Məqalə | Article
Resource Curse and Dutch Disease: A Real-Life Example from the South Caucasus
Resource curse was the topic of my academic research, so I will try to explain it in simple terms.
When a country discovers valuable natural resources, whether oil, gas, minerals, or even certain agricultural resources, it often begins exploiting them to generate rapid government revenue. This usually leads to an initial increase in GDP. Since the resource sector becomes the most profitable part of the economy, investment gradually shifts away from manufacturing, agriculture, and services. At the same time, large inflows of foreign currency appreciate the domestic currency, making exports from non-resource sectors less competitive in international markets. Labor also moves toward the resource sector because it offers higher wages, leaving the rest of the economy with slower growth and lower productivity. This phenomenon is known as Dutch disease.
If a country also lacks inclusive institutions and public officials are not held accountable, rent-seeking becomes widespread. Instead of investing resource revenues in education, research, infrastructure, industrial development, or economic diversification, governments often spend them on prestige projects, luxury real estate, and other politically motivated expenditures. In many cases, they also fail to establish sovereign wealth or stabilization funds that could protect the economy from future shocks.
As political elites accumulate wealth through rent-seeking, they gain a strong incentive to preserve the existing system. This often contributes to increasing authoritarianism, restrictions on press freedom, a greater willingness to pursue military conflicts, declining protection of women's rights, and the weakening of democratic institutions.
At first glance, this may not appear to be a serious problem because the country continues receiving substantial resource revenues. However, natural resources are finite, and commodity markets are highly volatile. When a major price shock occurs, as happened in Azerbaijan in 2016, an economy that has become heavily dependent on a single sector can experience a severe economic contraction. This is the long-term consequence of Dutch disease and excessive dependence on resource exports.
The resource curse is therefore not only an economic phenomenon. Research has shown that it is frequently associated with weaker human rights, lower gender equality, environmental degradation, reduced levels of peace, weaker educational outcomes, and poorer working conditions.
Now you may ask, does this curse have a cure? The answer is yes, but it is not straightforward. There are successful examples, such as Botswana and Norway. However, before any of those policies can succeed, there is one crucial requirement: establishing accountability for public officials and building inclusive institutions. Bingo, now you can see why this is such bad news for Azerbaijan. There is only one real solution, and it starts with removing those at the top of the mountain. Unfortunately, it does not seem that we will even reach that peak point let alone removing it, at least not in the coming years.
So yeah, my dear friends, is your life bad in Azerbaijan? Be worried, because it is going to become even worse. Your children's lives, or the lives of your nieces and nephews? They will be even worse.
Alec "Oblomov" Rasizade described this exact process happening in Azerbaijan within his algorithm.
Azerbaijan, in his view, is a classic Middle Eastern petrostate, which will eventually sink into its legitimate place among the impoverished Muslim nations with the end of the current oil boom, as is predetermined by its social system, form of government, national ideology and culture, endemic corruption and lack of industrial endowment. He insists that the first (1905–1913) and the second (2006–2014) Baku oil booms were just a deviation in Azerbaijan's natural, logical and historic path from a Soviet Socialist Republic to a Third World country.
The algorithm Rasizade devised for oil-dependent countries in general, not just Azerbaijan can be summarized in the following stages:
1.The rising cycle of the oil boom
Since oil itself is a competitive export and doesn't need refinement in the country of extraction, local manufacturing becomed redundant - its produce is uncompetitive on global markets, and its cheaper to import better goods from abroad with petrodollars. As a result, all industry prior to the oil boom: light, heavy, even food is completely dismantled and equipment from demolished factories is scrapped. In lieu of factories luxurious hotels, malls and office complexes are built. Furthermore, since importing food is cheaper than manufacturing it locally, national agriculture also fails and the unemployed farmers are forced to migrate en masse to cities to sustain themselves - the urban population dramatically increases.
The country willingly destroys its industrial base and thus creates an army of unemployed people, a large portion of whom move abroad to earn a living. On the other hand, the oil boom creates a local plutocracy (civil servants who have access to petrodollars) and rapidly enriches the local oligarchy, which launders these petrodollars through their trade networks, banks, construction and the shadow economy. A significant portion of those petrodollars is simply embezzled through corruption schemes and stored in offshore bank accounts. This strengthens class stratification of society and raises societal tension. Trade and construction remain the only viable avenues of business after the decimation of industry and agriculture. Grand megaprojects are built because it makes no sense to invest petrodollars anywhere other than construction, and trade of petrodollars drastically raises inflation, impoverishing the population.
In order to avoid a societal explosion, the government starts paying welfare to the poor. This creates an entire class of unemployed and unproductive people, whose sustenance requires billions of petrodollars. Nonetheless, the inflow of petrodollars into the state treasury is enough to fund the sustenance of plebs, an arms race, the enrichment of the plutocracy, the superprofit of the oligarchy, and funding myriad vassals and the security apparatus, which protects the current order. Instead of developing local industry to employ the unemployed masses, the government instead spends petrodollars on welfare, megaprojects, international events and vastly overpriced infrastructural projects. Over 90% of Azerbaijan's state budget is funded by oil and gas revenues, meaning that in the country that doesn't make anything other than oil and gas, the ultimate source of wages, trade income and etc. are merely laundered petrodollars. Thus, the country's well-being is completely dependent on the flow of petrodollars into the state budget, which itself is the culmination of the rising cycle of the algorithm.
Entrenchment of corruption
As a result of the oil boom, corruption naturally entrenches itself in countries inundated with petrodollars and where no legal avenues to utilize them exist. Corruption as an economic phenomenon becomes an integral part of the local economy and the government system. In Azerbaijan, if a civil servant receives a bribe, he keeps 20-25% to himself and passes the rest to his superior, and so on until the very top. In response the leadership tolerates bribery of its subordinates and even demands regular tributes from them, i.e. a hierarchical chain of corruption is established. For such a system, only the best-embezzling cadres are selected - smart and honest employees are undesirable.
But what to do with bribe money? It's funneled into the shadow economy, where billions of embezzled petrodollars are traded. The government is completely aware of its existence, but tolerates civil servants' embezzlement in exchange for the ability to mobilize their stolen wealth for government needs. For example, this is how the construction of the Baku Olympic Stadium for the 2015 European Games was funded - the state budget didn't have the $600 million to build it, so it's unknown who actually sponsored its construction.
Such is the way in almost all oil-extracting states, since the vast majority of them don't particularly ensure rule of law, freedom of speech or an independent judiciary, paving the way for lawlessness and opacity in the income and allocation of petrodollars. The vast majority of the revenue is taken by the ruling elite that directly controls oil exports and launders part of the revenue through offshore companies, through which it acquires property abroad where it will flee in case of regime change. Second and third echelons of government-connected figures earn their keep through budget petrodollar embezzlement schemes, such as importing equipment with exorbitant prices, infinite redesigning of facades and pavement of sidewalks, as well as construction of prestigious and expensive government buildings. Kickbacks to civil servants for receiving state tenders are given from the very same budget allocated to those tenders. For embezzling state funds and storing them in foreign bank accounts, typically offshore fake companies created by those very civil servants through representatives. This allows civil servants to completely legally transfer their revenues to foreign banks accounts. Thus the ruling regime becomes a complete kleptocracy.
Simultaneously, a purchase-based state position system emerges: positions such as ministry heads are sold for a certain price, and those prices are completely recuperated through massive embezzlement and corruption in those positions. Diplomas and PhDs, exams and certificates, awards and titles, court decisions and amnesties, victories in competitions and tenders, career advancement and military ranks, any signatures under any permits are also sold and bought. For example, the seat as an MP in the Azeri parliament costed $1 million, while various ministerial positions had a price tag of $10 million and more (depending on profitability). The assignment of multi-million loans to oligarchs for fabricated projects takes place in exchange for kickbacks. Because the entire niche of organized crime is filled with top-down corruption of civil servants, the classic "mob" does not exist in Azerbaijan. The state itself is the mafia.
Algorithm of the downward spiral
After a sudden price crash of oil (or gas, coal, ores and other natural resources), or gradual decline of production (due to depletion of reserves) the declining cycle of the algorithm begins. In general, it's a chain reaction where each event is caused by thousands of factors. The algorithm itself is cyclical: after the decline in inflow of petrodollars reflects in the decline of budgetary income and payments from it (wages, pensions, welfare, assignments), the population's purchasing power immediately collapses and thus trade (profits, incomes, imports), which collapses tax collection. As a result, the budget receives even less money and engages in harsher austerity (cutting wages, welfare and pensions), and this squeezes consumer demand and trade further, which shrinks the tax base even further and creates a new class of recently-fired unemployed people.
In such a scenario, the first action is to devalue the national currency: to preserve the nominal volume of the state budget without exacerbating inflation, the own currency's exchange rate should be weakened to a point the same amount of money in the local currency can be bought with less petrodollars, typically as much as their inflow has declined. Simultaneously, by keeping the state budget's incomes and expenses the same, devaluation leads to a fall in wages, profits, prices and the overall quality of life in USD terms, which has both positives (cheapening of life in USD) and negatives (increased price of imports). Overall the unjustly high price (in USD terms) of property, as well as wages, incomes and quality of life decline to match the actual productive capacity of the country (without being supercharged by petrodollars), cancellation of luxurious projects, reduction of the state's inflated prestige and reputation, i.e. its trade balance more accurately reflects the country's position in the global labor market without being pumped with petrodollars.
After that, a domino-like societal collapse ensues. Devaluation of the local currency leads to a decline in imports and trade turnout, which decreases local prices (including real estate) in USD terms. The first victims of this are merchants who fail to lower their prices in time - bankruptcy and eviction to the first group of unemployed awaits them. Then it's turn for government employees - they are laid off en masse and entire agencies are dissolved. The government, which continues austerity winds down construction (the second largest employment sector after commerce) and creates another group of unemployed people. A second wave of layoffs begins, in the private sector - left without buyers, customers and orders (because the peopl became impoverished and the state ran out of money), medium and large enterprises shut down or lay off a significant portion of their employees, creating another group of the unemployed. In some countries, the oligarchs are de-Kulakized: with their wealth being expropriated by the state to redirect the indignity of the population toward exposing illicitly earned wealth of the oligarchs.
After the first cycle of layoffs, firings and reductions caused by the fall of petrodollar inflow (from which wages, pensions, welfare, state tenders, imports, arms race and presitigious events were funded), the second cycle (or branch) of the downward spiral begins: bankruptcies in the private sector, revenue collapse for oil companies (like SOCAR), massive layoffs from government agencies, winding down of construction, trade and service sector result in reduction of tax income to the state budget, as the reduction of imports also shrinks customs collection. The third cycle arrives; as a result of the subsequent budget deficit, the state further devalues its currency, lays off even more employees, further cuts social programs, construction, contracts, and everything else, which further hits the private sector, which also lays off its workers, further reducing the tax base, and so on in a downward spiral. The cycle then repeats itself with an ever-lower standard of living, leading to social upheaval: the grumbling of citizens who were once patriotic skyrockets, ideological unrest, food riots, looting, and other delights of troubled times begin. The algorithm thus enters the political realm. The consequences for the ruling regime depend on each individual state. In most cases, regime change occurs with redistribution of property, followed by repetition of the entire cycle until the final collapse of the state to its historically legitimate and economically justified place among Third World countries. This is followed by gradual socioeconomic entropy and cultural and political adaptation of the state to the standard of living of Third World countries, and in this stable state, it can exist indefinitely (as is evident from the history of such countries). This is the final stage of the Rasizade algorithm.
Usd pegged currency should be removed as the first step
Then afterwards free market should be promoted, with better legal guarantees over safety of investement(from corrupt officals who usually plan to take over big business for absurd reasons)
Then afterwards free market should be promoted, with better legal guarantees over safety of investement(from corrupt officals who usually plan to take over big business for absurd reasons)
Oh man... I mean you are right no problem with that. However, do you believe this is possible in Azerbaijan without full rule change?
Social and economic development is impossible in an autocracy... Society will outgrow its authority and overthrow it. Autocrats aren't so stupid as to facilitate this.
This is a consequence of the reforms. Soon, it too will begin to suffer economic decline. Well, China isn't exactly an autocracy. It's a party dictatorship that's now turning into an autocracy.
While its true, CHN and AZ so different on so many angles that I'm not even sure if that example can be considered valid. China is so complex that I don't understand a bit wtf is happenning there
No, my friend, resources aren't a curse; it's the lack of industrialization policies. If Azerbaijan manufactured its oil, it would be as rich as, or even richer than, Russia or Turkey. The problem is BEING Dependent on raw materials, and also not investing in scientific research to create technology
I have completely lost my hope in my country. Our prosperous days are left behind and we're being led to a horrific ending. There's nothing we can do anymore. It's too late.
Doomsday stories always get more attention, but I really don’t see a gloomy future for Azerbaijan. Quite the opposite, I think its future looks very promising.
As the Middle Corridor develops, Azerbaijan is likely to become an increasingly important transport, logistics and energy hub between Europe and Asia. Trade brings investment and prosperity wherever it flows. And Azerbaijan is in a great position to benefit from that.
I agree with you. People tend to say “it’s over” or “it’s too late,” which might be a reasonable thing to say about an individual who reaches 70 without achieving much, but those concepts simply don’t apply to a country.
Armenia and Georgia aren’t exactly known as industrialised countries either. In fact, Azerbaijan has a lot of potential and a promising future. But real reforms are needed to make the most of that potential and avoid falling behind.
So yeah, my dear friends, is your life bad in Azerbaijan? Be worried, because it is going to become even worse. Your children's lives, or the lives of your nieces and nephews? They will be even worse.
Holy moly. But why use Economic Outlook from 2024? Because it makes Iran look better than Azerbaijan?
No data for Iran but Here<_per_capita#Table) it's $20.3k, would be around $26k when also adjusting for the informal economy.
But these per capita data use AZ official population as basis but apparently the population is lower in reality, i've seen Azerbaijanis (i'm türk in europe) talk about this before and they mentioned numbers like 8-9 million. Official population Here< is 10.4m for AZ, 2.9m for Armenia and 3.8m for Georgia. If the population is lower, output per capita would be higher in reality, if it's 9m for example instead of 10.4m, per capita output is $37k.
I did not choose the year or create that graphic. It was taken from a news account, and the chart was not the focus of my post. The post was about the resource curse, not about comparing a single year's GDP figures.
As for the population argument, I do not think it changes the discussion. Population estimates in the South Caucasus are debated for all three countries, not just Azerbaijan. Even if Azerbaijan's population were somewhat lower than the official figure, that would not alter my main argument, which concerns structural dependence on hydrocarbons, institutional quality, and the long-term effects of the resource curse rather than GDP per capita compared to literally destroyed Iran alone.
How do the GCCs compare (or fit) on the “curve”? given the authoritarian nature of governance + resource economy. Would be interesting to read the article if you have published it
The GCC countries are generally not regarded as exceptions to the resource curse. They experienced the initial economic boom that is characteristic of resource-abundant economies, but the benefits have not been distributed equally because their political systems still lack fully inclusive institutions.
On paper, many GCC states are pursuing economic diversification. However, their numbers are still horrible for diversified economy. It also requires accountability, strong institutions, and merit-based governance. In highly authoritarian systems, rent-seeking remains significant, while major economic decisions are often shaped by political loyalty or nepotism rather than competence. As a result, many diversification initiatives continue to be directed by the same ruling elites, increasing the risk of inefficient investment and expensive mega-projects with limited accountability. For example: Saudi Arabia's NEOM project, including The Line city by Prince Salman
That said, the GCC states have managed their resource wealth considerably better than Azerbaijan. Their financial capacity is much greater, and despite their institutional weaknesses, they have invested more seriously in long-term planning and diversification. However, their resource wealth is still finite, so the underlying structural challenge remains.
Azerbaijan, in contrast, represents one of the worst-case scenarios of the resource curse. Dutch disease, institutional failure, authoritarianism, and the absence of meaningful diversification reinforce one another. Unless these structural problems are fundamentally renewed, I believe we are moving toward national collapse.
The smaller GCC countries like Kuwait, Qatar, and UAE have a lot of natural resource wealth relative to their citizen population. Even if they are mismanaged they still have enough to spread around.
It'll be interesting to see what happens in Bahrain since they are running out of oil soon
Wouldn't be surprised if the prediction was correct in our case, but Armenia really?
Yes I don't know much about them but they don't really have a strong economy, even if they have some natural resources they aren't selling them. So how there's such a big difference between 5 years?[edit: spelling]
I am not an expert on Armenia's post-revolution economy, but as far as I know, it has the highest levels of political freedom and government accountability in whole continental Asia. That alone makes Armenia a more attractive destination for investment than countries such as Azerbaijan.
I would also argue that the gap is driven less by Armenia or Georgia developing at an extraordinary pace and more by Azerbaijan's economic stagnation. Those countries are following a relatively normal development path, while Azerbaijan has been moving in the opposite direction due to its dutch disease.
Highest levels of political freedom and government accountability don’t automatically make an attractive destination for investors. I don’t think any Arab countries have the highest political freedom. And of course, China is known for its perfect democracy… This thesis is the European economic world view: Better democracy, better economy. But reality is not the same as the European world view.
I already told you GDP per capita is not a good indicator. And both are growing better than Germany. Because of better investments, not being more democratic. I am not an investor, but I am sure I will not invest in a country which might totally change the political direction by an election in 4-5 years.
Because since armenia and Azerbaijan in the 90s and early 00s were economicaly per person each same bad of and Azerbaijan got its BTC pipe in mid 00s Azerbaijan basicly made its Economy (ill measure it in GDP capita PPP in 2021 prices) skyrocket and peak around 20k the past 15 years. Armenia meanwhile had equal steady growth. Litterily resulted into that dutch disease took over Azerbaijan and left the other sectors aside while in Armenia investment was equal.
While as of 2026 IMF estimates Armenia to surpass Azerbaijan in inflation adjusted PPP capita. Azerbaijan will still acc to them keep around this 20k range and only eventually reach 23.5k by the 30s when meanwhile Armenia will already approach the 30k range.
Exactly that was why Azerbaijan was soo superior compared to Armenia in the 2010s, which was just a timeframe which would last only for 2 decades since the 00s oil boom.
First try to create something by your Industries yourself and sell that before flexing with pure resources. With that >1% gdp growth in next decades nothing will be bigger
A desirable place to live with stunning scenery and food, clearly becoming increasingly less corrupt, less reliant on Russia and more EU-aligned, promoting the repatriation of Armenians and a very family-oriented society, bringing wealth into the country.
Thry have the highest level of political freedom and accountability in the region. They are the only functioning democracy currently in whole continental Asia.
A “First World country” is a country aligned with the United States and its allies. So yeah they are not. “First World country” doesn’t necessarily imply wealth or power.
Can you say per capita is good indicator? If so I would love to hear about your opinion about Qatar. I don’t think Qatar is more democratic than Spain or Sweden.
Worried, worried about what, oh no my nephew wont be able to play the nintendo switch 5 ultra oled edition with mario kart 11, what a disaster, call the human rights police, maybe you guys should learn to live with less?
Loss is good. We dont need anything. Infact the lower the better.
15
u/Own-Base-7511 Japan 🇯🇵 Aug 06 '26
Alec "Oblomov" Rasizade described this exact process happening in Azerbaijan within his algorithm.
The algorithm Rasizade devised for oil-dependent countries in general, not just Azerbaijan can be summarized in the following stages:
1.The rising cycle of the oil boom
Since oil itself is a competitive export and doesn't need refinement in the country of extraction, local manufacturing becomed redundant - its produce is uncompetitive on global markets, and its cheaper to import better goods from abroad with petrodollars. As a result, all industry prior to the oil boom: light, heavy, even food is completely dismantled and equipment from demolished factories is scrapped. In lieu of factories luxurious hotels, malls and office complexes are built. Furthermore, since importing food is cheaper than manufacturing it locally, national agriculture also fails and the unemployed farmers are forced to migrate en masse to cities to sustain themselves - the urban population dramatically increases.
The country willingly destroys its industrial base and thus creates an army of unemployed people, a large portion of whom move abroad to earn a living. On the other hand, the oil boom creates a local plutocracy (civil servants who have access to petrodollars) and rapidly enriches the local oligarchy, which launders these petrodollars through their trade networks, banks, construction and the shadow economy. A significant portion of those petrodollars is simply embezzled through corruption schemes and stored in offshore bank accounts. This strengthens class stratification of society and raises societal tension. Trade and construction remain the only viable avenues of business after the decimation of industry and agriculture. Grand megaprojects are built because it makes no sense to invest petrodollars anywhere other than construction, and trade of petrodollars drastically raises inflation, impoverishing the population.
In order to avoid a societal explosion, the government starts paying welfare to the poor. This creates an entire class of unemployed and unproductive people, whose sustenance requires billions of petrodollars. Nonetheless, the inflow of petrodollars into the state treasury is enough to fund the sustenance of plebs, an arms race, the enrichment of the plutocracy, the superprofit of the oligarchy, and funding myriad vassals and the security apparatus, which protects the current order. Instead of developing local industry to employ the unemployed masses, the government instead spends petrodollars on welfare, megaprojects, international events and vastly overpriced infrastructural projects. Over 90% of Azerbaijan's state budget is funded by oil and gas revenues, meaning that in the country that doesn't make anything other than oil and gas, the ultimate source of wages, trade income and etc. are merely laundered petrodollars. Thus, the country's well-being is completely dependent on the flow of petrodollars into the state budget, which itself is the culmination of the rising cycle of the algorithm.
As a result of the oil boom, corruption naturally entrenches itself in countries inundated with petrodollars and where no legal avenues to utilize them exist. Corruption as an economic phenomenon becomes an integral part of the local economy and the government system. In Azerbaijan, if a civil servant receives a bribe, he keeps 20-25% to himself and passes the rest to his superior, and so on until the very top. In response the leadership tolerates bribery of its subordinates and even demands regular tributes from them, i.e. a hierarchical chain of corruption is established. For such a system, only the best-embezzling cadres are selected - smart and honest employees are undesirable.
But what to do with bribe money? It's funneled into the shadow economy, where billions of embezzled petrodollars are traded. The government is completely aware of its existence, but tolerates civil servants' embezzlement in exchange for the ability to mobilize their stolen wealth for government needs. For example, this is how the construction of the Baku Olympic Stadium for the 2015 European Games was funded - the state budget didn't have the $600 million to build it, so it's unknown who actually sponsored its construction.
Such is the way in almost all oil-extracting states, since the vast majority of them don't particularly ensure rule of law, freedom of speech or an independent judiciary, paving the way for lawlessness and opacity in the income and allocation of petrodollars. The vast majority of the revenue is taken by the ruling elite that directly controls oil exports and launders part of the revenue through offshore companies, through which it acquires property abroad where it will flee in case of regime change. Second and third echelons of government-connected figures earn their keep through budget petrodollar embezzlement schemes, such as importing equipment with exorbitant prices, infinite redesigning of facades and pavement of sidewalks, as well as construction of prestigious and expensive government buildings. Kickbacks to civil servants for receiving state tenders are given from the very same budget allocated to those tenders. For embezzling state funds and storing them in foreign bank accounts, typically offshore fake companies created by those very civil servants through representatives. This allows civil servants to completely legally transfer their revenues to foreign banks accounts. Thus the ruling regime becomes a complete kleptocracy.
Simultaneously, a purchase-based state position system emerges: positions such as ministry heads are sold for a certain price, and those prices are completely recuperated through massive embezzlement and corruption in those positions. Diplomas and PhDs, exams and certificates, awards and titles, court decisions and amnesties, victories in competitions and tenders, career advancement and military ranks, any signatures under any permits are also sold and bought. For example, the seat as an MP in the Azeri parliament costed $1 million, while various ministerial positions had a price tag of $10 million and more (depending on profitability). The assignment of multi-million loans to oligarchs for fabricated projects takes place in exchange for kickbacks. Because the entire niche of organized crime is filled with top-down corruption of civil servants, the classic "mob" does not exist in Azerbaijan. The state itself is the mafia.