Principal component and regression analysis of the natural resource curse doctrine in the Azerbaijani economy

Abstract

The Azerbaijani economy has long been discussed in academic literature with reference to the theories of the natural 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 overcome 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.