Dutch Disease Effects in the Azerbaijan Economy: Results of Multivariate Linear Ordinary Least Squares (OLS) Estimations

Abstract

This paper investigates the increased role of extractive industry, particularly oil and gas, within the Dutch disease model between 2000-2018 in the Azerbaijan economy. Dutch disease phenomenon befalls when the national economy produces and exports a single commodity or a particular sector becomes the booming sector. Increased exports of particular goods and spendings of the accumulated mineral revenue appreciate the national currency, decreasing the competitiveness and thus the production or export volume of the non-booming sectors. Azerbaijan is an oil and gas-rich country which naturally actualizes the existence of Dutch disease syndrome . Therefore, the purpose of this research is to separately reveal the Dutch disease effects of resource movement and spending effects based on the theoretical frame­ work constructed from the core theory. The paper contains a comprehensive literature review and overall macroeconomic screening of the Azerbaijan economy to describe the preconditions of Dutch disease. Then, the study employs 42 multivariate linear ordinary least squares (OLS) estimations. The estimated models illustrate the presence of indirect de-industrialization (one form of resource movement effect) and the spending effect of the Dutch disease hypothesis. However, the paper does not find a direct negative influence of booming sectors on aggregated lagging (i.e., manufacturing and agriculture) and non-tradable sectors (services). Moreover, va­riables such as oil price growth rates, real effective exchange rate (REER), nominal effective exchange rate (NEER), and economic crisis periods failed to significantly explain the employment and real wages dynamics. However, these variables described certain influence channels in output and returns on capital growth rates. This paper sheds light on the interconnections between the Azerbaijan economy’s labor resources, government spending, and monetary channels. These interconnections indicate that the Dutch disease hypothesis holds true for Azerbaijan. Of the estimated OLS coefficients, 90.5% were highly stable, which suggests that the results are reliable. This study mainly tests the general theoretical expectations of the original Dutch disease model and presents a common ground to conceptualize the possible harmful effects of the booming oil and gas sectors in Azerbaijan. Any causal derivations should be handled carefully.