Foreign Direct Investment Liberalization and the Political Economy of Authoritarianism

The dissertation explains the causes, timing, speed, and magnitude of foreign direct investment (FDI) liberalization in autocracies and analyzes the relationship between economic liberalization, regime instability, political unrest, economic crisis and democratization. I highlight the commitment problem between the ruling elite and the citizens as one of the most important causes of economic stagnation and social unrest in an autocracy. I argue that the elite can partially solve the problemby promoting economic openness to foreign direct investment (FDI). Higher economic openness not only increases the country's reliance on foreign capital but also constrains authoritarian governments through binding bilateral investment treaties (BITs). Dependence on mobile foreign investment enables the elite to make sound and incentive-compatible policy promises ex ante; binding BITs promote the implementation of those policies ex post. The two factors together mitigate the commitment problem and reduce political unrest in autocracies. Furthermore, the structural political instability has a nonmonotonic effect on the choice of level of economic openness by an authoritarian government: the boldest economic liberalization polices are adopted when the regime has intermediate political instability. When the regime is either very unstable or stable, the elite has less incentive to move toward openness. Then, I further extend the model into an infinite time horizon setting and argue that the timing and magnitude of liberalization are determined by both the stage of economic development and the timing of political instability. High frequency of moderate political instability forces the autocratic elite to liberalize the economy in order to maintain his rule. Paradoxically, the elite in an autocracy that has infrequent high political instability fails to liberalize the economy and is eventually overthrown by the citizens. Finally I extend the model further to explain how real business cycles affect the prospect of economic liberalization and political democratization in an authoritarian regime. Moderate economic crisismotivates the elite to conduct pro-liberalization reform to solve imminent political and economic issues while severe economic crisis will lead to social unrest and democratization. Some of the theoreticalmodels are tested on a data set of 157 non-democratic countries from1980 to 2006, using a variety of panel data techniques and Monte Carlo simulations, while others are tested using comparative historical case studies, including China, Taiwan, Singapore, Malaysia, Indonesia, Eastern Europe and Soviet Union.