Oil dependency, economic diversification and development a case study of Libya

Edwik, AA

Abstract

The Libyan economy relies heavily on increasing oil revenues, which may deteriorate
with a future oil price decline. The Libyan economy performed as well as resource poor
countries over the past few decades.
The oil booms of 1973 and 1979 brought unprecedented income to Libya but, despite
the substantial oil revenues, much of the potential benefit of the windfall has been
dissipated. Libya relies heavily on oil receipts, the price of which tends to fluctuate
widely in the international market. Also, the Libyan economy is dominated by
hydrocarbons and the public sector. Sizeable oil wealth has supported a decent living
standard for Libya's population, and socio-economic development compares favourably
with standards in other Middle Eastern and North African countries. Libya has the
potential to raise oil production and revenues significantly in coming years, given its
large reserve. The reliance of public finance on a single sector means that shocks
threaten the economy's fiscal balance and stability. Libya has over-consumed in
response to windfalls from surges in world prices. Libyan government spending has
outstripped the gain in revenues. These sharp increases in government spending are
difficult to reverse when the boom ends and often lead to large fiscal deficits rather than
surplus.
However, the main challenge for Libya is to promote growth of the non-oil sector and
spur diversification of its economy. Non-hydrocarbon GDP growth has been weak and
oil revenue volatility has been transmitted to non-hydrocarbon GDP. Weak non-oil
GDP growth reflects both insufficient private investment and low productivity of capital
importing efficiency. Productivity growth is a precondition for faster growth and greater
investment effort. Strong productivity growth is also a prerequisite for competitive
diversification out of hydrocarbon. Projected high oil revenue will provide the finance
for growth but will not necessarily spur sustained growth in the non-oil sector. Overoptimistic
predictions of future oil revenues are shown to have seriously adverse
consequences, particularly if the non-oil economy adjusts to falling demand through
underdevelopment and capital flight is provoked.
Policy options for protecting the economy from volatility in oil revenues, without
eliminating the benefits from rising prices include the formation of a stabilization fund and hedging strategies in the international markets. The stabilization fund would smooth
consumption and reduce the costs associated with volatile spending. Libya needs sound
economic management and to address the problems associated with oil windfalls.
Market processes are required to help allocate public resources, and governments and
others responsible must take account of risk and uncertainty when selecting projects,
and formulating plans for development. Consequently, there is a macroeconomic need
to diversify the economy to avoid the pitfalls which so often plague developing
countries with vast natural resources.
The decisions concerning public investment in a social economic infrastructure would
be better if unconnected to the presence of hydrocarbon windfalls. To speed up non-oil
growth and job creation, the oil windfalls should be used strategically, with the aim of
facilitating the transition to a competitive, market-led economy. Over the long-term, the
intermediation of hydrocarbon windfalls through the household and business sectors
might produce superior long-term growth, but it should go in tandem with considerable
strengthening of the investment climate. Enhancing the quality of Libya's human
resources will also be essential to improve productivity and diversify out of oil -
especially into services - and compete in the global economy. Improving the quality of
governance deserves particular attention, because it underlies the development reform
agenda. Libya would probably have seen a larger benefit from its windfalls had it saved
a higher proportion abroad and limited domestic investment through applying market
criteria more rigorously.
Quite clearly, good fiscal control of periodic boom episodes enables the boom to
temporarily accelerate the rate of economic development. In addition, such questions as
the magnitude of the windfalls, how Libya has used them and their impact on non-oil a
sector have been addressed in this research.
The adoption of sound economic policies and the good management of oil windfall
gains will allow Libya to continuously manage growth and become one of the greatest
success stories of all developing countries.

Citation

Edwik, A. Oil dependency, economic diversification and development a case study of Libya. (Thesis). University of Salford, UK

• Thesis Type: Thesis
• Deposit Date: Jul 7, 2009
• Publicly Available Date: Jul 7, 2009
• Additional Information: Additional Information : PhD supervisor: Professor Les Ruddock
• Award Date: Jan 1, 2007