Natural Resource is curse or blessing for Post-Soviet countries: Case of Russia, Azerbaijan and Kazakhstan.

The scope of natural resources in this article is mainly limited to energy and precious metals production, which covers the majority production of post-soviet countries; Russia, Azerbaijan, and Kazakhstan (RAK). Economically, a natural resource contributes much to the country’s economic growth and employment. Let’s say oil production, has its multiple positive side effects on other industries and services, which enhances the level of activity in all sectors of the economy. Therefore, theoretically and in many cases practically, natural resources considered as a main factor of production, namely economic growth. While the positive effect on economic growth is inevitable, we think the dependency of the economy from natural resource production is a curse for most nations rather than a blessing. In other words, it does not have a similar effect on economic development, freedom of media and speech, democracy and government regulation as it has on economic growth. Here, we briefly analyze the impact of resource dependency on RAK countries, whose major natural resources are oil and gas.

There are some appreciated examples of crude oil and gas producing countries that are considered developed nations, such as Norway, the USA, and Canada. The structure of their economy is highly diversified and not dependent on oil and gas production. The dependency of RAK countries from oil and gas production is enormously high, where share of oil and gas exports in total exports of countries varies from 75% to 95%. The imports are significantly less diversified, and these economies are dependent on imports in many sectors. My descriptive discussion is not relevant for only RAK countries, the pattern is very similar to many other oil and gas producing countries like Saudi Arabia, Qatar, Kuwait, UAE, Venezuela, Libya, Nigeria, Iran, Iraq, and other natural resource-dependent countries. I would like to touch with the main reasons for my approach claiming the natural resource as a curse in RAK countries.

There are many investigations and discussions made in the topic of the resource curse in the academic and amateur literature from which I am inspired. The reasons for my claim are as follows:

1. Appreciated exchange rate: In theory, when exports significantly exceeding imports, causing much foreign currency inflow, which makes local currency expensive (appreciated). The appreciated local currency also means expensive non-oil exports, in other words, the non-oil export sector turns to be less competitive in the global market, as we see in the case of RAK countries. Inversely, imports become cheaper and killing the domestic business in competition, that country’s (RAK) non-oil sector turns to be dependent on imports. The weaker non-oil sector also means weak and inefficient domestic business with loosening hope to combat the imports. That is why, when oil prices decreased from around 100 USD to 35 USD during 2015, all RAK countries faced a remarkable recession and increased unemployment, thus, devaluated their currency by half, because of the imbalance between imports and exports. Which showed the strong dependency of economies from oil income, namely oil prices, which are unstable (volatile) during the month/year. The volatility of oil prices deems the economy to big uncertainty and decreases investment expectations.

This pattern is called “Dutch Disease” among economists. The 1981 UK recession is a nice example of it when the massive discovery of North Sea oil caused to the appreciation of Pound Sterling, and while 1 pound rose significantly from 1.5$ to 2.5$. The recession which was caused by appreciation had some long-lasting negative effects on its policies. Like, it led to the reduction in the investment, exports and consumer spending which ended up with a fall in economic growth.

2.Transparency and low taxation: Income generated from oil&gas exports is spent through either government spending or direct spending through national oil funds. Meaning that the domestic economies are highly dependent on oil&gas rents. The inflow of oil&gas rents thought two sensitive and corruptive channels increasing the transparency of its spending. Moreover, most of the local businesses, whose bosses are mainly government bodies, washing money though mainly construction and other government investments. Who also apparently would not tax themselves through several political supporting. The abundance of dollar inflow to government budget creates extra investment opportunities, from which these businesses are feed. Therefore, the ratio of tax income in the government budget of RAK countries varies between 40-65% in the last 20 years, where developed countries fill at least 90% of their budget from taxes. Lower taxation, less transparency, high corruption, and unfair competition decreases the hope for local businesses to be internationally competitive. It would worth to quote Mr. Larry Diamond’s thoughts here from Stanford University “There are twenty-three countries in the world that derive at least 60 percent of their export from oil and gas and not a single one is a real democracy”.

3.Inefficient investments in education: As a major driving force of economic development and growth, where education is highly underestimated in RAK and also other oil-exporting countries. Investments, which are aimed to wash oil rents are not oriented to enhance the quality of education. Because, the majority of investments are related to infrastructure and construction, where the quality of teachers and education methodology underestimated, the salaries of teachers in these countries are significantly low. Moreover, as the non-oil sector suffers from international competition and is significantly weak, local businesses are not interested in co-operation with universities and research centers, which deteriorates innovation and technology development. Most of the local businesses benefiting from foreign outsourcing and import substitution.

To sum up, the dependency of RAK countries from oil and gas rents enormously slowing economic development, increasing autocracy, keeping local businesses dependent-inefficient-uncompetitive, weakening taxation and regulatory control, rising corruption and increasing government power overpopulation. Therefore, modern literature calls natural resource revenues a curse rather than blessing for many nations, where I would put RAK in the same order.

References

01 Dutch Disease, Available on: https://www.investopedia.com/terms/d/dutchdisease.asp

02 UK Reccesion of 1981, Available on: https://www.economicshelp.org/macroeconomics/economic-growth/uk-recession-1981/

03 Why Natural Resources Are a Curse on Developing Countries and How to Fix it , Available on: https://www.theatlantic.com/international/archive/2012/04/why-natural-resources-are-a-curse-on-developing-countries-and-how-to-fix-it/256508/

17 thoughts on “Natural Resource is curse or blessing for Post-Soviet countries: Case of Russia, Azerbaijan and Kazakhstan.

  1. It’s interesting to get an economic perspective on why an economy that relies heavily on oil may cripple itself. Having any one resource be the mainstay of an economy seems like a bad idea because if production or availability of that resource decreases, there isn’t much to fall back on. However, oil being a resource that is highly desired by industrialized nations globally while being mainly controlled by governmental agencies rather than individual businesses probably makes it predisposed to causing the conditions you discuss.

    Liked by 2 people

  2. Thanks for following my blog. I’m impressed to meet such an enterprising young man!

    I, too, believe that economies of the future will be focused on sustainability and green solutions. Our planet has been raped and pillaged for way too long, including many species. The oil and mining industries to not sustain life, destroy the environment and the health of the people. I believe a truly positive, thriving and sustainable economy is one that is for the greater good of the all, not just a few.

    On one of the charts, the US is listed as having a high income…but in reality, that is only for a few, a few who have been quite successful in raping and pillaging. Much of the US are living in poverty, many are homeless, and while certainly quality of life might be higher than some 3rd world countries, much of it is not.

    Best wishes in your continued pursuit of knowledge and understanding!

    Liked by 2 people

  3. Pingback: Natural Resource is curse or blessing for Post-Soviet countries: Case of Russia, Azerbaijan and Kazakhstan. — Junior Economist – Truth Troubles

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