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Economic Diversification Through Industry 4.0 in Azerbaijan


Hina Ayra

Diversification of the economy has now become a driving aim of the government of Azerbaijan in recent years due to dramatic reductions in oil revenues resulting in low global prices. Agriculture reforms necessary in these regulations as a key non-energy sector of the economy in order to preserve financial protection and support for continued development. Advancement of the oil and gas sectors in the early 1990s encouraged Azerbaijan to rebound from both the post-Soviet economic meltdown. Despite the "Contract of the Century" agreed to sign in 1994 between the Azerbaijani government and the British Petroleum (now BP)-led conglomerate of energy companies, oil exports brought considerable financial resources that led to remarkable economic development in a relatively short period of time. By 2007, Azerbaijan was among the world's fastest emerging growing economies. The increasing reliance of Azerbaijan on oil and gas also multiplied its sensitivity to volatility in the price of hydrocarbon commodities. The transformation to a market economy and the war with Armenia, indeed, had disrupted much of the economic and social infrastructure and international trade relations, providing additional stress to rely on its oil and natural gas being developed.

After the global financial crisis of 2007–2008, Baku centered on tackling the consequent vulnerability of the economic system of Azerbaijan by attempting to put the foundations for regional economic diversification. The first prominent initiative was the idea of "Azerbaijan—2020: The Vision of the Future," launched in 2012 to build a competitive economy beyond hydrocarbons. These initial attempts were totally inadequate to sustain the important implications of sudden oil shocks in 2014 and 2015. The Central Bank of Azerbaijan undervalued the national currency by around 80 percent against the dollar in 2015 as a result of lower oil revenues. A deteriorating economic situation led to an economic depression of 3.8% in 2016, which further compelled Azerbaijan to strengthen its cycle of diversification. The government, in reality, introduced so-called "Strategic Roadmaps" to design a new liquidity-oriented business strategy. Baku is introducing many other structural reforms together with the roadmaps. The Economic Reform and Communications Analysis Center was formed to examine the efficacy of the ongoing reforms. And in the financial sector, the government has established the Financial Markets Control Chamber to impose stricter rigorous and effective control of the financial sector.

Azerbaijan is also focusing on developing the cross-regional transit possibilities of the country as part of its diversification approach. Within the China-led Belt and Road Initiative (BRI) and the North-South Transport Corridor, the government should take an influential role in presenting itself as a regional link. In order to maximise the flow of goods and people throughout its territory and keep improving the operation of its border crossing contentions, Azerbaijan aims to demystify the transportation process by putting in place the eTIR system (which ensures secure, digital data exchange between national customs systems) with surrounding countries such as Iran. A further important consideration undertaken was the establishment of a Free Trade Zone (FTZ) on the grounds of the launch of a new Baku International Sea Trade Port (BISTP), where all enterprises were exempt from taxes and government duties.

The FTZ will encourage the thorough utilization of the transit capacity of the country and reinforce the global role of Azerbaijan as a trans-regional transport and logistics center. The BISTP has also entered into an agreement with the Venlo Transport Hub in the Netherlands to draw well-known European companies functioning as part of Asia-Europe regional logistics chains. Azerbaijan's actions are yielding results in the implementation of its non-oil sectors. The non-petroleum economy contributed for 58.7% of the country's GDP in 2018. Non-oil sectors increased by 3% in the first seven months of 2019, non-oil exports by 17% and non-oil industries by 15.8%. The oil sector, however, still holds the highest dollar value share of exports and thus persists the main source of economic income of the state. Economic diversification encompasses more complex export destinations, which could be made necessary by experimenting with new partners. This prerequisite is the result of the increased expansion of Sino-Azerbaijani economic relations. Nevertheless, this advancement also increases China's political influence over conventional regional powers in the South Caucasus.

Azerbaijan is also convinced of the credit problems in the BRI countries. Considering these variables, Azerbaijan is hesitant in its economic relations with China, slowing the drive for diversification of Baku. The insurmountable reliance of Azerbaijan's non-oil exports on trade with two neighboring countries — Russia and Turkey — is another important consideration plaguing diversification. Agricultural products exports, with the highest proportion of all non-oil exports, are mainly targeted at these two locations. However, it takes time to prepare for new markets, and so does the consequent redirection of domestic exporters and the improvement of their products ' quality and traits to the mandates of new foreign customers.

World Trade Organization (WTO) participation might also be an effective way of increasing economic diversification. Yet Baku was unwilling to discuss WTO requests for dramatically reduced agricultural subsidies to Azerbaijan. Food production employs 36% of the country's labor force, and local products in Azerbaijan are technically unable to interact with imports in terms of price and quality. The government is therefore afraid that ratification to the WTO would undermine the political and economic situation at this time by increasing unregulated foreign economic influence.

Economic diversification is a complicated process, and there is a long way to go for Azerbaijan. Threats from a possible global economic slowdown, however, would have a negative impact on oil prices, thus raising the value of stimulating the growth of non-petroleum and non-gas industries or sectors. Azerbaijan has a tough task down that route of itself, making the existence of the above-mentioned barriers even more difficult. Nonetheless, it has already concentrated on a variety of strategically valuable ventures with impact on future advancement.

Industry 4.0 refers to a new phase of the Industrial Revolution with a strong focus on interconnectivity, automation, machine learning, and real-time data. Industry 4.0, also sometimes referred to as IIoT or smart manufacturing, blends physical production and operations with smart digital technology, machine learning, and big data to create a more integrated and better connected environment for manufacturing and supply chain management companies. While every enterprise and organization that operates today is unique, all of them face a similar challenge — the need for connectivity and access to real-time insights through systems, partners, goods, and individuals.

The industrial world is changing. One needs to be willing to invest in Industry 4.0 to survive and thrive now. It is important to first consider how precisely manufacturing has changed since the 1800s before looking too further into what, why, and how Industry 4.0 has developed. The planet has either experienced or continues to experience four distinct industrial revolutions today. Between the late 1700s and the early 1800s, the first industrial revolution took place. During this time, manufacturing changed from relying on manual labor performed by humans and supported by working animals to a more automated form of labor performed by humans through the use of water and steam-powered engines and other machine tool types.

In the early part of the 20th century, with the invention of steel and the use of electricity during manufacturing, the world entered a second industrial revolution. The advent of electricity allowed producers to increase efficiency and helped make machinery in factories more mobile. Mass production ideas such as the assembly lines were implemented during this period as a way to boost demand.

A third industrial revolution began to emerge gradually in the late 1950s when manufacturers began to integrate more electronic — and eventually computer — technology into their factories. Throughout this time, manufacturers began to experience a change that placed less emphasis on analog and mechanical engineering and more on software for digital technology and automation. A fourth industrial revolution, known as Industry 4.0, has arisen in the last few decades. With the support of interconnectivity through the Internet of Things (IoT), access to real-time data, and the implementation of cyber-physical systems, Industry 4.0 builds on digital technology from recent decades to a whole new level. It links physical to electronic, allowing greater communication and connectivity through agencies, partners, suppliers, products, and individuals. Industry 4.0 empowers business owners to better control and understand every aspect of their operation and enables them to leverage instant data to boost productivity, optimize processes and drive growth. Industry 4.0 is not just about investing in new technologies and resources to improve the efficiency of manufacturing — it is about revolutionizing how the entire business works and develops.

Digitalization is shifting the industrial future. Smartphones, watches, medical devices, avionics, automotive accessories are critical for many manufacturers in the electronics field to accept the industry's 4.0 transition in order to remain competitive or become more competitive. But, in recent times upon closer inspection Azerbaijan a resource rich economy, experienced an explosion in growth in the beginning of the millennium as a result of rising commodity prices. When unemployment fell and median incomes grew, this growth translated into prosperity, making it one of the former Soviet Bloc's most prosperous economies. It also highlighted the economy's weakness by over-reliance on oil production as commodity prices collapsed in 2014. The weakness fuels a new found vigor for a reform-driven agenda and economic diversification leadership.

Against this backdrop, international agencies have started to work with the Azerbaijan government to identify the leverage points within existing policies and strategies to harness the growth and development potential of the Fourth Industrial Revolution, in particular by recognizing emerging trends, incorporating bottom-up approaches and drawing on ecosystem knowledge and insights. Now, with economic figures we can have firsthand knowledge of how much progress Azerbaijan has made in moving innovation to centre stage of its policymaking. The results speak for themselves.

For example ASAN service. ASAN (which in Azerbaijani translates as ' easy ') is the one-stop shop solution for effective and transparent public service delivery that won the prestigious United Nations Public Service Award in 2015. Going big on technology, InnoLand Technology and Incubation is a state -of -the-art hub to support private sector growth and broaden the country's start-up movement by prototyping and design. The Ministry of Transport, Communications & High Technologies is also establishing a new Innovation Agency in Azerbaijan. When functional, the Agency will combine the State Fund for Information Technology Development and the first Hi-Tech Park in Azerbaijan, assist local businesses in developing technology solutions and support research, innovation and start-ups through grant.At the sub-national level, a new portfolio of initiatives arrives, feeding expertise into strategy and policy. The first "Robopark" robot engineering laboratories — will be opened in Azerbaijan's Shamakhi and PirAllahi regions, building on the successful UNDP pilot of the first children's robotics lab at one of the Baku's schools. 

Throughout the regions of Azerbaijan, National I2B (From Idea to Business) tours will be organized to encourage young enthusiasts to develop their business thinking and design new business solutions. The aim is to transform the technology culture into the country's innovation movement. At the same time International Agencies working with local authorities to design new smart city strategies that are situated at the intersection of technologies, methods and industries to reframe the smart city discussion to be more human-centered. In diversification to take advantage of the fourth industrial revolution, policy and infrastructure initiatives will be needed. And it eventually requires government funding to build a new data center in Yevlakh that will provide a higher level of data protection while significantly improving the security and availability of fast and reliable information for individuals, governments and businesses. Based on these observations, it will lead the planning of the vision for the National High Technology Strategy (2020–2025) to help the country unlock the potential for the country and its people to build digital technologies.

I think the time is right for global donor agencies in Azerbaijan for the worldwide pioneering Accelerator Lab network. As shown in the examples above, a new generation of innovators will be looking forward to joining their team to bring experience, innovation and collective intelligence to help them re-imagine growth with their country partners.




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