"After Us, the Deluge": Oil Windfalls, State Elites and the Elusive Quest for Economic Diversification in Azerbaijan

Abstract

Despite the officially stated goal of economic diversification and the billions of petrodollars in government expenditure, Azerbaijan has made slow progress achieving non-oil growth and remains heavily dependent on oil revenues. Why have Azerbaijan's efforts to reduce dependence on energy export revenue not borne fruit? Two factors seem crucial. First, various public investment projects, mostly on infrastructure, implemented under the banner of diversification were actually exploited by the elites to convert growing public funds into elite assets under their private control. Second, the peak in oil production (in 2010) and the expected depletion of oil reserves over the next two decades seem to have shortened elite time horizons, causing the authorities to spend about 65 percent of the overall savings from the state oil fund. In sum, elite financial interests and short time horizons deflected economic diversification and put Azerbaijan's long-term development at risk.