Dutch syndrome in the economy and
measures against it
Yaver Karimov1 ID , Elshan Orujov 2
ID
1
BA in Organisation of Tourism Business;
Western Caspian University; Republic of Azerbaijan
2
PhD in economics;
Azerbaijan University; Republic of Azerbaijan;
Western Caspian University; Republic of Azerbaijan
Abstract.
The Dutch disease, also known as the Dutch syndrome, refers to the negative economic
consequences that can occur when a country experiences a resource boom, typically due
to the discovery and export of natural resources like oil or gas. This phenomenon leads to
a rise in the value of the national currency, making other sectors like manufacturing and
agriculture less competitive in international markets. As a result, these sectors may shrink,
leading to an unbalanced economy. To mitigate Dutch disease, countries can implement
measures such as establishing sovereign wealth funds, investing in economic
diversification, maintaining a stable exchange rate, and improving fiscal policy
management. These strategies aim to ensure that resource wealth contributes to
sustainable and inclusive economic growth.
__________________________________________________________________________________
Keywords:
Dutch disease, resource boom, economic imbalance, currency appreciation,
deindustrialization, sovereign wealth fund, economic diversification, fiscal policy, exchange
rate stability, natural resource management.
__________________________________________________________________________________
Ministry of Science and Education of the Republic of Azerbaijan
Western Caspian University
FREELANCE WORK
FACULTY: Economics and business
SPECIALTY: Organization of tourism business
GROUP: 534 T ing
ACADEMIC YEAR: 2024/2025
SUBJECT: Economic development perspectives of Azerbaijan
TOPIC: Dutch syndrome in the economy and measures against it
STUDENT: Yaver Karimov
TEACHER: Elshan Orujov
Baku-2025
CONTENTS
2
Introduction .....................................................................................................................4
Dutch disease in Azerbaijan and its complications..........................................................5
The measures against Dutch sindrome...........................................................................7
Free Economic Zone establishment activities.................................................................8
Conclusion.......................................................................................................................9
List of sources................................................................................................................10
3
Introduction
“Dutch Disease” – can be expressed as the backwardness or collapse of other
sectors in the face of the rapid development of one sector in the economy of a
country. In a narrow sense; it is simply the preferential growth phase of the oil
industry, which is dependent on natural resources, and the economic structure
created by the excessive use of this sector, which prevents the healthy development
of other industries. This situation, known as the Dutch Syndrome or disease in the
scientific literature, indicates the disproportionate economic growth of the country in
which it exists.
The classic Dutch Disease argument focuses on the disproportionate growth
between the oil sector and non-oil sectors and sectors not related to foreign trade.
According to Dutch Disease, the negative impact of intensive use of natural
resources on other sectors of the economy related to foreign trade manifests itself in
two ways.
Thus, despite the increase in prices at a later stage of energy resource
exports, the expectation that energy resource revenues will increase in the future will
maximize domestic consumption and imports, and reduce the export volume of non-
oil sectors.
In short, the “Dutch Syndrome” refers to the negative effects of inappropriate
policy-driven growth of energy resources. As a result of not giving due importance to
other sectors of development outside the oil sector, disproportionate growth will
occur. The appreciation of real exchange rates will affect the competitiveness of
other tradable sectors. Due to the growth of the oil sector, wage and price
competition may increase compared to the non-oil sector, and as a result, the
balance between the labor market and prices may be disrupted. For example, in
Azerbaijan, since 1994, the increase in real exchange rates has been higher than in
other CIS countries.
4
Dutch disease in Azerbaijan and its complications
As seen in a study, some of the seven main indicators of the Dutch Disease
are observed in Azerbaijan. Among them, the excessive appreciation of the national
currency against foreign currencies in some years, the decline in the
competitiveness of export goods, the lack of distribution even when the marginal
utility of production factors is maximum, the one-sided development of the economy
in general, and the oil industry in particular, the dependence of demand on imports,
and the dependence of the budget on oil revenues can be cited. Despite the
observed growth in exports in other sectors, considering that the country's economy
experienced a recession during the transition period and is still in the process of
progress, it is possible to draw a wrong conclusion as to whether it has a real
competitive advantage in export products. The Dutch Syndrome in the country's
economy, the first indicators of the syndrome and the measures to be taken have
gained even greater importance, especially since the end of 2005, when oil exports
began.
An analysis of the positive changes in Azerbaijan's macroeconomic indicators
in recent years shows that the threat of the "Dutch Syndrome" predicted by some
experts has bypassed Azerbaijan. Even during the global economic crisis that
engulfed the world, the Azerbaijani economy maintained its stability. Today, the great
successes achieved by our country in the field of sustainable development allow us
to talk about the Azerbaijani model of development.
Studies have shown that some of the 7 main symptoms of the Dutch
Syndrome are also observed in Azerbaijan. One of these is the excessive
appreciation of the national currency against foreign currencies in most years, the
decrease in the competitiveness of exported goods, the lack of distribution even
during the period when the marginal utility of production factors is high, the one-
sided development of the economy, including the oil industry, in general, the
dependence of demand on imports, and the dependence of the budget on oil
revenues.
According to those who thought that Azerbaijan would pin its hopes solely on
oil, the country would gradually develop the ground for the "Dutch syndrome."
However, this ground has not gradually developed, and it is unlikely that this
syndrome will ever occur. President Ilham Aliyev gave a coherent answer to those
who held this opinion at the meeting of the Cabinet of Ministers dedicated to the
5
results of socio-economic development in the first nine months of 2010: “I remember
that 5-10 years ago, in discussions held in some foreign scientific centers on
Azerbaijan’s oil strategy, the idea was put forward that there would be a “Dutch
syndrome” in Azerbaijan, that the Azerbaijani economy would develop unilaterally,
that Azerbaijan would not be able to use its natural resources efficiently. I remember
those conversations well and I am very glad that today we no longer hear those
conversations. We knew even then that there would be neither a “Dutch syndrome”
in Azerbaijan nor that the economy would develop unilaterally. We knew that the
revenues from oil in Azerbaijan would be managed at the highest level. It is for this
purpose that Azerbaijan joined the Extractive Industries Transparency Initiative.”
The likelihood of not only the “Dutch syndrome” but any other syndrome
occurring in Azerbaijan in the next 20 years is extremely low.
The head of the Center for Economic and Social Development, Vugar
Bayramov, told our newspaper that despite the large share of the oil sector in
Azerbaijan, there are a number of reasons that prevent the occurrence of the "Dutch
syndrome". According to him, these are the reasons that unambiguously prevent the
occurrence of the "Dutch syndrome" in Azerbaijan: "First of all, the observation of
development trends in the non-oil sector since 2007 has unambiguously led to the
creation of a balance between the oil sector and the non-oil sector. This, of course,
makes it possible to avoid the "Dutch syndrome". The strengthening of the manat
exchange rate is considered one of the signs of the "Dutch syndrome". However, the
strengthening of the manat exchange rate does not create an imbalance in the
domestic economy. Therefore, the cases of the occurrence of the "Dutch syndrome"
are limited."
According to the economist-expert, Azerbaijan's advantage is that even the
revenues from the oil sector are long-term: "This unambiguously allows for the
formation of certain permanent financial sources. Even if there are certain decreases
in oil in Azerbaijan after a few decades, it is precisely as a result of the increase in
blue gas production that the state budget's revenue part is now permanently formed.
At the same time, if we consider that there are development rates in the non-oil
sector; this growth allows for an increase in the state budget. From this point of view,
the presence of continuous and stable sources of income in the formation of state
revenues does not allow the "Dutch syndrome" to arise."
6
The measures against Dutch sindrome
Revenues from oil produced in Azerbaijan under contracts signed with foreign
companies are collected in the State Oil Fund (SOF). The Fund was established by a
decree issued by the late President Heydar Aliyev on December 29, 1999. The
Fund's management rules were developed jointly with IMF specialists.
The SOF is a fund established to collect revenues that Azerbaijan will receive
from the implementation of contracts signed between SOCAR and foreign oil
companies on the exploration, production and sharing of oil and natural gas, and
from the implementation of contracts signed on the exploration of oil and natural gas
reserves in Azerbaijan, especially in the Azerbaijani sector of the Caspian Sea.
Since its inception in January 2001, the State Oil Fund has been reporting on
its revenues and expenses every three months. In 2004, the Oil Fund's revenues
amounted to 1,614.3 billion manats, and its expenses amounted to 871.2 billion
manats (before denomination). Thus, at the beginning of 2010, more than 18 billion
manats were accumulated in the State Oil Fund of Azerbaijan. Since its
establishment, about 15 billion manats have been spent from the Fund, of which 13
billion manats were transferred to the state budget. The higher than planned
increase in the income of the State Oil Fund is due to the increase in oil prices on the
world market. It should be decided first of all that the Fund's reserves should be
directed more intensively towards expanding investments. Although it is said that the
Oil Fund works better through the private sector, state investments can be preferred
in order to achieve greater benefits when the entire territory of the country is taken
as a basis. As a result of the amendments made, the income accumulated in the
fund is mostly deposited in high-rated credit organizations for investment purposes.
In addition to keeping oil revenues in foreign financial institutions, they are not
spent directly or indirectly on goods not related to foreign trade through financial
channels. Thus, efforts are being made to prevent the first negative impact that may
arise from this point of view for other sectors related to foreign trade.
In addition to the importance of using revenues from the State Oil Fund for the
development of the agricultural sector, simply providing subsidies from the Fund to
this sector will not be enough to get rid of the “Dutch Syndrome” that the country is
facing. Getting rid of these problems will be possible by implementing projects aimed
at developing industrial sectors with export potential. It is important to encourage
investments in necessary sectors by being selective in the policy to be implemented.
7
Starting from the end of 2005, the country's revenues from oil will increase
significantly. With these increased revenues, the government has planned the rapid
development of non-oil sectors. According to the calculations of the State Oil Fund,
along with foreign and local experts, after 2025, Azerbaijan's revenues from oil will
decrease significantly..
Free Economic Zone establishment activities
One of the factors that will boost economic development in Azerbaijan and
prevent the Dutch syndrome will be the creation of free economic zones from a
commercial perspective. Free economic zones will play an important role, especially
in the development of the non-oil sector. Today, there are a large number of free
economic zones in the world, which are created with the aim of increasing the
volume of foreign trade of countries, facilitating exports and imports, increasing
foreign exchange earnings and employment levels, giving impetus to the
development of industry, and implementing the arrival of modern technology to the
country.
Free economic zones have played an important role in the development of
industry in many countries. One of the most productive sources of regional economic
development is the creation of free economic zones. The limited financial capabilities
of local investors in the country also necessitates the creation of free economic
zones in some regions of Azerbaijan. Although this problem has caused different
opinions and disputes at the government level several times in the past few years, it
has been emphasized that there are quite favorable conditions for the establishment
of free economic zones in economic regions such as Baku, Sheki-Zagatala, Guba-
Khachmaz, Lankaran-Astara, and Nakhchivan, the steps taken and the work done in
this direction are quite weak.
The main essence of free economic zones is the establishment of its own
trade, service and export-production sector in an area located on convenient
international roads, in which case the zone is exempted from customs duties, certain
tax discounts are implemented and loans are provided at low interest rates. This will
play a major role in the revival of the economy in economically weak regions and in
eliminating differences in economic development between regions. However, the
lack of energy and other resources in Azerbaijan complicates the establishment of
free economic zones.
8
Conclusion
By definition, the “Dutch syndrome” is the deindustrialization of the economy
as a result of the discovery of a new source of natural resources. Its mechanism is
the increase in the value of the country's national currency due to the improvement
of the trade balance, which makes the products of the production balance less
competitive.
The “raw material” model of the local economy cannot ensure its sustainable
development due to the relatively rapid depletion of profitable oil and gas fields and
the development of new areas only with capital intensity. In addition, the
development of oil and gas fields in difficult areas requires the creation and use of
high technologies. Thus, without switching to a “high-tech” model, Azerbaijan may
lose its “non-core”, but also “raw material” future. In this regard, the main task of
Azerbaijan's economic policy is to convert petrodollar revenues into the potential for
high-tech economic development.
A large source of natural resources is not bad for the economy. But natural
resources mean high risk and require careful selection of economic policy, in fact, all
mechanisms of the negative impact of the relative abundance of natural resources
on economic growth are either associated with the state or can at least be controlled
by it.
Although the symptoms of the "Dutch syndrome" are not catastrophic, the
current raw material model of the Azerbaijani economy poses a threat to its future
development.
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List of sources
1. Aras O.N., Süleymanov E., (2016) “Azərbaycan iqtisadiyyatı”, Bakı, 2016
2. Əliyev T.N., Babayev M.T (2003). Neft-qazçıxarma sənayesini müəssisələrinin
iqtisadi potensialı. Bakı:Azərnəşr
3. Hacızadə E.M (2000). Energetik kompleks yeni islahatlar ərəfəsində. Bakı: Elm
4. Hacızadə E.M., (2001) Azərbaycanın təbii qaz potensialı: reallıqlar və virtual
cizgilər. Bakı: Elm
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