Azerbaijan - Politics, government, and taxation

After the declaration of the independence of the republic in 1991, severe political and economic instability lasted until 1994. Heydar Aliyev seized power in June 1993 through a military coup, toppling the democratically elected Abulfaz Elchibey. In October 1993, however, Aliyev legitimized his rule by winning presidential elections. In 1998 the incumbent president was reelected to office for a second term which continues through October 2003.

In the executive branch of the government, there is a president, a prime minister, and a Council of Ministers appointed by the president and confirmed by the National Assembly. The president is elected by popular vote for a 5-year term. The prime minister and cabinet members are appointed by the president and confirmed by the National Assembly. The National Assembly is unicameral (one-chambered), has 125 seats, and the members are elected by popular vote for a 5-year term. Parties in the Assembly from 1998 were: the New Azerbaijan Party (center party) chaired by the president Aliyev, the Party of the Popular Front of Azerbaijan (nationalist) chaired by Abulfaz Elchibey, the Party for National Independence of Azerbaijan (nationalist) chaired by Etibar Mammadov, and the Musavat Party (liberal) chaired by Isa Gambar.

Azerbaijan's government consumes about 11 percent of the GDP. However, in 1998 Azerbaijan received only 1.28 percent of its revenue from state-owned enterprises and from government ownership of property. The privatization program following independence was poorly thought out and was derailed by poor administration and corruption. It was thought necessary to privatize state-owned companies so that they could perform better in the market. However, the government mostly sold small firms rather than the large-scale companies that were poor performers. What made this process worse was that the opportunities for foreign participation were never properly defined. As a result of these major problems with the privatization program, the public sector remains large in the country's economic life. For example, 75 percent of outstanding loans in the banking system were from publicly owned enterprises in 2000, many of which chronically record operating losses. As high as that debt is, it represented some improvement from a 90 percent ratio of such loans in 1995.

The main revenue generators for the government are an income tax (levied on the employee's income at progressive rates ranging from 12 percent to 35 percent), a profit tax (0.5 percent), a value-added tax , and a social security tax (the employer is required to pay an amount equal to 33 percent of the gross salary of the employee). The contribution of these taxes reached 2.6 percent, 2.1 percent, 4.5 percent, and 3.7 percent of GDP in 1998, respectively.