An analysis of foreign trade and economic growth in Azerbaijan

The relationship between export performance and economic growth, and the role of exports in economic growth is a popular debate subject among development economists. Theoretically, exports are expected to increase economic growth by generating a greater capacity utilization; achieving technological progress; creating employment and increasing labor productivity; increasing specialization; improving allocation of scarce resources in the economy; relaxing the current account pressures by increasing the country?s external earnings and attracting foreign investment; increasing total factor productivity and consequently the welfare of the country.The aim of this study is to test the export-led growth hypothesis for the Republic of Azerbaijan. Azerbaijan is an oil-exporting country and the share of oil and oil products in total exports is 96 percent in 2008. This export structure is an indication of small-scale production of other goods in Azerbaijan that are expected to compete in world markets. Dependence of exports on oil can make Azerbaijan face the ?Dutch Syndrome?. Therefore, development of non-oil sectors of Azerbaijan must be in focus.In this thesis, the export-led growth hypothesis is tested for Azerbaijan using cointegration and error correction model techniques for the 1996-2008 period. Long-run and short-run relationship was found between real GDP, and exports and imports. The results fail to find any support for the proposition that exports Granger cause GDP. However, real GDP Granger causes exports. The findings of this study showed that export-led growth hypothesis is not valid for Azerbaijan.The increasing foreign capital inflows to the Azerbaijan?s oil sector partially explain the causality from real GDP to exports. The share of foreign capital in oil sector is remarkably high in Azerbaijan. Signing of ?Contract of the Century? regarding the production of oil in the Caspian Sea in 1995, and construction of the ?Baku-Tbilisi-Jeyhan? oil pipeline between 2002 and 2005, increased the volume of foreign capital inflows to the country. These capital inflows increased oil production and productivity in the sector and GDP of Azerbaijan.