An AAZ has the ability to pump out just as much power as the 1Z/AHU (early TDI) engines. They are both 1.9L and if both had a small to medium VNT would be identical. The only downside is you will need to spin %15 more RPM with the AAZ and use 15% more fuel in doing so to make the same power as the DI 1.9L.
Personally the AAZ in my brothers 84 with the pumped fully tweaked by yours truly and the tiny K03.. its a damn rocket. Spools hard off idle till about 2500-3000. A shift at 2500 drops you around 18-1900 in the next gear where you are making full torque yet again.. OFF SHE GOES.
On anything, I would never consider the 1.6 if you had an AAZ. Even if you were going for stock power levels.. the 1.9 being the next gen engine is better in almost every way. The TDI, unless you have a pump setup ready, will be quite a bit more work than the AAZ. Trust me, I've done both within three weeks of each other.
The only reason being, is the the TDI cam plate in the pump has steeper and higher ramps. Pushing the distributor farther in to the head to make the pressures necessary to crack the TDI injectors (195bar= 2,828psi). For this you need modified pump internals to move the fuel control collar further towards the head than a 1.6/1.9 lever can do in stock form. It will run, I've done that too. It will start and run perfectly, even in -20c weather (I did my swap in January). However you will have a severe cut in fueling over the stock TDI pump, and will not be able to maintain high enough pressures needed.
SO! My pro's;
1.6 IDI- There isn't any. Simplicity? not any less complex than a TDI motor..
1.9 IDI- Great power right out of the box, very de-tuned, lots of (free mods) power to be had.
1.9 TDI- Even better power out of the box, if staying electronic a chip and injectors alone will make it a coffin on wheels in an mk1/mk2. Way more stout bottom end, and the head breathes better too. Next Gen engine yet again.
My Con's;
1.6 IDI- Everything. Goes through Head Gaskets if you even look at the coolant bottle wrong.. Lot's dont have piston oilers (N/A), some are mechanical heads, smaller displacement.
1.9 IDI- Haven't found any yet from personal experience, engine has over 400kms with no rebuild and still starts cold and runs excellent. Seems to be pretty a damn solid unit.
1.9 TDI- The pump, the biggest concern for a swap candidate. There are no direct OEM swap on pumps as the 1.9L AHU was never offered as a mechanically throttled engine. There are a lot of choices, but each require machine work, and heavy tweaking to run properly on this engine. You can, and I have, build a "FrankenShteenPompe" out of entirely Bosch Volkswagen OEM stuff. You will still need to customize your throttle lever.. but that isn't much. Pretty much the only CON to a TDI swap