Accessibility links

Breaking News

Caucasus/Central Asia: Region Relies Too Much On Oil And Gas

London, 14 April 1998 (RFE/RL) -- Analysts say the energy rich countries of Central Asia and the Transcaucasus are threatened with what's known as the "Dutch Disease," an over-reliance on oil and gas to the detriment of the rest of the economy.

The Dutch Disease is named after a syndrome that afflicted the Netherlands economy from the 1960s and 1970s. The Dutch placed too much emphasis on developing their offshore oil and gas sector, leading to neglect of manufacturing industries, and a large slice of the population being dependent on state handouts.

Analysts say the same problem could afflict the Caspian region countries, particularly Azerbaijan but also Turkmenistan and Kazakhstan. Michael Kaser, of the Center for Euro-Asian studies at Britain's Reading University, explains the problem: "In Holland, when they started their oil and gas industries, they neglected the growth of manufacturing and did not bother to make other industries efficient. They were willing, with the downsizing of the non-oil sectors to support with unemployment pay, high pensions or early retirement, those people who were not benefiting directly from the crucial commodity. When output began to decline because of the exhaustion of resources, they suffered from an over-inflated social sector and neglect of non-core industries unrelated to oil and gas. That is known as the Dutch Disease."

Kaser says the country most threatened by the Dutch Disease is Azerbaijan, currently the poorest of the three Transcaucasus nations, but poised to benefit from its hugely rich oil and gas fields. Azerbaijan last year produced 9 million tons of oil but is forecast to produce almost 50 million tons in 2010, much of it expected to be sold abroad, particularly after planned export pipelines are constructed.

The Dutch Disease could also hit Turkmenistan, where 80 percent of industrial output comes from its oil and gas industries, and Kazakhstan, where the percentage is about 30 percent.

Says Kaser: "But I think it's in Turkmenistan where the real danger arises. One does already see the symptoms of the Dutch Disease, and that is substantial spending on social outlays. For example, Turkmen households don't pay for their utilities. That is a social benefit that could not be borne if it weren't for substantial oil revenues."

It may seem far-fetched to compare the potential problems of Azerbaijan, Kazakhstan and Turkmenistan, which are among the poorest of the former Soviet republics, with those experienced by the Netherlands, one of the wealthiest countries in the world.

Azerbaijan is only now recovering from the hyperinflation of the mid-1990s. Kazakhstan only last year stabilized industrial output after six years of steep decline. One in three inhabitants of Turkmenistan live below the poverty line. Given the poverty, weak industrial base, and the bureaucracy and corruption said by critics to be endemic in all three countries, can their problems really be bracketed with those of a mature western economy?

Andrew Apostolou, a consultant on Central Asia from Britain's Oxford University, says there are clear parallels: "We are creating economies that are commodity dependent. That is clearly a big issue. If you look at Kazakhstan, you are looking at oil becoming 60 percent of its exports within 10 years, compared with 30 percent now..."

How to avoid the Dutch Disease? Apostolou says the energy-rich Caspian Basin nations should embark on comprehensive market reforms in order to cope with the "huge inflow of petrodollars."

Says Apostolou: "They are absolutely right to try to develop their most competitive and most viable economic sector. That makes enormous sense. But what they have to do is reform their economies. Because if you have a massive petrodollar inflow into an unreformed economy, you will have real problems. You have in these countries bloated state sectors, bloated bureaucracies. You then have a huge inflow of petrodollars. Put the two together and you get enormous waste. You end up subsidizing the bureaucracy and state sector."

Apostolou says Kazakhstan, the Kyrgyzstan and Azerbaijan have led the way in trying to stabilize their economies, bring down inflation, and reform their state sector. In the absence of such reforms, there is a danger that the Caspian energy wealth could be squandered as happened in Nigeria and Venezuela.

Says Apostolou: "The way to do it is to reform the economy as if there were no oil money coming in ... If you do that, whether you get the petrodollar inflow or not, your economy is on a sustainable and stable footing. If you don't do it, you'll end up like Venezuela or Nigeria. Their problems are very unfortunate. They need enormous structural adjustments. They are enormously inefficient states and they basically wasted the huge commodity boom of the 1970s."