Welfare and Economy-Wide Effects of Azerbaijan’s Accession to the World Trade Organization

Abstract

Azerbaijan applied for membership in the World Trade Organization (WTO) in 1997 and negotiations are still ongoing. Accession to the WTO requires the applicant countries to align economic policies with the organization’s rules and principles. Such changes in policies likely have a substantial impact on economic performance and social conditions in the applicant country. The key policy changes anticipated to accompany Azerbaijan’s WTO accession include lowering of import tariffs and a reduction of agricultural subsidies. <br /> This study assesses the impact of these policy reforms in Azerbaijan in a quantitative (ex-ante) analysis using national economic indicators (such as key macroeconomic variables and domestic production in sectors) and social indicators (such as welfare at a household level and the incidence of poverty). The analysis considers Azerbaijan to become a member as both developed and developing country as the status is still uncertain in current stage of negotiations. A country-specific, multi-sector, static computable general equilibrium model complemented by a multi-household, non-behavioral micro-simulation model with an endogenous poverty line is developed to perform the analysis. Coupling these two approaches allows incorporating a complex set of interactions among production sectors, markets, heterogeneous consumers, and other institutions across the economy. Consequently, the analysis offers a comparatively complete picture of likely WTO membership impacts.<br /> Model results show that policy reforms associated with Azerbaijan accession to the WTO have an overall positive effect on economic performance and the social situation. The WTO membership generates pronounced structural adjustment throughout the economy. It generally favors export-intensive manufacturing sectors such as tobacco, chemical products, beverages, prepared and preserved fruits/vegetables, minerals, and textiles. In contrast, policy reforms reduce production in domestic-oriented sectors, such as leather, agriculture, sugar, ferrous metals, apparel and furs. Accession increases the overall scale of Azerbaijan’s foreign trade and diversifies imports and exports in terms of commodity composition and geographical distribution. Results also indicate that membership improves the level of welfare of the vast majority of households in Azerbaijan. However, welfare gains are unevenly distributed among households belonging to different income groups/deciles and regions. In particular, membership is expected to be more (less) beneficial for the wealthiest (poorest) stratum of the population. Moreover, rural households gain significantly more in terms of welfare compared to their urban counterparts. Rather importantly, WTO accession accelerates an already positive trend in the poverty-alleviation process at national and regional level. In case Azerbaijan is granted a “developing country” status, WTO membership generates stronger gains in terms of poverty alleviation and welfare improvement compared to the status as “developed country”. Lastly, it is worthwhile noting that liberalization of trade policies in form of reduced tariffs is the main driving force for the results described above.