Resource-rich governments tend to overspend extractives revenues on large infrastructure projects and underinvest in education, healthcare and social welfare. This is a key component of the so-called resource curse paradigm, and one clearly exhibited in the case of quintessentially oil-dependent Azerbaijan, according to a December report.

Proceeds from oil exports, if managed well, can improve the quality of a country’s schools and universities or build an inclusive medical insurance system. Heathy, well-educated and high-capacity labor is necessary to ensure sustained economic development, and would clearly help countries like Azerbaijan in the longer term.

In a widely-cited paper, economist Thorvaldur Gylfason finds that states with abundant natural resources often inadvertently or deliberately neglect education spending. He argues that “nations that believe that natural [resource] capital is their most important asset may develop a false sense of security and become negligent about the accumulation of human capital.”

Governments might also be de-incentivized from investing in education and building domestic labor capacity: most high-tech technology can typically be supplied by foreign oil corporations, as can a high-skilled workforce. Oil sector jobs also tend to be male-dominated, affecting female labor force participation.

Importantly, foreign oil companies are expected to contribute to countries where they work through corporate social responsibility (CSR) projects and local content policies.

The December 2016 issue of the Caucasus Analytical Digest tested these concepts, looking at the record of human capital accumulation, gender equality and CSR in Azerbaijan during the recent oil boom. Its findings can be summarized as follows:

• The government clearly under-invested in education and healthcare.
• The quality of public education deteriorated precipitously, falling behind even the regional standard.
• The oil curse hurt women more than men, and women have missed out on the dividends of the latest oil boom.
• The contribution by oil companies, notably BP, has been limited to project-affected regions or in and around the Baku area, and most of the education investments have targeted professionals in the energy sector.

Farid Guliyev is a research associate with Eurasia Extractive Industries Knowledge Hub at Khazar University, Baku.