WB: Unrealized trade accounts for 58% of potential trade turnover in Azerbaijan

Global economic integration-through trade and foreign direct investment (FDI)-offers some of the most powerful yet underused levers for productivity growth in ECA (Europe and Central Asia), Report informs referring to the World Bank.

"ECA's trade patterns are not fully aligned with what would maximize productivity. Exports are not diverse enough and are tilted toward lower-complexity products and nearer markets, suggesting unexploited opportunities to "trade up" in quality and reach. Although recent shocks have reshaped trade flows (including a shift toward intraregional trade and "friendshoring"), ECA still trades below its potential with the most dynamic global markets.

According to the Bank's estimates, the highest volume of unrealized trade is found in the resource-based and agricultural economies of Central Asia, where it exceeds 55% of potential trade turnover. The highest rates are recorded in Turkmenistan (72%), Tajikistan (64%), Kyrgyzstan (63%), and Uzbekistan (59%).

In Azerbaijan, the share of unrealized trade is 58%, in Montenegro 56%, and in Albania and Armenia 54% each. In Georgia, this figure reaches 48%, in Belarus 47%, in Kazakhstan and North Macedonia 45% each, in Bosnia and Herzegovina and Moldova 44% each, and in Ukraine, Serbia, and Croatia 36% each. Lower rates are observed in Romania (28%), Bulgaria (27%), Türkiye and Russia (26% each), and Poland (19%).

"Many countries-particularly resource-dependent and Central Asian agricultural economies-export less than expected to key partners such as Organisation for Economic Co-operation and Development (OECD) members and China, largely because of weak trade logistics and restrictive trade policies.

Much of this unrealized trade lies in manufacturing, limiting the region's ability to leverage the four channels of growth and innovation. ECA countries' substantial missing trade reflects the challenges that firms face in engaging in international markets and the forgone opportunities of not serving foreign markets. After all, it is not countries that export, it is firms, and those that export show an outstanding performance.

Despite being few, ECA exporters disproportionately contribute to their countries' value added, employment, salaries, and fixed assets and are the main drivers of growth in these performance measures. In other words, exporters can be key pillars for creating new and better opportunities and enhancing productivity across the region," the WB added.

"FDI inflows, often concentrated in a few sectors, are not sufficiently embedded in the domestic economy. Although FDI holds the potential to boost domestic firm performance, whether these benefits materialize depends on specific conditions. In ECA, there are additional untapped productivity gains because the presence of foreign firms in the region does not lead to significant improvement in performance for domestic companies, at least for those in the supplying sectors.

Four interconnected pathways highlight the multifaceted ways in which trade and FDI can enhance productivity. A robust competitive environment facilitates creative destruction and incumbent upgrading. Foreign investment plays a role across these channels. The overall productivity impact depends on these linked effects and supportive domestic policies and institutions.

For ECA, this means continued structural reforms, competition-friendly regulation, flexible labor markets, and accessible finance. Investments in education, skills, and innovation empower firms to learn and upgrade. When these conditions are in place, the gains from trade and FDI can be substantial. Conversely, domestic barriers can mute these benefits.

Given current global uncertainties, getting the domestic basics right is crucial. Adapting to shifting trade patterns may require finding new markets or investment sources. A flexible, productivity-oriented economy can navigate these shifts. By strengthening the enabling environment for the pathways, ECA countries can better harness trade and FDI for growth, leading to more competitive, innovative, and dynamic economies."

"To leverage structural transformation, policies should facilitate resource mobility across sectors. To address the challenge that resources are trapped in low-productivity sectors, policies should facilitate the mobility of labor and capital toward more productive sectors. Doing so involves removing distortions that trap labor or capital in unproductive areas, such as reducing subsidies for declining industries and enhancing labor market flexibility for retraining and relocation. Similarly, improving infrastructure to connect lagging regions with dynamic economic centers can help reallocate resources.

To translate the benefits of integration through reallocation of resources between firms, policies should unlock constraints to firms' growth. Resource reallocation requires pro-competition reforms-for example, streamlining business licensing, simplifying regulations, and breaking up monopolies-that complement trade by enabling the growth of efficient new firms that challenge incumbents. Removing reallocation barriers is crucial, including improving access to finance for high-performing small and medium enterprises and phasing out support for failing ("zombie") firms. Flexible labor markets and adequate schemes for reskilling also assist workers" transitions to expanding firms," the bank noted.

"To maximize the benefits from integration through creative destruction requires a dynamic business environment with easy entry for new firms and orderly exit for inefficient ones. Policy makers should reduce bureaucratic hurdles for start-ups (including by enabling foreign investments) and reform insolvency frameworks to expedite the exit or restructuring of unviable firms. Strengthening bankruptcy laws and removing barriers that discourage firm exit are vital in many ECA countries. Flexible labor market policies, supporting retraining and relocation, enable quicker replacement of shrinking firms with expanding ones. Fostering access to risk capital is also key for firm creation.

Active labor market policies can cushion displaced workers during trade liberalization, maintaining support for openness. Overall, a policy framework prioritizing economic flexibility and innovation ensures that global integration yields net positive productivity effects.

To foster the benefits of firm upgrading from integration, policies should facilitate firms' learning and absorptive capacities. Promoting upgrading requires investing in human capital and encouraging technology adoption (for example, through tax incentives for research and development). Building domestic capacity is essential for local firms to partner with and learn from foreign companies. Supplier development programs linking domestic suppliers with multinationals can amplify FDI spillovers.

A competitive services market (for example, telecommunications and logistics) provides manufacturers with better inputs. Trade facilitation (simplifying customs and improving airports) reduces the costs of engaging in importing and exporting. For export promotion, targeted support, like helping firms meet international standards, can be beneficial, as can addressing information externalities through targeted interventions such as "meet-the-buyer" events and providing information about prospective market opportunities," the WB added.