Aaron in Azerbaijan

Just another blog about Azerbaijan.

I Got Sloppy

with one comment

I put up this post rather quickly and without much depth of thought as you can see from the comments.  Not that I’m always deep in thought, but I was especially careless here.  Two things:

1) As Tim pointed out in the comments, there are two ways to peg your currency.  Without bothering to look deeper, I had assumed that Azerbaijan did it like the Chinese do, artificially pegging their Manat to the Dollar.  Instead, they actually do use heavy market intervention, using foreign reserves to manipulate their currency and maintain the current rate, .81 AZN to 1 Dollar.  This seemed unlikely to me, as that means that there is a government worker here who has the job of monitoring their currency reserves and manipulating the market.  That seemed to me like too much work for an Azerbaijani government employee.  I was wrong, apparently.

2) I off-handedly regarded Azerbaijan’s oil wealth as a sad discovery.  Without backing that up, that might be a pretty sad statement itself.  What I meant is that because of Azerbaijan’s current governance structure and their status as a relatively poor country, the presence of oil may actually be working against them.  First, there is the problem of Dutch Disease, which says that the influx of foreign investment and revenues from our favorite resource, oil in this case, is going to cause appreciation of the real exchange rate.  That in turn makes trade sectors less competitive, as their goods will be more expensive on the international market.  Sectors such as agriculture and manufacturing are generally the most affected.  Since those are sectors where workers are most likely to pull themselves out of poverty, or at least raise their standard of living, that puts a hurt on a majority of people.

Concerning governance, we also see that governments flush with natural resource endowments fail to make strong pushes to develop non-oil sectors. Azerbaijan is not necessarily showing the foresight needed to avoid these problems and the prospect of a serious crash when the oil runs out.  And the oil will run out.  You can see from that ADB report that agriculture and manufacturing suffered while oil did just fine.  This is to be expected in years of crisis, but current policies don’t reflect encouraging signs of a coming economic diversification.  A great example is what Evan writes about here, where government officials are pressing the tourism button on the economy, but the prospects are dismal, and the positive effects of tourism on the poor can be dubious.  Beyond just the economics, there are also concerns about human rights.  As can be seen by recent stifling of media and political parties, with some cases even going to the European Court of Human Rights, Azerbaijan’s government is much more focused on maintaining its power, maintaining a certain brand of stability, rather than focusing on the welfare of its people.  Whether this is a cause or a correlation, I couldn’t say.  What I can say is that the government has strong incentives to tolerate little dissent in order to maintain strong sources of foreign investment.

For an anecdote about the oil curse, read about the transformation of Venezuela here.  If you want to geek it up with me, read an analysis of the resource curse by Jeffrey Sachs and Andrew Warner here.  There is a great article comparing the governance structures of Russia and Azerbaijan, and discussing their success in managing their oil industries here (it’s behind a pay-wall, but they let me sign in as a guest to download the document).


Written by Aaron

May 6, 2010 at 2:48 pm

Posted in Uncategorized

One Response

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  1. […] in Baku and along the pipelines that traverse the physical landscape.  I wrote a few things in this previous post about the relationship the government has with its citizens and how it interacts with its more […]

    Aaron in Azerbaijan

    May 17, 2010 at 9:28 am

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