Abstract
We investigate non-oil sector effects of fiscal policy in Azerbaijan over a long time period in which a recent low oil prices sample is incorporated. To obtain robust empirical findings, we use different test and estimation methods as well as address small-sample bias issues in the extended production function framework. Results show that fiscal policy has a statistically significant positive impact on the non-oil sector both in the long and short run. However, the size of the impact is small compared to the findings of earlier studies due to, we believe, the low oil-price environment and different specifications used. Azerbaijani policymakers should take measures to compensate for the declining share of oil revenues in government revenues. They may consider increasing tax rates, import and export fees, energy and other tariffs as rapid remedies to fill the budget but these measures might hurt economic development. Alternative and less harmful remedies would be optimizing government spending, strongly monitoring ongoing projects, and phasing out social and infrastructure projects, which make lower contributions to growth. Our research opens the way for further investigation of this topic for the oil exporting economies in the future.
Highlights
Development of the non-natural resource sector is a key issue for most natural resource-rich countries
We explore the impact of fiscal policy on the non-oil sector using the cointegration and error correction modeling framework in this research
The results from the unit root exercise conclude that gvanoil, be and etnoil are integrated in order one while csnoil follows the I(2) process
Summary
Development of the non-natural resource sector is a key issue for most natural resource-rich countries. This is considered one of the essential pre-conditions for obtaining balanced long-run economic growth, especially in the post-resource boom period. The development of this sector could meet domestic demand for goods and services and promote exports which, in turn, may lead to an increase in the volume of the country’s foreign exchange reserves and, may stimulate further development of the economy. Understanding the relationship between various economic policies and the growth of the non-natural resource sector is paramount for natural-resource rich economies (Sorsa 1999, inter alia). According to statistics and conducted studies, the development of the non-oil sector is more urgent in Azerbaijan compared to Economies 2018, 6, 27; doi:10.3390/economies6020027 www.mdpi.com/journal/economies
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