The resource curse trap: rentierism and diversification in Azerbaijan

Abstract

The concept of resource curse refers to the effects of the natural resource on the several spheres of a country. The main idea behind the resource curse theory is that, countries are resource rich develop less and slowly than those the resource deficit. Resource curse has been considered as an economic matter, but its affects other spheres equally. Decreasing institutional quality leads to corruption and strengthens authoritarian regimes. Dutch disease is separately investigated from the resource curse theory, indeed, real exchange rate appreciation and decline in non-abundant sectors are main indicators of Dutch disease problem. Therefore, Dutch disease examined as an economic symptom of resource curse. Azerbaijan is one of the resource abundant countries in pos-Soviet era. The longstanding dominance of the extractive industry in Azerbaijan has created a situation that can be understood with the help of the Dutch disease model. The oil boom period (2008–2011) brought high levels of mineral revenue. The chronic overvaluation of the national currency during the oil boom, coupled with an appreciation of real wages in the mining industry that outperformed other sectors—particularly the manufacturing sector—reflect the first two symptoms of the phenomenon. In Dutch disease economies, the increased share of the services sector in the output (the third symptom of the disease) during unrecovered manufacturing (the fourth symptom) leads to a major slowdown in industrial production—also known as de-industrialization. Azerbaijan has suffered from unregulated investments, untargeted policies, and opportunistic behavior that has meant that mineral revenue has been spent rather than saved or redirected toward rebuilding the country’s industrial heritage. This thesis evaluates the presence of Dutch disease in Azerbaijan using the available statistical data and through comparisons with other resource-rich countries.