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Principal component and regressionanalysis of the natural resource cursedoctrine in the Azerbaijani economy

Year 2022, Volume: 9 Issue: 4, 225 - 239, 14.11.2022

Abstract

The Azerbaijani economy has long been discussed in academic literature with reference to the theories of the nat-ural resource curse (NRC) and Dutch disease. This is due to Azerbaijan’s heavy dependence on the oil and gas industry for its economic growth and development since 1995. While revenues from mineral resources helped over-come extreme poverty and increased GDP and GDP per capita, macroeconomic stability was shaken by the sharp decline in commodity prices in 2014 and 2015. This reality prompted scholars to look into the significance of NRC and Dutch disease in Azerbaijan. This paper therefore aims to contribute to the literature by analyzing NRC using principal component and regression techniques (dynamic and ordinary least squares) in a way that has not been studied before. The results of this study show that the oil industry had a negative impact on institutional quality in Azerbaijan between 1996 and 2019, which may translate into further negative impacts. For this reason, the human capital channel of NRC was tested for possible negative impacts of NRC and several negative associations were found. These results indicate that policymakers need to take the NRC doctrine more seriously. Although the first oil boom (2005–2014) is over, the Azerbaijani economy is facing a second oil boom starting in 2020, and the lowered quality of institutions could significantly reduce the benefits of mineral revenues if left unmanaged.

References

  • ACEMOGLU, D., JOHNSON, S., & ROBINSON, J. A. (2005). Institutions as the fundamental cause of long-run growth, In Handbook of Economic Growth, (Eds) P. Aghion and S. Durlauf, Vol. 1, Amsterdam, Netherlands, 385-472. ALTSTADT, A. (2018). Frustrated democracy in post-Soviet Azerbaijan. New York: Columbia University Press, ISBN 9780231704564. AMINEH, M. P. (2006). The resource curse: Oil-based development in Central Asia. International Institutefor Asian Studies Newsletter, No. 42, 27. AREZKI, R., LOUNGANI, P., VAN der PLOEG, R., & Venables, A. J. (2014). Understanding international commodity price fluctuations. Journal of International Money and Finance, 42, 1-8.AUTY, R. (2001). Resource abundance and economic development. Oxford: Oxford University Press .AUTY,R., & WARHURST, A. (1993). Sustainable development in mineral exporting economies. Resources Policy, 19(1), 14-29. BAYULGEN, O. (2005). Foreign investment, oil curse, and democratization: A comparison of Azerbaijan and Russia. Business and Politics, 7(1), 1-37. BHATTY, R. S. (2002). Tough choices: Observations on the political economy of Armenia, Azerbaijan, and Georgia. Unpublished World Bank report. BIRESSELIOGLU, M. E., DEMIR, M. H., GONCA, A., KOLCU, O., & YETIM, A. (2019). How vulnerable are countries to resource curse? A multidimensional assessment. Energy Research & Social Science, 47, 93-101. BRO, R., & SMILDE, A. K. (2014). Principal component analysis. Analytical Methods, 6(9), 2812-2831 BUSSE, M., & GRÖNING, S. (2013). The resource curse revisited: governance and natural resources. Public choice, 154(1), 1-20. CZECH, K. (2018). Oil dependence of post-Soviet countries in the Caspian Sea region: The case of Azerbaijan and Kazakhstan. Acta Scientiarum Polonorum. Oeconomia, 17(3), 5-12. DIEN, J. (2010). Evaluating two-step PCA of ERP data with geomin, infomax, oblimin, promax, and varimax rotations. Psychophysiology, 47(1), 170-183. ESANOV, A., RAISER, M., & BUITER, W. (2005). Nature’s blessing or nature’s curse? In Energy, Wealth and Governance in the Caucasus and Central Asia, (Eds.) Auty, R., & de Soysa, I., Central Asia Research Forum, 39-56 .FARISS, C. J. (2019). Yes, human rights practices are improving over time. American Political Science Review, 113(3), 868-881. FRANKE, A., GAWRICH, A. & ALAKBAROV, G. (2009). Kazakhstan and Azerbaijan as post-Soviet rentier states: Resource incomes and autocracy as a double ‘curse’ in post-Soviet regimes. Europe-Asia Studies, 61(1), 109-140. FRANKE, A., & GAWRICH, A. (2010). Autocratic stability and post-Soviet rentierism: The cases of Azerbaijan and Kazakhstan. In Are Resources a Curse (Eds.) Gawrich. A., Franke, A., & Windwehr, J., (pp. 71-99). Barbara Budrich Publishers, Leverkusen Opladen, Germany. JABA, E., IONESCU, A. M., IATU, C., & BALAN, C. B. (2009). The evaluation of the regional profile of the economic development in Romania. Analele Stiintifice ale Universitatii “Alexandru Ioan Cuza” din Iasi - Stiinte Economice, 56(1), 537-549. GULBRANDSEN, L. H., & MOE, A. (2007). BP in Azerbaijan: A test case of the potential and limits of the CSR agenda? Third World Quarterly, 28(4), 813-830. GULIYEV, F. (2009). Oil wealth, patrimonialism, and the failure of democracy in Azerbaijan. Caucasus Analytical Digest, (2), 2-5. GYLFASON, T., & ZOEGA, G. (2006). Natural resources and economic growth: The role of investment. World Economy, 29(8), 1091-1115. HAILU, D., & KIPGEN, C. (2017). The Extractives Dependence Index (EDI). Resources Policy, 51, 251- 264. HAUSMANN, R., HWANG, J., & RODRIK, D. (2007). What you export matters. Journal of Economic Growth, 12(1), 1-25. HAVRO, G., & SANTISO, J. (2017). To benefit from plenty: Lessons from Chile and Norway. Policy Brief, No. 37, OECD Development Centre. HEINRICH, A. (2010). The formal political system in Azerbaijan and Kazakhstan: A background study. No. 107, Arbeitspapiere und Materialien – Forschungsstelle Osteuropa, Bremen. HOFFMAN, D. I. (1999). Oil and development in post-Soviet Azerbaijan. NBR Analysis, No. 10, 5-28. JOLLIFFE, I. (1990). Principal component analysis: A beginner’s guide - I. Introduction andapplication. Weather, 45, 375-382. KAISER, H. F. (1974). An index of factorial simplicity. Psychometrika, 39(1), 31-36. KALYUZHNOVA, Y., & KASER, M. (2005). Prudential management of hydrocarbon revenues in resource-rich economies. United Nations Economic Commission for Europe, Discussion Paper Series, No. 2005.4 KASER, M. (2003). The economic and social impact of systemic transition in Central Asia and Azerbaijan. Perspectives on Global development and Technology, 2(3), 459-473. KENDALL-TAYLOR, A. (2012). Purchasing power: Oil, elections and regime durability in Azerbaijan and Kazakhstan. Europe-Asia Studies, 64(4), 737-760. KHANNA, P. (2011). Azerbaijan: The cork in the Caspian bottle. Russia and the moslem world, 7, 229. KRONENBERG, T. (2004). The curse of natural resources in the transition economies. Economics of transition, 12(3), 399-426.KRUGMAN, P. (1987). The narrow moving band, the Dutch disease, and the competitive consequences of mrs. thatcher: Notes on trade in the presence of dynamic scale economies. Journal of development Economics, 27(1), 41-55. LAURILA, J., & SINGH, R. (2001). Sequential reform strategy: The case of Azerbaijan. Russian & East European Finance and Trade, 37(3), 25-76. LUCAS, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42. MAHNOVSKI, S. (2003). Natural resources and potential conflict in the Caspian Sea region, Caucasus: Implications for the U.S. Army, RAND, In Faultlines of Conflict in Central Asia and the South, (Eds.) Olga O., & Thomas S., Santa Monica, 109–143. MATSUYAMA, K. (1992). Agricultural productivity, comparative advantage, and economic growth. Journal of Economic Theory, 58(2), 317–334. O’LEAR, S. (2007). Azerbaijan’s resource wealth: Political legitimacy and public opinion. Geographical Journal, 173(3), 207-223. POMFRET, R. (2011). Exploiting energy and mineral resources in Central Asia, Azerbaijan and Mongolia. Comparative Economic Studies, 53(1), 5-33. RADNITZ, S. (2012). Oil in the family: Managing presidential succession in Azerbaijan. Democratization, 19(1), 60-77. RINGNÉR, M. (2008). What is principal component analysis? Nature Biotechnology, 26(3), 303–304. SACHS, J. D., & WARNER, A. M. (2001). The curse of natural resources. European Economic Review, 45(4-6), 827-838. SACHS, J. D., & WARNER, A. (1999). Natural resource intensity and economic growth. In Development policies in natural resource economies, (Eds.) Mayer, J., Chambers, B., & Farooq, A. 13-38. SACHS, J. D., & WARNER, A. M. (1997). Natural-resource abundance and economic growth (Cambridge, MA: Center for International Development and Harvard Institute for International Development, Harvard University) SACHS, J. D., & WARNER, A. M. (1999). The big push, natural resource booms and growth. Journal of Development Economics, 59(1), 43-76. SADIK-ZADA, E. R., LOEWENSTEIN, W., &HASANLI, Y. (2019). Production linkages and dynamic fiscal employment effects of Azerbaijani economy: input-output and nonlinear ARDL analyses. Mineral Economics (online first), 1-14 SCHNAKENBERG, K. E., & FARISS, C. J. (2014). Dynamic patterns of human rights practices. Political Science Research and Methods, 2(1), 1-31. SCHUBERT, S. R. (2006). Revisiting the oil curse: Are oil rich nations really doomed to autocracy and inequality? MPRA Paper, No. 10109 TSALIK, S., & EBEL, R. E. (2003). Caspian oil windfalls: Who will benefit? New York: Open Society Institute, Central Eurasia Project TSIOUNI, M., AGGELOPOULOS, S., PAVLOUDI, A., & SIGGIA, D. (2021). Economic and financial sustainability dependency on subsidies: The case of goat Farms in Greece. Sustainability, 13(13), 7441 WADHO, W. A. (2014). Education, rent seeking and the curse of natural resources. Economics & Politics, 26(1), 128-156. WAKEMAN-LINN, J., MATHIEU, P., & VAN SELM, B. (2003). Oil funds in transition economies: Azerbaijan and Kazakhstan. In Stabilization and Savings Funds for Nonrenewable Resources, (Eds.) Davis J. M., Ossowski R., & Fedelino, A., IMF Occasional Paper No. 205, International Monetary Fund, Washington DC, 339–356 WELSCH, H. (2008). Resource dependence, knowledge creation, and growth: Revisiting the natural resource curse. Journal of Economic Development, 33(1), 45-70. WORLD BANK (2020). Oil rents (% of GDP) - Azerbaijan, Kazakhstan, Russian Federation, Ukraine, Georgia, Armenia, Turkmenistan, Uzbekistan, Latvia, Estonia, Belarus, Lithuania, Tajikistan, Moldova. Available at: https://data.worldbank.org/indicator/NY.GDP.PETR.RT.ZS?locations=AZ-KZ-RU-UA-GE-AM-TM-UZ-LVEE-BY-LT-TJ-MD (Accessed: 11.06.2020).
Year 2022, Volume: 9 Issue: 4, 225 - 239, 14.11.2022

Abstract

References

  • ACEMOGLU, D., JOHNSON, S., & ROBINSON, J. A. (2005). Institutions as the fundamental cause of long-run growth, In Handbook of Economic Growth, (Eds) P. Aghion and S. Durlauf, Vol. 1, Amsterdam, Netherlands, 385-472. ALTSTADT, A. (2018). Frustrated democracy in post-Soviet Azerbaijan. New York: Columbia University Press, ISBN 9780231704564. AMINEH, M. P. (2006). The resource curse: Oil-based development in Central Asia. International Institutefor Asian Studies Newsletter, No. 42, 27. AREZKI, R., LOUNGANI, P., VAN der PLOEG, R., & Venables, A. J. (2014). Understanding international commodity price fluctuations. Journal of International Money and Finance, 42, 1-8.AUTY, R. (2001). Resource abundance and economic development. Oxford: Oxford University Press .AUTY,R., & WARHURST, A. (1993). Sustainable development in mineral exporting economies. Resources Policy, 19(1), 14-29. BAYULGEN, O. (2005). Foreign investment, oil curse, and democratization: A comparison of Azerbaijan and Russia. Business and Politics, 7(1), 1-37. BHATTY, R. S. (2002). Tough choices: Observations on the political economy of Armenia, Azerbaijan, and Georgia. Unpublished World Bank report. BIRESSELIOGLU, M. E., DEMIR, M. H., GONCA, A., KOLCU, O., & YETIM, A. (2019). How vulnerable are countries to resource curse? A multidimensional assessment. Energy Research & Social Science, 47, 93-101. BRO, R., & SMILDE, A. K. (2014). Principal component analysis. Analytical Methods, 6(9), 2812-2831 BUSSE, M., & GRÖNING, S. (2013). The resource curse revisited: governance and natural resources. Public choice, 154(1), 1-20. CZECH, K. (2018). Oil dependence of post-Soviet countries in the Caspian Sea region: The case of Azerbaijan and Kazakhstan. Acta Scientiarum Polonorum. Oeconomia, 17(3), 5-12. DIEN, J. (2010). Evaluating two-step PCA of ERP data with geomin, infomax, oblimin, promax, and varimax rotations. Psychophysiology, 47(1), 170-183. ESANOV, A., RAISER, M., & BUITER, W. (2005). Nature’s blessing or nature’s curse? In Energy, Wealth and Governance in the Caucasus and Central Asia, (Eds.) Auty, R., & de Soysa, I., Central Asia Research Forum, 39-56 .FARISS, C. J. (2019). Yes, human rights practices are improving over time. American Political Science Review, 113(3), 868-881. FRANKE, A., GAWRICH, A. & ALAKBAROV, G. (2009). Kazakhstan and Azerbaijan as post-Soviet rentier states: Resource incomes and autocracy as a double ‘curse’ in post-Soviet regimes. Europe-Asia Studies, 61(1), 109-140. FRANKE, A., & GAWRICH, A. (2010). Autocratic stability and post-Soviet rentierism: The cases of Azerbaijan and Kazakhstan. In Are Resources a Curse (Eds.) Gawrich. A., Franke, A., & Windwehr, J., (pp. 71-99). Barbara Budrich Publishers, Leverkusen Opladen, Germany. JABA, E., IONESCU, A. M., IATU, C., & BALAN, C. B. (2009). The evaluation of the regional profile of the economic development in Romania. Analele Stiintifice ale Universitatii “Alexandru Ioan Cuza” din Iasi - Stiinte Economice, 56(1), 537-549. GULBRANDSEN, L. H., & MOE, A. (2007). BP in Azerbaijan: A test case of the potential and limits of the CSR agenda? Third World Quarterly, 28(4), 813-830. GULIYEV, F. (2009). Oil wealth, patrimonialism, and the failure of democracy in Azerbaijan. Caucasus Analytical Digest, (2), 2-5. GYLFASON, T., & ZOEGA, G. (2006). Natural resources and economic growth: The role of investment. World Economy, 29(8), 1091-1115. HAILU, D., & KIPGEN, C. (2017). The Extractives Dependence Index (EDI). Resources Policy, 51, 251- 264. HAUSMANN, R., HWANG, J., & RODRIK, D. (2007). What you export matters. Journal of Economic Growth, 12(1), 1-25. HAVRO, G., & SANTISO, J. (2017). To benefit from plenty: Lessons from Chile and Norway. Policy Brief, No. 37, OECD Development Centre. HEINRICH, A. (2010). The formal political system in Azerbaijan and Kazakhstan: A background study. No. 107, Arbeitspapiere und Materialien – Forschungsstelle Osteuropa, Bremen. HOFFMAN, D. I. (1999). Oil and development in post-Soviet Azerbaijan. NBR Analysis, No. 10, 5-28. JOLLIFFE, I. (1990). Principal component analysis: A beginner’s guide - I. Introduction andapplication. Weather, 45, 375-382. KAISER, H. F. (1974). An index of factorial simplicity. Psychometrika, 39(1), 31-36. KALYUZHNOVA, Y., & KASER, M. (2005). Prudential management of hydrocarbon revenues in resource-rich economies. United Nations Economic Commission for Europe, Discussion Paper Series, No. 2005.4 KASER, M. (2003). The economic and social impact of systemic transition in Central Asia and Azerbaijan. Perspectives on Global development and Technology, 2(3), 459-473. KENDALL-TAYLOR, A. (2012). Purchasing power: Oil, elections and regime durability in Azerbaijan and Kazakhstan. Europe-Asia Studies, 64(4), 737-760. KHANNA, P. (2011). Azerbaijan: The cork in the Caspian bottle. Russia and the moslem world, 7, 229. KRONENBERG, T. (2004). The curse of natural resources in the transition economies. Economics of transition, 12(3), 399-426.KRUGMAN, P. (1987). The narrow moving band, the Dutch disease, and the competitive consequences of mrs. thatcher: Notes on trade in the presence of dynamic scale economies. Journal of development Economics, 27(1), 41-55. LAURILA, J., & SINGH, R. (2001). Sequential reform strategy: The case of Azerbaijan. Russian & East European Finance and Trade, 37(3), 25-76. LUCAS, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42. MAHNOVSKI, S. (2003). Natural resources and potential conflict in the Caspian Sea region, Caucasus: Implications for the U.S. Army, RAND, In Faultlines of Conflict in Central Asia and the South, (Eds.) Olga O., & Thomas S., Santa Monica, 109–143. MATSUYAMA, K. (1992). Agricultural productivity, comparative advantage, and economic growth. Journal of Economic Theory, 58(2), 317–334. O’LEAR, S. (2007). Azerbaijan’s resource wealth: Political legitimacy and public opinion. Geographical Journal, 173(3), 207-223. POMFRET, R. (2011). Exploiting energy and mineral resources in Central Asia, Azerbaijan and Mongolia. Comparative Economic Studies, 53(1), 5-33. RADNITZ, S. (2012). Oil in the family: Managing presidential succession in Azerbaijan. Democratization, 19(1), 60-77. RINGNÉR, M. (2008). What is principal component analysis? Nature Biotechnology, 26(3), 303–304. SACHS, J. D., & WARNER, A. M. (2001). The curse of natural resources. European Economic Review, 45(4-6), 827-838. SACHS, J. D., & WARNER, A. (1999). Natural resource intensity and economic growth. In Development policies in natural resource economies, (Eds.) Mayer, J., Chambers, B., & Farooq, A. 13-38. SACHS, J. D., & WARNER, A. M. (1997). Natural-resource abundance and economic growth (Cambridge, MA: Center for International Development and Harvard Institute for International Development, Harvard University) SACHS, J. D., & WARNER, A. M. (1999). The big push, natural resource booms and growth. Journal of Development Economics, 59(1), 43-76. SADIK-ZADA, E. R., LOEWENSTEIN, W., &HASANLI, Y. (2019). Production linkages and dynamic fiscal employment effects of Azerbaijani economy: input-output and nonlinear ARDL analyses. Mineral Economics (online first), 1-14 SCHNAKENBERG, K. E., & FARISS, C. J. (2014). Dynamic patterns of human rights practices. Political Science Research and Methods, 2(1), 1-31. SCHUBERT, S. R. (2006). Revisiting the oil curse: Are oil rich nations really doomed to autocracy and inequality? MPRA Paper, No. 10109 TSALIK, S., & EBEL, R. E. (2003). Caspian oil windfalls: Who will benefit? New York: Open Society Institute, Central Eurasia Project TSIOUNI, M., AGGELOPOULOS, S., PAVLOUDI, A., & SIGGIA, D. (2021). Economic and financial sustainability dependency on subsidies: The case of goat Farms in Greece. Sustainability, 13(13), 7441 WADHO, W. A. (2014). Education, rent seeking and the curse of natural resources. Economics & Politics, 26(1), 128-156. WAKEMAN-LINN, J., MATHIEU, P., & VAN SELM, B. (2003). Oil funds in transition economies: Azerbaijan and Kazakhstan. In Stabilization and Savings Funds for Nonrenewable Resources, (Eds.) Davis J. M., Ossowski R., & Fedelino, A., IMF Occasional Paper No. 205, International Monetary Fund, Washington DC, 339–356 WELSCH, H. (2008). Resource dependence, knowledge creation, and growth: Revisiting the natural resource curse. Journal of Economic Development, 33(1), 45-70. WORLD BANK (2020). Oil rents (% of GDP) - Azerbaijan, Kazakhstan, Russian Federation, Ukraine, Georgia, Armenia, Turkmenistan, Uzbekistan, Latvia, Estonia, Belarus, Lithuania, Tajikistan, Moldova. Available at: https://data.worldbank.org/indicator/NY.GDP.PETR.RT.ZS?locations=AZ-KZ-RU-UA-GE-AM-TM-UZ-LVEE-BY-LT-TJ-MD (Accessed: 11.06.2020).
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Details

Primary Language English
Subjects Economics, Business Administration
Journal Section Articles
Authors

Ibrahim Niftiyev This is me 0000-0003-3437-9824

Publication Date November 14, 2022
Published in Issue Year 2022 Volume: 9 Issue: 4

Cite

APA Niftiyev, I. (2022). Principal component and regressionanalysis of the natural resource cursedoctrine in the Azerbaijani economy. Journal of Life Economics, 9(4), 225-239.

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