Export diversification and the S-curve effect in a resource-rich state: evidence from Azerbaijan

Abstract

Resource-rich states often miss out on diversified export-led growth opportunities due to their overreliance on resource-generated revenues. One strategy to boost non-resource exportation is to temporarily devalue the domestic currency and to provide exporters with some price competitiveness. This paper applies the notion of currency devaluation to the issue of export diversification via the S-curve principle. A comprehensive analysis of aggregate, bilateral, and industry-level trade is employed for Azerbaijan—a country-model for resource-abundant states with underdeveloped non-oil sectors. Consistent and strong evidence in favor of the S-curve effect is found in all stages of our analysis. In particular, a depreciative shock to the exchange rate correlates positively with the balance of trade on the aggregate and bilateral levels, as well as in 16 of the 20 industries examined. Results confirm previous literature findings. Azerbaijan’s non-oil exportation responds to a depreciated Manat in a systematically positive way, which adds further value to the argument of using currency devaluations for export diversification in resource-rich economies.