In many instances, 1998 seems to be a decisive year for the Caspian region. Presidential elections in Azerbaijan will define a leader for this strategically located country for the next critical five years. It seems that Caspian sea delimitation will be finally achieved this year. Moreover, in October 1998, a key decision will be made on which pipeline route the Azerbaijan International Operating Company will build. Still, all these events will determine mostly the shorter-term future and stability of the region.
Neither particular pipe-line routes, nor specific numbers of oil sales will help in achieving long-term stability in the Caspian region and regional cooperation. The long-term future lies in the democratization and building of civil institutions, which will promote political and social stability, solutions to regional conflicts and a smooth succession of power, a critical issue for all Caspian states. Indeed, the current political stability in many Caspian states is largely based on personalities, than on institutions and this may be a great threat to future of the region and to the increasing flow of foreign investments.
It is a common belief in the region and amongst outside observers that energy exports per se will result in revenues which will revive struggling economies, bring prosperity, and stimulate regional cooperation. However, this has rarely happened historically; nor is such an environment found in most oil-rich regions. Of course, the hard-currency influx and improved balance of payments will come and responsible governments may use these opportunities to revive failing economies and provide a needed social safety net.
Unfortunately, as the international history of petroleum development demonstrates the effects of oil exports can be unexpectedly negative for the economy and the societies of oil producing countries, with the well known phenomenon called the “Dutch disease,” being the most common occurrence. The effect of natural gas exports on the Dutch economy is a classic example of the negative overall effect of energy exports on a national economy. The first effect of cash flows associated with oil development is that national currencies become very strong in relation to the U.S. dollar. Imports then become cheaper while local products become more expensive because they cannot compete with imported goods. In addition, non-oil exports become expensive and non-competitive in international markets.
Currently, most of region’s industries are at a standstill, working equipment is outdated, and products are not competitive on the world market. “Dutch disease” may further aggravate this situation, since modernization of industries outside the oil sector could be considered an unattractive enterprise because most required goods can more easily be purchased abroad. A strong government commitment is needed to invest petrodollars in industries and such an investment does not always yield a quick return.
Another side effect may be the exacerbation of existing social and ethnic conflicts, due to disparities in standards of living between oil-producing areas and associated financial centers and other regions. Furthermore, oil profits create few incentives for an authoritarian government to conduct economic and political reforms. Indeed, a sudden flow of hard currency may help soften social problems initially; however it will provide for a well-paid and equipped police force to suppress political opponents. Corrupt governments then can control people with no changes to old, outdated political structures. This does not solve social problems in the long run and could lead to fundamentalist revolts like those in Iran or Algeria.
History shows that countries that encounter oil and turn the accident of location into national wealth have mature democratic governments, strong environmental regulations, and self-contained control of oil extraction and processing. For the Caspian region, these three characteristics are still in the future. Therefore, since current demand for oil is not high, time is on their side. Slower oil development and faster rebuilding of infrastructure could significantly help to bring the equation, “petrodollars = prosperity” into reality. Western governments can help by aiding democratization, opposition participation in the political process, supporting the development of a market economy and particularly private land ownership. The opportunity to ensure these exchanges and policies exists. Ensuring the equal distribution of wealth and greater freedom of choice requires an active civil society in a stable democracy.
The coming years will be critical for the future of the region. The past shows that oil may bring a lot of prosperity as well as a lot of problems. However, we should remain hopeful that the existing seeds of democracy will bear fruit and keep Caspian countries on the right course. Whether these seeds will grow depends on the wisdom of the regional governments and on Western democracies’ aid in building democratic societies.