Well, like millions of others, the volcano has stranded me. Here in Baku for what was meant to be a flying visit, weighing the odds of waiting for Frankfurt to open (en route to London) or hoping there might be a place on  a train and boat from Madrid (reachable via Istanbul), and just hoping for a fresh wind to blow (which is sort of ironic since Baku is the City of Winds), I am taking the opportunity to look around and glean some impressions.

City of winds

The first big impressions are about how times have changed. It’s inescapable, hitting your primary senses.

The air I’ve made a small handful of previous visits here – the last time was 2006 and the air in those days was pungent. Maybe the oil was extracted and refined in the roughest way imaginable and that has changed, or maybe I was just persistently unlucky with the prevailing winds off the Caspian Sea. Whatever the reason, the air used to be heavy with petroleum odours of different kinds, none of them pleasant, and now it’s not. You still get the smell as you go past the refineries outside Baku but not in the city, not these days, according to people who visit here much more often than I do.

The urban landscape Large areas of the city are either newly built or newly renovated and much of the rest is swamped by building works, new construction, renovation, roadworks (pot-holes used to make driving in the city genuinely uncomfortable and the roads have been improved beyond recognition; pot-holes remain in places but compared to London after the winter, nothing to write home about). As the winds swirl across the big plazas, the dust from all these work sites attacks your eyes. It’s worth it.

The work continues, part of a massive urban renewal programme that has already turned the sea-front and large parts of the city into places of genuine beauty. It’s a mixture of refurbishment and new building. It’s being done well – when it is finished, Baku will be a genuinely striking capital.

The oil and the wealth

It’s the oil that’s doing it, of course. Azerbaijan is developing fast on the back of its oil wealth. Oil has pushed economic growth along at Chinese rates, though coming down from previously dizzy heights to 9% in 2009, according to the IMF. Of serious concern, non-oil growth dropped in 2009 from 16% to 3% and looks set to fall again this year, which may restrict overall growth to around 3%. But that will be heavily influenced by what happens to oil prices.

Proven oil reserves are estimated to last for about 20 years at current pumping rates; as ever, new discoveries are not ruled out, estimates are uncertain and contested, and pumping rates will decline as reserves diminish. But what is clear is that for further ahead than the coming decade, Azerbaijan is a major oil producer. The question is how it uses that wealth.

Curse or blessing? – the debate

Oil and natural resources in general: blessing or curse? There is considerable evidence and a well established line of academic argument to show that an abundance of extractable natural resources – oil, gas and minerals – is closely associated with high risk of a country contracting one or more of a range of different ills – corruption, political instability, bad governance in general and armed conflict. For interesting summaries of the arguments click here and for an overview of policy views here.

The basis for the “resource curse” argument is the idea that, for the state, wealth gained by extracting natural resources is unaccountable, whereas revenues taken in the form of taxes are accountable wealth. When states build a military and administrative apparatus paid for by their citizens, they become democracies. It’s the principle that those who pay, decide. Taken in broad, the historical record and contemporary experience show that the process takes time, progresses unevenly, sometimes goes into reverse, isn’t inevitable, and sometimes – as in England and France – involves civil wars and revolutions along the way. But it tends to happen. 

By contrast, when states can build the apparatus from royalties paid to them by foreign companies for what comes out of the ground, who cares what the citizens think? States made wealthy by natural resource extraction can buy off their citizenry or clamp down on them if they are too noisy – or go in for a subtle mixture of both – but such states don’t really need to care very much about what their citizens think and want. In short, the argument is that natural resources encourage irresponsibility in government.

The ledger in Azerbaijan

How does Azerbaijan fare in the ledger of resource curse-or-blessing? If you wanted to take it as a case of curse, you’d probably start with corruption. Transparency International’s well respected Corruption Perceptions Index, which is compiled through surveys of perceptions, ranks Azerbaijan at a depressing 143rd out of 180 countries. That position that has slightly improved since last year but has stayed stubbornly unfavourable for too long. Azerbaijan’s rank is worse than that of its regional neighbours Turkey, Armenia and Georgia, but better than bigger neighbours Russia and Iran. Governments regularly protest about the index, sometimes perhaps with justification since perceptions may lag behind reality – but that there is a serious issue here is hard to deny.

You might also look at the conflict situation, since Azerbaijan has a long-running conflict with Armenia over Nagorno-Karabakh, which remains unresolved sixteen years after the fighting ended, and because the high correlation of natural resource wealth with violent conflict is one of the basic reasons for the view that natural resources are a curse upon poor nations. But statistical associations need close interrogation if they are to be more than casual generalisation and this is one case where the association does not stand up. The Nagorno-Karabakh conflict with Armenia has nothing to do with oil and pre-dates Azerbaijan mobilising its potential oil wealth.

It is important to find a way to resolve the conflict peacefully, even though negotiations currently reveal little prospect of imminent success, but it’s not connected to the question of oil and curse or blessing.

And thirdly, of course, you’d look at freedom of expression and democratic rights. Some high profile cases indicate this is a real issue – the murder of the editor of the Monitor, which happened four years ago around the time I was  last here, and earlier this year the arrest and incarceration of two bloggers. This kind of case – especially the bloggers – needs much more depth of knowledge in order to understand them than I can possibly pick up in a few days. But it is a fact that these cases have occurred.

Given the self-confidence that Azerbaijan seems to be gaining as it develops, it is increasingly difficult to understand why the authorities are not more relaxed about freedom of expression. They have more to gain from being more relaxed than they may realise, both in internal stability and in external standing and reputation, and they risk much less than they may fear.

After all, the positive side of the ledger is far from empty. There is a lot to look at, in fact, because the achievements are real.

First, there is the renewal of Baku. It is making an attractive city for people to be in; the building programme is about the Baku people use – this is not the vainglorious monument-and-monstrosity stuffed approach to building a capital city that has been experienced in some periods in some countries.

Beyond that, education policy is progressive: the state wants an educated population. If you get a place at a well-reputed university abroad, the government pays a full scholarship on condition that the student returns to Azerbaijan for a period of years after getting the degree. Given the way some countries in Africa and Asia have been stripped of talent by the brightest students going overseas and not returning, that makes sense. The government can impose the condition because it pays, not a foreign university or foundation, and the government can afford to because of oil.

What I hear is also that the health system is stronger than it used to be and that, unlike in the past and unlike in the other two Caucasus countries, people do not feel the need to go abroad for straightforward operations.

Azerbaijan is using oil wealth to motor non-oil investment. That has slowed down with the global recession but it will almost certainly pick up again. One concomitant of this – made possible by a broad-based investment strategy and, in positive feedback, making it possible – is that there is a visible, prosperous middle class in Baku. You don’t have to go far even within the city confines to find wealth-poverty contrasts, let alone if you head out into the countryside, but there’s many a western capital where those contrasts are all too visible. This middle class is the most likely engine of sustained growth in the coming years – educated, consumerist, motivated for self-improvement.

The prices for ordinary living in Baku are high – food, accommodation, the necessities of life – and one good thing about the recession is that inflation, which was racing at 20% in 2008 came down to 1-2% in 2009. High prices could cause a lot of frustration but the consequences are often explosive when subsidised economies are no longer able to subsidise the basics.

It is a lot more responsible to use oil income for long term infrastructure and economic investment than to fritter it away on subsidies.

Overall, Azerbaijan seems to my quick glance to be making a decent job of development. There will be political difficulties, there is a conflict to resolve, and the lack of regional cooperation holds back the development of all three Caucasus states. But overall, the ledger reads quite well.