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Azerbaijan and Kazakhstan Harness Natural Resources

Johannes F. Linn | The Brookings Institution | August 2008

Azerbaijan and Kazakhstan lead the region as two countries that have successfully harnessed their natural resources allowing them to grow their economies and avoid the apparent "natural resource curse" that plagues many developing nations. According to Johannes F. Linn, through economic transparency guided by the EITI and well-managed national funds generated by natural resource revenues, Azebaijan and Kazakhstan pave the way for other developing nations to follow.

A recent trend suggests that countries with considerable natural resources are in fact much worse off than those with little or no raw materials, particularly in Central Asia. David F. Linn explains this apparent paradox, also known as the "natural resource curse." In the process, he makes it clear why the judicious management of natural resources is so difficult for developing countries and how they can be helped.

What are the causes of the "natural resource curse?"

• "Dutch Disease" or Macro-economic difficulties: High export earnings from natural resources lead to an appreciation of the national currency, thereby hindering the production and development of other economic sectors.
  
• Volatility of earnings: Due to the volatility in prices of natural resources it is difficult to establish stable finances and debt management.
• Negative impact of high earnings from natural resource exportation on public institutions: Political decisions may be swayed by influential interest groups as opposed to concerns regarding optimal economic efficiency or even national interests. This in turn undermines the integrity of public institutions and thereby supports a culture in which corruption can quickly become endemic.
  

The clever use of "natural resource funds," perhaps aptly referred to as "oil funds," and the Extractive Industries Transparency Initiative (EITI) can both help to overcome this "curse." Azerbaijan and Kazakhstan are particularly good examples. So far both countries have escaped the negative repercussions of the energy boom. The EITI's goal is to encourage countries to adopt transparent economic management, thereby utilizing the earnings from natural resource exportation effectively. According to the Revenue Watch Institute, Azerbaijan is the paradigm of transparency standards. Kazakhstan has gained significant budget surpluses through its oil exportation. It has also created a National Fund, or an "oil fund," worth over $21 billion, which has been used to pay off national debt, as opposed to non-budget items. Meanwhile, Kazakhstan has been able to maintain a deficit below 5% (i.e., non-oil budget deficits of the GDP) and simultaneously modernize and invest in its own economy. Even though both countries have a long way to go before conclusively overcoming the "natural resource curse," they should still stand as examples for the entire region. A massive mismanagement of energy resources, as was seen in Turkmenistan, would presumably be avoidable under the transparency standards of the EITI and economically prudent use of "natural resource funds."

This summary was prepared by the Atlantic Community editorial team from "Central Asia's Energy Challenge: Overcoming the Natural Resource Curse" published here by The Brookings Institution, August 11, 2008.

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