Page 101 - Azerbaijan State University of Economics

70. Ibrahim Niftiye: Descriptive Analysis of Employment in Azerbaijan: Possibilities of the Dutch Disease

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growth, chronic Real Effective exchange Rate (REER) appreciation, and rapid spending
over the period of oil booming since independence from the Soviet Union (Hasanov,
2011; 2013; Hasanov and Samadova, 2010; Hasanov and Hasanli, 2011). The three-sector
economy that the core model of the Dutch disease describes is comprised of a booming
(SB), lagging (SL), and non-tradable (SNT) sector. An assumption is that SB and SL produce
tradable goods, while SNT contains tertiary sectors that are non-tradable. In the tertiary
sectors, output is produced by the exclusive production factors for each sector, the prices
for the ready products are set internationally, the factor prices are flexible but
internationally immobile, and labor is mobile and moves between sectors to equalize
wages (Corden and Neary, 1982; Corden, 1984).

As Corden (1984) summarizes, the source of a boom can be a once-for-all exogenous
technical improvement, such as a windfall discovery of a new resource and an
exogenous rise in the prices of the products of SB. There are two effects of Dutch
disease: the resource movement effect and the spending effect. The spending effect
occurs when revenue accumulated from taxes is spent by the government. This, under
the positive income elasticity of demand, provides additional incentives to employ more
in tertiary sectors due to the increased demand for services. In such cases, the labor
force moves from SB and SL into SNT. If increased marginal productivity resulting from
a boom in a small and open economy results in the labor force moving out of lagging
sectors and into booming sectors, a resource movement effect occurs. This increases the
demand for labor in non-booming (or lagging) sectors and lowers their output. This is
called direct de-industrialization, and an appreciation of REER does not occur.

The second form of the resource movement occurs when there is a movement of labor
from SNT into SB, along with labor movement from SL into SNT (which results from the
spending effect). The second form of the resource movement effect is also called
“indirect de-industrialization”. Usually, booming sectors are mineral sectors or corps,
while lagging industries such as manufacturing or agriculture are lagging sectors.

Several resource-rich countries like Australia (Corden, 2012), Nigeria (Otaha, 2012),
Indonesia (Pangestu, 1990), Mexico (Auty, 1991), Colombia (Kamas, 1986, as cited in
Bature, 2013), Norway, the Netherlands, the United Kingdom (Hutchison, 1994), and
Kazakhstan (Akhmetov, 2015) have been considered “Dutch disease-infected” as they
possess certain common characteristics, such as having a booming sector, an
undiversified economy (or having numerous lagging sectors), contracted manufacturing
sectors, and real exchange rate appreciation.

In the case of Azerbaijan, technical improvements beginning in 1994 as a result of
major foreign directed investments (FDI) upgraded the production frontier of the

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