absolute or
relative poverty standards consisting of specific numbers but by the society's individuals'capacity
to access tools in areas such as education, health, and culture. Therefore, individuals can be lifted
out of poverty even if their nominal incomes are below a certain level, provided that the state can
fairly deliver these services through public services, allowing easy access to these services. Thus,
a theory based on human-centric development has been embraced, asserting that the elimination
of poverty is possible by enhancing human capabilities or capacity (Uğur, 2017: 91).
It is understood that the feasibility theory developed by Amartya Sen has been adopted and
implemented by the United Nations (UN). This approach, translated into practice by the UNDP as
"expanding people's choices," encompasses human rights, self-esteem, education, health, and a
good quality of life (UNDP: 1990: 9).
In this context, the involvement of states, non-governmental organizations, or mass media may
come into play. The Human Development Index (HDI) encompasses different dimensions,
including healthy and long life, education, and the standard of living. Investigating the impact of a
country's economic prosperity on the standardsof those living in that country becomes crucial in
determining the HDI (Gürses, 2009: 341) 42.
This situation is expressed by the UN as the standard of human development. When calculating
the HDI, the following factors are taken into account:
- Income Standard: The importance of per capita GDP and purchasing power is emphasized (Tıraş,
2019: 18).
- Education Standard: Factors such as the age of enrollment, expected age of enrollment,
enrollment rate, opportunities for education for gifted individuals, and the continuity of the
education process take precedence whenmeasuring a person's well-being (Tıraş and Ağır, 2018:
31).
- Health Standard: Access to quality healthcare, obtaining clean water, exposure of an
individual to climate change in the community they live in, the cost of healthcare expenditures,
healthy nutrition, appropriate housing, and environmental factors are considered (Tıraş, 2019:
18).
For the year 2000 and beyond, the UN implemented the Millennium Development Goals (MDGs),
adopting a strategy covering the years 1990-2015. It is observed that the organization aimed to
promote the acceptance of programs towards ending extreme poverty and hunger, eradicating
certain daunting diseases such as HIV and AIDS,addressing environmental disasters, and achieving
sustainable development (Szirmal, 2005: 11) 43.
42 Hiç, M. (1994). Growth and development economics. Istanbul: Filiz Kitabevi

43 Huseynov V.A. (2005). Assessment of the manat and economic development: 'Dutch
disease content andevidence. Baku: Sada Publications
32
Comparative Country Data and Development
Economic development does not have a singular dimension. As mentioned earlier, it is crucial to
emphasize that economic development comprises various dimensions. These categories are
generally perceived as the traditional society stage, the preparation for take-off, take-off, the
mature stage trajectory, and the era of high mass consumption (Rostow, 1960: 4) 44. This can be
evaluated concerning per capita incomes, focusing on the European Union (EU) member countries
or OECD countries worldwide. For instance, when examining the period after 1980, itis observed
that economic development for the European Union member countries, except for certain periods
(such as 2016), has gained upward momentum. Additionally, concerning OECD countries, it is
evident that development can be more prominently observed compared to the restof the world.
Naturally, there are specific reasons for this. Developed countries are morenumerous in the
European Union and OECD countries. Consequently, it is understood that the per capita national
income is high in these countries (Şaşmaz and Yayla, 2018: 251) . As analyzedby Şaşmaz and
Yayla, the graph representing this situation is as follows 45:
EU
World
Figure 4. Per Capita Income by Years in Countries

Belonging to the EU, OECD,and the Rest of the World (in US Dollars)
Source: Şaşmaz and Yayla, 2018: 25246
44 Hüseyova,N. (2018). Features of the contemporary development of the Republic of Azerbaijan.

Master's thesis,Gazi University, Institute of Social Sciences, Ankara.
45 Ibrahımkhalılov, F. (2023). Azerbaijan's process of opening up to the world economy and
changes in the taxsystem. Master's thesis, Kütahya Dumlupınar University, Graduate School of
Education, Kütahya.
N. I. Ç., & Kopuz, E. (2020). Economic and Social Council as an actor in the policy-
46 İstikbal,
making process.KAÜİİBFD, 11(1).
33
2.1.4. Methods of Measuring Economic Development
Various methods exist for measuring economic development, with Gross Domestic
Product (GDP) and Per Capita GDP being two notable indicators. GDP values
essentially represent the value of goods and services created by citizens, making it a
significant indicator. According to data shared by the World Bank for the years 2021-
2022, countries' GDP rates are classified as follows 47:
Table 2. In the years 2021-2022 (July), Welfare Groups of Countries According to the world
Bank.
Groups July 2022 July 2021

Low-income countries <1.085 <1,045
Lower-middle-income group 1.86-4,255 1.046-4,095
Upper-middle-income group 4,256-13,205 4,096-12,695
High-income group >13,205 >12,695
(Source: World Bank 2023)
On the other hand, another method of measurement involves assessing economic indicators using
Purchasing Power Parity (PPP). Gross Domestic Product (GDP) can yield misleading results in
international comparisons due to the influence of exchange rates, which can vary in their impact
on different goods and services. Hence, Purchasing Power Parity is employed to eliminate
disparities arising from the valuation of currencies. This method addresses the differences in price
levels between different countries (Eğilmez, 2010) 48. It considers both traded and non-traded
commodities simultaneously. The International Monetary Fund (IMF) publishes parity rates based
on countries' assets, revealing that, in 2021, China led with the highest value of $26.65 trillion,
followed by the United States with $22.67 trillion. India (10.18),Japan (5.58), and Germany (4.74)
subsequently followed suit (Figure 5) 49.
47 IMF. (2021). World Economic Outlook Database. Access address:

https://web.archive.org/web/20210407080844/https://www.imf.org/en/Publication s/WEO/weo-
database/2021/April/weo-report, Access Date: July 21, 2023
48 Iñaki, P., & Jeroen, S. (2018). The Subnational Human Development Index: Moving beyond country-level
averages. UnitedNations Development Programme. https://hdr.undp.org/content/subnational-human-
development-index- moving-beyond- country-level-averages, (Access Date: July 21, 2023).
49 Kaynak, M., (2007). Development economics. Ankara: Gazi Kitabevi.
34
China USA India Japan Germany Russia Indonesia Brazil France Turkey
Figure 5. Countries by Purchasing Power Parity (IMF, 2021)(Source: IMF, 2021) 50
Finally, it is crucial to discuss the Human Development Index (HDI). Developed by the United
Nations Development Programme in the 1990s, this index encompasses 191 countries and is
annually published by the UN. It incorporates aspects such as health, education, income, and other
factors related to living conditions in respective countries. Although comprehensive, the HDI has
faced criticism for its criteria, with some scholars suggesting alternative indicators beyond those
presented by GDP-like indices. In 2022, for instance, variables such as birth rates,expected school
years for children, education duration for adults, per capita income, and life expectancy are
considered (Inaki & Jeroen, 2018) 51. Countries scoring above 0.800 are classifiedas very high,
those in the range of 0.700-0.799 as high, those between 0.550-0.699 as medium, and countries
scoring 0.550 and below are considered low on the index (Human Development Reports, 2023).
The countries with the highest scores based on these variables are as follows 52:
50 Juravlyova,
P., & Uzunova, Q. (2009). İqtisadi nəzəriyyə. Baku: İqtisad Universiteti.
Kamalov, N. (2000).Inflation in Azerbaijan between 1990-2000. Baku: Qafqaz
Universiteti
51 Kanbolat,H. (2004). President of Georgia Mikhail Saakashvili: As a political leader,
Atatürk is an exemplaryperson for me. Ankara: Eskicim Kitabevi
52 Kartal,
Ç. (2007). Relations between Georgia and Turkey. Master's thesis. Trakya
University, Institute of SocialSciences, Edirne.
35
Countries Point Countries Point
Switzerland 0,92 Georgia 0.80
Norway 0.96 Bosnia and Herzegovina 0.78
Iceland 0.959 Azerbaijan 0.74
Hong=Kong 0.952 Kyrgyzstan 0.69
Turkey 0.83 Southern Sudan 0.38
Figure 6. Situation of Countries in the Context of Human Development in 2021

(Source: HDR 2022)
2.1.5. Variables
As mentioned earlier, economic growth and development, although two countries may exhibit the
sameperformance, can lead to different outcomes. Therefore, it can be stated that there are some
key elements that determine these concepts. In this context, the increase in both physical and human
capitalat the individual level and the increase in productivity due to attracted investments or
technological advancements in the respective country are considered crucial (Pamuk, 2007: 4) 7³.
Capital accumulation and investment are essential at this point. Investment can occur in both
physical and human capital. There are obvious reasons for this. Firstly, through capital
investments, the value of goods produced inthe country increases. This appreciation can contribute
to the valuation of per capita income and labor. As human capital increases or becomes more
qualified, the productivity extracted from individuals willincrease. This situation also contributes
to the progress of technical and technological developments (Yıldırım, 2011: 442)7⁴.
It is worthwhile to discuss these variables affecting growth under this heading.

54 Kibritçioğlu, A., (1998). Determinants of growth and the place of capital in new growth models.
Ankara University Facultyof Political Sciences Journal, 207-230.
36
Innovation/Renewal and R&D Activities
In essence, innovation and R&D activities are outcomes of various other factors. However, their
importance is increasing steadily in today's context. Therefore, an examination of R&D is
necessary initially. At the macroeconomic level, it is believed that innovation and renewal activities
will increaseproduction. This renewal process is thought to affect both capital and labor as well as
productivity. In this regard, countries that gained momentum in economic growth in the 1990s are
described as havingeconomies with high capital savings, qualified labor force, and multifactor
productivity. Innovation activities have a direct impact on multifactor productivity. The increase
in productivity spontaneouslyaffects labor and capital (OECD, 2004: 30)77. The reason for this is
that, as a result of R&D activities,human capital can use existing technology more effectively or
make new technological breakthroughs.Investment is made for this purpose. Thus, through R&D,
continually making "new production" becomes possible, and this production capacity inevitably
increases productivity and output (OECD, 2004: 30)7⁶.
2.1.6. Human and Physical Capital
The creation of human capital is initially costly, involving expenses for education and internship processes.
Over time, however, this capital can be turned into high productivity with low expenditure. Technical
schools, universities, or other vocational training programs are established to address this. Individuals thus
make an investment in themselves, aiming to become "attractive" in terms of capital. Additionally, after
individuals enter the workforce, businesses organize courses to increase the accumulations of their
employees, aiming to enhance productivity. Human capital is not only important in terms of knowledge
accumulation but also regarding the health of this accumulation, covering the design of health education
and hygiene standards. Premature withdrawal of this capital from the labor market means the expenditure
on it becomes wasteful (Case, Fair, and Oster, 2011: 635). Therefore, human capital has positive
externalities, making it highly efficient due to its increasing marginal returns (Pistone, 2009: 1)7⁷.
55 Malikova, M. (2021). Post-independence development of the Azerbaijani economy and its

integration into international trade: Relations with Turkey. Master's thesis, Tekirdağ Namık Kemal
University, Institute of SocialSciences, Tekirdağ.
56 Mammadov, S. (1998). Inflation and financial markets. Baku: ADAU
57 Mammadova, N. (2020). General assessment of the Azerbaijani economy: The Heydar Aliyev era
(1993-2003).Master's thesis, Kocaeli University, Institute of Social Sciences, Kocaeli.
37
On the other hand, physical capital is equally crucial. In determining a country's capacity for
producing goods and services, physical capital plays a significant role. An increase in the amount
of capital per capita implies an increasein the average productivity of an employee. Thus, when
physical capital is at an appropriate level, it becomes a crucial determinant in increasing a country's
production capacity because the marginal return of capital decreases. However, it is important to
note that physical capital alone is not sufficient in this field (Pistone, 2009: 1).
The impact of physical capital on economic growth is realized by increasing productivity in the
workforce and directly providing services. The direct use of physical capital in production
enhances labor productivity. For instance, computers or technology, in general, are part of a
country's physical capital. With the introduction of computers into production, tasks that were
previously deemed impossible or required considerable time and effort have started to be solved
more efficiently. This extends to the diversification and strengthening of public transportation and
the development of vehicles such as high-speed trains and planes, which serve to transport more
passengers with less crew in a shorter time. While examples can be diversified, these instances
suffice for expressingthe purpose. Moreover, from a country's perspective, a single-use of physical
capital in production has the potentialto appreciate in value in the following years. Bridges and
tunnels remaining usable after being constructed once canbe considered a clear example of this
(Case, Fair, and Oster, 2011: 635).
2.4.2. To be commercially reliable
Being commercially reliable, or being assessed as commercially open, reveals a country's capacity
in commercial terms. Commercial openness is a crucial factor that influences a country's imports
and exports.The level of a country's exports, especially, determines the extent to which that country
can achieve growth.Moreover, the high performance and reciprocal relationship between import
and export activities can represent a significant factor revealing the depth of a country's
commercial openness (Kurt and Berber, 2008: 58).
Additionally, this concept contributes to making a country's economic situation more efficient and
productive. Similarly, high commercial openness contributes to an increase in real income per
capita (Türedi and Berber, 2010:302). In a country, production is primarily oriented toward the
domestic market at the outset. However, when goodsand services start to be exported to foreign
markets, a significant interaction channel opens up. This introduces the concept of an economy of
scale. For a country to benefit from this relationship sustainably, it needs to improve product
quality, even if not initially, to ensure the sustainability of this efficiency. Only then can a
commercially viable situation be established with high competitiveness in the international
economic arena, resulting in consistentincome and productivity growth. Moreover, due to the
reciprocal nature of interaction, such a situation may also contribute to the originating country
through technology transfer or the transfer of conceptual procedures regardingstructural issues.
Consequently, this could make the production process more effective and efficient. When
compared to protectionist or closed economies, countries considered commercially open or reliable
in international
markets tend to achieve faster growth (Nişancı, Karabıyık, and Uçar, 2011: 305)⁶¹.
61Loayza, N., & Soto,

R. (2002). The Sources of Economic Growth: An Overview, In Economic Growth:
Sources,Trends and Cycles, Ed. Norman Loayza and Raimundo Soto. Santiago: Central Bank of Chile.
38
2.4.2. Structural Reform Policies and Economic Performance
In order for a country to experience internal growth, it is essential, first and foremost, to establish
policiesthat are structurally and institutionally relevant in this regard. While the exact direction of
these policies may not be clearly defined in terms of content, it is widely acknowledged that
governments can impact theeconomic outlook of their countries through their policies. At this
juncture, structural reforms take on paramount importance. Structural reforms, in a manner
affecting the economic sphere, can be articulated as measures to increase the financial depth of the
country, expand educational opportunities, facilitate tradeopenness, or enhance the government's
influence through public services and infrastructure. Additionally,as seen above, the systematic
support of R&D and innovation activities can also be associated with structural reforms (Loayza
and Soto, 2002: 10)⁶².
In connection with structural reforms, it is imperative to discuss the economic performance of the
relevant country. Economic performance is subject to economic policies determined by the
country and guided by macroeconomic conditions. Policies developed in the field of economics
can, first and foremost, influence human capital, R&D research, structural policies, and
ultimately, economic growth. In cases where economic performance is shaped around a specific
economic policy, it is expressed that such a situation has an impact on the efficiency, stability, and
growth of the relevant country. An unstable economy not only diminishes efficiency but also
slows down the flow of capital. On economic performance, certain macroeconomic variables
such as inflation, budget deficits, or tax burdens can exert influence (Petrakos, Arvantidis, and
Pavieas, 8)⁶³.
62 Lubbock,
K. J., Merin, M., & Gonzalez, A. (2022). The Impact of Inflation, Unemployment, and Population
Growth on Philippine Economic Growth. Journal of Economics, Finance and AccountingStudies, 4(2), 55-64.
63 Lucas, E. R. (1988). On the mechanics of economic development. Journal of Monetary Economics,

22(1), 3-42.
39
2.4.3. Foreign Direct Investment
It is evident that a country faces certain limita tions in creating capital solely from its own
resources. Especially in countries with constrained opportunities either geopolitically or geo-
economically, inviting capital owners from other countries becomes crucial for sustaining
sustainable economic growth. At this point, the direct involvement of foreign capital is essential
for providing long-term contributions. This involvement may take various forms, including the
establishment of companies, setting up factories, acquiring existing companies, or increasing the
capital of a company through their own resources. The significance encompassed by these
investments is clear⁶⁴. Through these investments, insufficient capital and savings accumulation are
augmented through external support. Moreover, these investments tend to be relatively enduring
and have a long-term impact. Indirectly, they also influence economic growth. The primary
reason for the effectiveness of this type of capital on a country's economic growth is its direct
integration into production processes. They contribute positively to the expansion of the
production processand the diversification of technological capital (Alagöz, Erdoğan, and Topallı,
2009: 80)⁶7.
2.4.4. Social Cultural and Demographic Capital
Lastly, it is essential to focus on socio-cultural and demographic factors. To achieve economic

development in a country, it is emphasized that collaboration among societal dynamics must first be
established. This collaboration canonly occur through the establishment of trust relationships, which are
influenced in specific ways. For instance, trust is more easily established in a homogeneous society,
whereas countries with significant ideological/religious/ethnic diversity may experience a decrease in
trust-based relationships due to the potential for conflicts arising from these differences. The fundamental
reason is the inherent potential for these differences to turn into conflicts. While culturaldiversity can be
homogenized and amalgamated under a common identity (such as citizenship-equality-human rights),as
seen in Germany, for developing countries, this may pose challenges and negatively impact economic
growth (Petrakos, Arvantidis, and Pavleas, 9-10)⁶⁶.
64 Abrar, M., Baig, S. A., Hussain, I., & Umar, I. (2020). Understanding Brand Love in Fashion Clothing
Online Brand Communities: Moderating Role of Social Identity. Pakistan Journal of Social Sciences
(PJSS), 40(1), 315-325.
65 Ahamat, A., Ali, M. S. S., & Hamid, N. (2017). Factors Influencing the Adoption of Social Media in Small and
Medium Enterprises (SMEs). International E-Journal of Advances in Social Sciences, 3(8), 338-348.
40
66 Çele, F. D. (2018). Digital Marketing Skills: A Study in Healthcare Businesses [Master's Thesis].
Istanbul ArelUniversity Institute of Social Sciences.
On the other hand, demographic factors within a country can also influence economic growth. The
type/quality of human capital present in a country can affect labor force participation. Assessing
demographic characteristics involves evaluating factors such as the rate of population growth, the
ratio of the population's economic/religious/social/health dependencies, the country's population's
ability to use capital and save, and the quality of human capital (such as education and
accumulation). If a country's population is rapidly increasing, and this growing population is
supported by education and knowledge, an indirect contribution to economic growth is expected
due to an increase in the ratio of qualified human capital(Petrakos, Arvantidis, and Pavleas: 11)⁶⁷.
Impact of Population Distribution on Economic Growth and Demographic Factors:
For the increasing population to positively contribute to economic growth, it is crucial for this
population tobe concentrated rather than dispersed. This concentration would necessitate the
construction of fewer schools, hospitals, and government buildings, thereby reducing costs.
Increased interaction among the population would enhance productivity. Moreover, a dense
population would influence demand, facilitating regional production planning (Panahi, 2010:
702)⁶⁸. However, with the growth in population, the acceleratedintegration of the young population into
the workforce would lead to an increase in the country's productioncapacity. Conversely, the
increased dependency level of a substantial elderly population is anticipated to have adverse effects
on the economy. Migration is another influential factor in demographics, and unplanned and
dispersed migration can have negative macroeconomic impacts, causing inflation and
unemployment (Moody, 2006: 6)⁶⁹.
Mammadova, S., Guliyev, F., Wallwork, L., & Azimli, N. (2016). Human Capital Development in
67
Azerbaijan.Caucasus Analytical Digest (CAD), 90.

68 Mankiw, N. G., Romer, D. H., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The
QuarterlyJournal of Economics, 107(2), 407-437.

69 Mehdiyev, A. (2001). Realities of Azerbaijan's integration into the world economy. Expert Economic
Journal, (7-8),26.
41
CHAPTER 3: ECONOMIC OUTLOOK OF THE REPUBLIC OF AZERBAIJAN
3.1. General information about Azerbaijan
Situated in the southeastern part of the Caucasus, northwest of Iran, at the crossroads of Asia and
Europe, the Republic of Azerbaijan is a nation with a rich historical background. Spanning 800
km from the Black Sea to the Caspian Sea along the Caucasus, Azerbaijan holds significant transit
capabilities. Positioned at the intersection of Europe and Asia, Azerbaijan benefits from a well-
established road infrastructure, further solidifying its role as a major logistics center for the region
(Ibrahimkhalilov, 2023)⁷⁰. Culturally and economically, Azerbaijan plays a global role as a key
hub in the region.
3.1.1. Demographic Structure

The period between 1955 and 1970 symbolizes the most progressive demographic era in
Azerbaijan's history. During this time, Azerbaijan experienced a demographic boom, primarily
driven by substantial positive transformations in the economy and political life of the Soviet Union
(Malikova, 2021)⁷¹. This period is marked by significant progress in technological and economic
development, as well as in public life. Following radical domestic policy reforms by the Soviet
government, the population was liberated fromthe fear and repression of oppressive authorities.
Many exiles and prisoners, excluding Crimean Tatars, Ahiska Turks, and Germans, were allowed
to return to their homelands and homes. Moreover, numerous restrictions limiting the socio-
economic activities of the people were lifted.
Particularly from 1988 to 1999, Azerbaijan witnessed a crucial period in its unique history. This
timeframeis associated with significant historical events, notably Azerbaijan's independence in
1991 and its establishment on the world political stage. However, this period also involved military
aggression, politicalturmoil, socio-economic crises, and bloody tragedies (Abbasov, 2005)⁷². These
challenges led to a significantdecline in living conditions in Azerbaijan and triggered a series of
other issues during the same period, resulting in substantial changes in demographic processes.
The Karabakh War brought about the occupation of Azerbaijani territories, lasting for five years.
The dissolution of the Soviet Union and the transition from a socialist economy to a market
economy disrupted existing economic and trade relations. This combination of various factors
triggered hyperinflation, leadingto an economic collapse. Consequently, hundreds of thousands of
people became unemployed, and the quality of life declined.
70 Məmmədov, Z. (2004). External economic relations of the Republic of Azerbaijan. Baku: Ministry of
Education.
71 Mert, O. (2004). Turkey's Caucasus policy and Georgia. Istanbul: IQ Kültür Sanat Yayıncılık.
72 Muradov, Ş., & Bakhiş, Ç. (2013), Ethno-demographic processes in the Republic of
Azerbaijan: Historicalchanges and facts. Baku: Qanun Kitab Evi
42
These factors resulted in mass migrations to different countries, particularly to Russia, rapidly
reducing Azerbaijan's population (Aras, 2001). However, the 1999 census in Azerbaijan considered anyone
with Azerbaijani citizenship to be a permanent resident, regardless of their actual place of residence. This
made it challenging to determine the full extent of the population decline (Resullu and Aslanli, 2011).
The collapse of the Soviet Union and the shift from a socialist economic system to a free-market
approach led to the breakdown of past trade and economic relations. As an inexperienced
independent state, Azerbaijan faced the consequences, witnessing a surge in panic inflation and an
economic downturn. Numerous businesses went bankrupt, leaving hundreds of thousands
unemployed (Muradov and Bakhiş, 2013). As a result, the living standardsof the population rapidly
declined. This period of stagnation, lasting until 1997, forced hundreds of thousands of Azerbaijani
citizens to migrate to neighboring Russia and other countries to make a living (Malikova, 2021).
During the war in Karabakh, many individuals left Azerbaijan and migrated to other countries as
war refugees. Initially intending to leave their country temporarily, many migrants chose not to
return after adapting to their newliving conditions. Instead, they encouraged other family members
and relatives to migrate. This significantly increased migration during this period, contributing to
a rapid decline in Azerbaijan's population (Malikova, 2021).However, due to the majority of
migrants in the 1999 census being considered permanent residents of Azerbaijan, this decline did
not reflect in statistical figures, and the population showed an increase of 13.3% between 1989 and
1999. Despite most Azerbaijanis migrating, many attempted to acquire the citizenship of the
country they migratedto. As of 2002, it was determined that approximately 2.2 million Azerbaijani
citizens had settled in Russia. However,official Russian authorities reported that the population of
Azerbaijanis was around 620,000 in the 2002 census. It is essential to note that during the 2002
census, everyone had the right to freely express their citizenship status. Thisled to many minority
communities identifying themselves as Russians, presenting themselves as the indigenous people
of the country where they lived (Muradov and Bakhiş, 2013).
Since the early 2000s, Azerbaijan has witnessed a certain increase in the ethnic composition of its
population. Everything considered indicates that this period is characterized by an increase or
stabilization in the share of indigenous ethnic minorities. In other words, from 1828 to 1991, during
the 163-year rule of the Russian-Soviet government, ethno-demographic processes developed
towards the will of the imperial leadership rather than the political will of Azerbaijan (Malikova,
2021). However, shortly after 1991, changes in the ethnic composition of the population became
more pronounced This suggests that within the present political boundaries of Azerbaijan, the
existing ethnic structure closely resembles the ethnic composition during the Russian occupation
(Abbasov,2021).
70 Mert, O. (2004). Turkey's Caucasus policy and Georgia. Istanbul: IQ Kültür Sanat Yayıncılık.
71Lucas, E. R. (1988). On the mechanics of economic development. Journal of Monetary Economics,
22(1), 3-42.
43
Since the early 2000s, Azerbaijan has witnessed a certain increase in the ethnic composition of its
population.Everything considered indicates that this period is characterized by an increase or
stabilization in the share of indigenous ethnic minorities. In other words, from 1828 to 1991, during
the 163-year rule of the Russian-Soviet government, ethno-demographic processes developed
towards the will of the imperial leadership rather than the political will of Azerbaijan (Malikova,
2021). However, shortly after 1991, changes in the ethnic composition of the population became
more pronounced. This suggests that within the present political boundaries of Azerbaijan, the
existing ethnic structure closely resembles the ethnic composition during the Russian occupation
(Abbasov, 2021)⁷³.
3.1.1. Energy Resources

President Ilham Aliyev of Azerbaijan has consistently prioritized the progress of the energy sector over the
past eighteen years. Recently, significant reforms have been implemented in this field, and reconstruction
and constructionactivities have been expanded. With the Rehabilitation Program initiated by the President's
directives, the energy infrastructure has been modernized, and "lost" production capacity has been regained.
The continuity of electricity activities has been improved, the technological structure strengthened, and
infrastructure enhanced (Salimov, 2020)⁷⁴.
Under the Rehabilitation Program, lost electricity in key locations providing electricity to the capital's
infrastructure and industrial facilities, such as Baku, Astara, Sheki, Khachmaz, Shahdag, Sangachal, and
other modular plants, has been recovered both regionally and regionally. A series of power plants and
substations, including 500, 330, 320, 110-kilovolt overhead lines, have been rebuilt. High-voltage power
transmission lines have been modernized, and the SCADA control system for energy management has been
reorganized (Mammadov, 1998).
Currently, comprehensive steps are being taken to provide electricity to residential areas, lines are
being laid,and new substations are being established. The establishment of a "green energy" area
in the recovered regions is also on the agenda. It is crucial to note that the President declared these
recovered regions as a "green energy" area. In these regions, primarily renewable energy sources
such as hydro, solar, and wind energy will be utilized (Eldaroglu, 2001: 153)⁷7.
73 Murshudova, R. (2020). The impact of financial market development on economic growth: The case of Georgia.
Master'sthesis. Uşak University, Graduate School of Education, Uşak.
74 Namchavadze, B. (2016). How the Georgian banking system is developing. Retrieved from
https://forbes.ge/news/1674/rogor-viTardeba-qarTuli-sabanko- sistema Access date: June 21, 2017.
75 Neciyev, E., & Gasımlı,
T. (2022). Azerbaijan's Political and Economic Relations with Russia within the Scope of
Russia'sSouth Caucasus Policy (1990-2020). Turkuaz International Turkish World Scientific Research Journal, 3(2),
141-149.
44
Interest in renewable energy sources is increasing among both local and foreign investors in
Azerbaijan. This is not coincidental, as Azerbaijan is rich in renewable energy sources. The goal
has been set to increasethe share of renewable energy sources in electricity generation to 30% by
2030, aiming to effectively utilizethe potential of solar and wind energy (Huseynov, 2005: 45)⁷⁶.
Additionally, the commissioning of approximately 1,500 megawatts of new energy capacity is
planned by 2030, and this goal is expected to be achieved through private investments (Salimov,
2020).
On May 3, President Ilham Aliyev signed an order on "measures to create a 'green energy' zone in
the liberated territories of the Republic of Azerbaijan." According to the decree, $1,391,040 from
the President'sReserve Fund of the state budget of the Republic of Azerbaijan for 2021 has been
allocated to the Ministry of Energy to attract an international consulting firm to develop a concept
and master plan for creating a "green energy" zone in the liberated territories (Abbasov, 2021)⁷⁷.
Within the framework of the efforts made to restore the energy system in Karabakh, it is essential
to note that Azerenergy, under the directives of the President, has established the electrical
infrastructure in all the liberated territories and developed the Karabakh Energy Strategy
(Ibrahimkhalilov, 2023)⁷⁸. This strategy envisions the construction of 110-kilovolt substations in
each region and their integration into the national system through high-voltage power lines.
Azerenergy has started the construction of two 110-kilovolt substations in the Aghdam region,
selected as a regional center in Karabakh. Additionally, the 4.8-megawattSugovushan-1 and 3-
megawatt Sugovushan-2 stations have been restored and put into operation. These stations provide
energy to Sugovushan and Talish villages while contributing to the overall electrical supplyby
connecting to the Azerbaijan OJSC's 35/10-kilovolt substation (Heydarov, 2021)⁷⁹.
76 Nişancı,M, Karabıyık, İ, Uçar, M. (2011). Foreign trade and economic growth in upper-middle-income countries.
Journal ofEconomics and Administrative Sciences, Cumhuriyet University, 12 (1), 303-312.
77 Nuri, A., & Süleymanov, E. (2016). Azerbaijan Economy. Baku: Sharq-Qarb Nəşriyyatı.
78 OEC. (2004). Understanding Economic Growth: Macro Level, Industry Level, Firm Level. New York: Palgrave
Macmillan.
79 Oktay, E. (2002). Macroeconomic Theory and Policy. Istanbul: Maltepe University Publications.
45
3.1.2. Tourism Potential
Azerbaijan possesses distinct and rich natural, cultural, and ethnographic elements in its tourism
potential. The country's geographical location, hosting nine different climate zones, diverse and
rich flora and fauna, coastal position, cultural and historical heritage, delightful culinary culture,
and hospitality tradition significantly enhance its tourism potential. The extensive opportunities in
Azerbaijan's tourism sector enablethe country to collaborate with various global organizations on
a large scale (Malikova, 2021: 23).
Azerbaijan has signed intergovernmental agreements on tourism cooperation with many
experiencedcountries in the tourism sector, such as Turkey, Ukraine, Belarus, Greece, and Italy,
and plans to expand thescope of these agreements (Ahmedov, 2010: 11).
The annual organization of the Azerbaijan International Travel and Tourism Fair (AITF) in the
capital since2002 underscores the Azerbaijani government's emphasis on the development of the
tourism sector.Additionally, information about Azerbaijan's tourism potential and opportunities
has been presented in various major cities like Istanbul, Berlin, Moscow, London, Kuwait City,
Kiev, Tbilisi, and Tashkent (Malikova, 2021: 23).
The acceptance of the "State Program for the Development of Tourism in the Republic of
Azerbaijan for 2007-2016" has given new momentum to the development of tourism diversity in
the country. The primarygoal of this program is to implement state tourism policy in accordance
with the "Law on Tourism" and otherrelevant regulations, ensuring the effective use of tourism
resources to support socio-economic developmentand enhance the sector's productivity (Heydarov,
2021)⁸⁰.
The main objectives identified for the development of Azerbaijan's tourism sector include a
comprehensiveexamination and expansion of tourism resources, increasing the diversity of tourist
services and activities, organizing cultural events and tours, ensuring compliance with modern
standards and sustainability,operating sanatoriums and holiday resorts, expanding the construction
of tourism facilities, diversifying tourist routes, and developing various types of tourism.
Prioritizing ecological, cultural, and rural green tourism, as well as defining recreation tourism as
a priority tourism type, aims to enhance Azerbaijan's national traditions, develop its historical and
cultural heritage, distribute and expand publications reflectingthe history of various regions and
cities, and increase the production and sale of handicrafts and souvenirs (Aliyev, 2019; Malikova,
2021: 24)⁸¹.
80 Osmanov, E. (2022). The Impact of Fluctuations in Oil Prices on the Azerbaijani Economy. Master's thesis,
AtatürkUniversity, Institute of Social Sciences, Erzurum.
81 Özbay, R. D. (2014). The Socio-Economic Structure of Georgia, Its Relations with the World and Turkey. Istanbul:
IstanbulChamber of Commerce.
46
Azerbaijan has opportunities to expand its tourism potential. In Azerbaijan, where policies are
implemented to reduce dependence on oil and diversify the economy, the development of the
tourism sector holds great promise. The country possesses extensive resources for the development
of various aspects of the tourism sector. Azerbaijan'sgeographical location and nature make it highly
suitable for the development of nature tourism. Located on the coastof the Caspian Sea and
surrounded by the Greater and Lesser Caucasus Mountains, Azerbaijan consists of approximately
half mountainous areas and the rest expansive plains and depressions (Aliyev, 2019) 82. With over
1,250 rivers and around 250 lakes in the country, this landscape diversity creates a rich ecosystem
with 13 climate types out of 9 found in the country, hosting numerous animal and plant species. The
mountainous regions contribute to the development of winter tourism, mountain sports, and
extreme tourism (Malikova, 2021). Azerbaijan's uniquenatural features, such as mud volcanoes
and volcanoes, also attract tourists. The distinctive landscapes and fauna ofthe Shirvan, Mil, and
Mugan plains provide an ideal environment for safari tourism, fishing, nature excursions, and
wildlife observation. Additionally, the therapeutic thermal waters, mud, oil, and salt caves in
Azerbaijan make a significant contribution to the development of health tourism (Aliyev, 2019).
With the increase in the number of tourists, Azerbaijan boasts over 250 tourism companies catering
to both locals and foreign tourists, operating in various regions of the country. Approximately 600
hotels offering accommodationoptions are available in Azerbaijan (Malikova, 2021) 83. Among the
most preferred luxury hotels in the capital, Baku,are Four Seasons Hotel Baku, Hyatt Regency, JW
Marriott Absheron Baku Hotel, Jumeirah Bilgah Beach Hotel, Bulvar Hotel, Hilton Baku,
Kempinski Hotel Badamdar, Intourist, and Fairmont. Additionally, prominent hotels, recreation
areas, and sports centers in different regions of Azerbaijan include the Caucasus Hotel chain,
Gabaland Entertainment Park in Gabala, Tufandag Winter Tourism Complex, and Shahdag
Tourism Center in Gusar. These facilities, equipped for both sports and tourist activities, are
supported by more than 15 Olympic sports complexes.The president's participation in the openings
of many of these facilities and his support for entrepreneurs in the tourism sector underline the
significance of tourism in the country (Malikova, 2021: 26) 84.
A significant step toward the growth of the tourism sector was the introduction of simplified visas
for citizens of Qatar, Oman, Saudi Arabia, Bahrain, Kuwait, Japan, China, South Korea, Malaysia,
and Singapore at all international airports starting from February 1, 2016. As a result of this
arrangement, there has been a notable increase in the number of tourists arriving in Azerbaijan,
particularly from the United Arab Emirates (UAE) (Aliyev,2019) 85.
80 Özel, H. A. (2012). The Theoretical Foundations of Economic Growth. Journal of Çankırı Karatekin University
Faculty ofEconomics and Administrative Sciences, 2(1), 63-72.
83 Özgüven, A., (1988). Economic Growth, Economic Development, Planning, and Japanese Development. Istanbul:
FilizKitabevi.
84 Pamuk, M. (1995). Caucasus and Azerbaijan: Past, Present, Future. Istanbul: Harpak Publications.
85 Pamuk, Ş. (2007). Economic Growth in the World and Turkey (1820-2005). International Economy and Foreign
TradePolicies, 1(2).
47
3.1. Azerbaijan's Economic Situation.
Azerbaijan is a country open to developments with high potential in both industry and agriculture.
The areas where the Azerbaijani economy stands out will be examined under the following
subsections.
3.1.1. Industrial Sector.

The industrial sector holds critical importance for a country's economic growth, encompassing
chemistry, metallurgy, energy, machinery manufacturing, food, and other industries. It has shown
significant development since World War II. Historically, one of Azerbaijan's most crucial
industrial sectors has been the production of oil refining machinery, capable of meeting 70% of
the USSR's needs (Aliyev, 2019).
In the pre-independence period, the industrial sector had the largest share in Azerbaijan's
economy. In 1988,42.1% of the national income came from the industrial sector. In the same year,
there were 1005 operating enterprises in this sector: 529 in heavy industry, 206 in light industry,
and 263 in the food industry (Abbasov,2021).
The early post-independence years can be viewed as a period of adaptation for industrial
enterprises to a free-market economy. By the end of 1995, the industrial product volume had
fallen below 70% of the 1990levels. During the years 1990-1995, despite an increase in the
number of industrial enterprises from 3800 tomore than 2984, many ceased operations. The private
businesses that emerged during this period were unable to prevent a significant decline in
production volumes. Factors such as social tensions, political instability, and the country facing
a state of war immediately after gaining independence could be cited as reasons for this situation.
Since all industrial enterprises were connected to other states of the Soviet Union, there were
serious problems in the industrial sector after independence. Additionally, low-quality equipment
and machinery rendered production meaningless (Hüseyova, 2018)⁸⁶.
Starting from 1996, the achievement of macroeconomic stability revitalized the Azerbaijani
economy and triggered the opening of new industrial establishments. As a result, approximately
27% of the country foundemployment in the industrial sector (Heydarov, 2021)⁸⁷.
86 Trading Economics (2023). Azerbaijan - GDP from Construction. Retrieved from

https://tr.tradingeconomics.com/azerbaijan/gdp-from-construction Access date: July 1, 2023
87 Trading Economics (2023). Azerbaijan - Balance of Trade. Retrieved from
https://tr.tradingeconomics.com/azerbaijan/balance-of-trade Access date: July 1, 2023
48
The industrial sector in Azerbaijan is generally categorized as follows:
• Heavy industry (metallurgy, energy, machinery manufacturing, forestry and building
materials production,chemistry)
• Light industry (weaving, sewing, etc.)
• Food industry
Winemaking is the most important production branch in the food sector. In light industry, the
main production branches are carpet making, household goods, furniture, leather goods, and
textiles (Hüseyova, 2018)⁸⁸.
Enterprises in consumer goods and textile sectors face challenges in competing with imported
products. Therefore, the establishment of cotton-based integrated facilities is of great importance.
Thus, the expansionof the textile industry is one of the government's main objectives in programs
aimed at developing non-oil sectors (Ehmedov and Hacıyev, 2004)⁸⁹.
In heavy industry, semi-finished and intermediate products are generally produced. The most
critical part of Azerbaijan's heavy industry is the oil industry. Heavy industry enterprises in
Azerbaijan are mostly locatedin the city of Sumgait (Eyyubov, 2001). There are approximately
90 heavy industry enterprises in this city.The government has prepared a 25-year development
program for improving industrial facilities in the region. To implement this program, foreign
investments of 30 billion dollars are needed (Aliyev, 2019)⁹⁰.
88 Panahi, H. (2010). Size of A Country, Openness and The Economic Growth. World Academy of Science, Engineering and
Technology, 66(1), 699-705.
89 Peet, R., & Elaine, H. (2009). Theories of Development: Third Edition: Contentions, Arguments, Alternatives. UnitedKingdom:
Guilford Press.
90 Petrakos, G, Arvanitidis, P. ve Pavleas, S. (2007). Determinants of Economic Growth: The Experts‟ View. DYNREG Working
Papers,
20(1), 1-37.
49
3.1.3. Agricultural Sector
The primary objective of the next phase of economic reforms in Azerbaijan is to find new forms
and mechanisms for agricultural financing. In recent years, the high risks associated with
agricultural production have not attracted private bank financing, and relatively expensive
commercial loans are not entirely suitablefor the development of the agricultural sector. To provide
long-term and cost-effective financing for farmers,a new law on agricultural insurance and the
Azerbaijan Agricultural Credit Scoring System (AzALES) wereimplemented in 2020 (Ahundov,
2019)⁹¹.
It is essential to acknowledge that throughout all the years of Azerbaijan's independence, a

significant portionof investments made in rural production, along with direct financing from the state
budget, has been providedby state credit funds. It is true that international financial institutions
(IFIs) have played a role in shaping theagricultural market base through joint government projects
involving 700 million dollars in soft loans and grants⁹².
However, the state still holds a crucial position in agricultural financing. Additionally, the
Entrepreneurship Development Fund, established by the Ministry of Economy based on the
National Fund for Entrepreneurship Support (NFES) operating since 1992, through the
presidential decree of Ilham Aliyev dated August 1, 2018, has been of great importance to
agricultural enterprises. "During the years of the Fund's operation, approximately 36,000 small
and medium-sized enterprises (SMEs) received around 2.3 billion manats in soft loans. These
financial resources helped create 166,000 new jobs. It is noteworthy that68% of those benefiting
from the SIF are farmers and various agricultural enterprises, receiving about 1.5 billion manats
during the 27 years of the structure's operation" (Ahundov, 2019)⁹³.
91 Pieterse, J. N. (2010). Trends in Development Theory. In Development Theory:

Deconstructions andReconstructions, 2nd eds., 1–18. London: SAGE Publications.
92 Pistone, M. (2009). Economic Growth, University of Wisconsin Madison,
Retrieved fromhttps://mywebspace.wisc.edu/pistone/web/sum09ta5.PDF
Access date: July 21, 2023
93 Rahimov, V., Adigozalov, S., & Mammadov, F. (2016). Determinants of inflation in Azerbaijan. Baku,
Azerbaijan: CentralBank of the Republic of Azerbaijan.
50
In recent years, SIF (Entrepreneurship Development Fund) has provided 155.7 million AZN in
soft loans for the development of the agricultural sector in Azerbaijan. Specifically, funding of
110.7 million manats has been allocated for establishing 26 complexes for pedigree livestock
farming, 25 million manats for setting up 12 dairy processing plants, 14.9 million manats for
establishing 10 meat processing plants, and
5.1 million manats for livestock (Ahundov, 2019)⁹⁴.
To implement the new export strategy in the short term, additional investments in the agricultural
industry complex, focusing on activating the production segment, are required. The government
sets a new task for the agricultural sector, aiming to increase the export of high-value-added
products, enhance profitability, and reduce production costs by establishing efficient agricultural
clusters. To achieve this, industrial-type agricultural parks are being established in the country
where modern processing infrastructure will be localized, large grain and livestock complexes will
be set up, and material and technical foundations will becreated to transition from small disposable
areas. Changes in the structure of agriculture are among the newtrends in the agricultural sector:
viticulture, increased production of valuable industrial crops (cotton, tobacco, tea), and
consequently both light and export-oriented food industry (Ataşov, 2017)⁹7.
In 2018, agricultural enterprises in Azerbaijan increased their net profits by 54%. The total net
profit of economic entities operating in the agricultural sector in Azerbaijan in 2018 was
96,917,000 manats, which is 54.3% higher than in 2017. 81 enterprises closed the reporting year
with losses (a 15.6% decrease), totaling 19,588,300 manats. The sector's profitability reached
20.1% at the end of 2018 compared to 14.1% in 2017.Overall, in 2018, an average of 18,072 people
worked in agricultural enterprises, with their total salaries amounting to 54,978,000 manats
(Heydarov, 2021)⁹⁶.
94Rehman, A., Cismas, L. M., & Milin, I. A. (2022). “The Three Evils”: Inflation, Poverty, and Unemployment's
Shadow on Economic Progress—A Novel Exploration from the Asymmetric Technique. Sustainability. The Human
Journey, 14(14), 8642.
95 Resullu, R., & Aslanlı, K. (2011). Azerbaijan-Turkey economic relations: main trends and achievements. Baku:
BDU
96 Romer, M. P. (1986), Increasing Returns and Long-Run Growth. The Journal of Political Economy, 95(5), 1002-
1037.
51
According to the State Statistics Committee, by the end of 2019, this figure increased to 26,091
million manats or 15.9%, reaching 190,080 million manats. Over the past five years, the number
of industrial enterprises in the country decreased by 12%, reaching 1,471 by the end of 2019.
Consequently, 170 enterprises ceased operations during the year. In 2019, 93.5% or 1,376 of the
enterprises were profitable, and 95% operated at a loss. Compared to 2018, the profit amount of
enterprises increased by 3.5% to 120,622million manats, and the loss increased by 42.6% to 27,926
million manats. The total profit of agricultural enterprises was 92,696 million manats (4.4%)
(Table 3)⁹⁷.
Table 3. Basic Economic Indicators of Agricultural Enterprises

Indicators names 2015 2016 2017 2018 2019
The number of 1659 1592 1608 1641 1471

operating
enterprises
Employees working for 1530 1488 1512 1560 1376
profit
Employees working at a 129 104 96 81 95
loss
Profit amount, thousand 53275 92290 83720 116506 120622
manats
Damage amount, 13512 17043 20906 19587 27926

thousand manats
Gross profit 39763 75246 62814 96918 92696
Revenue generated from 391801 441505 504031 558807 622035

sales
Profit ( loss) in crop 20241 40267 32235 56577 68795

production
Total income 84990 119130 115024 163898 190080
Labor costs 3686 3526 4019 4310 4752
Source: State Statistical Committee of Azerbaijan, Access Date: 1.06.2023
97 Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98(5), 71-102.
52
3.1.1. Construction Sector.
During Azerbaijan's period of independence, the growth of the oil sector has directly influenced the
development ofthe construction industry. Revenue derived from the oil sector has elevated living
standards, consequently increasingdemand for new living spaces such as residences, youth centers,
and shopping complexes. In this period, the construction sector has emerged as one of Azerbaijan's
leading industries, with Turkish companies playing a significant role in these construction projects
(Aliyev, 2019)⁹⁸.
Figure 7. Share of the Construction Sector in GDP (%)

(Source: https://tr.tradingeconomics.com/azerbaijan/gdp-from-construction Access Date:
01.07.2023).
As indicated in Figure 7, the share of the construction sector in Gross Domestic Product (GDP) has
significantly increased. While constituting only 3.7% of the GDP in 1995, the construction sector
experienced substantial growth in the period after 1995, influenced by foreign investments in the oil
sector. The highest percentage was observed in 1998, contributing to 13% of the GDP. Although a partial
increase has been noted since 2007, there has been a decline in recent years (Aliyev, 2019)⁹⁹.
Among the prominent construction companies in Azerbaijan are specialized firms like SOCAR (State Oil
Company of the Azerbaijan Republic), Azersutikinti, Azersanayetikinti, and Azerenerjitikinti.
Additionally, organizations such as Caspian Shipping Company and Azerbaijan Railways Department
actively play a role in the construction sector.
98 Rostow, W.W. (1960). The Stages of Economic Growth: A Non-Communist Manifesto, Cambridge. United
Kingdom:Cambridge University Press.
99 Sachs, W. (1992). The Development Dictionary: A Guide to Knowledge as Power. United Kingdom: Zed Books.
53
3.1.1. Unemployment
Rapid population growth and a shift toward a younger demographic have contributed to the
unemployment issue inAzerbaijan. The expansion of the education system has led to an influx of
graduates, resulting in laborsurplus in certain sectors. Additionally, the key driver of economic
growth, the oil and gas sector, has created askill mismatchin the labor market by offering limited
job opportunities (Mammadova, 2016)¹⁰⁰.
Policies, investments, and government expenditures play a crucial role in effectively reducing and
sustaining unemployment rates in a country. In the case of Azerbaijan, recent World Bank data
indicates an unemployment rate of 6.6% in 2021. Since 1992, the unemployment rate has steadily
increased from an average of 1%, reaching its peak at 11.8% in 2000. Fortunately, the
unemployment rate has been consistently decreasing since 2000 (WorldBank, 2021).
Government expenditures and strategic investments have significantly contributed to alleviating
unemployment issues in Azerbaijan. Evidence of this lies in the commendable reduction of poverty
levels from 49% in 2003 to 7% in 2011 as a result of well-implemented reforms. Particularly in
2008, despite the global financial crisis affecting many countries, Azerbaijan managed to maintain
a stable unemployment rate. This resilience can be attributed to aconservative approach to public
offerings, minimal inflow and outflow offunds into the stock market, and prudentmanagement by
companies in the country. Consequently, the country witnessed no capital flight during the crisis,
allowing it to navigate the storm more effectively and experience relatively mild economic
downturns (Partalıyeva,2022).
The Azerbaijani government has implemented various policies to combat unemployment and
create a more inclusive labor market. Initiatives such as vocational training programs,
entrepreneurship support, and investments in non-oilsectors aim to enhance the employability of
the workforce and stimulate job creation. Additionally, the government actively seeks foreign
investment to promote economic diversification and reduce dependence on the oil sector. These
efforts aim to open new avenues for job opportunities and reduce the burden of unemployment
(Mahammadnabi, 2018)¹⁰¹.
In conclusion, Azerbaijan's successful efforts to reduce unemployment and manage economic
crises can be attributed to the government's prudent policies, targeted investments, and wise
financial management. These measures have contributed to a stable labor market and positioned
Azerbaijan for continuous growth and development in the future.
100 Saray, M. (1993). Georgia and Georgians. Caucasus Studies, 3.

101 Sarel, M. (1996). Nonlinear effects of inflation on economic growth. Staff Papers, 43(1), 199-215.
54
3.1.1. Inflation
Inflation has been a recurring issue for the Azerbaijani economy. Over the years, the country has
experienced periods of high inflation primarily due to external factors such as fluctuations in
global oil prices and geopolitical developments in the region. Additionally, the country's
dependence on imports for specific goodsand services exposes it to exchange rate and import
inflation risks. The impact of inflation is felt throughout theeconomy, leading to a decline in citizens'
purchasing power and an increase in the cost of living. Rising inflation erodes real wages for
workers and lowers the overall living standards, especially for vulnerable populations (Abuselidze,
2019)¹⁰².
Azerbaijan is a small, open economy, with the most significant factor fueling economic growth
being oil exports. As expected, inflation in such an economy will be largely directed by trade
balances and external price shocks, along with factors affected by them. In particular, inflation in
Azerbaijan has been influenced byhigh domestic consumption, monetary expansion resulting from
the oil boom, and hence an expansive fiscal policy. Since 2004, the Central Bank of the Republic
of Azerbaijan (CBAR) adopted a fixed exchange rate regime to prevent the appreciation of the
exchange rate and curb inflation expectations. Although inflation increased until 2008, it stabilized
in the following six years despite the global financial crisis. However, inflation gained momentum
from 2015 onwards, following the decision of the CBAR to transition to a floating exchange rate
regime in the face of falling oil prices (Rahimov, 2016)¹⁰³.
Until 2009, Azerbaijan experienced volatile inflation, shifting to a low-inflation environment since
then. The dynamics of headline inflation over the period between 2000 and 2015 are presented on
a quarterly basis. Headline inflation in Azerbaijan exhibited fluctuations in the first half of the
examined period. The figure indicates that inflation reached double digits in 2006 and peaked in
2008 at around 24%.
However, since 2009, inflation has been relatively stable. The period from 2005 to 2008 was also
characterized bya substantial influx of petrodollars into the country and a significant increase in
government expenditures fueled by oil revenues. Between 2009 and 2016, inflation rates in
Azerbaijan consistently remained in single-digit ranges. In 2016, the inflation rate was recorded at
12.4%, experiencing a slight increase to 12.9% in 2017. Subsequently, from2017 to 2021, inflation
continued to progress steadily without further increases until reaching 6.7% in 2021 (Partalıyeva,
2022)¹⁰⁴.
102 Saidu, B. M.,

& Muhammad, A. A. (2015). Do unemployment and inflation substantially affect economic
growth. Journal ofEconomics and Development Studies, 3(2), 132- 139.
103 Salimov,
N. (2020). The Role of the Energy Sector in the Azerbaijani Economy and Relations with Turkey (1991-
2018).Master's thesis, Marmara University, Institute of Social Sciences, Istanbul.
104 Salukvadze, J., & Golubchikov, O. (2016). City as geopolitics: Tbilisi, Georgia—A globalizing metropolis in a
turbulentregion. Cities, 52(1), 39-54.
55
3.1.1. GDP Development
Azerbaijan, as one of the leading power centers in the South Caucasus, has seen remarkable
economic growth, primarily anchored in its abundant reserves of oil and natural gas, constituting
an indispensable cornerstone of the country's economic strength. The country's GDP reached a
volume of 59 billion manats in 2014, with 39% of this volume attributed to the oil and gas sector.
This period witnessed a staggering surge in the country's economy, growing by more than
sevenfold in the last decade. Simultaneously, per capita GDP increased significantly by a factor of
6.7. This achievement gains even greater significance when compared with Kazakhstan, the
second- strongest economy within the Commonwealth of Independent States (CIS), which only
achieved a sixfold increaseby a similar criterion (Najiyev and Gasimli, 2022)¹⁰7.
The developmental process of Azerbaijan's GDP generally commences with the agricultural sector,
which hastraditionally been a significant part of the country's economy, contributing to both local
food supply and export opportunities. This sector encompasses crop cultivation, livestock
production, and related activities. Azerbaijan is rich in energy resources, particularly in oil and
natural gas. The extraction and export of these resources, along withrelated industries such as
refining and petrochemicals, have historically played a crucial role in the country's GDP
development (Abbasov, 2021)¹⁰⁶.
It is evident that Azerbaijan's economic trajectory has strengthened its position as the leading
economic player in the CIS, surpassing its Caucasian counterparts by twice the margin. As
disclosed by Aras, Suleymanov, and Huseynov in 2013, the driving forces of economic growth
diversified during this period.The commissioning of theBaku-Tbilisi-Ceyhan oil pipeline in 2005
marked a profound transformation in the country's economy. This turning point accelerated the
increase in oil production and exports, providing a revenue stream to the country's economy. The
growing revenues from oil had the most noticeable impact on the state budget in 2008. During this
significant year, transfers from the Azerbaijan Oil Fund to the budget experienced a surprising
increase of more than fourfold, resulting in a remarkable leap in state revenues. As indicated by
the 2015 data, the dominance of the oil sector wasstrongly established, encompassing a share that
represented 38.5% of the estimated seventy billion dollars of GDP, 93.5% of total exports, 66% of
budget revenues, and a notable 33.9% (Partaliyeva, 2022)¹⁰⁷.
105 Sapmaz, A. (2008). Russia's Transcaucasian Policy and Its Effects on Turkey. Istanbul: Ötüken Publications.
106 Saray, M. (1993). Georgia and Georgians. Caucasus Studies, 3.
107 Sarel, M. (1996). Nonlinear effects of inflation on economic growth. Staff Papers, 43(1), 199-215.
56
The increase in oil and natural gas production and exports brought a significant influx of
petrochemical capital to the country, especially when combined with the rise in global oil prices.
This convergence led to the integration ofsubstantial capital derived from oil into the national
economy. Particularly, the trajectory of oil production, startingat 15.6 million tons in 2004 and
peaking at 50.8 million tons in 2010, witnessed an extraordinary ascent. Despite fluctuations, this
upward momentum persisted. However, the global financial turmoil in 2008 cast a shadow over
many sectors, including the oil industry. While 2007 saw a significant increase of 10.3 million
tons compared to 2006, reaching a massive petroleum production of 42.6 million tons, the trend
rapidly changed. In 2008, it reachedits peak with a modest increase of 1.9 million tons¹⁰⁸.
Azerbaijan's GDP has followed a highly volatile course over the years. The GDP, ranging from 4.5
to 13.25 billiondollars between 2000 and 2005, exhibited significant progress in the following
years, particularly with thecontribution of the energy sector. Climbing to the level of 75 billion
dollars between 2010 and 2015, the GDP retreated to around 37 billion dollars in the subsequent
five years. However, showing a renewed upward trend in 2021 and 2022, the GDP has reached
approximately 80 billion dollars¹⁰⁹. (Figure 8)
Figure 8. Changes in GDP Over the Years

(Source: https://tr.tradingeconomics.com/azerbaijan/gdp Access Date: 11.08.2023)
108 Sato, R. (1964). The Harrod-Domar Model vs the Neo-Classical Growth Model". The Economic Journal,
74(294), 380–387
109 Seyidov, S. (2009). The Effects of Foreign Direct Investments on the Azerbaijani Economy. Master's
thesis, IstanbulUniversity, Institute of Social Sciences, Istanbul.
57
3.1.1. Foreign trade
Since 1995, the Central Bank has regulated Azerbaijan's balance of payments in accordance with
internationalstandards. Full liberalization of foreign trade has accelerated the decline of heavy
industries, significantly reduced domestic production, and completely opened up the domestic
market. Measures intended to boost local production faced opposition, notably from international
organizations such as the IMF and the World Bank. In April 2001, a new customs law was enacted
in Azerbaijan (Ibrahimkhalilov, 2023). The government attempted to increase customs duties on
imported products that could be produced domestically to enhance local production. However,
due to the impossibility of reaching agreements with international financial institutions, the fees
could not be raisedto the desired levels. While the tax rate was increased to 15% for some
products, this step is not expected to be sufficient to achieve the desired objectives (Mehdiyev,
2001: 26).
After gaining independence, Azerbaijan experienced trade deficits from 1994 to 1999. However,
the increase in oilexports helped mitigate these deficits (Ibrahimkhalilov, 2023). The
implementation of economic policiesfollowingthe signing of the "Contract of the Century" in
1994 contributed to the growth of the country's foreigntrade volume. Azerbaijan's foreign trade
volume increased by 37% in 2005 compared to 2004 (imports by 34%, exports by 40%)(Nuri and
Suleymanov, 2016: 55).
Due to the excessive appreciation of the manat in 1998, export revenues decreased, leading to a
$470.3 million increase in the trade deficit. Despite a $106.2 million deficit in 1999, the trade
balance has grown since2000, except for 2003. This growth is attributed to a significant increase
in oil exports as the country transitioned to the extractionand exportation phase of oil (Malikova,
2021)¹¹⁰.
It is essential to consider Azerbaijan's foreign trade policy as an integral part of the overall
economic policy. Even slight changes in the structure of foreign trade can impact the country's
material well-being (Awokuse, 2007: 97). Collaboration with foreign countries can offer
significant advantages for ensuring the diversified development of Azerbaijan's national
economy. Therefore, expanding economic relations with foreign countries and developing these
relations are crucial for the formation of Azerbaijan's national economy (Mammadova, 2020).
The country aims to further expand cooperation with foreign countries in socio- economic
development, revising the long- standing system of external economic relations, and establishing
equal, mutually beneficial relationships (Malikova,2021)¹¹¹.
110 Sharma,S. (1997). Making the Human Development Index (HDI) gender-sensitive". Gender & Development,
5(1), 60–61.
111 Sodevmonitor (2023). Growth Rates Announced, We Are Last Among OECD Countries. Retrieved from
https://sodev.org.tr/sodevmonitor-buyume-oranlari- aciklandi-oecd-ulkeleri-arasinda-son-siradayiz/ Access date:
July 21, 2023
58
Figure 9. Balance of Trade (million US dollars, 2000-2021) (Source:
https://tr.tradingeconomics.com/azerbaijan/balance-of-trade Access Date: 01.07.2023)
Figure 9 illustrates the foreign trade balance. Fluctuations and a twelvefold increase are observed
in the foreign trade balance in 2021 compared to the year 2000. In other words, while the foreign
trade balance was $2,917.3 million in 2000, this indicator reached $35,556.4 million in 2021.
Additionally, it can be seen from Graph 2.13 thatthe highest foreign trade balance of the past 20
years occurred in 2008. Thus, in 2008, the foreign trade balance was
$54,926 million. This implies an 18-fold increase compared to 2002-2007. Subsequently, it
decreased by 2.6 timesin 2009, increased by 1.5 times in 2010, and increased by 1.3 times in 2011.
A decrease in foreign trade turnover isevident from 2015 to 2021 (Ibrahımkhalılov, 2023).
In Azerbaijan, the implementation of a series of necessary measures at the state level, efforts to
ensure equal rightsfor all legal entities and individuals in the import and export of strategic
products, prevention of monopolization, accurate definition of domestic market marketing,
simplification of customs relations, liberalization of foreign trade,and the creation of a conducive
investment environment lay the groundwork for increasing the future volume of foreign trade
turnover (Malikova, 2021)¹¹².
112 Sodevmonitor (2023). Growth Rates Announced, We Are Last Among OECD Countries. Retrieved from
https://sodev.org.tr/sodevmonitor-buyume-oranlari- aciklandi-oecd-ulkeleri-arasinda-son-siradayiz/ Access date:
July 21, 2023
59
3.1. Economic Policies Implemented in Azerbaijan.
Under the directive of the President of the Republic of Azerbaijan dated March 16, 2016, and
numbered 1897,12 strategic roadmaps were developed for 11 sectors of the national economy.
The Strategic Roadmap for National Economic Perspectives encompasses short, medium, and
long-term economic development strategies and action plans until 2020, a long-term vision until
2025, and a post-2025 target vision. The document not only outlines development goals and
principles but also covers global trends in every field, a comprehensive diagnosis of the economy,
a SWOT analysis of the current situation, necessary measures, required investments, and
performance indicators. The Strategic Roadmap provides all factors contributing to economic
development, including communication and collaboration opportunities between local and
international private sector representatives. According to the roadmap, public investments act as
a catalyst, while the private sector acts as the locomotive of economic development. It should be
noted that, after the adoption of the Strategic Roadmap, relevant state institutions build their
activities based on more detailed programs for implementation. A feasibility study is conducted
before the implementation of envisagedprojects, and the responsible state institutions oversee
each initiative (Juravlyova and Uzunova, 2009: 152)¹¹³.
To systematically and consistently implement measures aimed at diversifying the economy, three
five-year programs were implemented for the socio-economic development of the regions of the
Republic of Azerbaijanfrom2004 to 2018, based on the relevant decrees and orders of the
President (Ibrahımkhalılov, 2023).
In addition to tasks envisaged in state programs accepted and successfully implemented in the
field of regional development, orders related to additional measures for the socio-economic
development of regions, sustainable development of the non-oil sector, improvement of public
services and social services, and further enhancement of infrastructure and the business
environment in regions have been implemented. These measures aim to stimulate growth in
investments, the establishment of new enterprises, job creation, an increase in employment, and
a reduction in poverty (Osmanov, 2022). During the implementation period of the state programs
from 2004 to 2018,gross domestic product (GDP) increased by 3.3 times, specifically by
2.8 times in the non-oil sector, 2.6 times in industry, and 1.7 times in agriculture. As a result of
measures taken to achieve the set goal, over 2 million new jobs, of which 1.5 million are
permanent, and more than 100,000 new businesses were created in the country. Unemployment
decreased by 5%, and poverty decreased by 5.1%. Extensive efforts conducted within the
framework of state programs have laid a solid foundation for thedevelopment of regions in the
coming years (Heydarov, 2021)¹¹⁴.
113 Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics,
70(1), 65.
114 Szirmai, A.
(2005). The Dynamics of Socio-Economic Development: An Introduction. United Kingdom: Cambridge
University Press.
60
The continuation of efforts in the socio-economic development of country regions, including rural
areas, as well as further improvement of infrastructure and social services to increase employment
and the material well-being of the population, is successfully being pursued under the State Socio-
Economic Development Program in the following years (Ibrahımkhalılov, 2023)¹¹7.
Presently, Azerbaijan has qualitatively established a new economic model, expanded political
and commercial ties between Europe and Asia, and played a significant role in the development
of the Caucasus transportation corridor with major projects. In recent years, the country has
become an international transportation corridor and hub through the implementation of
international cross-border projects initiated andjoined by Azerbaijan. The commissioning of Alat,
the largest international port in the Caspian region, and the Baku-Tbilisi-Kars railway were
historical events (Heydarov, 2021)¹¹⁶. In the early years of the transition period, high inflation was
observed in all post-Soviet countries. Steps towards liberalizing prices, foreign trade, and the
financial sector undoubtedly led to significant increases in overall prices. In such a situation,the
only way out is to balance the level of money in circulation through monetary policy and thus halt
the increase in the general price level. However, the key point here is that, from the perspective of
developing countries, the use of money for economic purposes outside the general price level,
parallel to the goal of balanced and stable growth or the high level of development and elimination
of unemployment (Mammadova,2020).
Since 1995, the Central Bank has pursued a tight monetary policy to curb hyperinflation in the
country. The National Bank has complete control over the country's monetary policy. The Central
Bank has a tight monetary policy. In 1994, the volume of manat emissions decreased from 500%
to 175% in 1995 and increased to 28% in 1997 (Şərifov, 1998: 551-552)¹¹⁷.
At the beginning of 1998, as a result of tight monetary policy, the amount of money in circulation
decreased. However, from the second half of 1999, the amount of money in circulation began to
increase.
115 Şahin, M. (2001). The Effects of Ethnic Distribution on the Political Geography of Transcaucasia. Eurasian
Studies, 19.
116 Şahin, Ş. (2016). Analysis of the Georgian Economy and Turkey-Georgia Trade Relations. Master's thesis, Atatürk
University, Institute of Social Sciences, Erzurum.

117 Şaşmaz, M. Ü. and Yayla, Y. E. (2018). Assessment of Determinants of Economic Development: Economic
Factors. International Journal of Public Finance. 3(2), 249-268.
61
After the adoption of the law on the circulation of the national currency in the "Ruble Zone,"
Azerbaijan introduceditsnational currency, the manat, in November 1992. Initially used alongside
the Russian ruble, Azerbaijan's national currency, the manat, was introduced while the government
announced its transition to a free-market economy. Dueto the small market size initially, the manat
maintained its value but had to carry most of its imports in rubles, leading torising prices in parallel.
The liberalization process started in mid-1993, causing the ruble to depreciate. Simultaneously,
banking sector bankruptcies in 1993-1994 and fears of manat depreciation, especially against the
USdollar, triggered a shift in foreign exchange (Şərifov, 1998: 551-552).
The concurrent use of both currencies for exchange purposes played a role in deepening the
economic crisis in the country, causing some issues in the payment system, foreign trade, and the
balance of payments (Osmanov, 2022).
Finally, since 1994, the manat has been the sole currency in the country. With the adoption of the
Currency Regulation Law in 1994 and the implementation of anti-inflation monetary and credit
policies in 1995, the manat began gaining value and reliability by May 1996. Although the manat
sharply devalued against the US dollar in the early years due to inflation, political and economic
instability, economic measures and strict monetary policies implemented since 1995 resulted in
significant stability in the national currency (Ibrahımkhalılov, 2023)¹¹7.
Due to the Central Bank's policies and supportive oil contracts, increased foreign investment
inflows caused the manat to appreciate against the US dollar in 1997-1998. Besides the overused
national currency, the 1998 crisis in Russia also led to significant declines in export revenues.
However, since 1999, efforts have been made to devaluethemanat in the effective foreign exchange
market to enhance Azerbaijan's trade competitiveness (Mammadova, 2020). In the second half of
1999, with the easing of the exchange rate policies implemented since 1995, the nationalcurrency
began to rise again. Since mid-1999, the national currency has been arranged within a floating
exchange rate regime, with a 7% depreciation against the US dollar to gain a competitive
advantage in exports, in line with the targeted market mechanism (Kamalov, 2000: 65-74)¹²⁰.
119 Şərifov,
C. (1998). The Current State and Development Prospects of the Foreign Exchange Market in Azerbaijan.
Baku:Ministry of Education.
120 Tabachnick, B. G., Fidell, L. S., & Ullman, J. B. (2007). Using multivariate statistics. Boston, MA: Pearson.
62
The devaluation of the manat made export products cheaper abroad but more expensive
domestically. Additionally,the cost of export based on imported raw materials increased, meaning
that the foreign exchange earnings from exports began to return to countries where the currency
appreciated against the manat (Seyidov, 2009)¹²¹.
From 2000 to 2003, the manat experienced a gradual devaluation, but in 2004, it observed a slight
appreciation. Thereasons for the appreciation of the manat include the impact of a 31% increase in
money supply in 2004, substantialforeign exchange inflows into the country, and the growth of oil
and gas production leading to increased GDP. These factors contributed to the appreciation of the
manat (Nuri and Süleymanov, 2016: 278).
The value of the manat, Azerbaijan's national currency, is determined daily on the Baku Interbank
Foreign Exchange. Monetary policy primarily aims to ensure price stability through a system of
measures implemented by the Central Bank. In the Republic of Azerbaijan, monetary policy is
carried out by the Central Bank (Seyidov, 2009)¹²².
121 Taban, S., (2011). Concepts and Models of Economic Growth. Istanbul: Nobel Academic Publishing.
122 Tanıl, G. (2015). Development of Tourism in Batumi and Its Contribution to Regional Development. Doğuş
UniversityJournal, 16(1), 91-107.
63
CHAPTER 4: ECONOMIC OUTLOOK OF GEORGIA
4.1. General Information on Georgia

Within the scope of this heading, general information about Georgia, including demographic
structure and tourismpotential, will be examined under sub-headings.
4.1.1. Demographic Structure

As of 2023, Georgia's population is 3,726,909. The Georgian community constitutes the majority
with 65%, followed by Armenians with 11%, and Turks and Russians each accounting for 10%.
Adjarans, Abkhazians, Ossetians, and other small ethnic groups make up the remaining
population. 89% of the population is Christian, while the remaining 11% is Muslim (Demir, 2003:
169).
In the South Ossetia Autonomous Region, Osetians, who have no ethnic connection with
Georgians, live (Saray, 1993: 14). Osetians are generally Muslims and use a language similar to
Persian. Additionally, Abkhazians are another group with no kinship with Georgians, living in
their autonomous republic in the northwest of the country. Among Abkhazians, there are
individuals practicing both Islam and Christianity (Avşar, 1994: 21).
Among other communities living in the country, Armenians are active in the trade sector, Greeks
stand out in craftsand industry, and Russians and Azerbaijanis (Şahin, 2001: 40).
Georgia is administratively divided into two autonomous republics and one autonomous region,
along with 12 regions, 8 provinces, and 63 districts. Georgians refer to themselves as "Kartveli"
due to their legendary ancestor Kartlos. Their language is called "Kartuli," and their country is
referred to as "Sakartvelo," consisting of many lineages (Pamuk, 1995: 114)¹²³.
The populations of Georgia's two autonomous republics are approximately 230,000 for Abkhazia
and 400,000 for Adjara. The population of the autonomous region of South Ossetia is around
99,000 (Mert, 2004: 108). According to unofficial data, the majority of the approximately
200,000 Georgians living in Abkhazia are in a migrant status within the country (Sapmaz, 2008:
34-35). The share of the Georgian population in the country's overall populationdistribution is
83%. Georgia has the lowest "ratio of the main ethnic group to the overall population" in the
South Caucasus region, leading to increased influence from other ethnic groups under state
political control (Pamuk, 1995:114)¹²⁴.
123 Tenzin, U. (2019). The Nexus

among Economic Growth, Inflation, and Unemployment in Bhutan. South Asia
EconomicJournal, 20(1), 94-105.
124 Tıraş,
H. H. (2019). Human Development Indicators for Turkey. Journal of Knowledge Economy and
Management, 14(1),15-31.
64
Muslim communities in Georgia include Adjarans, Abkhazians, Azerbaijanis, Kurds, and
Ossetians. Half of the population of the Autonomous Republic of Adjara and 40% of Abkhazia's
population are followers of the Islamic faith (Mert, 2004: 109).
Today, while the majority of Georgians, numbering 3,700,000, live in Georgia, it is estimated that
there are around 1,500,000 individuals of Georgian origin in Turkey. Furthermore, there are
390,000 Georgians in Russia, 150,000 in the United States, and 50,000 in Azerbaijan, Iran, and
Western European countries each, with 34,000 in Ukraine. The Adjarians in Batumi and
surrounding areas are essentially Kipchak Turks (Sapmaz, 2008: 34-35).
The Republic of Georgia has administrative units, including the main country along with the
Autonomous Republicsof Abkhazia and Adjara and the Autonomous Region of South Ossetia.
Both South Ossetia and Abkhazia share a common border with Russia and these regions seek
separation from Georgia to join Russia (Aslan, 2014: 8)¹²7.
Georgians live outside of Georgia, especially in the CIS, Turkey, and the USA. The majority of
Georgians in Turkeyand some in Georgia are Muslims. The transition of the country to Russian
rule in the 19th century led to the migration of a significant portion of the existing Muslim
population to Turkey (Mert, 2004).
The rapid increase in the Turkish population in Turkey affects other ethnic groups, making relations
between Turkishand Georgian communities directly related to population distribution and growth
rate. The dissolution of the Communist Party has resulted in a rapid increase in democratic
tendencies. There is a high literacy rate in Georgia,and the language of education is Georgian, the
official language. Russian, like in other former Soviet republics, is the second most spoken
language by many, but the standard of living is quite low. The majority of the population lives
below the poverty line, including additional income (Aslan, 2014: 9)¹²⁶.
125 Tıraş, H. H., & Ağır, H. (2018, April). Evaluation of Organization of Islamic
Cooperation Member Countriesin
Terms of Human Development Indicators. Journal of Social Economic Research, 18(35), 20-40.
126 Trading Economics (2023). Azerbaijan - GDP from Construction. Retrieved from
65
The education system in Georgia includes pre-school, basic education (primary-secondary
education), higher education (undergraduate-postgraduate), and postgraduate education levels.
According to data from the 1999-2000academic year, 3305 schools, including 104 private ones,
are in operation. The total number of students is 725 ,200.There are 24 state higher education
institutions, 8 subunits, and 163 private higher education institutions throughoutthe country.
These institutions have a total of 131,000 students, with 45.3% (59,600 students) attending for free,
24.7% (32,500)enrolled in fee-based programs at state higher education institutions, and 30%
(39,000) studying in private higher education institutions (Aslan, 2014)¹²⁷.
Georgia, predominantly influenced by Christianity, has developed a distinctive culture. The

official language withits unique alphabet is Georgian (Sapmaz, 2008).
4.1.2. Tourism Potential.
The tourism industry holds significant importance for countries like Georgia, where physical
capacity is limited. Although the sector cannot guarantee continuous growth on its own,
advancements and developments in tourism are crucial for attracting foreign investments to
developing countries like Georgia. The contribution of the tourism sector in balancing losses
arising from low agricultural productivity and safeguarding unskilled labor from unemployment
is undeniable. The country, with its coastline along the Black Sea, mountains suitable for winter
tourism, and abundant forested areas, has become attractive to tourists. Additionally, its proximity
to European countries provides extra advantages. Considering all these factors, it can be stated that
the tourism sector is one of the fastest-growing and most dynamic sectors (Tanıl, 2015: 1).
However, due to security problems and economic stagnation faced in the early 1990s, the sector
couldn't develop, leading to significant declines in tourist numbers. Improvement is required in
accommodation, international transportation services, and many other sub-sectors. Some factors
hindering the growth of the tourism sector includethe lack of qualified personnel and services,
advertising and image problems, low diversity of tourist activities, insufficient tourism
infrastructure, and security issues (Alsırt, 2009: 66-67)¹²⁸.
127 Trading Economics (2023). Azerbaijan - Balance of Trade. Retrieved from

ttps://tr.tradingeconomics.com/azerbaijan/balance-of-trade Access date: July 1, 2023
128 Trading Economics (2023). Georgia - Inflation Rate. Retrieved from
https://tr.tradingeconomics.com/georgia/inflation-cpiAccess date: July 1, 2023
66
In 2003, the Georgian government enacted a new law to encourage investments in the tourism
industry. Accordingto this new regulation, tourist facilities will receive a 20% discount on VAT
and, depending on the investment amount, hotels will be exempt from income tax for 6, 7, or 10
years when investing more than $0.25 million in mountainous areas and $3 million in other regions
(Özbay, 2014: 168)¹²⁹.
With the support of international organizations like EBRD, Georgia has taken significant steps to
improve its tourism infrastructure. Through collaboration between the World Tourism
Organization (UNWTO) and UNESCO,the implementation of the "Silk Road Project" has been
encouraged. This project aims to promote infrastructure development among participant countries
(Kartal, 2007: 64).
An agreement signed between Turkey and Georgia in 2011, which came into effect in December
of the same year,allows citizens of both countries to travel with identity cards. As a result, the
number of people traveling from Turkey to Georgia increased from 738,085 in 2011 to 1,533,236
in 2012. This increase significantly contributed toa 57% growth in the number of visitors to
Georgia from 2011 to 2012 (Özbay, 2014). Additionally, in 2014, the largest proportion of visitors
to Georgia came from Turkey, followed by Armenia, Azerbaijan, Russia, and Ukraine.
Approximately 90% of visitors came from these countries, indicating that geographical proximity
is the most significant factor influencing visits to the country (Şahin, 2016)¹³⁰.
129 Türedi,
S. ve Berber, M. (2010). Relationship between financial development, trade openness, and economic
growth: An analysis on Turkey. Erciyes University Journal of Economics and Administrative Sciences, 35, 301-316.
130 Ullah,K. M., Masum, F. H., Field, J. L., & Dwivedi, P. (2023). Designing a GIS-based supply chain for producing
carinata-based sustainable aviation fuel in Georgia. USA: Biofuels, Bioproducts and Biorefining.
67
4.1. Economic Situation of Georgia.
Georgia, which had a relatively high standard of living throughout the existence of the Soviet
Union, faced a severeeconomic downturn upon gaining independence. The period saw a peak in
inflation, a decline in industrial and agricultural production, a decrease in tourist flow, and an
increase in unemployment. However, the economic declinewas halted from 1995 onwards due to
an economic stabilization program implemented in 1994, leading to positiveprogress for the first
time. This positive trend continued in the subsequent years. In 1998, when looking at the sectoral
distribution of GDP, it was observed that the largest share, 30%, belonged to the agricultural
sector. It wasfollowed by trade, services, and the industrial sector. However, the second half of
1998 presented various challengesfor Georgia. The Abkhazia crisis, mistakes in fiscal policies,
and the uncurbed corruption aggravated internal conditions. When the economic crisis in Russia
in the same year is added, the country's economy suffered a significant blow (Demir, 2003:
224)¹³¹.
Georgia's economic situation, its military capabilities, and its population are far behind the
predominant power in the region, Russia. While a decreasing trend is observed in exports, the
main reasons for this situation are identifiedas fluctuations in domestic politics, difficulties in
transitioning to a free-market economy, energy shortages, and theinability to implement modern
methods (Sapmaz, 2008: 49). However, there has been no increase in imports. The revitalization
of economic activities, an increase in demand for consumer goods, and especially the country's
economic dependence on the outside world have led to this situation. While exports mainly consist
of raw materialsand natural resources, Russia has been the largest source of imports, followed by
Azerbaijan, Turkey, the United States, and Ukraine. Among imports, petroleum and petroleum
products lead, with machinery and equipment, light industrial products, and food industry
products also holding a significant place. Sectors that attract the most foreigncapital include
industry, communication, and the food industry (Demir, 2003: 228).
Investment in Georgia from 1992 to 1998 was led by Israel, followed by Ireland, Russia, the
United Kingdom, Turkey, and the United States. The EU has strengthened its relations with
Georgia and provided support in variousareas (Kanbolat, 2004: 107).
Economic ties between Georgia and Turkey have rapidly developed in recent years, thanks to
improvements in theforeign investment environment and economic recovery. In 2002, Turkey's
foreign trade volume with Georgia was
$241 million, and this figure increased to $600 million in 2006. This increase made Turkey the
fourth-largest investor in Georgia (Aslan, 2014: 50)¹³².
131 Turan, T. (2008), Introduction to Economic Growth Theory. Istanbul: Yalın Publishing.
132 Tutberidze,
M. (2021). The Georgian Resorts as a Basis for Wellness Tourism Development. Georgian
GeographicalJournal, 1(1).
68
In recent years, economic growth has been experienced in sectors such as industry, trade,
transportation, hospitality,and catering. The construction sector has become one of the rapidly
growing areas of the country's economy, supported mainly by domestic demand. However,
projects supported by external financing sources,such as the Baku-Supsa and Baku-Ceyhan oil
pipelines and energy and communication projects like the Shah Deniz-Turkey gas pipeline, have
also played a significant role (Demir, 2003).
Since the early 1990s, privatization processes have been taking place in Georgia. Privatization has
been used as a significant tool in the restructuring of the economy and transitioning to a free-
market economy. The economic reforms in Georgia aim to privatize all industries except
infrastructure and strategic enterprises. Eighty percent of small and medium-sized enterprises in
Georgia have been privatized. Of the privatized enterprises, 28.5% are in theagricultural sector,
18.5% in construction, and 15.2% in the industrial sector. The energy sector has the lowest
privatization rate (Aslan, 2014: 51)¹³³.
Looking at the broader picture of Georgia's economic situation, it is essential to acknowledge the
challenges faced after gaining independence. While Georgia had a relatively high standard of
living throughout the Soviet era, the transition to independence led to a severe economic downturn.
Inflation soared, industrial and agricultural production declined, and the country experienced a
reduction in tourist flow along with an increase in unemployment. The economic decline persisted
until 1994 when an economic stabilization program was implemented, resulting in a positive turn
of events. However, challenges such as the Abkhazia crisis, fiscal policy errors, and corruption
hindered progress in the latter part of 1998. The economic crisis in Russia during the same period
further exacerbated Georgia's economic challenges (Demir, 2003: 224)¹³⁴.
Georgia's economic situation, military capabilities, and population place it significantly behind the
predominant regional power, Russia. The country has witnessed a decreasing trend in exports,
attributed to fluctuations in domestic politics, challenges in transitioning to a free-market
economy, energy shortages, and difficulties in implementing modern methods (Sapmaz, 2008: 49).
On the import side, there has been no noticeable increase. Economic revitalization, an upsurge in
demand for consumer goods, and the country's economic dependence on external sources have
contributed to this situation. While exports primarily consist of raw materials and natural
resources, Russia remains the largest source of imports, followed by Azerbaijan, Turkey, the
United States, and Ukraine. Among the imports, petroleum and petroleum products take the lead,
with machinery and equipment, lightindustrial products, and food industry products also playing
a significant role. Sectors attracting the most foreign capital include industry, communication, and
the food industry (Demir, 2003: 228).
133 TÜİK, 2017. "Turkish Statistical Institute, Entrepreneurship, Economic Growth, and Development Data". Access
date: July21, 2023
134 Türk, İ. (1992). Fiscal Policy. Ankara: Turhan Kitabevi.
69
4.1.1. Industrial Sector
The industrial sector holds significant importance in Georgia's economy, encompassing key
branches such as iron and steel, non-ferrous metallurgy, engineering, chemistry, construction
materials, light industry and wood processing, food processing, machinery production,
metalworking, timber and paper, chemical and petrochemical industry, electricity generation,
petroleum products, flour and grain processing, and feed industry (Esen, 2011: 7). The country's
industrial infrastructure relies heavily on iron and steel processing facilities and manganese
processing plants. However, due to technological limitations and energy shortages, these facilities
operate below full capacity.Electrical energy is critical for these facilities to operate at optimal
capacity and for material transportation. Accelerating the privatization process is imperative for
the efficient operation of industrial facilities and reducing their economic burdens. Approximately
60% of industrial production comprises food and light industrial products. In the light industry
sector, raw materials such as wool, leather, pure silk, nylon, and cotton are imported for use in
textile, knitting, clothing, and footwear production (Yüzal, 2012: 7)¹³7.
4.1.2. Agricultural Sector
In the aftermath of the economic crisis following independence, the agriculture and forestry
management sector hasplayed a pivotal role in Georgia's economy, employing approximately 40%
of the population. Duringthe Soviet era,Georgia was positioned as a leading producer of citrus
fruits, fruit, wine grapes, and vegetables.However, despite over half of its land being suitable for
agriculture, the country had to import half of its grainneeds (Aslan, 2014: 51). In recent times,
private-sector management has taken over agricultural production. Low-cost agricultural loans
provided externally have contributed to the sector's recent growth. The state actively participates
only in tea and seed production. Notable agricultural products include tobacco, tea, citrusfruits,
sunflower, and wine grapes (Şahin, 2016). While Georgia ranks in the top ten globally for hazelnut
production, it imports 80% of its grain needs. Challenges such as the lack of modern farming
equipment, quality fertilizers, standardization issues, transportationand packaging problems, and
the absence of integrated processing facilities hinder the growth of the agricultural sector.
Particularly, the absence of significant producers, excessive land fragmentation, and the lack of
bulk buyers complicate the transportation and marketing of products. Despite favorable geographic
and climatic conditions for livestock, there is a lack of interest in the livestock sector, leading to a
substantial decline in livestock numbers post-independence (Esen, 2011: 6).
135 Türedi,
S. ve Berber, M. (2010). Relationship between financial development, trade openness, and economic
growth: Ananalysis on Turkey. Erciyes University Journal of Economics and Administrative Sciences, 35, 301-316.
70
4.1.1. Construction Sector
The construction sector plays a crucial role in the Georgian economy, influencing various aspects
of the economy beyond creating physical infrastructure, including employment, investment, and
overall economic growth. Historically, the construction sector has significantly contributed to
Georgia's Gross Domestic Product (GDP). While the contribution of the construction sector to
Georgia's GDP was approximately $50 million in 2004, currentfigures indicate a contribution of
around $520 million (Figure 10). Considering Georgia's GDP is approximately
$25 billion, the construction sector's contribution is around 1/5th of the total (figure10).
Figure 10. Share of the Construction Sector in GDP (%)

(Source: https://tr.tradingeconomics.com/georgia/gdp-from-construction Access Date:
10.08.2023)
The Role of the Construction Sector in Infrastructure Development
The construction sector has played a pivotal role in the development of critical infrastructure such
as transportation networks (roads, railways, airports), energy facilities, residential and
commercial buildings, and public services (Ullah, 2023). Its value, encompassing both direct and
indirect contributions, has been a significant driving force behind economic activity. The
construction sector, being labor-intensive, provides employment opportunities for various skill
levels, ranging from skilled engineers, architects, and technicians to unskilled laborers
(Abuselidze andZoidze, 2023). This job creation has positive effects on income distribution and
poverty reduction.
71
Large-scale infrastructure projects, including energy facilities, transportation networks, and urban
development initiatives, often require substantial investments. Direct foreign investment in the
construction sector can play a rolein revitalizing economic activity and modernizing the country's
infrastructure (German, 2013). The construction sector in Georgia is closely linked to real estate
development. Urbanization and population growth have increased demand for residential and
commercial properties. Real estate development stimulates economic activity in relatedsectors
such as finance, materials, and services, supporting economic growth (Salukvadze and
Golubchikov, 2016)¹³⁶.
Additionally, as a country with a growing tourism industry, Georgia's construction sector is

involved in the construction and improvement of accommodation infrastructure, including hotels,
resorts, and entertainment venues. The growth of tourism has created opportunities for the
development of facilities that meet the needs of both domestic and international tourists, further
supporting the construction sector (Tutberidze, 2021).
4.1.3. Unemployment
In Georgia, the economic, organizational, and legal framework determining employment policies
and social protection for the unemployed is governed by the Employment Law of July 25, 1991
(Murshudova, 2020).
Unemployment is recognized as the most significant problem faced by the population of Georgia.
According to a survey prepared by the Georgian National Statistics Office, an individual aged 15
and above is considered unemployed if they have not worked at all (not even for an hour) in the
past seven days and actively sought employment for the last month (Namchavadze, 2019).
136 Türk, İ. (1992). Fiscal Policy. Ankara: Turhan Kitabevi.
72
One of the reasons for the high unemployment statistics in Georgia is the significant population
engaged in agriculture and livestock in rural areas, sustaining their livelihood without formal
employment. In other words, theprevalence of hidden unemployment in the country contributes
significantly to the high unemployment figures. Another factor is the mismatch between the low
demand for labor by companies and the difficulty in finding suitableindividuals for employment.
Despite a high number of university or secondary education graduates in the country, there is a
shortage of technically skilled workers (Labadze, 2013: 7).
To address the issue of unemployment, the Georgian government initiated on-the-job training
programs in 2006. Inthis program, private enterprises invited selected "trainees" for on-the-job
training for a period of three months through the program. The cost of trainees was entirely covered
by the state (Namchavadze, 2019). The country continues to implement various measures and
policies to eliminate the problem of unemployment. The unemployment statistics for Georgia from
1998 to 2018 are presented in the following graph.
Figure 11. Unemployment Rate for the Period 1998-2018 (Source:

https://tr.tradingeconomics.com/georgia/unemployment-rate Access Date: 01.07.2023)
As depicted in Figure 11, the highest unemployment rate in Georgia, surpassing 17%, occurred
during the period from 2007 to 2012. Unemployment increased until 2009, reaching 18.3%, then
decreased by 0.9% in 2010, reaching17.4%. These years coincide with the aftermath of the South
Ossetia war. In the last 15 years, the unemployment rate reached its lowest level in 2018 (Georgia
Reforms Associates, 2019: 7).
In 2018, the highest unemployment rate was observed in the age group 20-24 (30.8%), while the
65+ age group traditionally exhibits lower rates, attributed to relatively high inactivity in this age
group. Economically active population constitutes 63.9% of the working-age population (15 years
and above) (Georgian National Statistics Office, 2019)¹³⁷.
137Uğur, M. S. (2017). Amartya Sen’s Capability Approach and a Human-Centered Development View.
Sosyoekonomi, 25(31),91–108.
73
4.1.1. Inflation
Georgia's experience in the field of inflation following the collapse of the Soviet Union has not
been positive. In theinitial years after the USSR's demise, the country faced hyperinflation.
Although the early years of independence were challenging, comprehensive economic reforms
implemented in the country later helped to control inflation and establish macroeconomic
stability (Papava, 2019: 5).
Inflation indicators in externally dependent developing countries like Georgia traditionally do not
accurately reflecteconomic issues characterizing pricing processes. Specifically, notable for
Georgia are factors such as imports exceeding exports by 2.7 times in the trade balance in 2018,
80% of the consumer basket consisting of imported goods, and a high level of dollarization (more
than 60% by the end of 2018).
One of the significant causes of the fluctuating inflation in Georgia is known to be external
factors. In developing countries like Georgia, such inflation is temporary, and central banks do
not alter their policies accordingly. If theydo, the costs will outweigh the benefits. As of January
2011, the inflation rate in the country was recorded at 12.3%.Therefore, the National Bank of
Georgia (NBG) initiated austerity measures. While the Monetary Policy interest rate of the
National Bank of Georgia was set at 8% in January 2011, it was slightly eased in June of the same
year.The reason for this was the prevailing expectation of a decline in international prices for oil
and food (Özbay, 2014:182). Annual inflation statistics for Georgia for the period 1996-2018 are
illustrated in the graph below.
Annual Inflation Rate

41.61
19.25
7.13 8.26 9.2 9.25 7.1 8.69

3.55 4.084.725.584.795.66
0.061.73 3.08 4 2.176.032.63
Series 1
Figure 12. Annual Inflation Rate for the Period 1996-2018 (Source:
https://tr.tradingeconomics.com/georgia/inflation-cpi Access Date: 01.
74
Figure 12 indicates that Georgia, which grappled with hyperinflation in the early years of its
independence, managedto keep the inflation rate below 10% except for the year 2008. The country
experienced a period of stagnation in 2012-2013. The inflation rate, which followed a high
trajectory from 2005 to 2008, decreased by 1.73%, influencedby tensions with Russia and the
financial crisis (Dikkaya, 2015: 592). As of 2018, the inflation rate had decreased to 2.63%.
4.1.4. GDP Development

After gaining independence in the early years following the dissolution of the Soviet Union (1991-
1995), the Georgian government faced significant economic challenges. The country witnessed
improvements in its economywith the Stand-By Agreement signed with the IMF in 1995 and the
transition to a national currency (Alevli, 2012: 9). Successful macroeconomic stability was
achieved through a currency reform implemented in 1996 and 1997, supported by economic
reforms endorsed by the International Monetary Fund and the World Bank (Papava, 2014: 4).
The "Rose Revolution" in November 2003 prompted anti-shadow economy and anti-corruption
policies in the country. Since 2005, a new tax code has significantly reduced the tax burden,
streamlined business establishment procedures, provided employers with complete freedom of
movement concerning employees, and adopted new laborlegislation (Papava, 2013: 8).
Relying on robust foreign investment inflows and substantial government expenditures, the
Georgian economy achieved a growth rate of 10.7% in the period of 2006-2007. However, GDP
growth slowed after August 2008 dueto tensions with Russia and, influenced by the global financial
crisis, contracted to a negative value of 3.6% in 2009as direct foreign investments and remittances
decreased (Murshudova, 2020).
Historically, Georgia has struggled to collect tax revenues. However, recent policies and anti-
corruption measures have contributed to the government's ability to generate higher income
(Murshudova, 2020). In the early 2014, the government released the 2020 Economic Development
Strategy, and former Prime Minister Bidzina IVANISHVILIlaunched the Georgia Co-Investment
Fund, a $6 billion private equity fund for investments in tourism, agriculture,logistics, energy,
infrastructure, and production. Additionally, in mid-2014, Georgia signed a partnership agreement
with the European Union, opening the path for free trade and visa-free travel. The results of these
initiatives have had a positive impact on the country's economy. Figure 4 illustrates Georgia's GDP
statistics for the period 1995- 2018¹³⁸.
138 World Bank (2023). Retrieved from https://www.worldbank.org. Access date: July 1, 2023
75
GDP %
12.5
11.2 11
10.5
9.5 9.4
7.4
6.2 6.3
5.7
4.8 5.4 4.4 4.8 4.8 5.1
3.1 2.9 3.6 3 2.9
2.6 2.4
1.8
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-3.6
Series 1
Figure 13. Distribution of GDP Growth Rate from 1995 to 2019

(Source: Murshudova, 2020)
Figure 13 indicates that Georgia's GDP growth had diverse trends until 2010. Following a 2.4%
growth in 2008, thecountry experienced a -3.6% contraction in 2009, mainly attributed to tensions
with Russia in 2008 and the global financial crisis affecting the entire world (Murshudova, 2020).
Examining the economic performance after 2010, continuous increases in GDP are observed. One
contributing factor to these increases is the reduction in the defenseexpenditure's share within the
GDP since 2011 (Dikkaya, 2015: 595).
76
4.1.1. Foreign Trade.
Since gaining independent state status, Georgia has implemented several significant economic
reforms. Initially, thecountry's foreign economic relations developed organically, but it was only
after the currency reform in 1995 and joining the World Trade Organization in 2000 that the
foundation of Georgia's foreign economic policy was laid. The goal of foreign economic policy
is to ensure the country's sustainable and stable development through the improvement of
investment potential, effective management of external debt, and the development of foreign
trade(Gogorishvili, 2016: 2-3).
Liberal foreign trade policy has been implemented in Georgia since 1991. In other words, a policy
characterized bylow import tariffs, no quantitative restrictions, a specific consumption tax, and
VAT applied to imported and domestically produced goods is pursued (Murshudova, 2020).
The country's trade balance has shown a rapid increase in recent years, resulting in a negative
evaluation of the country's trade balance. The rapid increase in imports is attributed to Georgia's
free trade policy, the potential saturation of the market with imported goods, the limited financial
stability of national companies, and Georgia's inadequate export potential (Gogorishvili, 2016:
2-3).
Georgia's most important trading partners are Turkey, Azerbaijan, Russia, Armenia, Ukraine,
Bulgaria, China, and Germany. Although trade dynamics occasionally change depending on
countries, the listed countries remain Georgia's primary trading partners. The country's major
export products include scrap metal, fresh or dried hazelnuts, ferroalloys, natural grape wine,
precious metal ores, and concentrated nitrogenous fertilizers. Import products include petroleum,
pharmaceuticals, wheat, cigars and cigarettes, and motor vehicles, among others (Murshudova,
2020). Table 4 presents Georgia's export and import statistics for the period 1995-2018.
139 World Bank. (2023). New World Bank Country Classifications by Income Level: 2022-2023. Retrieved from
https://blogs.worldbank.org/opendata/new-world-bank-country-classifications-income-level-2022-2023. Access
date: July 21,2023
140 Yeldan, E. (2010). Theories of economic growth and distribution. Ankara: 1st Edition, Efil Publishing.
77
Table 4. Foreign Trade Statistics for the Period 1995-2018 (million $)
( Source: National Statistics Office of Georgia https://www.geostat.ge/index.php/ka
Access Date: 1.07.2023)

Year
Year Exports Imports Volume Balance
78
As seen in Table 4, the country's performance during the transition to a market economy in the
early years of independence was notably weak. The introduction of free trade, competition
policies, and banking reforms after 1995 contributed to progress in Georgia. However, significant
advancements were not observed until the year 2000(Dikkaya, 2015: 592)¹⁴¹.
The country's accession to the World Trade Organization in 2000 and the signing of free trade
agreements with CIScountries, the United States, Canada, Japan, Switzerland, Norway, and EU
countries played a crucial role in the development of the country's foreign trade (Ministry of
Economy and Sustainable Development, 2015). Examiningthe import figures of the country, it can
be stated that Georgia is a dependent country on foreign trade. The increasesobserved in foreign
trade after the year 2000 can generally be explained by the upward trend in imports.
141 Yeldan, E. (2010). Theories of economic growth and distribution. Ankara: 1st Edition, Efil Publishing.
79
CHAPTER 5 : FINDINGS.
Separate analyses have been conducted for each country within the scope of the study. All statistical
and econometricanalyses in the study were performed using the Eviews 10 software package.
Various assumptions need to be met in regression analysis to ensure the accuracy of the results
and the reliability of the analysis. Therefore, checking the model is crucial. In particular, it
involves assumptions such as the variables exhibiting a normal distribution or,alternatively, the
errors conforming to a normal distribution (Wooldridge, 2015: 174). In this study, as a starting
step, the first evaluation was to check whether each variable exhibited a normal distribution. This
assessment was conducted by examining various statistical criteria, such as the Jarque-Bera test,
kurtosis, and skewness values. Descriptive statistics values for the variables used in the study for
both countries were calculated and presented in Table 7.
Table 7. Descriptive Statistics.

Azerbaijan Georgia
gdpgrowth Inf unemp pop gdpgrowth inf unemp pop
- 0.84007
Average 7.6266 6.0089 7.0074 1.03957 5.53712 7.109340 14.52404
- 0.61926
Median 5.8000 3.6743 5.9500 0.98126 4.98235 5.587837 13.57000
Max. 34.500 20.849 11.780 2.09985 12.5789 39.35750 20.71000 0.15748
- - 3.62954
Min -4.3000 4.8500 0.36692 -6.76044 -0.94365 10.82000
8.5251
Std. Sp. 8.9469 6.6312 2.2124 0.38642 4.43073 7.695509 3.246413 1.00965
- 0.40570
Skewness 0.5423 0.5537 0.7966 0.16808 -0.73125 0.896638 0.681322
Kurtosis 3.1790 3.2141 2.2484 3.03530 3.83835 2.69996 2.999294 3.15670
Jarque-
1.046 1.4316 3.4914 1.8001 3.19698 1.43607 3.21548 1.03972
Bera
Prob. 0.3212 0.4887 0.1745 0.45114 0.20220 0.41247 0.20033 0.55021
Observation 27 27 27 27 27 27 27 27
80
The skewness value being zero and the kurtosis value being three indicate that the variable
conforms to a normal distribution. A skewness value greater than zero implies right skewness,
while a value less than zero implies left skewness. In terms of kurtosis, having a value greater than
three indicates that the variable is more peaked than a normal distribution, and having a value less
than three indicates that it is flatter (Yalçın and Çakmak, 2016: 717). These values are generally
considered suitable for a normal distribution within the
±1 range (Tabachnick, 2007: 314). Therefore, based on the obtained skewness and kurtosis values,
it is determined that all variables for both countries are suitable for a normal distribution.
To assess the normality of the error term, the Jarque-Bera test was employed. A p-value obtained
from the Jarque- Bera test greater than 0.05 at the 5% significance level indicates that the error
terms exhibit a normal distribution (Jarque and Bera, 1987: 166). The results obtained indicate that
the error terms exhibit a normal distribution.
In time series analysis, it is essential for the variables included in the model to be stationary. Non-
stationary variablescan reflect nonexistent or "spurious" relationships in the estimated results.
Therefore, it is necessary to establish thestationarity of the variables used in the study (Greene,
2003: 279).
The stationarity of the variables used in the study was examined using the Augmented Dickey-
Fuller (ADF) stationarity (unit root) test. The number of lags used in the ADF test was determined
using the Akaike informationcriterion. The stationarity test results for the variables are presented
in Table 7. According to the stationarity test results, all variables are stationary at levels, meaning
they do not have a unit root.
81
Table 8. ADF Test Results.
Azerbaijan Georgia
Level Level
gdpgrowth inf unemp pop gdpgrowth inf unemp pop
Constant t- -4.268 -4.430 -3.968 -4.821 -4.679 -8.458 -3.852 -4.07

Statisti
c
Prob. 0.002 0.002 0.005 0.000 0.001 0.000 0.007 0.00
*** *** *** *** *** *** *** ***
Constant t- -4.182 -4.330 -2.717 -5.068 -4.57 -11.06 -4.04 -4.65

and
Statisti
Trended
c
Prob. 0.015 0.011 0.038 0.002 0.007 0.000 0.020 0.00
** ** ** *** *** *** ** ***
Non- t- -4.3626 -4.548 -3.927 -4.878 -4.84 -8.726 -3.93 -3.57

constant Statisti
and c
trendless
Prob. 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.001
*** *** *** *** *** *** *** ***
The fulfillment of necessary assumptions demonstrates that there is no hindrance to the accurate
interpretation ofthe results obtained from the estimated models. The prediction results are
presented in Table 9.
82
Table 9. Forecast Results
Azerbaijan Georgia
c
-9.987932 8.405834
(
(0,021) * (0,000) *
inf 0.160924
0.339692
(0,024) *
(0,000) *
unemp
1.620579 0.277776
(0,000) * (0,032) *
pop -0.025784
4.056681
(0,979)
(0,041) **
R2 0.65 0,69
Durbin-Watson 1,81 1,79
F-statistic 1.364311 1.410759
Prob(F-stat) 0.278554 0.265086

When evaluating the obtained prediction results, the R2 values, representing the model's
explanatory power, are calculated as 0.65 for the Azerbaijan model and 0.69 for the Georgia
model. These calculated R2 values indicate that the explanatory level of the model is sufficiently
adequate. Additionally, an F-test is used to test the overall significance of econometric models.
According to the obtained F-statistic values, it is determined that the F-statisticvalue for both
models is greater than the Prob(F-statistic) value. This situation indicates that the models are
significant as a whole.
83
The Durbin Watson test is used to determine the presence of autocorrelation in a data series. A
Durbin Watson teststatistic around 2 indicates that the error terms do not have autocorrelation
(White, 1992: 371). Theresults obtainedshow that there is no autocorrelation in the models. This,
in turn, indicates that the fulfillment of necessary assumptions does not pose an obstacle to the
interpretation of the prediction results.
When examining the obtained prediction results from the model, it was found that the constant
coefficient is significant for both countries. This value expresses the value of the dependent
variable when all other variables areassumed to be zero. Thus, for Azerbaijan, the model predicts
that the GNI growth rate will be -
9.9 when inflation, unemployment, and population variables are zero, while for Georgia, it is
calculated as 8.40.
In the study, it is revealed that the coefficient of the inflation variable in the model is statistically
significantat a 95% confidence level for both country models. This indicates that inflation has a
significant impact on both the Azerbaijan and Georgia economies. Furthermore, according to the
predicted results, a 1-unit increasein inflation leads to an increase of approximately 0.34 units in
Azerbaijan's GNI growth rate and 0.16 units in Georgia's GNI growth rate.
The coefficients of the unemployment variable in the models are found to be statistically
significant at a 95% confidence level for both countries in the study. This suggests that the
unemployment rate has a significant impact on both the Azerbaijan and Georgia economies.
However, the predicted results for Azerbaijan suggest that a 1-unit increase in unemployment
results in an increase of 1.6 units in the GNI growth rate, while for Georgia, an increaseof 0.27
units is predicted.
When examining the predicted results for the population growth rate variable obtained in the study,
it is foundto have a significant impact on the GNI growth rate for Azerbaijan, while for Georgia,
the population growth rate is determined not to have a significant impact on the GNI growth rate.
However, in Azerbaijan, a 1-unit increase in the population growth rate leads to an increase of 4.05
units in the GNI growth rate.
84
CONCLUSION
This study aimed to compare the economies of Azerbaijan and Georgia, two neighboring countries
in the South Caucasus region. Comparing economies is crucial for understanding the dynamics of
economic growth and development in different countries. Accordingly, Azerbaijan and Georgia
have undergone significant economic transformations since gaining independence. Their
geographical locations and historical backgrounds make them intriguing subjects for comparative
analysis.
Examining the economies of Azerbaijan and Georgia can provide insights into the factors
influencing growth and development within a specific geography. Analyzing similarities and
differences between these two economies allows policymakers, economists, and researchers to
gain a foresight into the economic conditions of the region. The variations in demographic,
structural, and policy aspects can contribute to the effectiveness of policies, strategies, and
structural reforms implemented in each country¹⁴⁴.
In this study, contrasting predictions for GDP growth rates between Azerbaijan and Georgia when
independent variables are zero can be attributed to various country-specific factors. Firstly,
resource endowment and sectoral differences may influence the outcomes. Azerbaijan, with
significant oil and gas reserves, might be more sensitiveto external shocks such as fluctuations in
global energy prices. On the other hand, Georgia's more diversified economy, focusing on services
and agriculture, could exhibit greater resilience to such shocks. Differences in economic policies,
structural reforms, and governance mechanisms between the two countries could also impact the
obtained prediction results. Policies related to financial management, trade, investment incentives,
and labor market regulations are crucial indicators affecting the overall economic performance of
each country.
The statistically significant coefficient of the inflation variable in both country models indicates a
notable impact ofinflation on the GDP growth rates of Azerbaijan and Georgia. Positive coefficient
values suggest thatan increase in inflation, to varying extents, is associated with an increase in the
GDP growth rates of the respective countries. The positive relationship between inflation and GDP
growth rate in Azerbaijan may indicate that moderate inflation canstimulate economic activity by
encouraging consumption and investment. Moreover, given Azerbaijan's heavy reliance on energy
exports, an increase in global energy prices could leadto higher local inflation, positively affecting
Azerbaijan's GDP growth rate. Similarly, in Georgia, the positiverelationship between inflation
and the GDP growth rate can be explained by factors such as increased internal consumption,
investment, and activity in sectors like tourism, services, and agriculture.
144 Yıldırım K. (2011). Introduction to Economics. Ankara: Ed. Kemal Yıldırım, Pelikan Publishing. Yüzal, S.
(2012). Georgia Country Report. Ankara: Mega Offset Printing House.
85
The study identifies that unemployment has a significant impact on the GDP growth rate for both
countries. Positive coefficient values in the obtained prediction results suggest that an increase in
unemployment is associated with an increase in the GDP growth rates of Azerbaijan and Georgia,
albeit with different magnitudes. The paradoxical finding that periods of rising unemployment can
be associated with increased economic growth challenges the traditional view that decreasing
unemployment is a factor supporting economic growth. One possible explanation is that higher
unemployment rates may drive employers to reduce costs and increase efficiency, potentially
leading to increased productivity through investment in automation and technology. Additionally,
high unemployment ratesmay lead job seekers to accept lower wages, reducing production costs
and enhancing companies' competitiveness.Therefore, the pressure in the labor market duringlow
unemployment periods may encourage employers to be moreinnovative and efficient¹⁴7.
The study also reveals the diverse dynamics between population growth rate and GDP growth rate
inAzerbaijan and Georgia. The significant impact of the population growth rate on the GDP growth
rate in Azerbaijan suggests that changes in population size and structure have a noticeable positive
effect on economicperformance. Population growth can increase the size of the consumer market,
stimulate consumption, and promote economic activity by boosting internal demand. Furthermore,
population growth contributes to the expansion of the labor force, presenting opportunities for
productivity, innovation, and increased investment. Conversely, in the case of Georgia,the lack of
a significant impact of the population growth rate on the GDP growth rate implies that population
dynamics might have a relatively limited direct effect on economic performance. Other factors,
such as productivity, investment, technological advancements, and policy frameworks, may play
more prominent roles in steering economic growth in Georgia.
In conclusion, the comparative analysis of Azerbaijan and Georgia provides valuable insights into
the economic dynamics of the South Caucasus region. The findings highlight the importance of
considering country-specific factors, policy frameworks, and sectoral differences when evaluating
the impact of various variables on economic growth. Policymakers, economists, and researchers
can utilize this comparative approach to make informed decisions, formulate effective policies,
and drive sustainable economic development in the region. Further research could delve deeper
into the specific mechanisms through which these factors influence economic growth, providinga
more nuanced understanding of the complexities inherentin the economic dynamics of Azerbaijan
and Georgia.
145 Yelwa,
M., David, O. O., & Awe, E. O. (2015). Analysis of the relationship between inflation, unemployment,
and economicgrowth in Nigeria: 1987-2012. Applied Economics and Finance, 2(3), 102-109.
86
The study reveals that Azerbaijan's economy has been significantly impacted by the energy sector,
particularly oil and gas exports. In contrast, Georgia's economy exhibits a more diversified
structure, focusingon services, agriculture, and manufacturing, potentially contributing to a more
resilient growth path amid fluctuations in globalenergy markets.
Azerbaijan's excessive dependence on energy exports renders its economy sensitive to fluctuations
in oil prices andglobal energy demand. This dependency could lead to more pronounced economic
fluctuations compared to Georgia. Conversely, Georgia's diversified economy may make it more
equipped to withstandexternal shocks, potentially rendering it less vulnerable to single-sector
disruptions.
The study suggests that both countries have attracted foreign investment to contribute to their
growth. However, Azerbaijan's energy resources have played a crucial role in attracting foreign
capital. In Georgia,efforts to create abusiness-friendly environment and strategic positioning seem
to have activated foreign investment. Moreover, Georgia's focus on regional connections and trade
relationships could position it as a potential trade hub in the SouthCaucasus.
Georgia's relatively swift transition from a planned to a market-oriented economy could enhance
its adaptability andresilience. Azerbaijan, with its Soviet-era economic structures and energy
dependence, may face challenges in diversifying its economy and promoting sustainable non-oil
growth. The importance of policy frameworks,institutions, and governance structures in shaping
economic trajectories is evident. Georgia's reputation for business-friendly reforms and anti-
corruption measures potentially contributes to its economic diversity and growth. Ongoingefforts
in Azerbaijan to diversify its economy and improve the business environment signify a
commitment to promoting sustainable development.
Both countries strategically occupy a crucial intersection between Europe and Asia. Georgia's
pursuit of European integration through various agreements, combined with Azerbaijan's efforts
to strengthen regional cooperation, could potentially open new avenues for economic growth,
trade, and development. The comparative analysis suggests that both countries present unique
opportunities and challenges in their paths toeconomic development. Azerbaijan's focus on non-
oil sectors, innovation, and sustainable development may facilitate inclusive growth andeconomic
diversification. In Georgia, continued emphasis on governance improvement, human capital
nurturing, and infrastructure development could solidify its position as a regional economic player.
87
In conclusion, the comparative analysis of Azerbaijan and Georgia's economies highlights the
intricate interplay of factors influencing their economic trajectories. Azerbaijan's acceleration of
growth throughenergy resources contrasts with Georgia's diversification and structural reforms,
forming a foundation for resilience and adaptability. The experiences of both countries offer
valuable opportunities for policymakers and stakeholders seeking sustainable economic growth
and development strategies in a dynamic global context.
88
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LIST OF TABLES
Table 1 Theories and Economic Development .......................................................................... 16
Table 2 Welfare Groups of Countries According to the World Bank .................................... 21
Table 3 Basic Economic Indicators of Agricultural Enterprises ............................................. 60
Table 4 Foreign Trade Statistics for the Period 1995-2018 ...................................................... 60
Table 5 Azerbaijan and Georgia Basic Data Set ...................................................................... 61
Table 6 Variables and Abbreviations Used in the Study.......................................................... 62
Table 7 Descriptives and Statistics ............................................................................................. 62
Table 8 ADF Test Results ............................................................................................................ 63
Table 9 Forecast Reuslts .............................................................................................................. 64
98
LIST OF FIGURES
Figure 1 Law of Diminshing Returns .................................................................................... 35

Figure 1.2.The Balancing Process in Traditional Economic Growth Models..................... 47
Figure 3.1.Economic Data Growth Data Based on Comparative Country......................... 74
Figure 3.2. Countries by Purchasing Power Parity ............................................................... 75
99

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Department of Management-International Business

COMPARATIVE ANALYSIS OF THE ECONOMIC GROWTH AND DEVELOPMENT OF AZERBAIJAN

Author: Mukhtar Gurbanov

written under the supervision of

Date and supervisor’s signature

ETHICAL PRINCIPLES AND COMPLIANCE ........................................................................... 1

LIST OF FIGURES ................................................................................................................ 88

R² "Model explanatory power."

USA: United States of America

AITF: Azerbaijan International Tourism Fair

AzALES: Azerbaijan Agricultural Credit Evaluation SystemUAE: United Arab Emirates

GDP: Gross Domestic Product

USSR: Union of Soviet Socialist Republics

UNESCO: United Nations Educational, Scientific and Cultural OrganizationUNWTO:

World Tourism Organization

Unemployment, according to Romer (1990), is a significant factor influencing economic growth.

Table 5. Azerbaijan-Georgia Basic Data Set.

Demograpics (2023) 10 Million 3,7 Million

Inflation (2023) 12,7% 0,6%

Unemployment 5,5% 18%

Source: Own and Internet

Figure 14. GDP Growth Rates for Azerbaijan and Georgia

(Source: World Bank https://www.worldbank.org. Access Date: 01.07.2023)

Figure 15. Inflation Rates for Azerbaijan and Georgia

Figure 16. Unemployment Rates for Azerbaijan and Georgia

(Source: World Bank https://www.worldbank.org. Access Date: 01.07.2023)

Figure 17. Population Growth Rates for Azerbaijan and Georgia

Variable Variable type Abbreviation

Economic Growth Rate Dependent Variable gdpgrowth

Inflation Rate Independent Variable inf

Unemployment Rate Independent Variable unemp

Population Growth rate Independent Variable pop

Source: Own and Internet resources

• Gross Domestic Product at Market Prices: Gross Domestic Product at Market

• Gross National Product: Gross National Product is computed by deducting

7Aliyev, P. (2019). The impact of foreign

2.1.3.1. Classical Growth Models:

Figure 1. Law of Diminishing Returns

politicalrelations. Master's thesis, Kafkas University, Institute of Social Sciences, Kars.

Figure 2. illustrates the balancing process in traditional economic growth models(Source:

- Information is used among consumers without rivalry and exclusion.

Definition and Purpose

Trade, ExportDevelopment Center

- Freedom: Economic development should be approached in a dimension that not only

İ. (2016). Foreign economic policy of Georgia since gaining independence: Estonian

Discussions onEconomic Policy. SSRN, 24(1), 1- 20.

Years Perspective Meaning of development

1870 > Latecomers Industrialization

1940 > Development Economics Economic Growth and

1950 > Modernization Theory Growth, Political, and Social

1960 > Dependency Theory National Capital Accumulation

1980 > Human Development Capacity and Options Expansion

2000 Millennium Development Goals Structural Reforms

42 Hiç, M. (1994). Growth and development economics. Istanbul: Filiz Kitabevi

Figure 4. Per Capita Income by Years in Countries

44 Hüseyova,N. (2018). Features of the contemporary development of the Republic of Azerbaijan.

making process.KAÜİİBFD, 11(1).

Groups July 2022 July 2021

(Source: World Bank 2023)

47 IMF. (2021). World Economic Outlook Database. Access address:

Figure 5. Countries by Purchasing Power Parity (IMF, 2021)(Source: IMF, 2021) 50

Figure 6. Situation of Countries in the Context of Human Development in 2021

It is worthwhile to discuss these variables affecting growth under this heading.

* * * * * * * *