Foreign Investment, Oil Curse, and Democratization: A Comparison of Azerbaijan and Russia

Abstract

The rentier-state literature pays little attention to the initial political conditions that shape the way an oil-rich country develops its resources. One of the key causal mechanisms linking oil wealth and regime type is the relationship between foreign investors and host governments. Especially in the developing countries that depend on international financing and expertise, the role of foreign capital in fashioning the balance of power in the political system and thereby the distribution of oil wealth becomes ever more important. As the experiences of Azerbaijan and Russia in the 1990s demonstrate, among oil-rich states in the developing world, those with authoritarian regimes tend to fare better in terms of attracting FDI in the oil sector than states with democratizing (or hybrid regimes). The durability of some authoritarian regimes in the developing world is partly a function of this external legitimation from foreign investors.

Dutch Disease in Central and Eastern European Countries

“…Concentrating the analysis of the DD phenomenon exclusively in the case of the Russian economy or comparing it with the rest of post-Soviet transition countries, several other authors (e.g., Bayulgen, 2005;Smirnova and Kulkarni, 2006;Korhonen and Juurikkala, 2007;Sosunov and Zamulin, 2007;Égert, 2012), have also investigated the presence or lack of DD problems by observing the export trend, the political factors associated with attracting FDI, and the impact of other macroeconomic monetary variables on the behaviour of the exchange rates in the Russian economy. Again, the results point to the absence of consensus regarding the presence of long-term negative effects resulting from the transmission mechanisms associated with the phenomenon of DD.…”

Tackling the Resource Curse: The Role of Democracy in Achieving Sustainable Development in Resource-Rich Countries

“…They distinguish between five groups of oil-exporting countries: Resource-rich autocracies may also be better able to attract investment. Based on a case study of Azerbaijan and Russia, Bayulgen (2005) suggests that more autocracy in developing countries that are rich in oil and mining resources may be beneficial for attracting foreign investment in the resource sector because there are fewer domestic veto players who can challenge the government's investment policies. In turn, such indirect or direct external legitimation by foreign investors can contribute to entrenching the ruling elites and hindering democratic transition.…”

Prudential Management of Hydrocarbon Revenues in Resource-rich Transition Economies

“…A more general interaction has been argued by Loayza, Oviedo & Serven (2005), whose large sample of developed and developing countries shows that a heavier regulatory burden -particularly in product and labour markets -reduces economic growth and induces enlargement of the informal sector. Bayulgen (2005) suggests that among oil-rich states in the developing world those with authoritarian regimes tend to fare better in terms of attracting FDI in the oil sector than states with democratising or hybrid regimes, and that the FDI inflow perpetuates such regimes by external legitimation.…”