Sharp increase in subsidies in Azerbaijan to

contribute to agriculture production growth

10 September 2019 17:46 (UTC+04:00)
2 165

By Trend
Incredible work has been done in Azerbaijan to improve the business environment
and support entrepreneurship, Chairman of the Azerbaijan Pomegranate
Manufacturers and Exporters Association Farhad Garashov told Trend.
He made the remarks as part of the video project entitled "PREZIDENT. Musteqillik.
Tehlukesizlik. Rifah".

The geography of export of Azerbaijani non-oil products is expanding, and trading

houses are opening in foreign countries, he said.

As a result, the flow of currency into Azerbaijan increased, entrepreneurs make big
profits, and thanks to the efforts of Azerbaijani President Ilham Aliyev, favorable
business environment has been created in the country, the state provides special
benefits in this area, long-term loans are granted to farmers.

Garashov added that entrepreneurs shouldn’t depend only on the state support.

“We ourselves must be aware of our responsibility,” he said. “The Association

supports the fulfillment of the requirements set by the president before state bodies
in order to solve all problems of entrepreneurs, as well as steps taken to improve the
business environment. Members of the Association present a single pavilion under
the brand 'Made in Azerbaijan' at the biggest exhibitions of the world. Naturally, we
set ourselves the goal of using all the conditions created for us.”

Garashov noted that the quality of products in Azerbaijan is growing from year to
year. In his opinion, a sharp increase in the amount of subsidies for agriculture
producers will contribute to the growth of agriculture production.

“All this is related to the policy of President Ilham Aliyev,” he said. “Each of us
expresses gratitude to the head of state for the conditions created for the
entrepreneurs.”
 A common argument for trade protectionist measures is protection for domestic
producers. In respect to that Azerbaijan’s ministry of agriculture imposed a subsidy to assist
domestic farmers that compete with imports. It also aims to create a favourable business
environment for producers and expand its export line, diversifying its source of revenue from
just oil. A subsidy is an amount of money paid by the government to a firm, per unit of
output.
If domestic farmers do not produce efficiently, they cannot face competition in the
global market since even at a domestic level, they are unable to satisfy excess demand.
Quantity supplied domestically is less than the quantity from imports.
 In Azerbaijan under a free trade, at price Pw, domestic production was Q1 and
quantity demanded was Q2. The excess demand between Q1 and Q2 was satisfied by imports
from foreign producers. After subsidies are granted, producers have lower costs of production
and are more willing to supply more at each price level. Therefore domestic supply curve
shifts to the right from S(Domestic) to S(Domestic)+subsidy. Since price is determined by
the world market, it is not affected by the subsidy. So consumers still demand Q 2 of
agricultural products.
After the subsidy grant, agricultural producers now receive the world price as well as
the subsidy from the government Pw + Subsidy. At that price domestic supply of agricultural
products increase from 0Q1 to 0Q3. With increased production, the revenue for domestic
producers increases as well from the amount represented by “b” in the graph to ‘b+e+a+c+d’.
Area ‘b+e” represents revenue received from consumers and ‘a+c+d’ is the total subsidy paid
by the government. On the other hand, the quantity supplied by foreign producers falls from
‘Q1Q2’ to ‘Q3Q2’. Since they supply less, revenue also drops from ‘e+f+g’ to ‘f+g’.
In Azerbaijan, it can be assumed that unemployment rate reduces because, after the
subsidy, domestic production increases and it can be assumed that for more output more
human resource is needed. Agricultural producers employ more resources to meet up to the
demand of the market. Additionally, domestic producers are left better off as they receive a
higher price per unit. It can be assumed that in the long-term the export industry for
agricultural products in Azerbaijan may expand, selling to other countries, in this case they
become more competitive and additional revenue for the government can be made from
exports.
On the other hand, It can be argued that a greater percentage of the Azerbaijan
economy is left worse-off. The government will have a negative effect on its budget because
they have to pay tax revenues represented by the areas ‘a+c+d’ and in turn they make no
additional revenue. In the long run if the expenditure on the subsidy grant surpasses
government revenue, a budget deficit is created.
The subsidy allows for inefficiency in production because, for a similar level of
output, domestic producers can only produce at price Pw+Subsidy when foreign producers
could have supplied the same at the world price. Thus it can be said that there is a
misallocation of resources globally. Furthermore, it can be said taxpayers are left worse off
since they get no benefits from the subsidy grant. A portion of tax revenues is used in the
subsidy however, it only increases production of the inefficient producers when the money
could have been invested in the provision of merit goods that improve the living standards of
consumers, in essence there is an opportunity cost incurred from the expenditure on the
subsidy. The Azerbaijan government may also later increase taxes to cover their expenditure
on the subsidy, consumers, households and firms who pay taxes are left worse-off since they
have lower disposable income, that’s income left after deduction of taxes. There is also a
welfare loss in the represented by the area ‘g’ which is the difference between the minimum
revenue needed by domestic and foreign producers. Domestic producers need more revenue
to produce the same level of output ‘Q1Q3’and so there is a welfare loss.
In place of subsidies, the Azerbaijan government could reduce corporate taxes. By
doing so costs for domestic firms are cut down giving room for them to be more productive
and overtime they can increase their supply into the agricultural market. This way they can
also enter into the global market. By cutting corporate tax rates, the government does not
have to face a budget deficit since it does not need to spend on provision for the producers.