Structural Transformation of Azerbaijan’s Economy: The Human Capital Paradox and Investment Multiplier Efficiency
Valiyeva L. M.

Valiyeva, Lala Maarif. (2026) “Structural Transformation of Azerbaijan’s Economy: The Human Capital Paradox and Investment Multiplier Efficiency.” The Problems of Economy 2:319–327.
https://doi.org/10.32983/2222-0712-2026-2-319-327

Section: Economic theory

UDC 330.101.541:330.341

Abstract:
This research investigates the structural transformation of Azerbaijan's economy during the critical macroeconomic transition period of 2015–2025, with a specific focus on the operational dynamics of January-November 2025. The study underlines the urgent necessity of transitioning national growth mechanics from quantitative, infrastructure-driven capital accumulation to qualitative human capital development to ensure long-term sustainability. Utilizing empirical time-series data obtained from the State Statistical Committee of Azerbaijan, the paper applies an Ordinary Least Squares (OLS) regression framework and structural decomposition analysis to evaluate sectoral investment efficiency, capital absorptive capacity, and labor productivity differentials. The empirical results reveal a significant structural imbalance within the economy. While the dominant oil sector experienced an 8.8% decline in capital investment and a 1.6% contraction in its GDP contribution, the non-oil sector recorded a 2.7% real growth rate. However, the estimated investment elasticity coefficient (1=0.485) contrasts sharply with the negative interaction term (3=-0.215), proving that the marginal efficiency of capital injections is systematically dampened by an un-upgraded labor force. This empirical asymmetry confirms the existence of a persistent “Human Capital Paradox” in Azerbaijan, where massive financial investments fail to trigger proportional productivity gains due to structural labor market mismatches and qualitative skill deficits. To guarantee the econometric validity of these findings, rigorous diagnostic testing was conducted, where the Breusch-Godfrey and White tests confirmed the absence of serial correlation and heteroskedasticity, alongside an Adjusted R2 of 0.912. Based on these outcomes, the study introduces a novel sectoral “Human Capital Productivity Gap” framework tailored for transition economies, offering strategic policy insights to optimize the investment multiplier through targeted educational and labor-market reforms.

Keywords: Azerbaijan economy; investment multiplier; Human Capital Paradox; economic diversification; labor productivity.

Fig.: 1. Tabl.: 6. Formulae: 6. Bibl.: 21.

Valiyeva Lala Maarif – Postgraduate Student, Department of Economics, Baku State University (23 Academician Zahida Khalilova Str., Baku, Azerbaijan)
Email: valiyevalala88@gmail.com

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