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Caucasus: A Mixed Blessing For Caspian Oil

By David Nissman

Washington, 3 April 1998 (RFE/RL) -- A study examining the discovery of Caspian Sea Oil and its potential impact on Azerbaijan and other Caspian countries, concludes that, among other things, it can be a double edged sword -- the revenue bringing prosperity or feeding corruption.

The study, entitled "Caspian Sea Oil Riches: A Mixed Blessing" was done at the conflict resolution center at the University of Maryland. It was written by Erjan Kurbanov and Barry Sanders.

Kurbanov is managing editor of Caspian Crossroad, published by the U.S.-Azerbaijan Council and affiliated with the Center for International Development. Sanders is affiliated with the Center.

The two authors provide numerous examples of countries to which oil wealth brought misery, not social well-being, from the degradation of the Indonesian economy, to the genocide directed against the Ogoni people in Nigeria, to the disintegration of Libya's infrastructure.

Kurbanov and Sanders say the development of an active civil society in a stable democracy is required to avoid the social and economic catastrophes that have accompanied the discovery of oil in other countries. This ensures the equal distribution of wealth and provides greater freedom of choice.

One of the problems that can affect a suddenly oil-rich country is the so-called "Dutch disease," named after the effect produced on the Netherlands economy by its natural gas exports.

The first consequence of the cash flows generated from oil is that national currencies become very strong in comparison with the U.S. dollar. This makes imports cheaper because the local currency is so strong, but hurts local products because they cannot compete with imported goods. Non-oil exports become expensive and non-competitive in foreign markets as well. The result is that most branches of the national economy outside of oil exploration and transport quickly deteriorate.

As Kurbanov and Sanders point out, the well-developed political and economic structure of the Netherlands prevented the 'Dutch disease' from having a long-term negative effect.

But they say the Caspian countries may be in serious jeopardy. Most of the region's industries are already at a standstill, working equipment is outdated, and products are not competitive on world markets.

The 'Dutch disease' would further complicate this situation since the modernization of industries outside the oil sector is less attractive when required goods can be cheaply purchased abroad. The important point, the authors say, is that a strong government commitment is needed to invest petrodollars in local industry, and this does not always bring a quick return.

This process can tie an economy too closely to the oil sector, making the economy susceptible to wild fluctuations in world oil prices. In a country that proclaims all natural resources as state property, a landowner on whose land oil is discovered does not prosper, but is forced to vacate the land. The compensation he gets in return won't even cover the costs associated with relocation.

The landowner is protected from this only in countries where land property rights are strictly enforced. In the Caspian countries, governments have exclusive rights to all natural resources, so the people will only receive their share of the oil wealth through the government. In other words, the large amounts of petrodollars in the government's hands are not necessarily translated into prosperity for the general population.

Adequate social and economic planning is necessary to prevent many of the negative social and political consequences of a flood of petrodollars. First, if the agricultural sector collapses due to neglect by the state, it can cause a migration from rural to urban areas and oil-producing enclaves by people searching for jobs. Since jobs might not exist, a reliable social safety met is essential.

Another side effect can be a worsening of existing social and ethnic conflicts, fueled by disparities in the standard of living between those living in large cities and oil-producing enclaves, and those in less fortunate regions.

Another fundamental problem is that oil profits create few incentives for an authoritarian government to conduct economic and political reforms.

Kurbanov and Sanders conclude that there is a need for greater democratization in the Caspian region and suggest that the leaders of the Caucasian and Central Asian states break with the past and demand human and environmental investment rather than decimating the land and ignoring the people.

It cannot be business as usual, the authors say. Oil revenues must stay in a local workforce and its profits must be used to develop an infrastructure that supports continued growth in a sound environment. They add that there is plenty of oil and a lot of time to move slowly and plan carefully.