ABSTRACT
This chapter applies models of economic development and governance to assess the development prospects of the energy-rich Caspian basin countries in transition to a market economy. Natural resource abundance should facilitate economic development because the rents (the residual revenue after deducting all costs of production including a normal risk-related return on capital) can be used to boost the levels of investment and taxation, while the foreign exchange from resource exports can enhance import capacity. However, research on the developing market economies shows that the resource-rich countries have often squandered these advantages in recent decades (Auty 2001a). For example, World Bank data on natural resource rents, available for the year 1994 only, show an inverse relationship between natural resource rents and per capita GDP growth (see Table 7.1).
