Presentation

The Paradox of Plenty: The Case of Azerbaijan Republic

1.      What the “paradox of plenty” is about?

2.      Politico-economic development of Azerbaijan Republic before the oil boom in 1994

3.      The “Contract of the Century” and the oil boom

4.      Did oil solve Azerbaijan ’s problems or caused new ones?

What the “paradox of plenty” is about?

             Presence of the natural resources is considered to be a remedy for all the problems national economy can face. However, very often countries suffer from the exploitation of its natural wealth. This is the paradox of plenty.

            According to Terry Lynn Karl (1998) we can highlight some perils of the petro-states that characterize this paradox: addiction to oil rents and development of the rentier mentality and weak incentives for enterpreneurship; knitting of political and economic power based upon the allocation of rents and decision making about distribution of financial resources: soft budget constraints, presence of “crony capitalism” etc; high level of non-economic expenditures and high absorption, corruption, incapacity of state to carry out austere macroeconomic policy if needed, undeliberate bargaining, Dutch disease and inefficient and unproportional economic structure, environmental problems and so on.

            Analysis of the record of OPEC countries shows us that they could not “translate their soaring gross domestic product (GDP) into corresponding improvements in their people’s welfare” (Terry Karl Lynn 1998, p. 38).  These countries have now the largest among developing countries deficit of goods and services; some of them had a fall in their living standards to less that they had had before oil booms. Another problem was concluded in permanent budget deficits in almost all OPEC countries ( Algeria , Iran , Indonesia etc). Almost all of them have faced hyperinflation. In other words, these data confirms what was claimed by T.L. Karl as negative outcomes of oil based development.

            It’s hard to believe, but the average real growth of GDP of the OPEC countries since the early 1970s boom till now fell down and was less then GDP growth rate for the 1960s(Terry Lynn Karl 1998, p. 40).

            The most important economic affect of natural resources is so called “Dutch Disease”. Dutch disease is expressed in “ unbalanced growth among the petroleum sector, the nonpetroleum traded goods sector, and the expanding nontraded goods sector” (Rosenberg-Saavalainen 1998, p.36). As a result there is bias in development – services, transportation, construction and other nontradeables grow at the expense of discouraging industrialization and agriculture.

We can conclude claiming that oil captures all spheres of political, social and economic life of a country and effects every decision making. Not a state exploits its petroleum resources, but petroleum resources are more likely to exploit this state.

Politico-economic development of Azerbaijan  Republic before the oil boom in 1994

             Transition to independence in Azerbaijan Republic was notable for some specific connected to each other features:

1.      Military conflict with Armenia , which took place within the territory of Azerbaijan

2.      Presence of rich oil and gas resources.

3.      Beneficial geopolitical situation and clash of interests of the great states in this region as a result.

Dissatisfaction with central policy and growing conflict in Nagorno Karabakh brought Azerbaijani Popular Front to the political arena in 1989. The ideology of APF later developed to clear anti-Soviet policy and restoration of Azerbaijan ’s state independence. There were demonstrations and action of protest in all regions of the republic. Situation was also compressed by flow of 300 000 refugees from Armenia as a result of anti-Azerbaijani riots and inaction of the central and local governments concerning situation in Nagorno Karabakh. In January of 1990 demonstrations in Baku intensified and then turned to anti-Armenian riots led by Azerbaijani refugees as a result of provocations, which aimed at transfer of stress from the actions of protest to national clash. This situation was a good reason for Soviet military intervention on 20 January and “Black January” took place. About 180 people were killed by Soviet military troops.

After that party functioner Ayaz Mutalibov was named party head. However, the weak legitimacy to the Communist regime that still could be among some stratums of population was destroyed by the “Black January”. All attempts of Mutalibov to establish coalition with AFP failed. This had negative effect on the fight for Nagorno Karabakh. As Svante Cornell writes “ Azerbaijan had failed to create any self-defense forces; the fighting in Nagorno Karabakh was carried out by paramilitary formations. By contrast, Armenia characterized by political stability and unity had long since created a national army. As a result, the situation on the front worsened considerably, especially as the Soviet Union dissolved in December 1991 and the conflict now became one between two independent states rather than one between two components of the same state.” (Cornell 2000). After the terrible massacres on the civilian population by Armenian forces in Khojali town n the late February Mutalibov was forced to resign and AFP tool over the government. In May Mutalibov unsuccessfully tried to return lost power, but failed and had to emigrate to Moscow .

On the presidential elections on June 6 of 1992 Elchibey was elected president. The presidentship of Elchibey was a bright example of the fact that being good orator and ideologist does not mean being a good state leader. Short period of AFP rule was notable for unbalanced foreign policy, internal unstability, economic collapse and hyperinflation. Bad news from battle fields were still coming and even new separatist movements appeared (Lezgin separatist movement “Sadval” and establishment of so called “ Talish-Mughan Republic ” in the South). Central government was unable to manage Nakhchivan Autonomous Republic where former Soviet Azerbaijan leader Heydar Aliyev was ruling.

Economic situation was terrible. After collapse of USSR national economy was degrading year by year: 26% - in 1992, 23% - 1993, leaving about half of the work force population unemployed (Rasi-zadeh 2001). Government did not have any kind of macroeconomic policy and seemed to be confused.

AFP government tried to ignore interests of Russia and Iran in the region. As a result more of Azerbaijan ’s territory was occupied by Armenian military forces, which were supported by Russian central government. For example, they did not let Russia and Iran participate in the oil projects.

Thus, AFP did not satisfy Russia and Iran as well as Western countries, which wanted economic and political stability for exploitation of oil resources of Azerbaijan . Elchibey was doomed.

In June of 1992 field commander Suret Husseynov starts revolt in Ganja city and marches on Baku taking over all cities on his way with out any resistance. Elchibey invites Heydar Aliyev to Baku and then leaves for his native Nakhchivan. Heydar Aliyev becomes speaker of Parliament and reaches compromise with Husseynov who later became Azerbaijan ’s Prime Minister for the short period of time. On presidential election held on October 3 Heydar Aliyev was elected president. Since that time till now new stage in Azerbaijan ’s latest history has begun – the “second” Aliyev era (Cornell 2000).

During the period of 1993 – 1996 Aliyev manages to establish political stability, sign cease-fire with Armenia though sides are still far from the political settlement of this conflict. Under Heydar Aliyev’s rule Azerbaijan acceded to CIS. One by one Aliyev defeated all his opponents including Husseynov. There were several attempts of coups against Aliyev, but they all failed.

One of his achievements was a final agreement with multinational oil giants on oil fields in the Caspian sector of Azerbaijan and signing $7 billion contract with Azerbaijan International Operation Consortium (AIOC) as a result. This was the beginning of oil boom.

The “Contract of the Century” and the oil boom

             As it can be seen from the events happening in Azerbaijan the “invisible hand” of oil was there all the time. Finally, all interested actors agreed on Heydar Aliyev as a needed person. The process of negotiation started in 1991 was over on September 24, 1994 . According to this contract three oil fields – Azeri, Chirag and Guneshly were intended for exploitation during 30 years with estimated reserves of 511 million tons. Shares of participants were as follows: Azerbaijan Republic – 80%, all companies – 20%. This 20% were shared by the State Oil Company of Azerbaijan Republic (SOCAR), BP-Amoco, LUKOIL, Pennzoil, Unocal, Statoil, McDermott, Ramco, TRAO, and Delta-Nimir. Later some new companies appeared and bought shares from above-mentioned companies. Azerbaijan Republic received $300 million. By the moment 16 other Product Sharing Agreements have been signed and new oil fields are being exploited.

            What could the positive factors of such an intensive exploitation of oil resources? First, export of Azerbaijani oil to the European markets and integration to world economic society, increase in foreign direct investments, opportunity for capital investments to the sectors adjacent with oil sector, possibility of creating currency stocks and implementation of independent investment policy, new technologies, etc. Starting from 1995 Azerbaijan has had stable growth of GDP unlike other Transcaucasian republics.

            However, we should mention that the case of Azerbaijani oil boom in the 1990s differs from other oil booms. The reason is that it was not first oil boom in Azerbaijan and it is a country with the richest experience in this field. The first boom was in the beginning of the 20th century, but oil exploitation and production in Azerbaijan has much longer history. By 1990 Azerbaijan produced half of all oil in the world, first oil well was drilled in Azerbaijan as well as first oil craft. It was Azerbaijan where first oil pipeline and oil rigs were constructed. Oil workers, engineers and geophysics from Azerbaijan participated in exploration and exploitation of oil and gas fields in Western Siberia , Tatarstan, Bashkortastan, Northern Caucasus and Central Asia as well as Iraq , Algeria , Indonesia , Egypt , China and so on. Azerbaijan produced 70% of all oil equipment of the former USSR (Rasi-zadeh 2001). So it was more beneficial for foreign companies as they did not need to develop, but just update oil infrastructure and avoid schooling of specialists.

Did oil solve Azerbaijan ’s problems or caused new ones?

             Terry Lynn Karl mentions extreme molding influence of oil wealth on the states where “petroleum exploitation coincides with modern state building”(Karl 1998, p. 34). This we also can refer to the case of Azerbaijan which is now passing through process of constructing market economy and democratic state.

            Let’s assume that Azerbaijan had two ways of dealing with its oil wealth. One was concluded in rejection of intensive exploitation and keeping them for the future generations. According to the second way Azerbaijan urgently exploits its oil fields, gets richer and then tries to create and implement long-term development strategy. (Mamedov 2000). In fact Azerbaijani government did not have any choice, but go the latter way.

            What happened then? First of all, was created myth about “second Kuveit” and 200 milliard barrels of oil. People were told that very soon everything is going to be all right because and the only thing that they should do is just wait and have patience. Then government used received bonuses to stabilize internal situation and first of all food supply problem. Oil factor is still dominant in the foreign policy as well.

            The main peril of the paradox of plenty is not oil itself, but efficient using of the revenues. Many scholars consider that there are two stages of transition: macroeconomic stabilization and structural reforms (Nelson 1992). Oil wealth enabled Azerbaijan as well as other oil rich transition countries to have three-stage transition: macroeconomic stabilization – construction of state discipline through oil revenues – structure reforms (Mamedov 2000). In other words price of transition in Azerbaijan could be less than in other post-communist states because of lack of necessity to accumulate capital.

            However, government did not choose this way of long-term smooth transition, but under influence of IMF and its credits started rigid stabilization program (which was successful) and extreme structural reforms. In the response, international financial institutions supported this Aliyev’s government and publicized the success of economic reforms in Azerbaijan in 1994-1998. This “friendship” has a geopolitical aspect too – Azerbaijan could oppose the plans of Russia towards the Caspian oil.

Now let’s compare the perils of the paradox of plenty, highlighted by Karl, to the case of Azerbaijan Republic :

 I would also mention that oil boom did not solve a problem of occupied territories and refugees. Oil factor in the foreign policy of Azerbaijan Republic almost failed.

Fuad Aliyev

Budapest, Hungary

October 2001