Transition reform in the mineral-rich Caspian region countries

Abstract

In the absence of a developmental political state, natural resource abundance may impede the economic transition by diminishing the urgency of reform and by distorting the economy (through Dutch disease effects and also rent-seeking behavior and corruption). These problems tend to be especially acute in mineral-rich economies because the socio-economic linkages from mining concentrate revenues on the government and increase the risk of policy failure. This paper tests these hypotheses through a comparison of mineral-rich and resource-poor countries in transition in the Caspian region, all of which failed to evolve developmental political states. It shows that the mineral-rich countries are slower reformers, despite the fact in three of the four resource-poor countries the reforms were adversely impacted by civil strife. Mineral-rich countries also experience a stronger rebound of the real exchange rate and greater shrinkage of employment in the tradeable sector. These differences are reflected in a reverse J-shape post-transition development trajectory for the mineral-rich countries compared to the V-shaped trajectory of the resource-poor countries. However, rent-seeking and corruption do not appear to vary with the natural resource endowment.