Azerbaijan Moves to Avoid Downside of Oil Wealth
FrontLines - March 2009
By Paul Davis
“Dutch disease” or the “resource curse” refers to countries that have windfall profits from oil or other natural resources—but the good luck turns bad.
(Dutch disease refers to a 1960s economic crisis in the Netherlands precipitated by a decline in the manufacturing sector after natural gas was discovered.)
Azerbaijan may be the latest example—two years ago new oil and gas production led to a dramatic
influx of foreign revenue that drove up the value of the Azeri currency, making local industries unable to compete with cheaper foreign goods.
Increased government spending—
a byproduct of the increased oil revenues—fed domestic inflation. About one-fifth of Azerbaijanis lived below the poverty line.
USAID worked with Azerbaijan,
the World Bank, and the International
Monetary Fund (IMF) to ensure the country’s oil earnings are managed efficiently and transparently,
and benefit the people.
In late 2007, Arnold C. Harberger, USAID’s chief economic
advisor, visited Azerbaijan for two weeks to share his more than 50 years of experience working with developing
and transitional economy countries on similar challenges. Harberger emphasized to key economic officials the need to:
- spend oil income at a moderate
pace to limit inflation and save for the future;
- be sure infrastructure and other improvements are cost effective; and
- increase trade and agricultural productivity.
Over the past year, the USAID mission in Azerbaijan worked with the State Oil Fund to improve oversight. Once adopted, this will strengthen protection of the fund for future generations.
USAID also worked with the government on: trade reforms that helped jumpstart previously dormant negotiations and move the country closer toward membership
in the World Trade Organization; a market-oriented food security strategy; and improved Central Bank policies that helped stem inflation and maintain public confidence in the banking system.
USAID also worked with the government to make changes in the country’s business environment. Consequently, Azerbaijan’s Doing Business ranking, a World Bank measure of the ease of doing business
in a country, improved by 64 places—from 97 to 33—between 2008 and 2009. This is the largest single improvement in the history of the Doing Business survey.
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