Resource Curse and Dutch Disease in Azerbaijan: Empirical Analysis

ABSTRACT: Resource curse theory studies negative effects of natural resource abundance on different sectors of countries such as economy, politics and social life. According to theory, countries with resource abundance develop less than the resource deficit ones. This problem also affects the political life of countries by decreasing institutional quality, increasing corruption and strengthening authority. Decreasing number of school enrolments and hospitals, low wages in education and health sectors are signs of resource curse problem in social life. Dutch disease model is a separate from resource curse theory. Real exchange rate appreciation and decline in non-abundant sectors are main indicators of Dutch disease problem. Most times it is investigated as an economic symptom of resource curse theory. Azerbaijan is one of the natural resource rich countries of former Soviet Union. After regaining its independence, this country enlarged the relations with international community in all fields. Economic integration was also important for this newly independent state. Natural resources, especially oil and natural gas played an active role in this process. Because of this, research papers studying different fields in Azerbaijan increased sharply. It is not surprising that resource curse and Dutch disease theories were more on center of attention in these studies. Different sides of resource curse theory had been researched for case of Azerbaijan during past years. However, there is not any paper investigating resource curse theory completely for sample of Azerbaijan. Hence, the aim of this thesis is to investigate the resource curse problem with economic, political and social sides. The main question of thesis is to determine whether Azerbaijan suffers from resource curse and Dutch disease or not. In other words to find, does oil have negative or positive effect on countrie’s economy, politics and social life?! For studying Dutch disease problem firstly, different tests such as unit root test, causality test, cointegration test, Impulse Response Function, Variance Decomposition are conducted. Then Vector Error Correction model is applied. For supporting previous results two regression models are also used. Then, separately political and social sides of theory have been investigated by using number of linear regression models. According to estimation results, it can be concluded that oil does not create resource curse and Dutch disease in Azerbaijan economy. Also, it became clear that crude oil export is playing an active role in government efficiency increase and development in social sector. Keywords: Resource curse, Dutch disease, VAR model, linear regression model, economic development, institutional quality, social life. …………………………………………………………………………………………………………………………