Front Matter Page
European II Departments
Authorized for distribution by Peter M. Keller
Contents
Summary
I. Introduction
II. The Potential Curse of an Oil Boom: The Case of Azerbaijan
A. Macroeconomic Adjustment Problems
B. Unbalanced Growth
C. “Waste” of Oil Wealth through Unproductive Government Spending
III. The Dutch Disease in a Transition Economy
A. Initial Undervaluation of the Real Exchange Rate
B. Capital Inflows
C. Underdeveloped Financial Markets, Market Mechanisms, and Institutions
IV. A Policy Strategy for Azerbaijan—A Comparative Assessment
A. Short-term Adjustment
B. Preserving Macroeconomic Stability
C. Adjusting to Unbalanced Growth
D. Spending Oil Revenues Wisely
V. Lessons for Resource-Rich Countries in Transition
References
Tables
1. Estimated Competitive Position in 1996 in Selected Transition Economies
2. Capital Inflows in Selected Transition Economies
Figures
1. The Third Oil Boom
2. Oil and Gas Sector in Selected Countries
3. The Adjustment of the Real Exchange Rate and Real Money Balances
4. External Transactions of the Petroleum Sector, 1995-2005
5. Stylized Path of the Real Exchange rate (RER) in a Resource-Rich Transition Economy
6. Exchange Rates in Resourch-Rich Transition Countries
7. Oil Sector Output in Percent of GDP
8. Inflation, Money, and Real Interest Rates
9. Nominal Exchange Rates
10. Fiscal Balance and Gross Domestic Savings
11. Real Effective Exchange Rates
12. Non-Oil Traded Goods Sector Output and Government Consumption
13. Oil Sector Wages and Production in Azerbaijan
Summary
Four newly independent states around the Caspian Sea and in Central Asia have emerged from the former Soviet Union with substantial endowments of oil and gas. Their natural wealth, while an advantage in itself, makes these countries potentially vulnerable to what is often dubbed the “Dutch disease”—the potentially negative effects of an inadequately managed natural resource boom. This paper identifies the economic risks associated with the use of large natural resources in a transition economy and proposes a policy strategy to deal with them. The discussion focuses mainly on Azerbaijan, a country that has already embarked on a path to market reforms and at the same time has made substantial strides toward exploiting its natural resources.
The first part of the paper identifies three areas in which the standard Dutch disease theories could apply to the case of a resource-rich transition economy such as Azerbaijan: short-term macroeconomic adjustment problems related mainly to large, petroleum-related foreign exchange inflows; unbalanced growth, that is, the “crowding out” of the non-oil traded goods sector; and the “waste” of petroleum wealth through unproductive public expenditures.
The paper then examines how the textbook analysis could be expanded to capture the characteristics of transition economies. We identify three areas. First, the currency is generally undervalued in transition countries, which may permit a real appreciation for some time without endangering the competitiveness of the non-oil traded goods sector. We propose a stylized path for both actual and equilibrium exchange rates in such a situation and offer some supporting empirical evidence. Second, strong capital inflows can be expected in successfully transforming economies, even without a resource boom. Third, underdeveloped financial systems are likely to result in a shortage of capital for the non-oil traded goods sectors. More generally, the absence of market mechanisms and institutions threatens the traditional export sectors even in the absence of an oil boom. The first two “transition factors” are likely to add to the speed of actual real appreciation of the currency. And while non-oil traded goods sectors may suffer, this may be primarily due more to structural and institutional rigidities than to the real appreciation of the currency.
Finally, we outline a medium-term policy strategy for Azerbaijan, which could serve as a blueprint for countries dealing with the dual challenge of transition and oil boom. This is done in a comparative framework, relating Azerbaijan’s prospects to the experience in the 1970s of Ecuador, Indonesia, and Nigeria. The strategy relies on policies promoting savings and open trade. At the same time, structural policies need to strengthen the supply side; particular attention should be paid to the capacity for financial intermediation in the banking sector.