Oil Dependency, Economic Diversification and Development A Case Study of Libya

Alshadli Ahmed Edwik

Ph. D Thesis

2007

Oil Dependency, Economic Diversification and Development A Case Study of Libya

Alshadli

Ahmed Edwik

Research Institute for the Built and Human Environment School of the Built Environment The University of Salford

Submitted

in Partial Fulfilment

of the Requirements

of the

Degree of Doctor of Philosophy
2007

CONTENTS

Page
................................................................................................................. LIST OF TABLES ..................................................................................................... vi ACKNOWLEDGEMENT viii ....................................................................................... ix ABSTRACT ............................................................................................................... A LIST OF ABBREVIATIONS .................................................................................... 1 CHAPTER ONE: GENERAL INTRODUCTION .................................................... 1.1 Background 1 .......................................................................................... 9 1.2 Research Focus ....................................................................................
1.3 Layout of the Thesis .................:........................................................ 10

CONTENTS

i

...................................................................... 12 The Structure of the Economy 1.5 .......................................................... 14 Libya before Oil Discovery 1.6 ............................................................... 14 The First Oil Boom 1.7 ............................................................................ 16 Conclusion 1.8 ......................................................................................... CHAPTER TWO: LITERATURE REVIEW ......................................................... 18 18 Introduction 2.1 ....................................................................................... 18 Other Countries Experiences in Dealing with Oil Windfalls 2.2 ........... 26 Economic Rent 2.3 ................................................................................... 29 The Rentier State 2.4 ............................................................................... 30 2.5 A Rentier Economy ........................................................................... 33 2.6 Oil Revenue Volatility... .......o ....... .......................... o ......................... o 35 Economic Development and Wealth Creation 2.7 ................................. 40 Conclusion 2.8 ......................................................................................... 41 CHAPTER THREE: RESEARCH METHODOLOGY ......................................... 41 Case Study Methodology.... 3.1 .... ..................... .................................... o o 3.2 The Application of Case Study Methodology 42 ................................... 3.3 3.4 3.5 3.6 3.6.1 3.6.2 ......................... o .................................................... Research Questions 47 ........................................................................... Rationale for Research 50 ...................................................................... Research Problem 52 .............................................................................. Volatility and Uncertainty of the Revenue Stream 57 ........................... Exhaustibility of the Revenue Stream 58 .............................................. Research Method, 43

1.4

Historical Background

10

3.6.3 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14

Real Exchange Rate Volatility and "Dutch Disease" 59 ........................ Research Aims 59 ................................................................................... Research Objectives 60 .......................................................................... Research Hypotheses 60 ......................................................................... The Choice of the Topic and Its Contribution to Knowledge.......... 61 62 Limitation of the Study .................................................................... . 62 Impact Assessment Methodology in Rentier Economies .................. 63 Impact Assessment Methodology in the Oil Industry ...................... 65 Data, Sources Collection and Analysis ............................................. .
Introduction 67

CHAPTER FOUR: OIL AND GAS INDUSTRY DEVELOPMENT ..................... 67
4.1 .......................................................................................

4.2 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.4 4.5 4.5.1 4.5.2 4.6 4.7

Historical Background

...................................................................... 72 Oil Industry Development ................................................................. 73 Discoveries, Exploration and Drilling .............................................. 74 Reserves .......................................................................................... 76 Production and Export of Crude Oil ................................................. 78 Crude Oil Export and Marketing ..................................................... . Crude Oil Prices Policies ................................................................. 80 82

70

Refiners

.............................................................................................. 84 Gas Production and Development .................................................... 84 Gas reserves .................................................................................... ................................................................................ Incentives for Foreign Investment in Oil and Gas ........................... 87 Conclusion Gas Production 85

......................................................................................... CHAPTER FIVE: LIBYA'S ECONOMY FROM DEPENDENCY TO DIVERSIFICATION 5.1 5.2 5.3 5.4

89

................................................................................................ 91 Introduction ....................................................................................... 93 Diversification Concept ..................................................................... 96 Economic Development Objectives ................................................... 98 The Development Plans: A synopsis .................................................

91

5.4.1
5.4.2

The Third Plan 1973-1975 98 ...............................................................
The Social and Economic Transformation Plan 1976-1980 101 ............

5.4.3 5.4.4

The Transformation Plan 1981-1985 104 .............................................. The Plans1986-2000 105 .....................................................................

...6 Attracting Directing Foreign Investment 136 .................. 5............... Macroeconomic Policy Management 116 ...................................................3 Plastics industry 135 ...... 5...... 157 ....................................2 5......5 5.................10........................ 5....................10 Economic Development in 2000s 112 ................................. 5.9....... 5....7 5..............9...8 5..................................1 Justifications for a stabilization and saving fund for Libya.......................10......2 Strategyfor privatization 130 ... Population Growth...... The Role of Tourism as an Alternative Resourceto Oil Revenues.......1 Why should the government strength the private sector's role? 129 Strengthening the Private Sector 128 5.5.........3....................................12 Interview Analysis 149 ..............11...........9 .....10.................... 146 ........... Perspectives of the Development Plans 114 ..........10..1 Difficulties in achieving better quality 143 ...........................9.......................10 Transit Trade ....................................................... Measures of Economic Diversification 113 ......10................10.......................... 5.............................. Diversification............ 127 5................................ 5... 5..........................................10.10....10.......................................2 Education policy factors'suggestions 5.......6...2 Petrochemical industry's intermediate and final goods 134 ... The Role of Industry to Develop Alternative Income Instead of Oil 131 5.................................................. 5..................................2 Stabilization and Saving Funds 123 ..................4...........................................................................140 ........10................................ Export Structure 117 .....................10................. Employment and Sectoral Growth 118 ......................... 5..........................3 .6 5... 5... 144 146 Education and Economic Growth 142 Fishing and Marine Wealth 138 ......... 5. 120 5..1 How Should the Rent be Invested? 121 .......7 5........................................................10.10......1 5.........10...........9 5...........1 The advantagesof foreign direct investment 137 ...........9....................................5.... 5.......5 The Industry Sector as a Pioneer for Diversification 134 ...................8 5..2..... ..............................................1 Programming industries 134 ....5 5.....3.10.10.. Growth and Diversification 5.........10.5........10.... CHAPTER SIX: THE CONTRIBUTION OF THE OIL SECTOR TO ECONOMIC DEVELOPMENT IN VENEZUELA ................... The Diversification Dilemma 118 ...............4 5........... Sectoral Choices and Promoting Selected Sectors The Fiscal Investment and Banking Dimensions 119 which Have a Comparative Advantage ...................10............5....13 Conclusion 153 ...

........... 182 182 Adoption of a Sound Monetary Policy ......2....3...................1 7...7 Introduction Findings . CHAPTER SEVEN: FINDINGS AND RECOMMENDATIONS ................................7 ...3................ 166 Economic Performance and Development Goals ..................5 6..3...2....... 186 7.........................................2 7...3...6 7..7 ............ Hydrocarbon Sector Development ..2....... 165 157 6................................................... 177 Exchange Rate Overvaluation ..................................................3............ The Urgent Need for a Saving Fund in Libya .. iv 191 179 7..........3.1 7.........3 7. 173 Negligible Diversification ................................. 175 Oil Windfall and a False Senseof Security ... 160 The Role of Oil Receipts in Economic Development ....................... 184 The PressingNeed for Macroeconomic Stability ................... 187 7....... 172 7.....................2. Economic PressureNeeded for Restructure Reforms ..1 7.............................. 180 Recommendations ....... Expenditure and Investment .........................................................3...................... 169 Conclusion 6...................................................2 Governmentfocus on public services .............................2.....5 Diversified Economy ................3 7..4 7.............................................3..................................................................7....................................3.............3. 174 Poor Management of Oil Revenues .7...4 7..............................6...........5 7.....................2 6.....3 6.................................................................................3 Financial sector reform ......................1 6..........2......................................................6 7.................. Over Confidence in Oil Prices and Over-ambitious Targets ......................5 7.....................4 Introduction .....2 7................... The Failure of Policy-makers to Insulate the Economy from Oil Receipt Swings 7...... 185 GDP Increase Per Capita ........2...............................................................................8 ............................................. 185 7....1 Enhance Libyan economic growth ..............7.............. Strategic Policy Options for the Use of Hydrocarbon Revenues for a .................................................. 181 181 Fostering the Role of Fiscal Policy ..............7............................................................................................. 175 177 Lack of Policy Coordination ............................ 187 7...2 7.... 167 169 The Challenges Ahead 6..... 188 Looking Forward ........ 180 Oil RevenuesShould Support Diversification ...................................... 162 Oil Wealth Impact..........4 Trade liberalisation ...........3....... 172 173 .......6 Problems Which Accompany the Management of Oil Windfalls.....................3 7...................................................4 7.............................

...............................................5.... 225 A.................................................................................................2 7.................. CHAPTER EIGHT: CONCLUSION 198 ..................................... V .. Interview... Questions ...........2 The Goals of Diversification 201 ...............2................... C................. Published Papers . Map of Libya .................... 209 ............................................... Domestic Refineries 231 ......................................................................................................................................2............... 233 D.............................................................................. Oil Sector-Blessing and Curse 207 .................... ......1 7.................. 191 193 196 ......................... Level of Expenditures 202 ..4 REFERENCES Oil Revenue 202 ........................ Composition of Expenditure 203 ............... 236 E.........1 8......3 8.................... 226 B............................................................. Overseas Refinery and Distribution Activities ................... 8......................5...............................................................................................................................................2 8...............................................................................................................................7............................................................. 8..............................6 Policy Option A Policy Option B Conclusion ........1 Introduction 198 .......... APPENDICES 225 ............................................ 8........................................................2.....................2.........................................

........................................................................................................................ Table 4...........5 Libyan Crude Oil Exports by Destination (1998-2003) 79 ...6 Transformation Table 5...........5 Population Plan (1976-1980) and Workforce .............. ...........................................................4 Value of Exports and Oil Exports (1982-2004) 78 ............ Table 4.2 Libyan Population (1995-2000) ....................................4 Fixed Capital Formation by Economic Activity in the Social and Economic Transformation Plan (1976-1980) Table 5....8 Libya Crude Oil Production (1990-2005) .......................................... 100 Table 5.. (1973-1975) ............................... 2 Error! Bookmark not defined..............................9 Economic Activities' Contribution to GDP (1996-2003) .. Table 4...........3 Structural Change in Economic Activities over the Transformation Plan (1976-1980) ...................LIST OF TABLES Table 1.... 83 Table 4.............................................................................................. ........... 103 in the Social and Economic Transformation 104 ........ 107 by Sectors (1986-2000) ...7 Transformation Budget Appropriations Budget Appropriations by Sector (1986-2000)...................................... 33 70 Table 2....... vi ................7 Libya's Natural Gas Reserves (1990-2005) 85 ................................ 88 99 Table 5......3 Libya Proven Crude Oil Reserves (1990-2005) 75 ......8 Economic Activities' Contribution to GDP......................... Table 4........ 100 Table 5.. 108 110 111 Table 5..............................6 Libyan Oil Output of Refined Products Development (1990-2005)........................ Table 4......2 Development of Producing Wells in Libya 1998-2005 71 ............. ......1 Spot Crude Oil Price (1972-2003 $/ bb) Table 4..........1 Libyan Oil Production (1961-1974) .............1 Economic Goals in the Third Plan (1973-1975) .................. Table 4........ 102 Table 5...................1 Crude Oil Production in Selected Exporting Countries (1970-2000) Table 1.........2 Structural Change in Gross Product in the Third Plan .......... (1986-1994) Table 5.. Table 5........................

...........1 Attributes of Development Planning 116 ............................. Fig 3....................................LIST OF FIGURES Fig 2.....1 Libyan Proven Crude Oil Reserves (1997-2005) 54 ......... VII ....2 Venezuela's Proven Natural Gas Reserve 165 Fig 6................................ 161 162 Fig 6........... .....................................1 Venezuela Oil Productions (1994-2005) ................ Fig 5..... .1 Libyan Oil Daily Average Production (1961-2005) Fig 5....2 Shows the Relation between Oil Revenue and Economic Growth..............1 Economic Rent and Consumer Surplus 29 .................................3 Venezuela's GDP at Current Market Prices (1994-2005) .......... 148 Fig 6................................................................... 69 Fig 4.....

giving me life in the first place. my supervisor. Les was always there to listen and give advice. listening to my complaints and frustrations and giving valuable advice and help. I would like to thank the rest of my committee for (the hard and valuables questions). Also.ACKNOWLEDGEMENT First. Professor Les Ruddock for his continuous support in the PhD programme. for their continuous support support during my study. Let me also say "thank you" to the following people at Salford University: Professor Ghassan Aouad (Dean) for having confidence in me for supporting my research. to all my friends. Finally. advice and the motivation he provided me with. and solving all problems concerning my PhD. even when those interests went beyond the boundaries of language. and to my children for their extended and patience. I would like to express my deepest thank to my supervisor. at any time. dear wife Naziha for sharing her ideas and concepts of the endeavour of writing a dissertation with me. a special thanks and appreciation is dedicated to my family. He showed me different ways to approach a researchproblem and the need to be persistent to accomplish my goal. educating me and for unconditional support and encouragement to pursue my interests. I could not have finished this dissertation. I highly appreciated his suggestions. He taught me how to ask questions and express ideas. especially to my parents: my father Ahmed and my stepmother Khiria for their care and endlesssupport. his interest in my topic and his valuable discussions. viii . Besides. Last but no means least. Also. Without his encouragement and constant guidance. Dr Dilanthi Amaratunga for helping me. his ideas and thoughts with me and for their influence on my idea throughout sharing my academic research at Salford University.

The Libyan economy performed as well as resourcepoor countries over the past few decades. Projected high oil revenue will provide the finance for growth but will not necessarily spur sustained growth in the non-oil sector. underdevelopment Policy options for protecting the economy from volatility in oil revenues. Libya relies heavily on oil receipts. the main challenge for Libya is to promote growth of the non-oil sector and diversification of its economy. Also. Non-hydrocarbon GDP growth has been weak and spur has been transmitted to non-hydrocarbon GDP. the price of which tends to fluctuate in the international market. These sharp increases in government spending are outstripped difficult to reverse when the boom ends and often lead to large fiscal deficits rather than surplus. Overfuture oil revenues are shown to have seriously adverse optimistic predictions of consequences. The reliance of public finance on a single sector means that shocks threaten the economy's fiscal balance and stability. Productivity growth is a precondition for faster growth and greater investment effort. and socio-economic development compares favourably standard in other Middle Eastern and North African countries. the Libyan economy is dominated by widely hydrocarbons and the public sector. Libya has over-consumed in to windfalls from surges in world prices. given its potential large reserve. Libya has the with standards to raise oil production and revenues significantly in coming years.ABSTRACT The Libyan economy relies heavily on increasing oil revenues. Strong productivity growth is also a prerequisite for competitive diversification out of hydrocarbon. Sizeable oil wealth has supported a decent living for Libya's population. despite the substantial oil revenues. However. Libyan government spending has response the gain in revenues.which may deteriorate with a future oil price decline. without eliminating the benefits from rising prices include the formation of a stabilization fund ix . The oil booms of 1973 and 1979 brought unprecedented income to Libya but. Weak non-oil oil revenue volatility GDP growth reflects both insufficient private investment and low productivity of capital importing efficiency. much of the potential benefit of the windfall has been dissipated.particularly if the non-oil economy adjusts to falling demand through and capital flight is provoked.

and governments and others responsible must take account of risk and uncertainty when selecting projects. In addition. good fiscal control of periodic boom episodes enables the boom to temporarily accelerate the rate of economic development. such questions as the magnitude of the windfalls. there is a macroeconomic need to diversify the economy to avoid the pitfalls which so often plague developing countries with vast natural resources. because it underlies the development reform agenda. Consequently. but it should go in tandem with considerable might strengthening of the investment climate. 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. To speedup non-oil and job creation. Libya needssound economic management and to address the problems associated with oil windfalls. the oil windfalls should be used strategically. Enhancing the quality of Libya's human resources will also be essential to improve productivity and diversify out of oil especially into services . The stabilization fund would smooth consumption and reduce the costs associatedwith volatile spending.and hedging strategies in the international markets. with the aim of growth facilitating the transition to a competitive. how Libya has used them and their impact on non-oil a sector have been addressedin 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 successstories of all developing countries. X . and formulating plans for development. Market processesare required to help allocate public resources. the intermediation of hydrocarbon windfalls through the household and business sectors produce superior long-term growth. The decisions concerning public investment in a social economic infrastructure would be better if unconnected to the presenceof hydrocarbon windfalls.and compete in the global economy. Quite clearly. market-led economy. Over the long-term. Improving the quality of governance deserves particular attention.

LIST OF ABBREVIATIONS Agoco API BP CBV ENI EPSA GDP HEM IMF LCB MB/D Arabian Gulf Oil Company American Petroleum Institute British Petroleum Central Bank of Venezuela Ente Nazionale Idrocarburi Exploration and Production Sharing Agreements Gross Domestic Product Hexane Extractable Material International Monetary Fund Libyan Central Bank Million Barrel a Day NAME NIGC NIR NOC OECD OPEC PPP PDVSA PVC UAE North African andMiddle East National Iranian Gas Company Net International Reserves National Oil Company Organization for Economic Co-operation and Development Organization of Petroleum Exporting Countries Purchasing Power Parity Pteroleos de Venezuela Socialed Anonima Poly Vinyl Chloride United Arab Emirates UN USA VIF YPF UnitedNations United States America of Venezuela International Fund Yacimientos Petrolitoros Fiscales xi .

Despite frozen wages. The lack of multi-resource income makes the economy vulnerable to oil price shocks.1 Background The sizeable oil wealth has supported decent living standards for Libya's population. and to reach as high a peak as in the projected 1970s' at 3. As Table 1.3 million barrels per day.269 on average swing during 1990-2000 reaching US$ US$ 9. Libya faces the challenging task of its dependenceon short-lived and potentially volatile oil revenue.General Introduction Chapter One CHAPTER ONE: GENERAL INTRODUCTION 1. living have been supported through an extensive social safety net with the provision standards free housing education and health care. government. subsidized food and utility prices and of sizeable energy subsidies.965 in 2004. per capita PPP GDP hovered around US$ 9. The including parliament. Yet. At what pace should the oil be extracted? How should the proceeds be spent and used? Which investments will addressthe country's development needs? The decisions made on such issuescan have a long-lasting impact and can affect the well-being of today's as as future generations in a society. Oil wealth creates major opportunities. plays an important role in managing these windfalls.1 demonstrates. It is vital to reducing the country's economic future that the government managethis revenue in a way which the diversification of the economy.the windfall to early the government of Libya has been substantial. Oil production in Libya is to increase sharply by the early 2010. experience in Libya in the management of oil wealth offers a dramatic illustration of the problems that these windfalls could pose. reflecting a in oil revenues. Libya ranks ahead of several other oil-producing countries in terms of per capita GDP adjusted for differences in purchasing power parity (PPP) to GDP and. at the same time. well Libya has a substantial endowment of oil and gas deposits. . especially in developing countries. in order to ensure a steady increase in the allows living standards of the Libyan population.

708 Annual 1. all the reservoirs that exist on our planet will he discovered.858 1995 2.General Introduction Chapter One Table 1.903 2.280 2.989 1975 2. At best.053 3.1 Crude Oil Production in Selected Exporting Countries (1970-2000) (1. as an oil exporting country.790 1.135 1. 1. (Makro.530 2. This the exploitation alone creates of oil generates very large and sudden inflows significant challenges fier developing of revenue. because their administrative systems are often ill-equipped to handle such flows.498 0.346 Statistical 2.936 1990 0. Moreover. On this aSSUnlption.378 2.165 Bulletin.891 Typically. Ilydrocarbon deposits may he very generous but the size of the mineral gifts is finite or later. and thereby provide an environment 2 . these circumstances on how to handle the new Ibund wealth.564 (2003) 1.term sustainahility consideration. Nigeria and Venezuela have a weak economic performance and worse than resource poor countries like Asian Tigers.058 0.084 1980 1. sooner if the demand filr fössil fuels remains positive för as long as supplies are forthcoming.083 0. the uncertainty associated with volatile oil prices adds a layer ol'complexity that further strains an already over-burdened challenge the most able policymaker largest drawback infrastructure system.0 3. Arczki and I'Ioeg (2007) conclude that the resource-rich countries such as Congo. is to stabilize budgetary expenditure and sterilize excess revenue inflows in the context of mediumto long.663 1985 0. substantive role in a social and economic transformation (Fconomidcs and Oligney. not least change countries.343 2.716 1. The challenge of macroeconomic policy in Libya.006 2000 1.716 2. In addition.820 2. full depletion will inevitably occur.783 0. Building and the adroit use of taxes and incentives constructive. 2000). 1970 2. The and facilitating can only a natural gas play a very in oil export is economic. supplies will dry uh at some future date.000b/d) Years Kuwait Libya Nigeria Norway Venezuela J'uurce: Ol'L(.996 1. 2003) a date which is yet highly uncertain.

The main argument is to support the urgent need to improve social facilities such as education. and Botswana) appear to have avoided these problems through prudent and transparentmanagementpractices. Norway. Furthermore. (ii) Oil revenue is a foreign exchange inflow. The 3 . there has been a strong deficit bias and a procyclical fiscal policy has been driven by oil price development. number of countries. relationship between resource abundance and economic performance. In contrast. economic growth over the long haul tends to be slower than in other countries that are less endowed. health and infrastructure (Hanneson. (i) Oil revenue is more volatile than revenue from other export commodities because international of marketconditions. Instead. The macroeconomics of oil exporting countries face challenges arising from three of characteristics oil revenue. and a significant body of literature has grown poor seeking to explain the. how the income of hydrocarbon rent investment should be used to get more benefit must be combined.General Introduction Chapter One conducive to growth and overcoming unemployment. In most countries that are rich in oil. In a growth. While a completely satisfactory explanation for this particular type of "resource curse" is not available. 2001). and its use can have large effects on macroeconomic stability and economic structure. the potential costs are well documented. a range of countries (including USA. In addition to the possible adverse impact on resource riches can be a major contributor to corruption and social unrest. direct participation by the oil sector in industrial projects has been limited. the government has been satisfied with providing an infrastructure capable of attracting private and foreign government participation in investment. In most of the oil-producing countries. and (iii) Oil is an exhaustible resource stream. oil. 1999). gases (and diamonds) are associated with causing and financing civil war with its attendant social and economic costs (Collier. This question is relevant for a large number of countries. A key question in this regard is how a country like Libya can avoid the resource curse and turn their abundance in resources into a blessing. minerals and other natural resources. with a finite revenue For the most part. It is often argued that there is an association between hydrocarbon riches and performance "the resource curse".

may largely significant its success. economy and varied non-energy exports. solid and mature institutions. are the result of many interrelated factors. a market-oriented economy. the high concentration 4 . base. namely agriculture. (Vandewalle. the enclave of and natureof the oil sector. Norway and Alaska are frequently cited as exceptions to this of The fact that Norway was already developed and had a diversified industrial rule. The petroleum revenues have touched of the Libyan population's life and have resulted in extensive change in all every aspect functions of the population and physical resources. However. massive funds were allocated national for productive sectors. especially for providing the financial surplus sector to fund the socio-economic development plans. 1998).The changes. the as but their difficulties seem to be accentuatedby the peculiar nature of oil markets and oil production.which have economic in the economic sectors. and economy. with a long-tradition of democracy. During the social-economic development plan 1970-1985. Where oil represented the exclusive income of the local revenue its impact on state-building. which tell us a great deal about their respective statebuilding experiences. Few countries in the gulf that have been heavily dependent on the oil sector succeeded in managing their oil wealth in a manner that allowed for the simultaneous development the boom-oil sector. industry tourism and infrastructure. the most dominant in the developing Libyan economy. the discovery and exploration of oil has been and remains. which transformed the country's economy from being traditional dependenton oil revenue to a modern more diversified economy. Oil-revenues in Libya became part of a larger. such impacts remained tempered by the boom's contribution to overall development. growth and development was more powerful government. but the accrued dominant factor is government intervention policy which has played a significant role in the great changes of development in the Libyan economy since 1970.General Introduction Chapter One impact of oil on the fortunes of local states shows both remarkable similarities and subtle but important variations.the exhaustibilityof oil reserves. Libya has encountered samechallenges other natural resourcebasedcountries. explain In brief. diversified. This led to distortions and other ills associated with hydrocarbon productive booms. The main challenges come from the high volatility of oil prices.

resulting in a high debt burden. will require time and sustained commitment.General Introduction Chapter One flows from the oil sector.however. and weak and limited administrative capacity on the other has proven to be disastrous governance for many countries. In the past. It is often argued that there is a link between oil resource riches and poor economic performance. many oil-producing countries have been disappointed in their expectations that favourable resource endowments would lead to rapid improvements in development processindicators (World Bank. Very large. during oil boom years. and a significant body of literature has grown seeking to explain the relationships between oil abundance and economic performance. but during the subsequent period of lower oil prices and lower government revenue. evidence to date suggests that revenue often becomesa curse rather than a blessing. The oil and gas revenue some 68% of total government revenue and the oil and gas industry's share represented total exports were over 95%. challenge. In 2001. quickly growing. Discretionary behaviour and out-right corruption. but time-limited production and revenue countries flows combined with weak administration. large expenditure programmes were initiated. Addressing this weakness. Unfortunately. The oil and gas industry has become the most value creating industry in Libya. Oil production provides the most dramatic illustration of the problems resource rich developing face. in principle unlock the constraints of foreign exchange. all contribute to poor growth performance and eventual dissipation of national oil wealth. The availability presents both an opportunity and a of The sums involved can have an enormous positive impact on development. while there are certainly exceptions. The combination of resource riches on the one hand. serving as a development and diversification spur. Researchin this regard petroleum has spawned a rich literature of case studies and theoretical frameworks for analysis of the rise of this problem. 1995).The fiscal deficit records of the 5 . means that the ownership of such wealth provides ample scope for inefficient policies. which invites rent-seeking behaviour and may lead to revenue governance problems. Furthermore. A typical phenomenon in Libya has been that. these programmes were cut back or postponed. fluctuating oil fiscal policy increased revenues and pro-cyclical government domestic borrowing. Yet petroleum revenue could. some 36% of Libya's GDP was from the oil and gas sector.

determined the economic policies implemented and growth in Libya. as a result of the oil price volatility. That is. and of the early of the 1990s. at 3. has meant that only modest progress towards these goals has been achieved. in 2000. main. However. failure of the development process in Libya. For instance. Libya received about 98 per cent of its revenue from oil export and 65% of government revenue from oil-related activities. the government is the owner of oil reservesand the only recipient of oil revenues and these accounts for over 60% of total government The massive influx of monies enabled the government to perform a new revenues. The issue of oil price uncertainty and its influence on the Libya economy has been studied extensively. Thus. the choice of individuals and institutions that have managed economic policy. In addition to Libya's economic managementthe focus during the last three decadeshas been on how to accommodate change in the international oil market. In the past. the economic context of Libya underwent a dramatic change with a surge in exports starting in September 1962 and a percentage increase in government oil oil revenue that reached its peak in 1970.General Introduction Chapter One late 1980s. Besides. Forecastsof oil prices are crucial in fiscal projections when economic preparing the government budget each year. The debt-to-GDP ratio increased from about 30% in early 1980 to about 50% during 1999-2000. function in the economy that was not possible before the oil discovery. This dependence on oil exports has. and the oil gradually dominated other traditional economic activities until oil become the sector if not the only source of national income. The Libyan economy still lacks the 6 .exploration and production rights are the exclusive right of the state. The criterion for assessing the success or failure of Libyan economy development resides in determining the extent to which the development process is successful in furthering the diversification goals. to aids economic diversification. reflected in the high variability of saving and investment. has resulted in the poor management of oil resources with flow-on effects to the economy. looking for other resources as a substitute for oil and gas. The magnitude of this change was enhancedby the fact that oil revenues. to a large extent.3 million barrel a day. were financed by recourse to domestic borrowing. despite the priority of several development attempts and the massive financial resources allocated toward development since the early 1960s.

the government has managedto increase its investment in infrastructure quite rapidly Moreover. its inability to constrain the growth of government consumption.General Introduction Chapter One level of diversification that would enable the country to reduce its dependencyon the oil sector. An International Monetary Fund Survey (2005) stated that. exploiting its windfall and trying to avert the potential risks of Libya's oil boom. despite the opportunities that oil has conferred. political and economic cost. Despite. So far. certain sectorsof the nonespecially those producing tradable goods dependent on this sector. with only 11% of the Libyan labour force employed in the sector in 2000. Libya is facing the challenge of economically managing the transition from plan to market as well as dealing with this oil wealth. (International Monetary Fund. will oil economy. It is vital to the country's economic future that the government volatile this revenue in a way that allows for the diversification of the economy. Recently. 7 . but also becausethe oil sector. 2005). Libya faces the difficult task of reducing its dependenceon short-lived and potentially oil revenue. especially if fairly sustained. Furthermore. It can only be speculated whether oil has been blessing or a curse to the Libyan people (Vandewalle. in manage order to ensure a steady increase in the living standards of the Libyan population. This is essential not only becauseof the temporary nature of the boom. it is difficult to make the case that a revenue windfall. They "encouraged and supported the authorities to attempt to reassess their onesector-at-a-time approach to reform and to seek greater economic diversification. is not a source of much employment. However. be adversely affected by the windfall (Galeb. can have a negative overall value since it expands the options available to the government and therefore to the entire country. there are no clear signs and specific plans to guide the country through the anticipated non-oil future "pp 194. Libya has made great strides on the path to market reforms and. 1996). in doing so. its exploitation has also exacted high social. while a substantial source of revenue for the country. 1988).

General Introduction

Chapter One

Thorvaldur, (2000) concludes that oil revenues bring risks. One risk is that too many become locked in low-skill, oil-resource-based industries, including agriculture, people and thus fail, through no fault of their own, to advance their own or their children's education and earning power. Another risk is that the authorities and other inhabitants of resource-rich countries become overconfident and therefore tend to underrate or overlook the need for good economic policies as well as the need for good education. A nation that believes that natural capital is their most important assetmay develop a false sense of security and become negligent about the accumulation of human capital. (Amuzegar, 1990).

An equally high priority should be given to establishing clear policies for the use of hydrocarbon revenues targeting diversification to avoid oil revenue volatility. The need to preserve the value of finite resource assetsand the wise use of proceedsfrom selling these assetsshould be clearly recognized in fiscal policy frameworks. Addressing other issues is more difficult and progress will necessarily be slower. For instance, there are high degrees of uncertainty over the value of resourcesand assetswhich are associated with extraction. It will be necessary, therefore, to establish priorities among practices, both over time to Libya-specific circumstances. A high, immediate priority should be and according to improving the quality of economic diversification related to oil endowment. given The government has benefited from large flows of revenue from the exploitation of resourcesand needs to address several important issues. First, they need to take natural measuresto stabilize the budgetary and liquidity impact of revenues which are subject to high and unpredictable price volatility or other fluctuations. Second, since the are finite, policy should take account of the intergenerational distribution of resources income flows as well as the distribution of spending and the immediate social impact of industries. Besides, hydrocarbon resources will dry up sooner or later. Third, resource the impact of large inflows of resource revenueson exchangerate developmentsand the tradable sector need to be carefully considered. "Dutch Disease" non-resource (characterized by an appreciating real exchange rate and the associatedadverse impact on the non-resource tradable sector of the economy) is an important issue for oil richcountries. A clear policy framework that recognizes all of these oil-related issues is an

8

General Introduction

Chapter One

essential basis for designing an effective and transparent fiscal managementplan in oilrich countries.

Many countries have established separate funds for resource revenues, purportedly to tackle some of the above problems. However, the establishment of a resource fund, while necessary, is not a sufficient condition to address these problems adequately (Danis et at 2003). It is not necessary because, in principle all of the issues can be tackled as integral elements of government budget and fiscal policy.

Also, oil funds usually a sort out a number of problems and is recommended as a necessary contribution to resource revenues diversification. However, a number of countries have set up funds, purportedly to help protect the revenues, and subsequently to protect the government budget and economy from the volatility of revenue flows and to save for future generations,or for other purposes(e.g. development funds).

1.2

Research Focus

This study attempts to examine and evaluate the experience of the Libyan economy and its performance during the crucial 1970-2000 period within the framework of major hypothesesregarding the dynamics of economic development in an oil-based economy. Several fundamental questions are raised: How did the Libyan authorities allocate their windfalls among competing needs? What strategies and policies did they pursue in oil optimising returns on their fortunes during the oil boom, and controlling the damage during the oil bust? Moreover, to what extent did this allocation and strategy help them to achieve their state or implied rational socioeconomic agenda? A wish to explore at least some of these answers underlies this study. Any examination of the nature and evolution of the Libyan economy on society needs is argued to be in a consideration of a number of broader issues such as development rooted sustainability, resource conservation, employment opportunities, the provision of social welfare benefits and political stability. In addition, the specific organisation and focus of national development plans themselvesare also significant issues. Also, this study aims to explore the problems and issues which accompany oil windfalls and set up the best solution for such problems.

9

General Introduction

Chapter One

To enhance non-resource based growth and overall domestic economic development, the likely outcome is that looser in short run, but growth enhancing, fiscal policy will be sustainable, while government unproductive policies will not, and a behavioural reaction function of the government could be introduced to look at what constitute both sustainable and optimal policies in the face of volatile world commodity prices. (Nigel, 1998).

1.3

Layout of the Thesis

Chapter Two concentrates on the literature review. Chapter Three investigates the methodology. Chapter Four focuses on oil industry development. The research " which has been attained so far and how to get more benefit from this sector achievement by further investment and significant contribution to the GPD in addition to more emphasis on the role of oil revenue development is considered. Chapter Five will on the development processdilemma and diversification problem and looks concentrate the obstacles which faced Libya including the most recent developments at overcoming in the oil industry over the chosentime period. How can Libya divert this windfall from to a blessing through economic diversification from dependence on a single a curse There is emphasis on the interview analysis with Libyan policy-makers, their resource? in respect of Libyan economic development and how they can benefit from the views Chapter Six shows the Venezuelan experience of how they dealt with such windfalls. in the past. Chapter Seven look at findings and recommendations. Finally, wealth Chapter Eight is the conclusion.

1.4

Historical Background

The Libya population grew 4 389,700 in 1995 to 5 021,400 in 2000. The rate of increase in 1997 was 6.5% as Table 1.2 demonstrates.The highest rate of increasein the Libyan population over this 5 years period was concentrated in urban areas (more than 80%) and most of the population were living in cities and working in business, administration, trade and tourism. (Information and Documentation Corporation, 2003)

The 1950s, Libya was characterized by great poverty. Minimal economic development was made possible only by the payment and loans received from various Western nations (see map) Appendix A.

10

General Introduction

Chapter One

The economic underdevelopment resulted from a scarcity of political and economic resources.In 1955, petroleum was discovered in the country and by the early 1960's Table 1.2 Libyan Population (1995-2000) Year Population (. 000) Libyan 1995 1996 1997 1998 1999 2000 4389.7 4 519.4 4 647.5 4768.8 4 895.1 5 021.4 Non-Libyan 409.3 500.1 700.0 405.4 405.4 405.4 Total 4799.0 5 019.5 5 347.5 5 174.2 5 300.5 5 426.8 Libyan 2.7 3.0 2.8 2.6 2.8 4.5 Non-Libyan -31.8 22.2 39.9 -42.1 4.0 4.0 Total -1.5 4.6 6.5 -3.2 2.9 4.5 Population rate increase (%)

Source: General Planning Council, 2UU2

Libya was taking in growing revenues from the exploitation of that resource. In 1953, Anglo-Libyan and American-Libyan treaties were concluded that allowed Britain and the United Statesof America to establish military basesin Libya in return for economic This was terminated by Libya in 1964. British and American troops were subsidies. in early 1970. withdrawn At the time of independence,the Libyan economy was basedon agriculture, which was divided unevenly between tree crops and livestock products. Agriculture provided raw for much of the country's industrial sector, exports, and trade. It employed materials than 70% of the labour force and contributed about 30% of the GDP, dependent more on climatic conditions. For the most part, agricultural resources were limited to two comparatively narrow stretches along the Mediterranean Sea and a few desert oases. The cropland had been maltreated, and the pasture had been overgrazed. Erosion was common, production methods were primitive, and close to a quarter of the agriculture area was held on a tribal basis and was being used inefficiently. Rainfall was unpredictable, except that

General Introduction

Chapter One

usually, it was scarce and ill-timed. When the rain did come, however, it was likely to be excessive. Groundwater was in short supply in the agricultural areas. In some locations it had been excessively drawn upon and so had become brackish or saline and longer suitable, even for agriculture. Because the country has no perennial was no there is only limited potential for irrigation and even less for hydroelectric rivers, power. At the time of independence, the apparently abundant subterranean water supplies located in the lower Saharahad not been discovered. Even if officials had known about the water, its presence, while encouraging, would not have been very helpful in the due to lack of development funds, inadequatetransport and storage facilities. short-term In 1986, although agriculture contributed a very small share to the GDP, it still provided employment opportunities for a large portion of the population and was, therefore, still important. Shortage of water was the main drawback to the expansion of cultivable land, but reclamation and irrigation schemes and the introduction of modern farming techniques held promise for the future.

1.5

The Structure

of the Economy

The Libyan economy is dominated by hydrocarbon. At the time of independence (1951), the Libyan economy was based mainly on agriculture, which employed more than 70% of the labour force and contributed about 30% of the GDP. Before the discovery of oil and gas, Libyan was one of the poorest countries in the world. However, by 1961, substantial qualities of oil had been discovered and greatly the country's social and economic development. Thus, with a population supported to 5.5 million, Libya had an estimated per capita income of US$ 6,800 in 2005. close The share of the hydrocarbon sector has been constantly increasingly, and represented an estimated 70% of GDP at 2005. Oil also represented93% of government revenues 95% of export earnings. However, the share of oil in the economy has been on a and declining trend during the 1990sbefore rising to 32% in 2004. Libya appearsas slightly one of the less diversified oil-producing economies in the world. The services sector is the second most important economic activity. The contribution of services to GDP declined from 46% during 1990-99 to 10% in 2005, reflecting the

12

General Introduction

Chanter One

However, output in services grew faster than total GDP, so that the soaring price of oil. share of services reached 46% of GDP in 2005 from about 40% in the early of 1990s. Despite this increase, the contribution of services to GDP remains below the average in upper middle-income countries (53.8%). Construction and manufacturing each contribute around 7% to GDP, a share that has remained largely constant overtime. At 9% of GDP, the Libyan agricultural sector contributes to the GDP around 8% more than the averageof upper middle-income countries. The Public sector dominated activities. In the most radical of the measures,all private property rights were eliminated in March 1978. In later years, most private trading, retail and wholesale, was abolished. The only type of private sector activity that the government did not actively seek to eliminate was small service-producing firms (mostly self employed), which were not viewed as inherently exploitative. The central bank's credit policy was confirmed to supporting the government's effort. It limited credit to the private sector and directed it instead to state entities. As a result of the severe repression of private business activity, a large number of Libyan manager and left the country. However, private investment and ownership were skilled workers in agriculture, even for foreigners. encouraged The last phase of the socialist period was characterised by an intensive effort to build industrial capacity targeting diversified processes.But failing world oil prices in the early 1980s dramatically reduced government revenues and caused a serious decline in the economic activity. The decline in oil prices during the 1980s reduced Libya's in terms of energy costs and greatly reduced the supply of foreign exchange. advantage Whereas in the late 1970s, it may have been possible both to import industrial raw and subsidise food imports, by 1987 it was becoming increasingly clear that materials foreign exchange earnings was causing a rehabilitation of private sector activity. Beginning in 1988, Libya took some steps towards liberalisation with a greater scope to private enterprise in the trade, small scale industries and agricultural allowed business. In September 1992, a privatization law was passed,but this initiative had no impact on the structure of the economy.

13

General Introduction

Chapter One

1.6

Libya before Oil Discovery

At the time of independence,Libya possessedfew minerals in quantities sufficient for iron ore was subsequently found in the Wade ash Shati in the commercial use, although the country. In turn, becauseof the absenceof coal and hydroelectric south-central part the country had little energy potential. In the modern sense, Libya had power, practically no industry and, given the limitation of the agricultural sector, could produce few exports to be exchangedfor the import commodities the country needed. At independence,illiteracy was widespread, the level of skill was low and technical and (the lack of sufficient management expertise and organization were at a premium Libyans in the labour force remained a problem in the 1970's. numbers of skilled Despite large sums of money having been spent on training Libyans, the government foreign workers). A large part of national life was lived under nomadic or still relied on than settled, conditions and the high birth-rate added to the semi-nomadic, rather The rapid population increase strained the agricultural economy and country's poverty. in the drift of excessunskilled labourers to urban centres, but these centres,also resulted lacked sufficient adequately-paid employment. In term of resources, including human resources, the outlook at independence was bleak. Throughout the 1950s, and the early 1960s, international and other foreign the United States, Britain and Italy, continued to finance the gap agencies, mainly between Libya's needs and its domestic resources.The foreign community was not in a however, to undertake an across-the-board and sustained development position to set the economy on a course of immediate self-sufficiency. During much programme of the 1950's, the country's administrative apparatus was unable to utilise all the made available from a broad. resources

1.7

The First Oil Boom

During the decade after the petroleum discovery, Libya became a classic example of the dual economy, in which two separate economies (petroleum and non petroleum) operated side by side. For practical purposes, no connection existed between them, that the petroleum companies employed limited quantities of local labour and except

14

Genera! Introduction

Chapter One

paid a portion of their profits to the government in royalties and taxes. The financing and decisions affecting the activities of the petroleum economy came not from the domestic non-petroleum economy but rather from outside the country. Although this sharp dichotomy was in the processof relaxation, especially after 1967, it appearsnot to have been attacked conceptually, at least not with fervour, until after the 1969 change of government. Crude oil production has benefited from dramatic changes which have happened all over the world, such as the Iranian revolution and the Arab-Israeli conflict (Khan, 1994).

In 1981, when oil prices started to fall and the worldwide oil market entered a period of the present phase of independent Libyan economic history began. The decline in glut, prices has had a tremendous effect on the Libyan economy. By 1985, Libyan oil oil had fallen to their lowest level since the first organization of petroleum revenues countries (OPEC) price shock in 1973. This fall in oil revenues, which exporting 57% of the total GDP in 1980 and from which, the government had constituted over derived over 80% of its revenue in some years, causeda sharp contraction in the Libyan Real GDP fell by 14% between 1980 and 1981 and continued to decline in economy. late 1986. The negative trend in real GDP growth was not expected to reverse itself in the late 1980s. The increasing importance of oil in the world economy and the in concentrating the world's most prolific reservoirs in a arbitrariness of geology handful of third world countries, made the overwhelming and long-lasting successof the landlord-state possible (Mommer, 1998).

The decline in real GDP placed a great strain on government spending, reducing the level of imported goods available in the Libyan market and increasing Libya's debt repayment problems, all of which combined to create lower living standards. The decline in oil revenues, as of 1986, also caused the Libyan government to revise its somewhat haphazard way of making economic policy decisions, because it no longer possessedthe financial resourcesto achieve its many goals. Thus, during the early and mid 1980s, development projects were subjected to a more rigorous cost and benefit analysis than during the easy money time of the 1970's.

15

launched in 1981. In the long-term. although a large amount of money was spent on development plans. This puts pressure on the government and in some cases more schemeswere cut as a result of the falling prices. Since the early 1960s. In the mean-time (the wealth created or become a companion) to problems such as rent-seeking "Dutch disease" and corruption. On the other hand. announced in 1975. engines and contributes les pollution than other crude. while having rather a high wax content. The first well began in 1956 in western Fezzan and the first oil was struck in 1957. The development of the oil industry was remarkable in terms of its rapid proliferation. oil prices have seen a dramatic change and more volatility then any other commodity and cannot be predicted even in the shorttime. what should the government do to overcome such problems? Some solutions will be 16 . just as several firms were planning to give up exploration. was programmed to pump US$ 20 billion into the development of a broad range of economic activities that would continue to provide income after Libya's petroleum reserves had been exhausted. the petroleum industry has increasingly dominated the whole economy. which makes it easier on internal combustion areas. Industry. is lighter and easier to handle than crude from most other petroleum It also has a low sulphur content. 1.General Introduction In regard to Libyan economic plans. Libyan crude had a receptive market in Europe from the start. Esso (subsequently Exxon) made the first commercial strike in 1959. The first oil flowed by pipeline from an Esso concession at Zalten to its export facilities at Marsa al Buraygah in 1961. the consequences were still modest. of which there was little before the revolution. although in 1984 it provided direct employment for fewer the 20.8 Conclusion Despite substantialoil wealth. Libya's Chapter One five-year economic and social transportation plan (1976-1980). Libyan crude oil. oil exploration began in 1955. also received a significant amount of funding in the first development plan as well as in the second. In respect of extraction.000 Libyans. dealing with theserevenues represents a challenge and difficult for task the Libyan authorities. Nevertheless. Agriculture received the largest share of aid in an effort to make Libya self-sufficient in food and to help keep the rural population on their land. For this reason. which is a gift from God.

experiences. 17 .General Introduction Chapter One Other countries' experiences will be reviewed. particularly the successful suggested.

In addition. have found that there is a relationship between resources and rent many researchers. particularly when the country depends heavily on these resources and is perceived as lacking in political maturity. in particular. This essentially needssound given fiscal policy that ensures the preservation of the oil wealth's value. basedon exhaustible resources. which have suffered from a poor institutional system. seeking. Oil exporters. taking into account its exhaustible character and with due attention to intergeneration equity. However. have not 18 .1 Introduction The hydrocarbon impact on an oil economy has been tackled by many economists over the years and demonstratesthat oil and gas revenues have many benefits. manageand use their oil wealth. Thorvaldur (2000) concludes that natural resource abundancetends to release forces that undermine sound economic management and this challenge means that the authorities need to put in place countervailing stabilizing mechanisms. and this is of great interest to some economists. many of these countries have found out that these windfalls.2 Other Countries Experiences in Dealing with Oil Windfalls According to Okogu (2003). particularly in Western Europe and performance North America (such as Norway. a few countries have a good record in dealing with this windfall. This windfall has provided a good opportunity for those countries to improve their economic performance and the standardof living for their people. Eifert et al (2003) state that the economic achievement record of mineral-exporting countries has generally been disappointing. Economic stabilisation is especially important in resource-rich economies. and Canada) and also Indonesia and Botswana. perhaps the most important challenge oil-producing countries encounter.become more a curse than a blessing particularly in the developing countries. 2. In addition. In contrast. if the countries have utilised them successfully.Literature Review Chapter Two CHAPTER TWO: LITERATURE REVIEW 2. their dependency on a depleting natural resource. is how to deal with.

becauseoil prices and revenuesare highly volatile and hard to predict but also becausethey must plan for the time when the oil runs out. Subramaninan (2004) highlights that it is well documented that most countries do not benefit from their oil and gas endowment. measured than US$1 a day increased from close to 36% to just under 70%. economic and political institutions. Firstly. in other natural resources.Literature Review Chapter Two done as well as resource-poor countries over the past few decades. oil revenue is more changeable than revenue from other export commodities (largely due to rapidly fluctuating 19 . or subsidies. that the natural resource curse is evident in most countries with oil or and this causesa depression in long-term growth. but countries that are rich minerals. basedon cross-country evidence he found. Sala-I-Martin (2003) illustrated. are not to the curse. Perhaps it is becauseof the way oil economies are run.especially when one considers the big revenue gains to the oil-exporting countries since 1973. large investment projects. and more important. Managing wealth is much the same as managing any budget well. how to achieve economic stability in the face of uncertainty and avoid boom-bust and how to ensure that spending is of high quality. Barnett and Ossowski (2003) pointed out oil-producing countries face special challenges in managing their economies. not just. largely because of poor economic Nigeria falls squarely into this category. Between 1970 and 2000. such as agricultural products and commodities. The presence of oil or minerals gives to rent seeking and corruption. The uncertainty of oil revenues has a number of implications for both short and long-term fiscal policy. whether in the form of cycles. Katz and Bartsch (2003) noted that policy in oil-exporting countries faces challenges arising from three features of oil revenue. Also. the curse works by demolishing subject domestic. These include how much to save for future generations. increasing from about 19 million in the 1970 to an 90 million in 2000. the management. This trend translates imbalance in the number of poor. while the fact that oil is a non-renewable form raises complex issues of sustainability. which adversely affect the climate for investment rise and growth. but some issuesare more oil important for oil-exporters. when oil prices soared. public consumption and saving. intergenerational equity and of energy resource allocation. by the share of the population subsisting on less country's poverty rate.

the development of the oil sector can lead to an appreciation in the country's its non-oil exports less competitive. expansion Fasano and Iqbal (2003) pointed out. However. has resulted same in an erosion of national competitiveness in the age of the "knowledge worker". 2002). Fiscal policy is clearly the key. many economies that have very large oil. with reasonsclarify the low investment in education. along with diversificationand structural pricesbut to stabilizegovernment 20 . results real exchange rate. At the same time. oil revenue is an exhaustible resource with a bounded revenue stream.Literature Review Chapter Two international market conditions and the high fixed costs involved in exploration and production). The rapidly increasing challenges. gas or mineral endowments have very high poverty levels. that the windfall was accompanied with which started to emerge once oil was discovered. We should at least be able to determine the real exchange rate fluctuation. 2003) pp 34 Furthermore. Secondly. (1996) propose that one way to manage oil price shocks is to create a stabilization fund. which. and institution reforms. far worse than it did before oil became a major factor in the economic since the living standard of Nigerians worse than in it was 1960. "Given a good example like Botswana who manageswealth well and who to act with wisdom. domestic labour force calls for a sustained drop in GDP. poverty may apply for a can and confront those who say that God is a Nigerian resident permit "(Utomi. investment in human capital. oil revenue is a foreign effect on macroeconomic stability. that the Nigerian economy has performed poorly 1973. in Nigeria. the general overof the public sector (Devlin and Lewin. It is chose better to get wise late than never. It we do not learn from them. reduction in vulnerability to oil receipts requires a prudent fiscal policy and enhancesstructural reform to volatile stimulate diversification. which in turn. Varangis et al. Some of the economies in the world that should still have had enough income to provide a comfortable living for their entire population for many years find themselves in dire economic straits and abuse their resources. making in a decrease in the output of the non-oil export sector an effect termed "Dutch disease". rent-seeking corruption and of course. Singapore and Malaysia. In addition. not to support or stabilize oil revenues. we can profit by learning from Botswana. These equation. Finally.just as we from South Korea. It is no surprise therefore.

foreign debt. given its income value. and suggests advantage. The favoured channels for deploying rents are trade protection. that a crucial determinant of African and Asian political regimes is their level of dependency on natural resource revenues.a lack of security in how they have been spent and a lack of stability in the economy. job creation. Oil wealth has also distorted national economies and interfered with development strategies.Literature Review Chapter Two adjustment. yielding stagnation and corruption. 2000). Wantchekon (1999) explains that a rentier economy tends to create incumbency weak democratic governance and socio-political stability.According to Auty (2006). reflecting the strong political attraction of rent extraction and distribution compared with wealth creation. Programmes should be carried out to increase economic capability. political corruption. At the heart of this failure has been a lack of transparency in the receipt of revenues. More broadly. an invitation to major power intervention. democratic governance. As the case study on Norway would improving transparency of government revenue allocation should facilitate suggest. paradoxically. and over-extended public expenditure. However. Auty and Galeb (2000) conclude that contests for rent are linked to the political economy of resource-abundantcountries and this leads to factional states that serve sectional interests. the results also suggest that resource dependencequite clearly has more political significance than GDP allocation. Collier (2003) notes that natural resource revenues have been a missed opportunity for many developing countries. 21 . However. in recent decades rent-rich states have tended to exhibit predatory motives rather than developmental ones. The economy is thereby diverted from its comparative advantage and accumulates economic distortion that hampers diversification or causesthe economy to regress into a stable trap of dependenceon a weakening primary sector. Many oil-producing. particularly in the booming sub-sectors. and militarization and. developing countries have turned this blessing into a curse. Along with oil. Such governments prefer a non-transparent manner for deploying the rents in order to maximise the room for political manoeuvring. resource-abundanceoccasionally engenders developmental countries that pursue a modified competitive industrialization path. wealth instilled a false sense of power and false sense of long-term economic security in the minds of policy makers in oil exporting states (Tetreault.

Moreover. investment and diversification policy and not relax attention on underlying structural problems. which were easy to finance underdeveloped during the boom. saving. many of these industries have little chance of benefiting from these subsidies. 1999). If the country does not prepare itself properly before the boom occurs. which may bear a low rate of return. in Azerbaijan there are strong pressures to invest in large projects. Subsidies to these sectors. and great in Arab countries economies (Abd-alhassan. To avoid the consequencesof a mismanaged natural resource boom. 1983). emigration to towns. becausemore apparent and immediate. the price effects. imbalances. This literature generally finds that countries rich in natural resources tend to grow less rapidly and experience higher macroeconomic instability than resource-poor countries. The earnings from petroleum revenuescan be associatedwith and promote rent-seeking behaviour. drew most of the to the neglect of the. became hard to maintain after revenues from the booming industries declined. Oil revenue has negative impacts on development. distribution of income effects attention (El-Beblawi.Literature Review Chapter Two Esanov et at (2001) stated that governments are a main topic in the large literature investigating the impact of natural resources on economic performance. 22 . such as money expansion and inflation. The oil shocks implied two major reduces changes. Dalmmazo and Blasio (2001) developed a model in which reform leads simultaneously to a reduction in rent appropriation by the elites and an expansion of private business opportunities. The results are that natural resource abundance the incentives to reform and hurts growth. the the project would very likely rely on continued explicit or implicit viability of subsidies and would be channelled to traditional export industries. economic equilibrium. the end can bring economic disorder and collapse. perhapsmore important. aids the traditional productive sectors role. There is encourages investment at a constant pace in non-oil Arab countries compared with oil countries. countries need to make important decisions about consumption. Largely. Rosenbergand Savalainen (1998) argue that. a change in relative prices and a change in world income distribution. However. Linn et al (2004) stated that the windfall associatedwith the natural resource boom weakened the authorities' commitment to undertake necessary restructuring of sectors.

although oil funds in Azerbaijan and Kazakhstan have some provision that allows for horizontal accountability but does not restrain actions. the International Monetary Fund (2006) stated that Libyan oil proceeds reached 68% of GDP. The non-oil deficit widened to 35% of GDP. in Libya the local investment rate to GDP was 37% in 1981. Partly reflecting the downside effects of the new tax law and customs tariff. government spending was increasedby about 33%. the rent earned from extracting oil and gas in ways that increase the production capacity at 23 . By transferring revenues to the stabilization fund. According to Abd-allah (1986). and not sufficient to support the rapidly increasing Libyan labour force. Furthermore. 1985). created by oil companies (Ghanem. particularly with defence expenditures (Samak. the government is able to improve overall fiscal discipline. Non-oil revenue declined due to non-transfer of the interest on the Oil Reserve Fund by the Central Bank of Libya and lower collections by customs and local governments. in turn is responsible for the oil price increase. which. By investing. This is one of the negative economic impacts while private and public sector consumption have been exacerbated. It suffered deficits for many years later as a result of the capital transformation from oil companies. Peterson and Budina (2001) affirm that Kazakhstan stabilization funds firstly shield the economy from the negative effects of volatility due to variation in government tax revenues and secondly the stabilization fund reduces uncertainty emanating from fluctuation in revenues from natural resources. It affirms that the levels of growth and investment in the non-oil sector were among the projected lowest in neighbouring countries and not enough to create new job opportunities for the country is potential. The significant reason for this was the considerable demand. 1987). oil receipts encouragea country to increase their imports and this situation leads to finance surplus decline and inflation import from industrial countries.The balance of payments in Libya recorded a surplus for the first time in 1963. llannesson (1998) proposed that a good thing for the next generation is a share in oil revenue and this can be possible only by transforming the non-renewable resource into a renewable one. reflecting a sharp increase in the wage bill 25%.Literature Review Chanter Two For example. whereas it was 42% in 1960. Developing horizontal accountability is essential to create a constituency for a longterm vision and enforcement of prudent and sustainable fiscal policies.

customs union and economic union. The legal-philosophical reason is that oil deposits often and lie underneath public land.Literature Review Chapter Two home or abroad. so the standards of living for the present as well as future generations are increased. For the Arab oil exporting countries. However. or be reduced by a half. the best investment the oil financial surplus in global institutions is to introduce easy loans and aid from the wealthy countries to poor countries such as Sudan. volatile and can double or triple. Hannesson (1998) notes that many practical problems are glossed over by this simple example. Uses of the windfall are subject to parliamentary scrutiny in only 40% of the countries where there is evidence that the existence of a formal mechanism to handle the oil windfall leads to higher saving.5 percentage points whereas the current account improved by 3 percentage points in the oil exporting countries. as countries with a special fund tend to place most of the oil export windfall in this fund.in trust for the people who elect them. How should this risk be dealt with? The downside risk of low revenues is probably more difficult to live with than the upside risk of high revenues. However. Between 2003 and 2004 oil and gas export receipts relative to GDP are estimated to have increased by 3. quite abruptly. This will substantially affect the petroleum wealth and change the amount that should be set aside accordingly. oil funds are not a panacea. Mauritania and Somalia in the from of free trade. so the governments in question consider themselves the rightful owners of these resources. Toungui (2007) Conclude that the African's Economy must diversified over the medium term if the sustainable growth necessary for poverty reduction is to be assuredthe dilemma is how oil revenuesshould be managed. Allen (2005) discusses the Arab Gulf oil exporting countries that are generally estimated to have saved the bulk of the export windfall. an emerging economy and an Arab Economic Integrated policy. Oil prices are. only one third of oil rich countries have a formal budget process for handling the oil windfall. Pomfret (2006) concluded that Uzbekistan must 24 . This suggeststhat the private and public sectors taken together saved more than four fifths of the export windfall. as we have seen. Governments in oil-producing countries usually try to obtain a substantial share of the petroleum rent through user fees or special taxes. There are legal-philosophical practical reasonsfor this.

The International Monetary Fund (2005) stated that the Libyan economy still largely remains controlled by. A worrisome phenomenon is the increasing dependency of private consumption expenditure on petroleum revenues. the country's is objective must be the diversification of exports in order to help diminish the impact of of world demand for exports of crude oil volatility McPherson (2002) stated that oil economic management should be given more consideration and concentration by developing countries that rely on it. where 25 . the oil sector.Removing the latter would be a major step in reducing the rent extraction in agriculture and in improving operation of the domestic price system. is restrictive of labour practices. a significant scaling down of the dominant role of the sector. and the development of the private sector. They added employment that complicated regulations hinders private sector activities. The report claims and urges that higher growth rates and diversification of the Libyan economy could only be achieved through deregulation.Algeria is heavily dependent is this sector by a well-marked trend in oil exports. about 5%t as a result of the change in oil prices. Ethiraika and Harried (2002) wrote that oil prices have an adverse effect on real From one year to another the fluctuation in the UAE was on economic growth. the recovery of the oil market in the oil market added to a significant improvement in the external current price account surplus which reached about 50% of GDP.Literature Review Chapter Two diversify its economy and that it has more scope to do so than does Turkmenistan. However. 2000s Uzbekistan appeared to be moving towards this with the adoption of a new attitude towards economic management aimed at helping small and medium-size enterprises. The strategy for this requires policy reforms so that prices guide resource allocation in efficient directions. Heidrian and Green (1989) conclude that the Algerian economy has been heavily dependent on hydrocarbon export. Three quarters of is still in the public sector and private investment is low. Therefore. By the early. and is heavily dependent on. average. will take a leading role in assisting Libya to reform the economy. together with World Bank. and leaves a legacy of bad policy. They expressed strong public interest in these findings and.

Sachs and Warner.with adverse outcomes for development. contrary to what would be expected under the "Dutch Disease" hypothesis. "That part of the payment to an owner of resources over and above that which those resources could command in any alternative use. applied rent is connected to income that is derived by methods other than planned productivity. it is an allocatively unnecessary payment not required to attracting the resources to the particular employment" 26 . Moreover. for instance. In addition. examined the relationship between broadly defined resource-rich groups of countries over the period 1960 to 1990. when oil was doing well. they found riches that the hydrocarbon wealth remained challenging and there was poor economic performance. Rent is receipt in excess of opportunity cost. The term is to whatever is annually paid by a farmer to his landlord. owns the oil and gas sector. (2000) show that there is a robust inverse relationship between growth and resource for a sample of 97 countries over the period 1970-1989. Auty (1997). Hausman and Rigobon (2002). mineral resources.3 Economic Rent In his "Principles of Political Economy and Taxation. In some sense. the largest businesses." Ricardo defines rent as "That portion of the produce of the land earth which is paid to the landlord for the use of the original and indestructible power of the soil. There is too much government control and too much government interference in every aspect of Venezuelan life. Lederman and William (2003) have raised doubts about the robustnessof the Sachsand Warner findings. while supporting the generally inverse out that oil-rich countries performed well economically in the relationship. Schlesinger (2002) pointed out that the problem for Venezuela is that the government spends the money.Literature Review Chapter Two failures have been of far more concern than successes.and the largest employer and is the largest financial power. 2. However. point 1980s.

are required to satisfy demand. In other words. cultivation on the land of higher quality results in rent. rent. However. The origin of way Ricardo sees it. " Ricardo (in use except where it possessed Sraffa. this concept is applicable to all periods of history. Sraffa. Hence. the phenomenon of rent is not unique to capitalism (Bina. namely the of the land.Literature Review Chapter Two `If all land had the same properties. 1985). He argued that. 1976) pp 324 Clearly. tenants can always afford to some form of ground rent. if it were unlimited in quantity and uniform in equality' Ricardo pointed out. this rent reflects the difference in the quality of "marginal" and that of "intra marginal" lands as cultivation is extended. and therefore. proprietor the labourers by whose industry it is cultivated. the owner of the stock or capital necessaryfor the cultivation. as the margin of cultivation is extended to use land of inferior quality. additional investment in the same lands. at decreasing productivity. as different qualities of land and sometimes. non-charge could be madefor its peculiar advantages of situation. economic rents appear even on land of the poorest quality. which regulate the process of distribution of "the produce of the earth". sit among the three classes of community. which necessarily leads to the cultivation development of a particular structure of property relations in agriculture. (1976) makes a distinction between rent and profit as part of a more general theoretical development. The cause of rent here is seen in the extension of rather instead of the monopolization of nature. Moreover. In fact.is due to the physical characteristic of natural resources. the empirical fact that tenants always pay form of ground rent is compatible with the assumption that the marginal pay some ground rent on production is zero. The laws. both limited quantity and heterogeneity of land are factors that led Ricardo to develop his version of rent theory in agriculture. as are perceived to be universal no matter what the nature of production might which be. As a result. 27 . that the origin of rent in Ricardo's senseis through technical consideration than social necessity. Another to look at this is by noting the limited quality or scarcity of land. It is not surprising at all.

OM units at a reasoning. indeed. is a payment over above its necessary supply price.create elite arenas of competition. or fuel unsustainable booms and eventual fiscal crisis. costs are equal to market prices (Mommer. occupation 2. 2002). 2004). but becauseof competition in the product market. marginal production Libyan oil rent inflated the size of an inefficient public sector in the economy and an increased oil dependency gave rise to large variations in fiscal balances and high levels of government borrowing which was necessary to maintain expenditure initiated during boom years (Ntamatungiro. Revenue income from black gold can economy of a petroleum-exporting finance production. underpin It is quite clear. to any input whose supply curve in any one capable of application. up to the point where long-term production. They can also improve public welfare consumption through transparent distributional mechanisms.1 where market forces have resulted in a price of OP and a supply of OM. once lease have been signed. It is immaterial for present purposeswhether the demand and supply functions relate to a input or a physical product. Consider the situation illustrated in Fig. Oil rents shape the political nation.Literature Review Chapter Two Moreover. physical and social investment. it is economic rent. By similar and all of the area SPN out of the total payment OPNM (i. Therefore. Since the supply schedule SS' is upward productive (i. is of less than infinite elasticity. or kleptocratic governments (Eiffert et al. QN'. e. 28 . e. the tenants will be compelled to invest and expand contracts as long as it is profitable to do so. there is a limit to what can be paid. that the concept of economic rent is one of very wide application. has less than infinite elasticity) every unit supplied except the last (at sloping M)is receiving a price (OP) in excessof that strictly necessaryto obtain it. NM each) is economic rent and representsrevenue received by the supplies price of the input or commodity which is in excess of that strictly necessaryto bring forth of that supply. competition amongst tenants will drive the economic rents in the form of ground rent into the pockets of the property owners. For point the unit corresponding to the point M' would be forthcoming at a price example. 2003). in fact it receives a price M'N' so that the difference. M'Q. That is.

1985). the Libyan state is highly centralized and the rent received by the government has very little to do with the productive efforts of the community as a whole. citizens are far less demanding in terms of political participation. With no taxes.ý a Dý s 0 Mý M Quantity Fig 2. State controlled capital inflows enable governments to avoid the extraction of revenues and to shelter themselves from the political and social conflict that accompanies taxation. it is not a rentier state. This is mainly due to oil rents being the main intermediary 29 . totally divorced from the cost of total production. In cases where some important substantial flows of income containing a rent component do not accrue directly to the state. and distributive state institutions. in fact. extractive. It is generally accepted that. High levels of external capital in flows coincided with the initial stages of state building. on a regularbasis.4 The Rentier State Rentierstatesare definedas thosecountriesthat are in receiptof.Literature Review Chapter Two D ýY . in oil exporting countries. The first structural impact of external capital inflows on the state from mainly the oil economy is the dismantling of extractive institutions. the state plays a significant role in the economy. creating a disjuncture between the development of regulatory.1 Economic rent and consumers' surplus 2. amounts for external rent (Bina. Thus. Oil export prices are.

the state's income determines GDP rather than the other the differences in per capita GDP simply reflect the variable income way around and opportunities and spending performances of each state structure. On the contrary. which is neededto do so. High or low wages and profit are the causesof high or low price: high or low rent is the effect of it" (Smith. is largely limited to the distribution of this rent to the population. the state's simple act of spending domestically will maximize GDP growth. Classical economists have few kind words for rent and rentiers (mainly property owners). however. and is therefore not a precondition for the existence and expansion of the This is a unique situation. rentier states are largely state. However. the largest part of the population obtains its income from sources different from the state itself. the strengthening of the domestic economy is not reflected in the income of the state. almost without fail. Thus. A rentier state inevitably ends up performing the role of allocating the income that it receives from the rest of the world. Hence.Literature Review Chanter Two between the oil sector and the rest of the economy (Benli. Both liberal and socialist economists as 30 ." Asserts Smith "enters into the wages composition of the price of commodities in a different way from wages and profit. "Rent. in economies where the state is of the non-rentier type. it is to be observed.5 A Rentier Economy In a celebrated passage. and profit. 1995). independent of a domestic economic production. the state can grow and a basic function only to the extent that the domestic economy provides the perform income. The state role. 2. Thus. As long the domestic economy is not used to raise further income through domestic as taxation. the relevant distinction appears to be one between "allocation" and "production" states. 1976). The primary distinction between rentier and non-rentier states is the predominant function of the state. pp 325 A long tradition of hostility and mistrust was. In oil exporting countries. thus born in the economic profession against rent and rentiers. and clearly reflect the variable income opportunities and spending performances of each state structure.Adam Smith separatedrent from other sources of income. the state essentially redistributes income by relying on taxation. when the income of the state is based on tapping the domestic economy.

as well as rent of land. but it is never a cause of wealth" (Sraffa.Although not on the economicrationaleof the rent. it is to be remembered. sharing in the produce without. A rent. The International Monetary Fund (2006) stated that Libya as a rentier economy. In this stereotype analysis.the 31 . an important reservation on the social function of the rentier. Mines as well as land generally pay rent to their owners and this rent. but there remains.an efficient allocation of resources would call upon as much as other factor prices. Rent is an rent economic price. a handsome share. and (iii) the reform and consolidation of the judicial system to streamline and speed up conflict resolution. is the effect and never the cause of the high value of their produce. as it implies sustained effort to promote medium-sized enterprises in order to expand the country's bases. 1976). The general perception of a rentier was that of someone who. in the produce and in time. This is of course a caricature. but somewheredeep in apportions slice of the subconscious of the social observer there is always a doubt on the legitimacy of the rent. "Diversification is the biggest challenge for Libya. (ii) the continuation of efforts to improve should the legal and regulatory environment including the reform of the labour code. will heavily dependent on oil revenue and that diversification was still too farremains reachedto achieve. so to speak. is not merely an income for the property owner but a reward for ownership of the entire property and also a reward for generally ownership of all natural resources. No value judgement is implied. are contributing to it. and create jobs to meet the demands of non-oil production and export the rapidly increasing labour force. he only rentier the produce.Literature Review Chapter Two unproductive. a a share is a member of a special social group who does not earn his income. and improve the private sector's confidence in the legal institutions (p 16)" country's In modern economicanalysis. nevertheless. receives. "The rise of rent" affirms Ricardo" is always the effect of the increasing wealth of the country and of the difficultly of producing food for its augmented population. It is a symptom. Policies to expand the production base be centred on (f) land reform. almost antisocial assaultedrentiers. a feeling that is shared by liberals and radicals alike (El-Bablawi. 1983). though they do not participate in the economic activity. as any other price.

While in most countries is only a small fraction of income receipts and pure rentier are either nonexistent rent few.Literature Review Chapter Two discussion of a rentier economy is thus concerned with a social group of rentiers rather than the economic significance of rent referring as it does. that is the major part. theoretically capital investments made by the owners of the subsoil are consistent with the separation of the ownership of the subsoil and the ownership of land. being an exchange assets wealth value of or (transformation real asset-oilinto financialasset-foreign or exchange). which is realized legally through the act of lease contracts of concessions. The owner of the land received to appropriate rent. The separation of ownership is part an historical process. Of course. In matters of behaviour. remains differences in natural resources endowment. The differences among countries are however.At the same time. economic 32 . even if the state as a legal form of landed property. the owners of capitalist oil producers are faced with the obstacle of the ownership of the oil lands. rent is in fact. Rent. the dominant or very factor. one of magnitude. In countries where the ownership of the surface soil legally includes the subsoil. the situation in Libya is quite different. is not a special general phenomenal known in all In as far as there. owns the oil lands. after all. human knowledge and location there will always be rent paid or imputed. This relationship remains the same. the separation of the ownership of hydrocarbons from the ownership of the oil fields in the development of a barrier within the context of capital accumulation in resulted oil production. However. a more accurate assessmentwould reduce the income element in oil revenues to that part imputed to added. hence the epithet " rentier economy". it is to be remembered. 1985). economies. However. all this remains academic since oil revenuesare perceived by governments and citizens as income and treated as such. technically "income" oil revenues are not perceived in the Libyan state as property income accruing to the whole society. while the capitalist investor receives appropriate normal profit (Bina. The notion of oil rent in the oil industry is nothing but the phenomenal form of the specific property relation that is unique to the oil industry.the rest. to a special behaviour and spirit. Historically.

21 14. enterprising spirit both at the government and individual level. while adding 30-50% to the GDP. fiscal management.68 20. only the effect of a remarkably high productivity of oil labour.83 13.56 18.13 1982 1983 1984 1985 1986 1987 31.41 10.20 15.Literature Review Chapter Two reasoning is of little help. the very high contribution of oil in the GDP is not.32 1996 1997 18. Conventionally measured. June 2003 33 .90 2.76 16. overwhelming. only perceptions count.83 10. particularly when it makes up a large share of total revenue.56 17.75 Year 1988 1989 1990 1991 1992 1993 1994 1995 Brent 13.50 16.90 14.24 22. 2.80 23.91 1998 1999 2000 2001 2002 2003 12.1 Spot Crude Oil Price (1972-2003 $/ bb) Year 1972 1973 1974 1975 1976 1977 1978 1979 Brent 1.70 11.6 Oil Revenue Volatility Reliance on oil revenue.63 12.53 13.09 1980 1981 35.10 Source: E3?Statistical Review of World Energy. public Table 2. budgetary planning.06 27.80 28.30 26. and the efficient use of renders short-run resourcesdifficult.69 34. of course. Oil revenues are perceived as windfall profits a gift of God. The fact that oil revenues are not directly related to and hard work affects a large spectrum of behaviour and attitudes.78 28.85 28. No more than a third of total manpower is engaged in the oil production.16 17. a rent element is in fact.03 29.01 16.

sustainable Furthermore. and it has been difficult to separate out temporary fluctuations from trends. even when changes are measured as Changes have also been very poorly predicted.01. the experience of the last few years has shown that large annual price movements can take place in either direction. These which oil exporting countries must balance rising oil receipts over time. in 1972 the price was US$1.90. Therefore. post In addition. cycles.01. twice as variable as those of other deviation from recent trends. There is ample evidence that oil prices exhibit volatility in the short run and large fluctuations over the medium term. these fluctuations are often difficult or even impossible to predict (Table 2. The dependenceof fiscal revenue on the oil sector renders public finances vulnerable to a volatile external variable that is. in any month there was a one-in-six chance that the oil price might drop by some US$2 a barrel (Cashin et al. to accomplish a sustainable increase in real income. Moreover. 2000). as economic and budgets adjust asymmetrically. Annual average oil prices surged by 30% in 1995-96. then increased to reach US$35. declined by 36% in 1997-98 and then more than doubled in nearly 1999-2000.Literature Review Chanter Two The challenges largely stem from the volatility and unpredictability of oil prices. For instance. that oil prices have been through some dramatic increases. They must take steps to ensure real economic growth. It can be seen from the table above. and producing countries will be vulnerable to boom-bust Instability is very costly. and increasedagain in 2003 to arrive at US$28. countries face.69 in 1980 then fell again in 1986 to US$13. for the most part. commodities. Oil prices have been highly variable. shocks will continue to be poorly foreseen. largely beyond the control of 34 . The volatility of oil prices leads to corresponding volatility in the fiscal cash flow. If experience is a guide. at the average oil price in 2002. Borqujari and Melhem (1990) and Amuzegar (1990) argue that the bigger challenge. rather than a mere rise in current consumption. so one-third of the time the oil market will be faced with the prospect of a monthly price change greater than 8%.1). is the economic diversification dilemma. a reduction is required in the economy's dependenceon the volatile world price and demand for oil.

For example. Economic development is a sustainable increase in living standards that implies increased per capita income. An alternative explanation to this curse puts the emphasis on volatility growth. and how to use oil revenue. Amuzegar (2001) state that despite strenuous efforts run in Libya towards self-sufficient food as an overriding national goal. Thorvalder (2000) suggest that the analysis of the short-run fiscal stance in oil. for investment. oil revenue accruing to the public sector fell from 27% of GDP in 1996 to 12. 2002). and the impact of fiscal policy on shortmacroeconomic dynamics. in Venezuela. the results were disappointing and the objective of reducing dependence on oil was only partly achieved. In addition. Thus. Natural resource rents tend to be very volatile because the supply of natural resource exhibits low price elasticity of supply (at least in the short term). The economic development process supposesthat legal and institutional adjustments are made to give incentive for innovation and for investment so as to develop an efficient production and distribution system for goods and services. for poverty and for education attainment.Literature Review Chanter Two policy makers. dependence on oil as a major source of export earnings and government revenue confronts policymakers in oil exporting countries with the short-run issues of how to address sharp and unpredictable variation in oil prices and revenue. better education and health. Development is economics on a social level that has evolved into a professional industry of highly specialised practitioners normally working in public- 35 . 2. Public policy generally aims at continuous and sustained economic growth and expansion of national economies so that developing countries become developed countries. a change in the oil price of US $1 a barrel on an annual basis is associatedwith a variation of close to 1 percentage point of GDP in Venezuelan public sector revenue (Barnett and Ossowski.producing countries should take into account the macroeconomic and fiscal costs of a volatile fiscal pattern.5% of GDP in 2000.7 Economic Development and Wealth Creation Economic development refers to the development of economic wealth in countries or regions for the well-being of their inhabitants. for income distribution.5% of GDP in 1998 before rising again to 22.

Economic development encompasses three major areas: (i) Policies that governments undertake to meet broad economic objectives such as stability. affordable housing. high employment. economic output and increase in taxable bases are the most common measurementtools.Literature Review Chapter Two private partnerships that are sanctioned and many times at least partially funded by local. trade and tax policies. It is the business and start-up activities that create jobs. regulation of financial institutions. to assist the businessesin their needs. (iii) Policies and programmes explicitly directed at job creation and retention through specific efforts in business finance.too much emphasis. When considering measurement. and education. has been placed on economic developers for "not creating jobs". Job creation. depending on its mission. which marked the beginning of an unprecedentedperiod of science and technology transfer (Todaro and Smith 2004). neighbourhood development. The modern era of development began with the end of the Second World War. small business development. Economic development is a process directed at outcomes encapsulating improved standards of living and greater capacity for self-reliance in economies that are technically more complex and more dependenton global integration than before. Such efforts include monetary and fiscal policies. an economic development organization may or not address these issues. parks. a existing of the economic developer to make sure there is sufficient economic responsibility development programmes in place. crime prevention. technology transfer and real estatedevelopment. The primary purpose of these programmes goes beyond economic development. (ii) Policies and programmes to provide infrastructures and services such as highways. marketing. It is however. 36 . and sustainable growth. Therefore. Economic development in its simplest from is the creation of economic wealth for all citizens within the diverse layers of society so that all people have accessto potential increasedquality of life. regional and state provincial tax money. and in some cases blame. business retention and expansion. Economic developers do not typically create jobs. as they have implications for economic development.

seamlessly integrating. The theories of economic development in the 1950s and 1960s regarded the improvement of people's livelihoods and standard of living as little more than byproducts of the building blocks of modernisation i. demography and law. welfare. It should be strongly focused on low-income developing countries where poverty is especially acute. Development is a processed intended to achieve a well-defined outcome. especially aggregate and per capita national income as measuredby such statistics as GNP and NNP (net national product). and future. How can low-income economies in the world be set on the track of sustained economic development for the immediate good or reducing poverty and the longterm goal of catching up to the wealth developed economies? `Economic growth' has a connotation of quantitative expansions in economic variables. the definition to which we subscribe must be just as relevant in reverse as it is in the identification of successful development (Gillis et al (1996). But. groups and communities obtain the means to be responsible for their own livelihoods. It is a process by which individuals.Literature Review Chapter Two Development of economically backward areaswas to create investment opportunities and demand for the output of industries desperateto find peacetime customers. According to Hayami (2001). agriculture. Development is a process for growth towards self-reliance and contentment. administration and planning. the major task of developed economies is to explore the possibility of emancipation from poverty for developing economies. The modern era of development began brash and confident that the world and developing countries in particular. The key actors in the planning and implementation of development were technical professionals from all aspects of engineering. Technology transfer and massive investment in infrastructure quickly could bring Libyan economy on line.e. could be remade within a generation or two. (i) economic return to successful accumulation of capital. Therefore the analysis of economic growth is concerned mainly 37 . and (ii) economic growth fuelled by productivity improvement arising from the transfer of technology from technologically and economically advanced areas to technologically and economically backward areas (Remenyi 2004).

economic growth is considered a quantitative aspect of economic development. Moreover. the primary concern would have been how to increase the productivity of natural resources by applying more labour and capital. Both in the short run long-run. the modified model's long run result is at variance with standard proposition that the growth rate of output is independent of export activity.Literature Review Chapter Two with measuring growth i. and are affected by. If so. is conditioned by culture and institutions in society. However. It has been under the new technology regime since the Industrial Revolution that the substitution of capital for labour is seen as the central issue in economic development. If we follow this usage. the development must investigate the influence of institutional and study of economic culture factors on economic growth as well as the impacts of economic growth on those factors. and the general easing of the foreign exchange constraint associated with the expansion of the export sector. at the stage when natural progressed resource endowments were the binding constraint on people's living. improvements of human resources. On the other hand `Economic development' is usually concerned as a process involving not only quantitative expansions but also changes in non-quantitative factors such as institutions. endowments The efforts to increase the productivity of labour by applying more capital have since the beginning of human history. organization. in addition to the analysis of economic growth. and Although the short-run transitional dynamics in the standard neoclassical analysis of the relationship between export and economic growth remain valid. and culture under which economies operate. However. long-term economic growth through including production and demand linkage. consisting of its resource and technology. an increase in export activity will raise the growth rate of output. the productivity of an economic subsystem. Villaneuva (1991) rate stated that exports affected. A strategy commonly adopted has been to maximize the natural of capital accumulation under the government's directive. many developing economies are trying to achieve rapid industrialization under high population pressure and severe resource constraints. e. learning effects and various mechanisms. economic variables and identifying their interrelationship such as between the national income growth rate and speedof capital formation. adoption of superior technology embodied in foreign-produced capital goods. 38 .

development and construction studies has been the lack of the appropriate information on the construction sector when they studied the relationship between the economic development and the level of activity in the construction sector. Lopes et al (2002) conclude that there is a direct relationship between the share of in gross output and economic growth which is consistent only with a construction downturn economy. because human capital is typically treated as a economic growth. Over time. Romer (1989) concludes in a theoretical framework for thinking the role of human capital in a model of endogenous growth. wage rates and capital-labour ratios different countries are expected to converge. very little is understood about how different types of tertiary. The framework about particular attention to two questions: What are the theoretical differences pays between intangibles like education and experience on the one hand. Ruddock and Lopes (2005) have found that a major obstacle to economic. The method rests on the aggregate production that factors increase their marginal products. Romer (1986) stated that the rate of return on investment and monopolistic the rate of growth of per capita output are expected to be decreasing functions of the level of the per capita capital stock. 2004). can effect However. noting how imbalances in these two stock as well as human capital externalities. secondary. 39 . and knowledge on the other? And flow do knowledge and science actually affect or science One implication is that the initial level of a variable like literacy may be production? important for understanding subsequent growth. initial conditions across disturbances have no long-run effect on the level of output and or current consumption. homogeneous concept. but it could extend to assumption factor.shape the overall development process education(Ramcharan.Literature Review Chapter Two No country has achieved sustained economic development without substantial investment in human capital and education. Consequently. and so forth. Much literature has emphasised the complementary relationship between human and physical capital. This emphasises that level of an input contrasts with the usual emphasis from growth accounting on to rates of change inputs. Solow (1957) suggested a simple way of segregating shifts of the on function from movements along it.

Some researchersattributed this to rent seeking and others. creditability. However. There is still a long road ahead for oil exporting countries trying to improve their economy and subsequently. the effort from these countries to reduce this dependence. bad economic performance still dominated.8 Conclusion Despite the rich economic literature reviews in oil wealth. there is a strong relationship between natural resources. the results are modest and were disappointing in for the most part. to lack of accountability. increase their standard of living and sustainabledevelopment. Countries poor in resources show good performance over the last decades. particular oil wealth.Literature Review Chapter Two 2.The oil wealth abundance provides a good opportunity for the oil-exporting countries to diversify their economies. and others. 40 . and slow growth. to lack of transparency or "Dutch Disease". Despite.

Feagin et at (1991) stated that a case study is undertaken by giving special attention to completeness in observation. Critics of the case study method believe that the study of a small number of casescan offer no grounds for establishing reliability or generality of finding. to make it case more scientific. when the boundaries betweenphenomenon and context are not evident. ResearcherRobert Yin defines the case study researchmethod as. They asserted that the drawbacks of case study were not being attacked. rather the immaturity of sociology 41 . and in which multiple sources of evidenceare used" (Yin. made in the midst of methodology conflict.1 Case Study Methodology Case study research excels at bringing us to an understanding of a complex issue or object and can extend experience or add strength to what is already known through previous research. 1994). Some dismiss case study researchas useful only as an exploratory tool. Case study is done in a way that incorporates the views of the "actors" in the case under study. The field of sociology has been associated most strongly with the development of study research. in particular. have made wide use of this qualitative research method to examine contemporary real-life situations and provide the basis for the application of ideas and extension of methods. Hamel et al (1993) were careful to reject the criticisms of case study as poorly founded. "An empirical inquiry that investigates a contemporary phenomenon within its reallife context. and analysis of the cases under study. Case studies emphasize detailed contextual analysis of a limited of events or conditions and their relationship. Others feel that the intense exposure to study of the case biasesthe finding. Social scientists. Researchershave used case number study research methods for many years across a variety of disciplines.ResearchMethodology Chapter Three CHAPTER THREE: RESEARCH METHODOLOGY 3. This coincided with a movement within sociology. reconstruction.

ResearchMethodology Chanter Three as a discipline was being displayed. Case study can include both single-and multiple-case studies.the use at casestudy as a methodology slowed down. thus increasing confidence in the robustness of the theory. However. Yin (1994) pointed out that generalisation of results. Case studies can be single or multiple-case designs.the casestudy is not a data collection tactic or merely a design feature alone. 1994). the case study should not be confused with qualitative research. Though some fields.casestudiescan include. another criticism of case study methodology is that its dependenceon a single case renders it incapable of providing a generalising conclusion. the contrast between quantitative and qualitative evidence does not distinguish the various research strategies. In Therefore. fact. where a multiple design must follow a replication rather than sampling logic.and evenbe limited to. from either single or multiple designs are made to theory and not to populations. Multiple cases strengthen the results by replicating the patternmatching. single and multi-case studies are in reality but two variants of case study design. There are several examples of the use of case methodology in various types of literature (Yin. detailed observation of the natural world by the investigator and (b) the attempt to avoid prior commitment to any theoretical model. 3. such research political science and public administration. but a comprehensive research strategy (Yin. As a related but important note. 42 . Some qualitative research strategy follows ethnographic methods and seeks to satisfy two indicators: (a) the use of close-up.2 The Application of Case Study Methodology The case study as a research strategy comprises an all-encompassing method with logic of design incorporating specific approaches to data collection and to data analysis. quantitativeevidence. As the use of quantitative methods advanced. In this sense. have tried to delineate sharply between as these two approaches and have used such terms as the comparative case method as distinctive from multiple-case studies. 1993).

Not case studies have been a common research strategy in psychology. A focus on analysis. Interviews are among the most widely used methods of data quantitative in the social sciences (Gubrium and Holstein 2002). In this dissertation we have used the qualitative approach by using documentation analysis interviews with members of the Libyan General Council Planning. some investigators distinguish between quantitative research and qualitative research. these distinctions have produced a sharp debate within the field philosophical of evaluation research. and political phenomena. sociology. there is a strong and essential common ground between the two (Yin. strengths.not based on the type of evidence. 1994). Ministry Planning and the Libyan Central Bank. of 3. either a quantitative or qualitative can be used. social work and planning. changessignificantly how interviewing may be pursued within the social science. As a research methodology endeavour. While a great deal generation has been written for decades about the procedures for generating such data (how to ask questions. Using the most appropriate method for data collection indicates method opportunities and threats in detail. political science. the distinctive need for case studies arises out of the desire to understandcomplex social phenomena. organizational. may be investigated by using a case study design. business. the counter-argument can still be posed that regardlessof whether one favours qualitative or quantitative research. or the economy a region. social. in which the structure of a given industry. In all of of country or these situations.3 Research Method Multiple methods of date collection have been used. how to relate etc).ResearchMethodolozv Chanter Three As a further note. rather less attention has been given until relatively to the analysis of such data. a focus on the researcher's recently expertise in the analysis of the interactional data as much as in the generation of it. surprisingly. Case studies are even found in economics. but basedon wholly different beliefs. Depending on what type of data is required. weaknesses. These include qualitative and interview. 43 . Although some believe that these philosophical beliefs are irreconcilable. the case study contributes uniquely to our knowledge of individual.

access Also. Interviews are the most widely used methods in cross-socio economic research. Thus a focus sample designed to obtain views about Libyan economy reform and diversification are likely to be larger than a sample interviewee that explores a topic related to a more emotionally involved construct. related pay etc. basiswith a single on Such interviews are most commonly conducted between the researcher participant. interviewshavebeenconducted a one-to-one In this research. Different types of interview are useful for different research purposes. and criteria of successat interviewing include such matters as whether there was good "rapport". and what they talked about. such as attitudes to performance. Non-standard interviews can be used to explore topics and explain other findings. interviews can be differentiated according to the level of structure standardisation adopted. and participant face-to-face. attitudes. Here. (2004) for many conventional science perspectives. whether the respondents talked a lot. knowledge. Where focus groups are being used. Sanders et al. and perspective) to extract from the respondent. The size of sample may also be related to the topic. All such criteria of successrely on the assumptions that there is pre-existing information of some sort (beliefs. Furthermore.ResearchMethodology Chanter Three According to Baker. this is likely to be associatedwith a higher level of interviewled structure and intervention to facilitate discussion than where group interview as are being used. whether (and how) they divulged what the interviewer was after. non-standard (qualitative) research interviews include two broad types that are generally refereed to as in-depth (or unstructured interviews) and semi-structured interviews. although it will need to develop a sufficient level of competence to conduct these and to be able to gain to the type of data associatedwith their use. qualitative research interviews have been chosen 44 . Some basic questions about designing of interviews have been raised. (2006) stated that the use of non standard (qualitative) research interviews should allow us to collect rich information in detail.the relevant researcherexpertise is the getting of the data.

An interview provides them with an to reflect on events without needing to write anything down. especially where and relevant to their current work. Essentially. where it is necessary for us to understand the reasons for the decision that our research participants have taken. and the opportunity to probe these meanings will add significance and depth to the data obtained. This opportunity situation also provides the opportunities for interviewees to receive feedback assurance about the way in which information will be used. apart from the difficulty of trying to design a viable questionnaire schedule to cope with questions that are complex or open ended or large in numbers. Subjects can be probed. 3. Furthermore.The interviews methods to be used depend on the nature of questions. The researcher is likely to gain valuable insights based on the depth of the 45 . and personal Therefore the use of personal interview. 5. Where the questions are large in number. approach which is also likely to include interviews in order for the an explanatory study researcher to be able to infer causal relationships between variables. 1-Where we are undertaking an exploratory study or a study that include in our aimed to identify the income resourcesdiversification. rather than complete a the interview topic is seen to be interesting questionnaire. 4. 2. or to understand the for their attitudes and opinions. and which help us to address our research question and objectives.ResearchMethodology Chapter Three as a method of data collection (face-to-face approach) because there are many advantages. In such cases. the best or only alternative.The time neededto obtain the required data may mean that an interview is. interviews may use words or ideas in a particular way. a number of complex or open-endedand where the order and logic of questioning may need to be varied.Depth of information. issues pursued and lines of investigation followed over a relatively lengthy period. Also.Participants are more likely to agree to be interviewed. in any case. where appropriate. Interviews are particularly good for producing data which deal with topics in depth or in detail. It may also lead the discussion into areas that had not previously been considered but which are significant for understanding. may achieve a higher responserate than using questionnaires.it is important for us to reasons conduct a qualitative interview.

Also. observation and experiments. Interviewing allows for a developing line of enquiry. interviews have a high responserate. Glassner and Loughlin (1987) describe instances in their study in which the interviewer brought up a topic that was seen by the subject as irrelevant or misinterpretation. Also. as a method for data collection. interviews are a good method for producing data based informants' priorities. interviews require only simple equipment and build on conversation skills which already have. This ensuresa prearranged and scheduled relatively high response rate. In regard the flexibility. explain their view and identify what they regard as the crucial factors. opinions and ideas. if given the chance. There is a more personal element to the method. interviewer and interviewees does not mean that the interviews are devoid of information about social worlds.ResearchMethodology Chapter Three information gathered and the wisdom of "the key informant". interviews are probably the most flexible. in terms of equipment. 2003). Moreover. Finally. Miller and Glassner (2004) stated that strength of qualitative interviewing is its capacity to access self-reflexivity among interview subjects leading to precisely the greater likelihood of the telling of a collective story. direct contact at the point of the interview meansthat data can be checked an accuracy and reliance as they are collected. Adjustments to the lines of enquiry can be made during the interview itself. Also. From their experience. Interviews are generally for a convenient time and location. researchers regarding informants' priorities. interviewees will tell them. therapeutic. regarding validity. they suggest that the existence of social differences between the correction. and people tend to enjoy the rather rare chance to talk about their ideas at length to a person whose purpose is to listen and note the ideas without being critical (Martyn. 46 . interviews can be a rewarding experience for the informant compared with questionnaires. and they afford Also. which interests and formulations make sense or no sense to them. Informants have the opportunity on to expand their ideas. The strength of qualitative interviewing is the opportunity it provides to collect and rigorously examine narrative account of social worlds.

The researchersinvestigate the object of the case study in depth. The questions are targeted to a limited number of events or conditions and their inter-relationships. The study's questions are most likely to be "how "and "why" questions and their definition is the first task of the researcher. organizations or countries. using a variety of data gathering methods to produce evidence that leads to understanding of the case and answers the researchquestions. " The criteria for interpreting the finding by evaluating analysing the data.the researcher must collect and store multiple sourcesof evidence in and comprehensively systematically. formatsthat can be referenced sortedso and that a covering line of inquiry and patterns can be uncovered. and are helpful in focusing the study's goals. Stake (1995) and Yin (1994) identified at least six sourcesof evidence in case studies. (i) Documents (ii) Archival (iii) Interviews (iv) Direct observation (v) Participant-observation 47 .ResearchMethodolo2y Chanter Three 3. but it is the primary unit of analysis. The unit of analysis defines what the case is. by selecting the cases and determining data gathering and analysis technique. Furthermore. Linking the data to propositions and the criteria for interpreting the finding are the least developed aspects in case studies (Yin. 1994).4 Research Questions Yin (1994) identified five components of researchdesign that are important for case studies: "A study's questions that determine and define the researchquestion " Its propositions (if any) " Its units of analysis. The study's propositions sometimes derive from "how "and "why" questions. 9 The logic linking the data to the propositions. This could be groups.

How can Libya best manage its oil wealth. Chapter Three The final step is to evaluate and analyse the case study evidence. which is most useful for understanding the rationale of theory underlying relationships. researchers in Therearethreeresearch questions this study: 1. Researchers use the quantitative data that has been collected to corroborate and support the qualitative data.the researchertreats the evidence fairly to produce analytic conclusions the original "how "and "why" researchquestions. investigations. once potential better understand its features. Another technique is to use multiple investigators to the advantage provided when a variety of perspectives and insights examine the gain data and the patterns. given the country's character dependency on a depleting natural resource? 3. It can also be used in combination with other methods. How can Libya's oil revenues best be employedfor achieving and maintaining a high rate of economic growth. not all case studies lend themselves to this type of analysis. This aspect of the is the least developed and hence the most difficult. consistent with the country's social objectives?. methodology. achieving and maintaining economic growth? The purpose of this work is to assessLibyan economy efforts to date. 2. the process would be easier and more acceptable. Case study is a valuable answering with distinctive characteristics that make it ideal for many types method of research. In all cases. As a case study methodology have suggested that if the study were made conducive to result. What progress has been made towards economic diversification and how can it be gauged? 48 . Why is Libya continues to be heavily dependent on oil export and do not fully realiying the potential of its oilfor utilizing. Its use and of reliability should make it a more widely used methodology. some researchers statistical analysis. This would be appealing to some of the critics of the case study quantitative approach However. taking into account its exhaustible and with due attention to intergenerational equity.ResearchMethodoloQy (vi) Physical artifacts.

Furthermore. Thirty years have elapsed and these foundations are not yet there. 49 . However. during the crucial 1970-2000 period. it will be possible to say whether there has been any significant change in their revenue priorities as a result of economic diversification and implementation of the economic reform programme. this research will consider how the compositions of the government's policy changes when oil revenues change. historically. to what extent were oil receipts allocated. Within the framework of some major hypotheses regarding the dynamics of developing economies in an oil-based economy. for example declined from US$19. policy makers in oil Libya have faced a high degree of revenue uncertainty. several fundamental questions are raised: How did Libya compare with other countries with allocating of their oil windfalls among competing needs? What strategies and policies did they pursue in optimising returns on their fortune during the oil boom. and controlling the damage during the oil bust? Moreover. this is not as difficult as may appear at first sight.54 Brega in 1992 to US$12. The significance of this subject arises from the fact that oil constitutes a significant portion of the central government revenues to the Libyan economy. the price of has been highly unstable over the three decadesand. as a result. Libya's oil price. The analysis also enable us to compare the diversification process of the Libyan economy will with the economies of others. Countries that depend heavily on oil revenues face the daunting challenge of transforming their economies to enable them to grow in an era of reduced oil income.many among us thought that the newly accrued oil wealth should enable Libya to build the foundation of a non-oil economy capable of sustaining long-term economic growth. by tracing the revenue allocation of those countries over time. In addition. In the early 1970s. socioeconomic agenda? More specifically.ResearchMethodo%Qy Chapter Three How has Libya's economy performance compared with that a similar economic country? What particular problems must be overcome if the economic diversification process is to continue? What are the country's prospects for the future? This study attempts to examine and evaluate the experience of the Libyan economy.90 Brega in 1998. to provide funding for strategies to help achieve a national.

Oil exports have also increased over time.To investigate possible resourcesto replace oil wealth and economically manage their petroleum wealth in the changeableenvironment of the oil market. 3. Besides. The fiscal policy will determine the real exchange rate fluctuation.To build a long-term strategy toward diversifying the economy. oil production has been very important in generating economic and social development. which has varied growth from almost 67% of GDP in 1988 down to 36% in 1999. To maintain the standard of living should oil turn out to be under threat.ResearchMethodology Chapter Three To prepare for an economic future in the period when the prospects for oil will begin to decline requires immediate action. They only yield the desired results after very long periods. 2. The availability of oil revenue representsan opportunity and a challenge in Libya. should be able to substantially aid in the diversification process. the wise course of action is to prepare for a day when revenuesmay not be sufficient or oil run out. it is essential that the non-oil sectors are developed. Their implementation takes time. or without oil windfalls. The purposes are: 1. at the least. Oil revenue is a relatively painless way for the government to expand and their 50 . addressing the challenges posed by oil dependence. the general overexpansion of the public sector. and it is something that. The policies that favour future economic development do not bear fruit very quickly. thereby assuring the people's future with. Fiscal policy is clearly the key. the purpose of this study is to investigate another resource. stimulating the Libyan economy. instead of oil that can sustain and bolster oil wealth in the economy and measurethe impact wealth of oil revenue role in the economic development process over time. The task should begin today. Whether the future of oil is threatened or assured. and look at how future generations can gain benefit from non-renewable resources that will have been depleted before they were even born? In addition. Many economies that have very large oil and gas revenues still have very poor economic performance. To delay the formulation and execution of these policies will put gestation the economic well-being of oil nations in seriousjeopardy. and of course.5 Rationale for Research In recent years. rent seeking corruption.

and low taxes. but also becauseit must plan for the time when the oil runs out. not only becauseoil prices and revenues are highly volatile and hard to predict. natural resource-rich may be tempted to underestimate the long-term value of education. In most nations that are rich in oil. 51 . account for 75% of total exports (George et al 2003). Libya. because government of the absenceof effective automatic stabilizers. for both short and long-term fiscal policy. and institutional economic quality. which could cushion the severity of fluctuations. on the other hand. social spending. Natural resourcescan be a blessing as well as a curse. in part. has yet to generate sustained growth high enough to absorb the growing of entrants into the labour force. This is. bureaucratic efficiency. while the fact that oil is a non-renewable form of energy raises complex issuesof sustainability and intergenerational resource allocation. In many of the larger oil economies. minerals and other natural resources. The non-oil sector. it is not the existence naturalwealthas such. these revenues have a number of implications. There is an increasing awareness of oil revenue management among involved stakeholders and recognition of the opportunities missed. It is not rather inevitable that these abundant natural resources will prevent the emergence of a dynamic economy or that the discovery of such resources will act to dampen an already developed economy.ResearchMethodology Chapter Three overexpansion is determined by how to spend the money from oil receipts. economic Furthermore. Volatility and low growth in several of the numbers oil economies are aggravated further by highly procyclical fiscal policy. including free trade. Nature resource abundance or intensity may reduce private and public incentives to accumulate human capital due to a high level of non-wage income dividends. Besides the uncertainty of oil. abundant natural resources may imbue people with a false sense of lead governments to lose sight of the need for good and growth friendly security and management. as spending tends to rise and fall with oil revenue. In termsof what the problemis.but of the failure to avert the dangers that accompany these gifts of nature. faces special challenges in managing their economy. as an oil producing country. Awash in cash. oil and other hydrocarbon products on average.economic growth countries over the long haul tend to be slower than in countries that are less endowed.

economic management? The basic problem for oil-dependent governments is that they are exposed to a large oil price risk. (Gelb. appropriate financial management can result in a permanent income stream that can be enjoyed indefinitely by further generation.' A key question is whether the under-performance of resource-abundantcountries that experience export booms is inherently linked with the fact that they are richly endowed with natural resources. ending up spending too much. Norway has used their resources to spur growth. In contrast. too quickly. have been disappointing.6 Research Problem Although oil Oil wealth could generate a sizeable permanent income for Libya. The permanent hydrocarbon revenue steam can be calculated as an annuity. 52 . Libya has been unable to properly manage these windfall gains. Perhaps. This phenomenon has been referred to in associated literature as the `natural resource curse. Oil exporters. when oil soared. Eifert et al (2003) showed that the economic records of mineral-exporting countries.4 billion (52% of 2005 GDP). Their revenues were not saved abroad or used to reduce budget deficits. have done less well than resource-poor countries over the past few decades. Alternatively. over an infinite time horizon. which they are ill suited to bear. prices 3. in general. The permanent hydrocarbon income stream could climb to as much as US$20. especially when one considers the big revenue gains to the oil-exporting countries since 1973. wealth is exhaustible. in particular. might that symptom of the curse be avoided through prudent.it is becauseof the way oil economies are run. undertake modernization. 1988) noted that petroleum revenue is often on public investment projects and to a far less extent on transfers to households spent and enterprises (public handouts and subsidies). but spent inefficiently as they were accrued. Absorption through the government could follow a pattern similar to that in developing countries such as Algeria or Nigeria. and economic diversification and to increase their control over key areas in the economic sector.ResearchMethodolo y Chanter Three Unfortunately.

often above the costs of production. Also uncertainties about the growth problem based transport fuels demand. However. oil and gas are associated with causing unemployment and mismanagement. despite the substantial amount spent on development schemes over the last three decades. A key question in this regard is how Libya can avoid the curse and turn their abundancein resources into a blessing.has had disappointing results. there are greater uncertainties about the growth of global oil demand. In the more distant future. growing environmental concerns over hydrocarbon use and global warming. Thus crude oil prices are likely to remain extremely volatile. In a number of countries. which are usually caused by oil wealth through prudent. accountability and creditability is still predominant.As a central resourcefor national income.ResearchMethodolo2y Chanter Three On the other hand. Libya. Whereas a range of countries (including Botswana." and a significant body of literature has grown seeking to explain the relationships between hydrocarbon abundance and economic performance. transparent management practices and economic diversification. massivelydependent the oil sector. with economy forces exerting download pressure on prices while OPEC production restraint pushes prices upwards. There are significant risks to future levels of Libya oil production depending upon OPEC's pricing. There are no resource constraints for the distant future. some modest progress has recently been achieved. In revenue to the adverse impact on growth. on moreover. therefore. it is a fundamental finance for current government investment and 53 . "the resource curse. Canada. production and revenue projections are surrounded by considerable uncertainty. particularly oil exporting countries. The Libyan national economy is and will remain for the forthcoming decades. especially in developing countries. resource riches can be a major contributor addition to corruption and social unrest. Many of these are low and middle-income countries in which hydrocarbon and mineral accounts for over 50% of government revenue or export proceeds. The lack of transparency. It is often argued that there is an association between oil abundant riches and poor economic performance. This question is resource relevant for a large number of countries. production policy and market circumventions and world demand for OPEC oil. and new technologies continue to lower the cost of production. and Norway) appear to have avoided these problems.

One of' the main. The oil share reached 35% of' GDP over the period 1999-2000. There is a critical gro%Oh which occurs in non-oil activities reflecting a new source of national income. -' 45.1 Libyan Proven ('rude Oil Reserves (1997-2005) 54 . Furthermore.1). The oil sector still dominates and leads the economy. and create new sources of revenue to finance the general budget. the oil sector contribution declined in gross domestic product from 63. production activities' contribution. 2005 Fig 3. close to 98% from oil revenue on the balance of payments. the outcome of this was not encouraging.7 million projects and infrastructures dinar over the last three decades (1970-2000) and was goals was to intended to carry out a group of goals. such as agricultural manufacture services sectors was still less than expected. 2001). Reserves reached 39 126. particularly in the case of exports.8% in 2000 (general and Planning Council. oil receipts reached more than 65% of' the budget sources. Over the second half of the nineties.000 35. significant diversify the national economic structure.000 40.1% in 1970 to 37.Ilowever. In terms o1 the government budget. Nevertheless. and fier the last three decades it has depended heavily on oil resources to finance a part of its expenditure.t feilo i'ioj i- ('huiniýr 1111"ee expenditure. (' Annual Statistical Bulletin. Expenditure development on services and productivity reached at 41 898.000 ! III I 60 1997 1999 2001 Years 2003 2005 Soarers: (>I'I.Research .0 million barrels in 2003 (see Figure 3. reduce the oil sector control on economic activities and benefit the country as a %ýhole.

Non-oil sectors grew steadily in the mean time but did not contribute in any crucial form to develop an income based on diverse resources. influence on general expenditure and investment opportunities (Taher and Dandy.8% in 1995 returned to rise to around 7. 55 . provides ample evidence of a of high revenue. 2006).5% in 1998. The debt reached at 7. from Norway to Nigeria. These events required Libya to adopt a productive base economy and diversify its income sources. socialunrestcaused fiscal and budgetary and adjustments. Following OPEC's introduction of oil extraction limits. dismal and dispiriting. Yet. Fluctuation in the global oil market had a negative effect on the Libyan economy. The history of these countries to deal and manage their endowment is still very poor. To increasingly continue to relying rely on oil receipts may damage other sectors and cause a distortion in economic stability in the long term. The history of oil-rich states. most beneficiaries were unable to translate the windfall into economic growth. This led to a vulnerable income.followed by an oil cycle by marketslump. Tsalik (2003) pointed out that the last 30 years have provided oil-exporting countries with an excellent opportunity to shape their destinies. Crude oil revenue was the chief driver for the Libyan economy. This was followed by accruing general banking debt.high expectation.ResearchMethodoloQV Chanter Three Data indicates that the proportion of average shortfall in budget to gross domestic product rose by 11% over the period 1985-1990 and declined by 2.high expenditure. the price of oil has seen a substantial increase from US$ 3 in 1970 to more than US$ 70 in 2006 and the oil exporter has gained a sizable chunk of the capital.644 million dinars and the proportion was 50% of GDP in 2002. to protect the economy from the risks threatened by on one source which is vulnerable to depletion.a declinein revenue. The main challenge which faces oil exporting countries is to implement income diversification to minimise the effect of oil revenue fluctuation and its resource. This was intended to fill the shortfall in the administrative budget that required borrowing from the banking system.

a lack of a consensuson how to own and exploit the oil reserves and the large number of Libyan poor with pressing needs are all that Libya needs to overcome.including commodities and services. the main source of income. Eventually oil. 2005). and expending this revenue for the Libyan people are a huge responsibility that is complicated by being state-owned. These are some of the hazardous challenges facing the economic management of Libyan oil revenue and are likely to threaten Libya's future. The dilemma. obstacles will run out (Merza. A statemanaged infrastructure. Oil revenue should be transparently. Privatization should be undertaken. and put in a legal frame (International Monetary Fund. The public education system should be improved. economically managed. These issues need a speedy resolution. adequately taxed and protected from government abuse and corruption. An effort should be made in good faith to build a consensusamong the Libyan people that private ownership of industrial assets.ResearchMethodology Chapter Three Best management practices and financial controls in the taxation and expenditure stagesof oil revenue accrual and disbursementare essential. Policymakers should be aware of a "dual hazard" in politics of revenue taxation and expenditure. however. 56 . Such a fund would protect oil revenues. creating a professionally managed oil fund. an absenceof a functioning legal system. Their representatives are likely to press for higher tax rates and budget deficit and to lobby for borrowing against future oil receipts. Generating accounting for. Even with projected revenue growth in oil production Libya will still be a poor economic performer at the bottom of the medium-income developing countries. which has recently faced Libya. a shattered public service. To facilitate this process. managing. 2003). failed to use centrally economic managed oil revenues to jump-start development and prevent precipitous declines in their GDP per capita as a result of oil price fluctuation. Libya. Added to this. is economically more efficient than a government-owned system. Libya has large unemployment and a small population whose basic needs are still not met. with poorly defined rights. should be seriously considered. is how to avoid the dependenceon a single resource. since the diversification attempts over the last three decadeshave failed.

ResearchMethodology Chanter Three A central issue for hydrocarbon rich Libya is how best to use their hydrocarbon resource assetsover time Barnett and Ossowski (2002) have developed a framework for formulating fiscal policy in annual. medium and long-term horizons. when formulating fiscal policy. The non-renewable particularly sector is an important source of foreign exchange and fiscal revenue in resource countries.budgetary planning. hydrocarbon riches are treated as wealth rather than income. Second. and the efficient use of public resources difficult. typically face two main problems exploiting that the revenue stream is uncertain and volatile. Libya and many other oil countries with large fiscal revenues derived from a non-renewable resource such as oil. and that it will eventually dry up or later sooner 3. discretionary behaviour. in line with the consumption to permanent income concept.1 Volatility and Uncertainty of the Revenue Stream A volatile and uncertain fiscal revenue source renders fiscal management. 57 . This is the case when it makes up a large share of total revenue. quickly growing. mainly as a result of unpredictable and frequently large fluctuations in international commodity prices. and outright corruption. making them vulnerable to external variables largely beyond the many control of policymakers and domestic agents. combined with a high degree of volatility as a result of fluctuating world prices. Oil production provides the most dramatic illustration of the problems posed by for developing countries: very large. each period Within this framework.6. in what is becoming the standard treatment. Two basic propositions underline their approach: First. The uncertainty and volatility of nonrenewable resource revenues is typically greater than other kind of revenues. but timeresource riches limited production and revenue flows. a fundamental objective in should be to limit consumption to permanent income expectations. ownership of such wealth provides ample scope for inefficient policies. When combined with administration. all of which contributes to poor growth performance and eventual dissipation of national oil wealth. hydrocarbon resources such are treated as part of national wealth and are expected to finance other sectors as oil rather than being treated as revenue.

As a result. This approach would both stabilize usable revenue and provide for the accumulation that of financial resources would makeup for the depletionof the naturalresources. When a significant share of government revenue is derived from the exploitation of such intergenerational equity and fiscal sustainability require considerations of resources. In particular. sources 3. government wealth can be seen as the sum of net financial wealth and resource wealth. and medium-term comprehensive strategy of expenditure adjustment. especially if not done in the context of a unpopular. 58 . the productivity of public investment could be affected and if this raised negative oil price shocks. In fiscal management. Nevertheless. a distinction should be made between countries that rely on revenue from non-renewable resourcesand those that have a broader fiscal revenue base. where the return on spending might some additional expenditure may be high. the impact of resourceprice volatility would be less severe. this would leave less wealth and lower consumption opportunities for future generations. it is generally considered that if all the revenue from non-renewable resources were to be consumed. the finite nature of the resourcesand of the prospective evolution of government net based solely on indicators of fiscal balance could be wealth.2 Exhaustibility of the Revenue Stream Government revenue derived from exploitation of non-renewable resources differs from other revenue in that it partly represents a depletion of wealth. expenditure often falls sharply too. which is typically costly.6.ResearchMethodolo2v Chanter Three When revenue falls sharply and unexpectedly. Thus. For countries that have a relatively diverse production structure and alternative of fiscal revenue. since analysis misleading. fiscal sustainability could be questioned. thereby helping to implement fiscal policies that are set within a longer-term framework. Cutting capital involve the abandonment of viable projects. Cutting current expenditure can be notoriously difficult and it may be socially damaging. considerations of long-term fiscal sustainability would generally imply saving a portion of today's non-renewable resource revenue and setting limits on the proportion of non-renewable income that is spent on the non-resource fiscal deficit.

Stringent institutional measures to prevent such subject behaviour may be required 3.ResearchMethodolo2y Chapter Three 3. particularly if perceived as permanent. The 59 .6. There is evidence that the volatility of the real effective exchange rate is damaging to the non-resource sector and capital formation (World Bank. it will attempt to address the scope of economic diversification as a means to minimise adverse effect and impacts on the Libyan economy. Moreover. This study is to determine whether Libya's economy has become significantly more diversified over the past three decadesor whether it remains overly dependenton oil and gas resources. This can be done through identification of how oil revenue and oil price fluctuation affects those key macroeconomic variables and the dynamic response of these economic variables. may positively aid. the real effective exchange rate.3 Real Exchange Rate Volatility and "Dutch Disease" has Large revenuefrom volatile non-renewable resources an impacton the economy resourceshockscan affect as a whole. 1993). high non-renewable resource revenues may be misused or otherwise to poor governance. Moreover. this dissertationaims at deriving some general principles that are important for formulating and assessingfiscal policy in Libya's economy. In addition. an increase in resource revenues. not just on the fiscal sector. with effects on the non-resource tradable sector (Galeb.7 Research Aims This dissertation aims to explore whether this simple theoretical solution to government oil revenue and risk fluctuation might be able to work in managing if it can. Also. the aims of this study are to investigate how the impacts of oil revenue fluctuations on key macroeconomic variables of the Libyan economy determine the direction of causality and measure the magnitude of such impact. and short-run monetary disequilibrium. 1988). In addition. what is preventing government from doing it? practice and. including policy variables such as government expenditure.Non-renewable the level of the real exchange rate through several channels including disposable income non-tradable.

as controlled by the government from 1970 to 2000. stage of development of the non-oil economy and government financial position. explore how productive sectors are able to develop and diversify resource income in order to achieve a reasonable degree of selfsufficiency by reducing the heavy dependenceon imports of basic goods. the size of oil reserves. it will explore the sectors. Stronger precautionary saving motives are needed in times of wealth. to recommend what measures need to be taken to achieve an economic growth sustainable without reliance on oil revenue. three major hypothesesare proposed: 1. 3. consider the effect of broadening the economic base by expanding and -To diversifying economic activities through accelerated in 'the non-oil growth economy.9 Research Hypotheses For the purpose of measurability and test-effectiveness. 3. the study will evaluate the contribution of the oil rent to Libya's economic and social development. an aim is to understand how movement in oil revenue affects estimates of government oil wealth. As noted above. 60 . which will be replacing the oil sector in an attempt to diversify the economy.The Libyan economy has benefited from oil revenueand from economic diversification.8 Research Objectives discover the contribution of oil rent to the national income of Libya in the past -To and the present. all of which would effect fiscal policy decisions. oil wealth is a key determinant of the size of the sustainable non-oil fiscal deficit. overcome its obstacles and what can be done to minimize the risks from oil rent. This study aims to recognize the impact of oil on the Libyan economy and the managementof oil rent. Moreover. Furthermore.ResearchMethodoloi y Chanter Three relative importance of oil to the economy. 2003). and thus an important variable for fiscal policy formulation (Barnett and Ossowski. Also. which could become entrenched and thereby endanger fiscal sustainability. Finally.maturity of the oil industry.

10 The Choice of the Topic and Its Contribution to Knowledge The topic of the rentier economy and the associated development problems is of special to importance to Libya and other rentier economies in general. it serves as an example for other countries in which similar problems are found. Moreover. Moreover. Vandewelln (1998). contemporary and generation of. the results of this study could shed some light on the ways and means of implementing a nationwide impact agreement.Heavy dependenceon oil receipts harm the economy and.Finally. The importance of such an issue can be seen in two main factors.ResearchMethodology 2. Given the fact that oil is a depletable natural resource that is associatedwith the risk of being substituted by other sources of energy. Amuzegar (1999) employed a framework focused wealth inclusive of oil in the ground similar to the World Bank on government analytical framework. Chapter Three 3. 61 . It will further provide a mechanism for monitoring policy in the Libyan oil industry. Therefore. The second motive for choosing this topic is to examine the failure to develop a new income and diversify the rentier economy and attempt to identify the sourcesof such failure. it development failure in Libya to the existence of a rentier mentality and attributes resulting from the rentier structure of the economy. income sources other than oil. and focuses on the more questions of how the government should allocate resourcesand distribute normative over time. In addition it will highlight fiscal policy design in the case of oil dependence. More specifically. sustaining the wealth and the high living standards in Libya requires the search for. selected Galeb (1988). rent-seeking Several studies have empirically examined the sustainability of fiscal policy in oil-productioncountries. This goes beyond sustainability. the contribution of this dissertation is to relate the failure in economic development to the rentier nature of the Libyan economy. the country is pressured to search for other sources of income that reduce the magnitude of oil dependence.There is a significant relationship between oil wealth and economic growth 3.

data. complexnatureof the research 3. Oil is assumed to consume no inputs and generates a stochastic stream of revenues dominated by the tradable. The significance of this study will lie in the most preferable difference it is capable of making in the quality of lives of the people. Looking for other sources has become the and urgent of priorities. 3.11 Limitation of the Study to Although. each using capital and labour.time and non-quantifiable factors. the and its relationshipwith the naturalresources. resources. non-tradable goods and oil. The tradable and non-tradable sectors comprise a finite number of firms. They assume that capital is 62 . Hausman and Rigobon (2002) applied a formal model of inefficient specialization. but for many concernedsocial scientists and policy makers as well. given a heavy dependence on oil are volatile and unpredictable. As a country improves its wealth. the quality of life of its inhabitants should also improve. but there were a number of constraints in reaching the ideal goal in terms of cost. and will sooner or later dry up due to revenue. The model includes three sectors in the economy-tradable goods.ResearchMethodolorv Chanter Three This dissertation will significantly assist decision-makers to discover new resources to finance the economic development process. Almost all oil exporting countries encounter the problem of dependenceon a single resource to finance their budget. oil receiptsimpactthe Libyan economyover time. Relying entirely on a single resource creates hazards for the national economy. One assumes that when a country realizes profit from its natural resourcesthen its population will also benefit.12 Impact Assessment Methodology in Rentier Economies The impact of an economy dependent on natural resources and extractive activities has always posed a major concern not only for the government. Libya faces a serious problem when there is an oil price shock. which oil and gas being exhaustible. its premise is that human value should supercede the profit motive. this studyis intended be complete and comprehensive. Several conceptualand empirical approacheshave been developed to measurethe socioeconomicand in effectsof naturalresources a given country. environmental In a study of an alternative interpretation of the "Resource Curse" theory and policy.

(3) information. Another problematicareaof an oil impact assessment the natureof an oil productionswing. Moreover. the difficulties associated with socioeconomic impact assessmentof oil wealth are within the nature of wealth itself. Early were studies to investigate oil impact on economic development process assessment confronted with conceptual. According to Emil et al (2003) there are several specifically identifiable problems: (1) uncertainty. (4) price. and uncertain and largely originate from abroad. Applying a medium term expenditure framework and fiscal rules removes the uncertainty and volatility of oil revenues facing the government and adopting this analytical framework addresses the underlying question of how the government allocate resources over time. Several studies have empirically examined the should sustainability of fiscal policy and allocation of resource issues in selected oilcountries. Liuksila et al (1994) and Chalk (1998) employed a framework producing focused on government wealth. inclusive of oil in the ground. If the government decides to save its oil revenue. which consumes it entirely in non-tradable goods. inherentin oil windfalls. (2) conflicts. volatile. (5) royalties (which are payments may made to local units of government. (6) the integration of diverse petroleum is activities. 63 . investigate the challenge which may appear in oil producing countries from the fact that oil revenuesare exhaustible. For instance. 3. landownersor the petroleum ministry). and empirical problems.ResearchMethodolo2y Chapter Three owned by foreign investors and oil belongs to the government. it will do so in foreignassets. They used this formal model to determine which factors may have causedthe "Dutch diseases" and answer the question as to whether this is caused by volatile oil prices or due to political economic forces unleashed by the presence of rents. methodological. what are the policy implications of this problem? Barnett and Ossowski (2003) in studying operational aspects of fiscal policy in oil-producing countries.13 Impact Assessment Methodology in the Oil Industry A number of impact assessmentshave been performed in the oil industry.

the ability of sub national jurisdictions vis-ä-vis the central government and the stabilising of revenues in response to oil price uncertainty and volatility. particularly with demand for a direct share of the oil revenues from the regions where the oil fields are located. 64 .and output is the input/output model. A second mechanism often utilized in estimating the secondary effects of an initial economic stimulus on a diversification economy. with quantitative estimates of the interdependencies of an economic sector (including factors such as suppliers of inputs. income and business volume). According to Leistritz and Chase (1982). This model. there are some tools of socioeconomic impact analysis. wealth First. there are a number of issues in this area including the right of sub-national region to raise revenues on natural resources. While conceptual and methodological issues involved in the socioeconomic impact assessmentof allocated oil revenue remain problematic generally. given a dynamic quality of the oil wealth and the uncertain nature of the resource. These result from petroleum activity and are an important aspect of any comprehensive social and economic impact assessment. and purchasers of products) provides the basis for tracing the multiplier effects of a dramatic increaseof petroleum activity in the economy. A number of their models well-developed and methods have proven empirically useful in researchers' understanding of oil impact assessment and analysis. and the financing of a stable level of public services. e. allocation resources. a useful employment. Subgovernment provides interjurisdictional national equity. This model goes further as tool in estimating the magnitudes of secondary economic activities (i. is that larger countries will gain revenues from oil wealth. the gravity allocation model is a widely used technique for projecting the The underlying premise of its use settlement patterns of oil and gas related countries. redistribution. realistic projections of future productions and activities within the development region are extremely difficult. There is also an overriding motive on the political economy a consideration associated with the assignment of natural resource revenues.ResearchMethodolozv Chanter Three According to Ahmed and Motu (2003).

the International Monetary Fund (IMF). affect the welfare of the economy. Ministry of Planning. Central Bank of Libya. such International Organisations as the OECD. Documentation and Information Corporation. Sources Collection and Analysis The socioeconomic and environment data presented for this study are drawn from sources. primary and secondary data from archival records of federal and several oil industry records. books. This model a solution-saving rate that maximises economic welfare both during and provides the oil era.However. using a modified employed by banks. Archives. (iv) the desired changes saving ratio in the post-oil era. which assumesa simplified economy that version of a model can only receive income from the extraction of oil and gas reserves. World Bank. viz (i) the life span of after the oil and gas reserves (ii) the real long-term rate of oil price and production cost (iii) the very long-term rate of return on investment and. consumption 3. how private agents maximize welfare by allocating income between show and investment. available. when actual figures were not previous researchers estimates were derived from the available raw data.ResearchMethodoloev I Chapter Three In addition. They used of a variant of the standard neoclassical growth model. out of exhaustible natural resourcesrevenues. and Leistitz (1981) and Leistitz and Chase (1982) these studies provide examples of the methodology of oil wealth impact on the economy. Takizawa et al (2004) draw a model to analyse how alternative government spending routes. The World Bank (1994) has estimated optimum saving rates. publishedand unpublished the writings of in the oil management. Countries (OPEC) and Arab Oil Petroleum Exporter's Countries. National Oil Corporation. The model dependson a number of variables. information from statistical publications. journals.the documentation. the Organization of the Petroleum Exporting state government. (NOC).14 Data. some studies have adopted survey techniques useful to understandingthe social economic impact of oil wealth as related to the economic development and diversification process on a country. the Libyan General Planning Council. 65 . various Research Institutes.

they need to be analysed. Once the data are ready for analysis.ResearchMethodolo zy Chapter Three After data have been obtained through documentations and mouth interviews. 66 . the researcheris ready to test the hypothesesalready developed for the study.

The committee granted 137 concessions to 42 different companies between 1955 and 1968.Libya returned as a consultant opened up its territory to oil exploration in 1955. its share of the budget revenue is substantial. Recently. instead of abroad. the government has become opportunities aware of the sector's importance particularly with foreign investment increasing in this sector. Some signs of oil had technologically been discovered in Tripolitania as early as 1914.000 sq km. when water wells were drilled to Tripoli city (Waddams. There had been a small scale survey of a limited kind in Libya in the Italian period. 1980). when exploration operations were way in 118 active concessions. the has a growing concern about the Libyan economy when the oil will dries government up. Also. when a petroleum law was passed an independent committee to oversee the award of exploration licenses establishing to international oil companies. It represents the main source for foreign exchange proceeds and represents98% of total exports.a total of 586. and (one third of the under country's land area).Oil and Gas Industry Development Chapter Four CHAPTER FOUR: OIL AND GAS INDUSTRY DEVELOPMENT 4. In addition. but was never full implemented due to the onset of war.1 Introduction The oil and gas industry plays a significant role in the Libyan economy. Indeed. 67 . . It provides Libyan job and foreign investment as well.working in Libya in the 1950s. The growth of the Libyan oil industry dates from 1951-the same year that Libya became an independent sovereign nation. Deiso with the oil companies. This is of vital importance in the future. More oil was discovered in Tripolitania in the supply 1930s and a full-scale exploration programme was prepared in the years 1937-1940 by the Italian national oil corporation under the geological guidance of Professor Ardito Deiso. when the manufacture and production of crude oil is undertaken in Libya.

governments in countries where oil reserves had been found have supply acquired sufficient confidence in their sovereignty to demand higher shares of the gains from the production and sale of their oil.1) by the end of the decade. However. despite this role. the post-war European market for oil was increasing at a dramatic pace. thereafter. Production of crude oil in Libya began in 1961 (see Table 4. some of which were. On the demand side. which makes it easier on internal combustion engines and less of a pollution contributant than other crudes. Libyan crude oil. It also has a low sulphur content. placing the long-term of the international industry in a handful of major oil companies. For this reason. The development of the oil industry was remarkable. In addition. the industry has become more complicated and more mature. Enlarged markets encouraged independent companies to enter the business. reflecting its substitution for indigenous coal and a greatly expanding transportation sector. Since the early 1960's. due to the oil ports of the easternMediterranean. Libyan crudes had a receptive market in Europe from the start.Oil and Gas Industry Development Chapter Four Most concession-holders carried out vigorous exploration programmes and by 1959 several oil accumulations had been discovered. the other sectors' roles 68 . On the side.000 Libyans. while having rather high wax content. is lighter and easier to handle than crudes from most other petroleum areas. Libya's petroleum development benefited from the technology and acquired by the industry in other parts of the petroleum world during the experience preceding fifty years. control However. rapidly developed.Libya had becameone of the leading oil producersand and. the petroleum industry has increasingly dominated the whole economy. with many other sectors dependent on an oil economy. not forgetting that Libya is close to the European markets. the oil income and the resultant re-positioning of the economy as an oil economy influenced other sectors and now play a vital role. Since then. An exceptional combination of circumstances contributed to the development of the petroleum sector. both in terms of its rapidity and in terms of its proliferation. it provides direct employment for fewer than 20. exporters in the world. Nevertheless.

3. Libya's production rose rapidly during the 1960s to third largest oil production countries by 1969 making if one of the dominant members of OPI.2.8% in 1962.Oil und Gas Industry Development in the economy have declined. Libya's although oil production has largely föllowed UPI: ("s over all production modestly.65 million barrels per days (mb/d) is little more than half the peak of' the early 1970s.000 0 ---- 2. to 5.500 ä 2.5% in 1958. The industrial contribution ('huller Four sector has declined from a GDP in 1965 and 1. 2005 Fig 4. the country has the resource base to raise production capacity significantly 69 . profile.000 ® Libyan Oil Production.500 a) m 1.6% (Wershfani. over the last fifteen years has been grown compared with Libya's oil capacity has been OPEC's average growth of around 3`%0 per annum. Current production of 1. the constrained country's oil sector is again attracting foreign capital and technology.9% in 1968 of 11. I lowever. and production is rising. 2003). (' at the time. I lowever.000 500 C01965 1970 1975 1980 1985 1990 1995 2000 2005 Years Source: OPEC Annual Statistical Bulletin.1 Libyan Oil Daily Average Production (1965-2005) Figure 4. 0 1. by lack of investment mainly due to economic sanctions.1 demonstrates that the share of oil in GDP has a dramatically changed over time.500 3.

Eastern Europe and China) Libya also possesses measure of comparative geographical advantageagainst Gulf a being situated close to the then rapidly growing oil market of Western producers. The consequence of the terms of this. which laid the framework for the subsequentdevelopment of the Libya related oil industry and the open-door policy pursued by the government.4 1969 3.1 1968 2.7 1974 1.5 1971 2.180 4. being low in sulphur and high yielding in the more valued components and aviation spirit. once refined.110 8. was a rapid growth in the number of concessionsfor oil exploring within the The process of drafting the Libyan Petroleum Law and the associated country. criticised 70 . Libyan oil is extremely high quality.5 1972 2.0 1970 3.3 1964 0.520 3. was deeply at a later period.1 Libyan Oil Production (1961-1974) (.3 1973 2.with a increase in oil production as Table 4. Libyan crude causes minimal pollution problems such as petrol during refining and gives high financial returns.321 8.745 5. enhanced light crude.Oil and Gas Industry Development Chapter Four 4.465 2. steady Libya's importance in the field of international oil production and export was by factors of geology and geography.8 1962 0.000 b/d) Year Production Share (%)* Year Production Share (%)* 1961 0. Europe. per barrel.506 7.6 1963 0.505 5.4 Source: BP Statistical Review of the World Oil Industry 197) *Share of World Output (Excluding USSR.18 0. and subsequent revisions of the Law (1965 and generous operating 1967).240 5. Table 4.6 1965 1.765 6.2 Historical Background The expansion of the oil industry in Libya raced ahead during the early 1960s. the assetsof the oil companies in Libya were given far-reaching protection under amendments of the Petroleum Law.5 1967 1.220 4.860 3.1 demonstrates. At the time.20 0. laws.1 1966 1.

In the first place.2 Development of Producing Wells in Libya 1998-2005 Year 1998 1999 2000 2001 2002 2003 2004 2005 Producing wells 1.545 1. Undoubtedly. This mandated extensive relinquishment of acreagewithin a very few years and allowed large integrated oil companies.585 Source: OPEC Annual Statistical Bulletin.Oil and Gas Industry Development Chapter Four The government's goals were quite clear and it went about achieving these by taking two very significant initiatives. In addition to this. bringing the country rapidly into the rank the main oil exporting states (see Table 4. 2004 By 1969.2).573 1. however. In order to accomplish this at a time when abundant reserves of oil had been discovered elsewhere. but it was receiving what were probably the lowest per-barrel revenues in the world. as no one company was essential to the Libyan oil industry and there were always others willing to take over a relinquished stake. the way was opened to the eventual nationalization of some foreign companies operations and the conclusion of participation agreements.498 1. but also smaller independent and state oil not only companies to become producers of Libyan oil (Gurney. Libya had become the world's fourth largest oil exporter.436 1. it did succeedin attracting a wide spectrum of oil companies into Libya. 1996). it had to offer attractive financial terms. The government gained through this of system. The best international techniques for exploration and development were put to work in Libya within a very short space of time. The new regime embraced a new strategy aimed at changing the whole basis of operation.595 1. the government wanted to foster a competitive oil industry and to avoid a situation where the oil companies took concessions and failed to explore or to produce oil in order to suit their own worldwide reserve portfolios. It was able to pressure individual companies successfully for its competitive desired ends. the year of the Libyan Revolution. In the second place.430 1. 71 . Table 4. it wanted to bring oil companies in to look for oil in Libya.425 1. Its 1955 Petroleum Law established a system that limited the size of concessions.

the Libyan authorities drafted a new agreements model exploration agreement EPSA-II in which production-sharing terms varied according to the prospects of the acreage concerned and the contractor's share of output was the net sum of taxes and royalties. New participation agreements were concluded which gave the NOC a holding of at least 51% in all concessions. all operating refused.including overall control over the national oil production level in order to reduce the rate of depletion of oil reservoirs. 4. and replacing it with National Oil Corporation (NOC).However. One of the first steps taken by the NOC was to raise official export prices in 1970 and increasethe tax rate payable by foreign companies. Indeed. especially with limited funds. Royal Dutch/Shell and the four major US companies they in Libya. Occidental Petroleum and the Oasis group (the US companies Conoco. 72 . British Petroleum. By the early 1980's. (Exxon. particularly in the early days of the 1980s. the government realized that foreign investors had remained in the country and the National Oil Company (NOC) were not capable of finding and developing new oil at a sufficiently high rate to replenish Libya's diminishing reserves base. all accepted the National Oil Company's new terms. in January 1980. This was followed by the UN sanctions in 1992 which had a clear effect on exports.when the American companies withdrew. The nationalization of the Libyan oil industry began in 1972.Oil and Gas Industry Develonment Chanter Four The government began by abolishing the Libyan General Petroleum Corporation in 1970.3 Oil Industry Development The oil industry in Libya has seen many substantial developments. In order to attract new companies to exploration in Libya and to interest those already in the country to expand undertake their exploration efforts. with disappointing consequences. The new company was given wider power than its predecessor. Mobil. the authorities overcame such problems by inviting other companies into the Libyan oil industry. Texaco and Standard Oil of California). Marathon and Amerada Hiss). ENI. it began to offer exploration and production sharing (EPSA).

Mobil and Gelsenderg the Hafra field and Esso Sirte. This increase in activity was associated with the 41 new concessions of 1966. production in this well was 17. Esso discovered the giant Zelten field (later renamedNasser).1 Discoveries. New concession-holders frequently negotiated with those who had surrendered the area for survey information.Oil and Gas Industry Development Chapter Four 4. 1980). discovered the Dahra and Waha field. Subsequently. Continental.000 barrels a day in August of the sameyear. this production rate was not of commercial size. thus avoiding duplication of work. when US companies found six large fields. However. Exploration and Drilling The first oil well production had been discoveries in concession contract number in the area Alatshan by the Esso Company on 20 January 1958. 73 . the BP and Hunt partnership discovered the giant Sarir fields and Oasis discovered the giant Gialo and the smaller Samah fields. Esso also contract number discovered another production well and the preliminary production was 15. the Raguba Field. Oasis. The geological and seismic survey work was at its most intense in 1960 and 1961 this reflected the high activity in early concession before the first surrender of and 25% of acreage. Subsequently. there were other significant finds in the mid-sixties. After these times. Amerada and later joined by Shell. both geological and seismic survey work diminished and any of the favourable structure revealed by this was subjected to seismic survey.500 barrels a day. with the exception of 1966 and 1967 for geological and 1967 and on 1969 for seismic. particularly as the company had drilled more than two wells in the same area and found them dry. allocated from surrendered acreage. five years after the original grant. including two giant ones in the Sirte Basin. These levels reflect the culmination first of drilling. Drilling activity rose to its highest levels in 1963 and 1964 in exploration and 1964 and 1965 in development. Oasis found the Defa field.3. The production was not more than 500 b/d and in the view of the company. a consortium originally composedof Marathon. and according to concession '6. (Waddamas. The first and crucial major discoveries in Libya occurred in June 1959. survey activity was a falling trend.

Agip found the Bouri field there in the mid-1970s.Oil and Gas Industry Development Chapter Four Decisions on drilling programmes were taken many months before the completion of wells was reported although drilling activity was far lower before early 1966. There were smaller increasesin exploration drilling in 1968 and 1969 and of development drilling in 1969 and 1970. The other significant western area for discoveries in this period was the offshore Pelagain Sh. the bulk of discoveries during the rest of 1960s. In 1971. The most successful operator during the period was Repsol YPF. all in Sirte Basin. Occidental's discovery of Idris (later renamed Intisar) and Augila in 1967 and Agip's discovery of Abu Attiful in 1968. 4. with its estimated reserves of two billion barrels of original oil. arguing that oil companies had inflated their field reserve figures in order to justify over-production. attributable to the rise in activities from the 1966 concessions. 1996). the government lowered the official reserve estimate from 35 to 25 billion barrels. as Table 4.3 million barrels a day) Libya has a reserve-production ratio of 76 years. The exceptions included Amoses discovery of Nafoora in 1966. The Libyan company Ageco identified five potential productive structures in the Hammada Al-Hmra plateau of the Ghidames Basin.3. Aquitaine Company also found offshore oil in this area.near Tripoli. However. which struck oil five out of eight wells drilled on Block NC-186 in the Murzuk Basin between with 1998 and 2002. were smaller and less dramatic (Gurney. with the 4 most important discoveries being made between November 1998 and mid-2002. 74 .3 demonstrates.2 Reserves Official proved reserves increased dramatically from 3 billion barrels in 1963 to 36 billion barrels in 2003. At the 2003 rate of output (1.

Some experts think that the country's six large basins-Sirte. 3% of reserves are located in the Murzuk basin. the Prime Minister announcedthat Libya has proven oil reservesof as 47 billion barrels.500 36.Oil and Gas Industry Development Chapter Four Table 4. an The Sirte basin. 3% in the Ghadamesbasin and 5% offshore.000 39. Of the 21 fields in Libya reservesof over 1 billion barrels.800 22.126 39. Murzuk.500 29.800 29.800 22. with cumulative oil to date equivalent to 60 % of present estimates of recoverable reserves.800 22.500 29.500 1999 2000 2001 2002 2003 39. which has been more extensively explored than others has accounted for fully 87% of known recoverable reserves. Libya has the potential to rise significantly in coming years given its large. with relatively modest domestic demand. Whereas in 2005. Kufra and the offshore sedimentary could contain total oil-in-place of as much as 220 billion barrels. 75 .126 In 2004. with recoverable However. production However.000 36. undiscovered potential of 107 billion barrels. Ghadams.500 1996 1997 22.800 1991 1992 1993 1994 1995 29. representing sites.3 Libya Proven Crude Oil Reserves (1990-2005) (Million barrels) Year Proven Oil Reserves Year Proven Oil Reserves Source: OPEC Annual Statistical Bulletin 2005 1998 29. of which 79 billion barrels were found during the first 10 years.1 billion barrels.000 36.126 2004 2005 1990 22. Libya's current level of crude oil reserves is 39. it also has the potential to increase exports of both fuels well into the future. 113 billion barrels of oil-in-place has been discovered as much in the country since oil was first struck in the 1960s.Libya's profiles of cumulative production to date differ for oil and gas. The estimates represent only recoverable They do not include economic reservesthat are plannedfor development. Cyrenaico. proven undeveloped proven reservesor estimates of probable and possible reserves. the Secretary of Energy estimated Libyan oil reserves at 100 billion barrels. 19 are located in the Sirte basin.

In the light of assurancesgiven by the Revolutionary Command Council. when Esso and Oasis accounted for 88% of total production. This suggeststhat the companies were determined to produce as much as possible at this time. was not surprising.1 demonstrated.3.1 barrels a day a level comparable with other leading oil exporters of the time million (Iran.Oil and Gas Industry Development Chanter Four base. By the middle of 1969. were The decline in production in 1971 and 1972 was a direct result of government restrictions on the production of each company. Libya was exporting 3. This was done partly. production in 1970 was the highest. Saudi Arabia and Venezuela). The possibility of significant reserve growth could also expand its reserve capacity to produce and export hydrocarbon fuel into the future. Output began in 1961 and reachedmore than 1. production peaked at 3. their had fallen to 70% with the arrival of BP and Bunker Hunt's Sarir field and with share increasesfrom Amosas and from the Mobil and Gelsenberg partnership's fields.7 million barrel a day a figure that representedthe entire capacity of the pipeline system. Libyan leadership in this field was only temporary (Waddams. oil revenue although still behind Venezuela. and that they may have been doing so to the detriment of the fields involved. An immediate increase in production and exports. 4. The only limitation to oil production and exports over the past 20years has been the lack of upstream investment and the commitment to OPEC quota.2 million barrels a day in 1965.3 Production and Export of Crude Oil Libya started to produce crude oil from the beginning of 1961 as Table 4. to force the companies to agree to higher 76 . On an annual basis. in order to prevent overproduction of fields and partly. as those of the two Middle Eastern producers. 1980). most concession-holders bent on exporting all the oil they could while the going was good. Occidental began production from its Intisar field at a rate only slightly below that of Esso and Oasis. Given current investment plans to raise capacity. a major constraint might be adherenceto its OPEC quota. In 1968. total government was about the same level. By 1967. In April 1970. but as take per barrel in Libya was higher than in Iran and Saudi Arabia. Oil exports were not stopped at the time of revolution. after the revolution of Ist September 1969.

Among the technologies the Libyan authorities would like to see more widely utilized are seismic acquisition. Libyan crude oil production declined further in 2002. which was fixed at 1. the fact was that the new price agreement resulted in a relaxation of the government's allowable production levels.3 million barrels per day as against 1.9 million-barrel day.The restrictions were targeted at companies which had the biggest percentageproduction increaseduring 1969.35 million barrels per day in 2000. The decline was to cuts in the OPEC quota assigned to Libya.162 attributable million barrels per day through 2002. The government became alarmed.32 million barrels per day in 2001 and about 1. which were interrupted after the US administration embargo in the early 1980s. geological modelling. Libyan production at the end of 1974 hovered around 800.5 million barrels per day and exports in the third quarter of this year averaged 1. as Table 4. infill and horizontal drilling. By contrast it annual growth between 1970 and 1980 was minus 6%. Libya was able to stimulate output somewhat in the secondhalf of this decadebut never sufficiently to reach its 2 million barrel a day official goal.000 barrels a day. Output was cut back in the second half of 1992 as a result of million technical constraints caused by the US trade embargo against the country and due to the UN sanctions introduced in April 1992 and tightened at the beginning of December 1993. Despite the protestations of the government that the cuts were only intended to protect the oilfields from overproduction. output had risen to 1. It realized its error and cut prices drastically. Recently. averaging 1. It annual growth from 1965 to 1972 was 22% an impressive rate (Gurney.1 displays. even for a country beginning promotion. 1996).7% growth rate in Saudi Arabia.5% per annum.Oil and Gas Industry Development Chapter Four taxes and new contractual arrangements. effectively stimulating production and export.43 million barrels per day to 1. In 1993.38 barrels per day. However. hardly more than half its level in the spring of the year. to a positive 10. US oil companies' returned to continue their works. compared for instance. Libyan oil production fell slightly from 1. Libya authorities 77 . especially as it had set a target production growth rate of 7. sanctions had impeded the transfer of technology and the commitment of the necessaryinvestment. By June 1975.

344 20.341 10. but prices and realisations in Europe were reasonably firm as a whole. Table 4.568 6.970 12.576 6.793 8.482 Value of Oil Exports Oil Share* % 86 91 94 93 93 98 96 97 98 1991 1992 1993 11. the United Kingdom and West Germany.689 91 2003 86 90 2004 2005 14.Oil and Gas Industry Development Chapter Four hoped to reach the previous production of the early 1970s.612 7.673 8.341 7.510 10.697 11.225 13.170 7.365 8.905 5.234 10.032 7.875 10. resulted in a lower At this point the Arab-Israel war upset the economics and logistics of oil production.984 12.700 13567 18.681 7.230 10.734 12.763 9.155 9.711 7. supply.034 13.203 28.246 11.692 12.341 11.324 95 95 98 Source: OPEC Annual Statistical Bulletin 2005 Share* Oil value as a percentageof total exports In France.986 6. 78 .522 10. but the firmness of the average salesvalue of products derived from a barrel of Libyan crude between 1965 and 1967 may be attributed to a marked hardening of prices in Italy.4 Crude Oil Export and Marketing Libyan oil in the markets of Europe portrays a marked erosion of product prices between 1961 and the early part of 1965.573 10.543 8.3. 4. which was almost 3 million barrels per day by the end of 2010.293 6.132 7.653 28. which in turn.326 7.715 Value of Oil Exports Oil Share* % 98 100 98 98 94 78 90 82 82 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Value of Total Export 8.4 Value of Exports and Oil Exports (1982-2004) ($-million) Year Value of Total Exports 1982 1983 1984 1985 1986 1987 1988 1989 1990 13.961 12. prices continued to fall.148 12.070 6.211 9.

2 11.5 250. 000 b/d) Destination North America 1998 1999 - 2000 - 2001 - 2002 2003 - Latin America Eastern Europe Western Europe Austria Belgium France German Italy Netherlands 5.6 - 4.2 48.5 233.5 27. Within Western Europe.0 13.5 Libyan Crude Oil Exports by Destination (1998-2003) (.5 20.0 1161.9 - 3.5 0.5 899.5 10. roughly reflecting changes in production volumes.5 264.7 - 7.4 1 048.6 3.5 illustrates.8 202.9 1 126.5 70.0 1 131. the German share declined somewhat.0 987. It was about 27% in the first decade or so of Libya production.5 187.2 22.5 986. the prices there may have which been affected by the amendmentto the Libyan concession in early 1966.7 36.0 5.9 140.1 15. Its share of Libyan crude oil exports averaged 93% between 1963 1979. as Table 4.1 37. Table 4.0 49.0 30.4 922. the export destination pattern has remained substantially the same since 1998.0 438. the main market for Libyan crude oil has remained unquestionably after Western Europe.1 60.7 29.0 128.7 10.Oil and Gas Industry Development Chapter Four hitherto had been a depressedmarket.0 - 7.1 13.4 1005.9 25.1 431.5 974. mainly the United States.0 991.6 7.9 3.5 47.9 46. Although the volume of exports has changed. except in the 79 .5 12.7 46.1 53. In addition.6 1. decreasedthereafter.6 Source: OPEC Annual Statistical Bulletin 2005 Although the was a surge in exports to North America.5 Spain Switzerland United Kingdom Middle East Africa Asia and Pacific Unspecified Total world 130.5 409.9 180.9 13.7 963. it was predicted that it would remain the main market and for Libya oil crude and returned to 90% between 1982 and 1993. and averaged 22% to 25% from 1982 to 1993.9 43.8 19. 1975.2 539.6 1.3 20.6 145. dropped to 15% when exports to the United States surged.7 466.7 484.5 18.7 153.6 49.

The US market was in the late 1970s. a secondary (Ghanem. Pricing was at that time. gravity location compared to what normally prevails in the petroleum industry. Further. undervalued applicable in determining Libyan revenue from the oil sector until the end of stayed 1964. As the North Sea production came more and more into production. Britain's market significant share was 15% until 1971. its share fell to practically nothing. at sharply discounted prices. Libya had no influence on oil price at that time. the oil companies were entitled. The first Libyan posted price. Italy's share increased from an average of 26% in the late 1960s. to make unrestricted marketing allowances from the officially concession undervalued posted price. connected with other discounts and allowances. This was mainly to the bad Libyan economic situation of the day and its urgent need for a fund related for social and economic development. Libya received the lowest prices not only in Africa and the Middle East. The Libya oil crude has an advantage in terms of quality. 4. and then decreased:ending in 1986. The other oil companies operating in Libya selected the base posted price. did not require oil companies to publish a price for Libyan crude. not least of which was that the law was drafted by the oil companies' themselves and the government's main concern was to attract oil companies to begin exploration. Libya as a small producer of oil cannot have an impact on critical significance the global oil price. the Libyan legislation and terms. Subsequently Libya's ability to raise state revenues from crude oil deteriorated. according to. This was for many reasons. but in the world as well. The first step was to find oil. encourage exports of Libyan oil. 1975). oil companies convinced the 80 . full advantage of the situation and other buyers. pricing policy became of later. concern Given the high dependence of Libya's economy on oil. and Moreover. A number of countries took the lead in oil pricing policies and ensured a profit-sharing agreementwith major multinational companies. By contrast.Oil and Gas Industry Development Chapter Four mid-1980s. to almost 44% in the late 1980s and early 1990s. concessionary agreements.5 Crude Oil Prices Policies The Libyan Petroleum Law and accordingly. They took announced.3.

However. to reach US$40 per barrel in 1981. In April 1990. among other things. the Libyan crude oil base for the posted price of Brega 40° API was adopted by the Libyan pricing according to OPEC's decision and consequently controlled the government production. The market oil price in the 1980s was on a decreasing trend in general to reach US$14.10 per 81 . OPEC pursued a new pricing and marketing system corresponding to the situation. hence. The expensive Royalty Agreement has. The policy was based on mutual agreement between Libyan and international oil companies. From 1973-1978 posted the oil prices system became OPEC member controlled. as a result of the Iranian revolution. it should be treated as if it was 37° API gravity. Brega (40° API) and Zuetina (41° API) were priced at a premium of US$0. was soon widely employed by states anxious to secure the best possible relationship between pressing fiscal needs and conservation policies. collected (a) marketing allowances to be reduced to 5% barrel and (b) a new OPEC allowance on current posted prices plus a gravity allowance. crude oil prices rose to unprecedented levels. In 1979.72 per barrel in 1988 for the Libyan crude 40° Brega API. The key instrument that of controlling production levels. 1968). Libya operated a market-related strategy linking the export price of Libyan crude to the spot rate-dated North Sea Brent. The power base within the international oil industry shifted from the oil companies to the producing countries. Provided that all crude had API gravity in excessof 37°. The gravity allowance was in term of cents per barrel for each full degree of API gravity in excessof expressed 27 API°. 1981). while the shared fixing of prices was replaced by unilateral action (Abozrida. In the second quarter of 1989. Production declined in Libya in the early 1970s. so as to obtain the best possible return on their crude revenue. The financial provision of Libyan concession agreementswas amended to cope with the agreement. The Arab Israeli conflict on 6th October 1973 affected the international oil industry to an unprecedented level.Oil and Gas Industry Development Chapter Four government of the day that its tax revenueswere rising more steeply than if they sold less a higher price (Tugendhat. In September 1971 Libya employed a new pricing policy.

35 per barrel This formula was modified at the beginning of January 1995.Oil and Gas Industry Development Chapter Four barrel to dated Brent. and a concession-holder would not be would to finish or build additional handling or transportation facilities for this required purpose. the law also required the crude to be made available at `field storage'. However. This crude be made available at `field storage'. In the event.Libya tried to convince OPEC members to increase enhance their share to post-sanctions 1970's levels at 3.4 Refiners The Petroleum Law of 1955 had made a provision in Libya for refinery development in Article 21. whereas other crude were priced at discounts. In its main 82 . and has since gone on to develop downstream activities.5% of the value of crude oil exported. no consumption satisfactory implementation of these measureswas achieved. ranging from US$0. Further stipulating that if refineries were construct established the producing concession-holdersmight be required to contribute pro rata the crude oil required by the refinery to meet domestic consumption. amount These provisions might have laid the foundation for the supply of oil for internal in Libya at bare cost of production and refining. by giving any concession-holderwho discovered petroleum the right to and operate a refinery in Libya. 4.15/b to US$1.3 million barrels a day. Libya long ago built up a substantial domestic refining capacity. but even after the 1965 amendment. since this amendment stipulated that the recovered of royalty to be expendedwas 12. Libya has been eager to attract more investments in the oil industry and has ambitions to increase its crude oil production in forthcoming years and employ more workers in this auspicious and promising sector. Royalties would be paid on this oil. would be as an offset against surtax due. Furthermore. refining and distribution activities. new companies entered Libya and the authorities sought to increase the production in response to the high oil prices and responding to the need urgent to development processes. Pursuing a strategy of diversification and vertical integration of production.

with the emphasis on the country's traditional export market in Europe.0 1998 1991 282.This compares to 324. since production in recent years has consistently been in the range of 275. the NOC has received plans for developing a new refinery at Sebha.7 2004 1997 307.0 1999 1992 282.6 324. 83 .7 356. barrels a day in 1999 and 342. but was scrapped when United Nations sanctions were imposed. however.000 barrels a day. the Libyan refinery capacity has increasedsteadily. since the Libyan refining industry suffers from a serious shortage of conversion capacity and is unable to produce environment-friendly products such as unleaded gasoline.000285. Although refinery output in 2001 was more than double the level of domestic oil consumption (159.000 barrels a day of crude a cross the Mediterranean.7 356. In Italy.000 barrels a day.8 2001 1994 295. Meanwhile.6 shows.000. over three times the rate of domestic oil consumption. The government's medium-term strategy remains to secure outlets for Libyan oil through the entire downstream chain.5 396.000 barrels a day in 1997. it has become a direct producer of refined products. Libya is not fully utilizing its domestic refinery capacity. Altogether. Libya has a total refining capacity of 642. it plans to build up its European interest to the point where it has a market for 400. Spain and Switzerland.7 Source: OPEC Annual Statistical Bulletin 2004 Refinery output has risen steadily yearly. therefore. '000b/d) Year Refined products Year 1990 278.Oil and Gas Industry Development Chapter Four European export market. reformulated gasoline and very low sulphur gas oil.000-450. Germany. Table 4. giving it the possibility of processing over some 40% of its crude oil production in its own refiners.8 322.4 2002 1995 300. which would process crude from the nearby Murzek fields. As Table 4.4 2003 1996 304.6 2005 Refined products 317.500 barrels a day in 2001. In particular. since the mid-1990s having averaged 341.6 Libyan Oil Output of Refined Products Development (1990-2005) (.4 2000 1993 286. Libya's five domestic refineries have a combined production of 342.000 barrels a day at present.8 341.700 barrels a day) its composition does not correspond to the structure of demand.9 337. The project was originally conceived in the late 1980s.

then increased from 2000 to 2005 to 380.increased its moreover.299 billion cu/m (45. both to meet rising domestic demand and to increase the volume of exports.100 strong chain of service stations. 4. although that trend was percentage reversed in 1990. Slightly below the previousyear's figure of 84 . 4.000 barrel a day Holborn Europa refinery in Hamburg from 30% to 66. but the volume exported has been limited by the fact that the authorities have placed greater emphasis on developing petrochemical and fertilizer facilities that the use of gas as feedstock and expanding the use of gas as a fuel in industry and households. They included 200.87 trillion cu ft) on January1993. for which contracts were awarded in 1989. Libya started exporting gas in 1971. thus adding another 108 outlets to its European network. Spain and the Czech and Slovak republics.33%.Oil and Gas Industry Development Chanter Four Other projects for expanding the capacity of the domestic refining companies have also been shelved for the time being. NOC has acquired a Swiss refinery in which they took over Gatoil and its 72.000 barrels a day export refinery in Misurata and the expansion of the Tobruk refinery. In 1991. Continued expansion of gas production. Libyan refinery capacity was 342.000 barrel a day plant in Collenberg. Oil Invest .5 Gas Production and Development Libya started developing its gas resources in the mid-1970s.000 barrels a day Libya's largest overseas operation is in Italy. processing and suddenly transport capacity remained a high priority for Libya in the 1990s. and by the end of the decade had reduced the proportion of gas flared to about 20% of gross output.5.the investment branch of NOC in aboard . Those moves followed the purchase of an 80% holding in the German oil distributor HEM and an additional 300 retail outlets in Italy from Cameli Petroli. where Tamoil Italian operates a 105. Libya continued to consolidate its overseasrefining and distribution interests by purchasing the Dutch independent distribution Cebeco in May 1993. holding in the 80. while expanding its retail operations in retail Hungary.000 barrels a day between 1990 and 1999.1 Gas reserves Libya has proven natural gas reserves that were estimated at 1.000 barrel a day refinery and a 2. The saw a marked increase during the 1980s.

figure takes account of new accumulations of natural gas discovered in recent years.6 billion cu/m was marked.491 Source: OPEC Annual Statistical Bulletin 2005 Although the current. a level only equalled in 1989. which put them at 1. the country's thought to have considerably increased due to discoveries actual gas reserves are in the past two years.313 2003 1.289 2001 1.6% and a drop in the proportion flared to 15.314 2005 1.314 1993 1.314 1995 1.315 1992 1.6% in 1992 to 14. In 1993.309 billion cu m but still higher than the first revised estimate published by NOC at the beginning of 1990.491 1997 1.6% the year before.208 1998 1.8 billion cu/m.491 1996 1. mostly offshore. 4. in March 1991.310 2002 1.209 1999 1.314 1994 1. including the Ghadames and Bouri field.218 billion cu m. gross output fell to an 14 billion cu m. which translated into an improved utilization rate of 47.7 Libya's natural gas reserves. giving Libya grater flexibility to adjust the volume of output to demand.311 2004 1.Oil and Gas Industry Development Chapter Four 1.299 2000 1.6 billion cu/m the year before.5.2 Gas Production Libyan gas production.315 1991 1.7 Libya's Natural Gas Reserves (1990-2005) (Billion Standard cu/m) Year Natural Gas Reserves Year Natural Gas Reserves 1990 1. the market volume rose to 6. See Table 4. which had increasedsteadily between 1987 and 1991.2 billion cu/m from 15. However. However. estimated Since associated gas currently accounts for the bulk of Libya's gas production the is tied largely to the rate of crude oil production. following a find made at Hamada on Block NC-169 in made the GhadamesBasin.2% in 1992 from 23. Table 4. 85 . fell by 8. the official estimate that remained constant at only 728 billion cu m since 1987. before that. of which about 6. non-associatedgas output will receive a boost in the coming years by the development of several new output fields.

10 inch gas line to carry the Abu. it awarded a contract worth US$175 billion to Snamprogetti and Bonnati of Italy for the construction of a gas production and treatment plant. where the country's main onshore gas structures are concentrated. Agip NAME. there are also some 10 non-associated gas structures. Meanwhile.Oil and Gas Industry Develonment Chanter Four The biggest offshore structure being developed is the Bouri field. which has estimated reserves of 9-10 trillion cu/ft of gas and production potential of 250350 million cu/ft a day. non-associated Sirte Oil Company is now developing the Attahadi gas field in the Sirte basin.500 billion cu/ft. which the operator. one 75 km long and 12 inches in diameter and the other 25km long and a diameter of eight inches. On the same block (NC41). The plan. Agip NAME is already well advancedwith the development of the AbuAttifel site in the Sirte Basin. Several other projects are underway or have been completed for recovering associatedgas from oilfields. for feeding into the coastal pipeline system.Attifel plant's output of natural gas liquids north. In mid-1991. the Arabian Gulf Oil Company (Agoco) invited companies to bid for Phase 1 of the al-Nafoora gas utilization project. covering a gas compression station two gas lines. The project calls for the installation of a 36inch gas line to carry the field's output to Marsa El"Brega. which was inaugurated in September 1993. is planning to bring into production as well. with Sirte Oil Company currently produces some 725 million cu/ft a day of associatedand gas at five fields in the Sirte Basin. Then in October 1991 Agip awarded a US$432 million contract to Bonatti for the construction of a 132 km. In mid-1992. which contains associatednatural gas reservesof an estimated 2. 86 . has a processing capacity of 3.5 million cu/m /day and a production capacity of 300 million fllday gas is injected in the Zuetina 103-D field.

host countries benefit from being exposed to best international practice in project planning and implementation forced to build up their administrative and institutional capacity. Although the Libyan authorities are eager to attract investment in all areas of the economy . have welcomed private investment in their oil and gas industries.126 million barrels and 1. 7% of world reserves.6 Incentives for Foreign Investment in Oil and Gas Many developing countries. in which they are new roads and typically located. Because they adverse consequences are minimized jobs and business opportunities. create accessto water and power to isolated rural areas.the sector is attracting a lot of interest (Gill. reposition 2005). Libya has to take two dramatic strides towards its stated aim of returning indigenous to its historic peak of 3 million barrels a day and. Although gas reserves are small in global gas. so Libya is as a spectacular opportunity (Anderson et al.construction. the sufficient local communities are crucial for investment projects to have a governments and lasting development. and are Oil and gas investment could be a boom for developing host countries. they have potential to stimulate economic growth and diversification and raise living standards. oil seen has declined due to maintenance and re-investment as a consequenceof production 87 .Oil and Gas Industry Development Chapter Four 0 4. Libya's proven oil reservesstood at 36. Although projects in the extractive industries can have a serious environmental impact and be socially disruptive as well if people must be resettled to make way for them they can make a particularly to the economic development of host countries if their significant contribution through careful planning. growth areasIn 2005. 2003). In addition. 2004). oil production itself as a lead player in the Mediterranean oil and gas industry (Danieus. in one stroke. to make Libya the ninth-largest source of untapped oil and cubic to 3% of world reserves. equivalent terms. tourism and telecoms are the key potential it is the hydrocarbons sector that is attracting the most attention. and often bring generate sizable revenues. Despite high reserves. Partnerships between foreign investors. which lack funds to work alone.491 billion feet of natural gas. rich in natural resources. Exploration licenses cover only one third of the country's surface area.

This unprecedentedstep was explained by the Libyan authority's desire to American oil companies to begin work in Libya after an estrangementof 3 entice decades. Libya wants US$30 billion in foreign investment to hike by 40% to 2.347 1993 1.432 2000 1.5% a year and so Libya has an urgent need population to provide work opportunities. Although production Libya is still largely unexplored. which were imposed by the UN nearly 10 years ago.Once the American investors returned.395 2005 1. recent finds have been modest.361 2001 1.8).1 billion barrels a day over the next five years.8 Libya Crude Oil Production (1990-2005) t-000 Will Year Production Year Production 1990 1.389 1998 1. can spur opportunities.405 1999 1.431 1996 1.580 1997 1.693 Source: OPEC Annual Statistical Bulletin 2005 88 . The global oil oil industry's activities are expanding which.287 1992 1. The NOC will award no more than 40% of the concession to any foreign oil discovery company. the Libyan absorb has grown more than 3. However. most promising Table 4. create work and the increasing numbers of youth looking for work. Libya needs to acquire such technology particularly employ it on these programmes. It has been hindered in the past by the sanctions and Libya has a pressing need to increase exploration activities and to compound the experience and acquire knowledge.390 2003 1. to be disseminated at a local level. this percentagehas declined in some contracts to less than that.449 1991 1.200 1995 1.Oil industry technology is considered complex and develops rapidly.394 2004 1. Today it is less than half this level. needed Therefore suitable foreign investments along with local investment representa major factor in the activation of oil industry schemes.Oil and Gas Industry Development Chapter For the economic sanctions. particularly in the oil sector which has become the sector (see Table 4. a major obstacle for Libya in the oil sector. Sustained capacity stood at 3.3 million barrels per day in the 1970s.323 1994 1. they brought with them the urgently funds for oil development. In addition.389 2002 1.

in the long-term. It represents than 50%. Also. Political upheaval and short-term oil policies have done a great deal to create difficulties. uninterrupted and ever increasing financial strength and political power in the international arena oil earning. improving workers' skills reducing production costs. The productions of ethylene. There is a significant need to increasethe size of investment. despite long-term government plans to instigate such growth. unprecedented production. Thus might also far.7 Conclusion The most acute problem faced by the Libyan authorities since the revolution has been the unreliability of oil revenues. especially foreign investment in this sector. and on taking significant steps to reform this sector. in oil prices. notably PVC. This problem has been largely of their making. concentrate These steps include the creation of modern infrastructure. The urgent need is to increase production to previous and levels in as short a time as possible. the natural rewards for Libya's efforts in overthrowing the old oil pricing seemed order. The oil sector is are employed considered a promising sector. The hydrocarbon industry has undoubtedly reshaped the economy and life of the state. more than 20% more in the oil sector from the total Libyan employment. wealth. 4. it was said a new era was dawning. fertilisers or refined lubricants typify such developments.Oil and Gas Industry Development Chapter Four The hydrocarbon industry in Libya is confined to "upstream" activities. the production and processing of oil and gas. The significance of the oil sector The oil sector plays a critical role in financing government revenues. so authorities should pay more attention. and recently. Such industries might include a diverse range of products. which will lead to a rise in These commitments must be made during the recent. "Downstream" activities have not developed. be produced in the early stages of such downstream development. Then. Libya was significant in bringing about the first oil price shock in 1973/74. that is. Synthetics. has contributed 40-50% in GDP. no progress has been made on such developments. There is also a pressing need to establish a strong chemical surge 89 .

there is a backlog of discoveries to develop and the possibility of enhancing from some of the other major fields that have seen very little investment production for 20 years. Meanwhile. which depended on raw crude oil. Libya's oil sector deteriorated. Challenges ahead Despite the brilliant successachieved in the oil industry. Libya reopened its doors to US companies following the lifting of sanctions. as a authorities result of the UN sanctions. This challenge is not new. The most fundamental challenge facing the is to increase oil production capacity. combined with a focus on improved oil recovery projects. This number will be a high priority and a challenge at the same time. rising prices and the current thin cushion of spare oil production capacity have resurrected an old worry. Libya faces a significant challenge related to production. to aid in the target of economic diversification.Oil and Gas Industry Development Chapter Four industry. However. This number depends on a exploration. Indeed. Libya hopes to reach the 3 million barrel a day target. a number of successful licenses have accrued and it is anticipated that new discoveries will start feeding into the development queue by 2007-2008. 90 . It successful is still early days for the reopening of the Libyan oil market and it remains to be determined how rapidly activity will pick up.

Industrialization and economic and 91 . etc and the manner in which non-renewableresourcecould be manpower. The Libyan economy is which reflect dependent on oil exports. The of oil-exporting. raw-materials utilisation infrastructure. but in the industrial field as well. The hydrocarbon industry has undoubtedly of reshaped the state.which will lead to self-sufficient objectives How does a long-term strategy for optimal exploitation of the and self-sustainedgrowth. conservedfor future generations.Libya's Economy From Dependency to Diversification Chapter Five CHAPTER FIVE: LIBYA'S ECONOMY FROM DEPENDENCY TO DIVERSIFICATION 5. owing to the steep rise in oil at in 1973-74 was a turning point.Most of the economies utilization and upgrading of developing countries exclusively depend on oil export revenue. together with the inadequatephysical social infra-structure limit the developmentprocess. small size of the market and sparsepopulation. not only in the socio-economic and political life prices Libya. historical ideological factors. with the share of crude oil and natural gas in GDP exclusively 50% in 2005. which is one of the dominant structural also examines of the whole economic developmentprocess. natural resources. capital. land.1 Introduction Development planning in Libya has been shaped by a range of institutional. e. The significant increase in export earning.fit into the concept available diversification or self-sustainedgrowth? Any rational policy for resource of economic has to take into account the factor endowment. i.especially the non-renewableresources. ' has bequeathed planning models and structures the strong desire to develop the country. This chapter outlines the evolution and objectives of developmentplanning in the stateit the accelerating diversification.The transformation of this structure from oil-dependent development to self-sustained growth lies in the mobilization of efforts for the full the indigenous productive resource. The particular path to independence adopted by Libya. coupled and with its distinctive political structure.

Each decision in turn leads directly into others regarding the scale and pattern of diversification and hence the choice of specific fiscal. skilled manpower. to be best suited to Libya's long-term interests.Libya's Economy From Dependency to Diversification Chapter Five development depend on imports and technology. and administrative expertise from industrially developed equipment and managerial countries. monetary and trade options. the right choice perceived development processstrategy for Libya is significant for two main reasons:First. In particular. Diversification policies have beena central leitmotiv of the developmentdebatein recent years (Masood. the machinery and equipment. With most of the state infrastructure. for accessto alternative sourcesof revenueand jobs has thus underpinnedattempts need to wean the economy away from its dependencyon oil and gas. development plans have focused on the need for economic diversification but planners now accept that the long-term growth of the economy depends on a more diversified economic base. The threaten national revenues. being imported. dependencyhave become increasingly acute and make the problems of such external economymore vulnerable to shocks. 1989). Planners and underlined alike are aware that a prolonged slump in prices and production would political analysts increase unemployment and create political instability. on the use of income from oil revenuesfor current consumption or for future exports and The allocation of oil receipts must be used to improve domestic real capital generations. is how best to transform a dormant pool of but finite oil reserves into a permanent flow of present and future income valuable to raise its standardof living. and conservation. formation (including social infrastructure). which faces Libya. machinery. oil of 92 . intermediate materials and even labour. The basic problem. The domestic policy implications of this objective needed involves a series of decisions regarding the level of production. Moreover. in an attempt to reducethe heavy reliance on oil and gas revenuesand returns from overseasinvestments. The need for accessto alternative sources of income and employment has also been by the medium and long-term fragility of the oil economy.

delayed completion of projects. cannot be relied on as a perpetual to finance. economic cultural background. A second section will investigate the diversification rationales the sectorswhich can becomealternative resourceincome and considersthe processand for sustainableeconomic diversification in Libya. higher standardof living) cannot economic (i. inflationary cost overruns. prospects 5. seems to raise questions about the appropriatenessof the and developmentmodels. Libya under a different political regime.which underwrite development activities.The first section examines the backgroundof the previous development plans debate and more particularly. 93 . economy At the time of the first boom in the early 1970s. income gap. overcrowding. and social tension).2 Diversification Concept Economic diversification means heavily reducing dependenceon the oil and gas sector by developing a non-oil economy. be ensured. urban pressure. chosen This chapter is divided into two sections. owing to the non-renewablenature of oil deposits. and an averageof 95 % of exports and government revenues. development (and its expectedcontaminant.Libya's EconomyFrom Denendencvto Diversification Chanter Five revenues. it also means reducing the leading role of the public sector in the Libyan by promoting the growth of the private sector. These "revenues" source continuous streamsof future income flow. non-oil exports and a non-oil revenue source. By implication. the Libyan economy had basic which hindered balanced economy growth. This included heavy characteristics dependenceon oil production and exports. a scarcity of natural resourcesother than hydrocarbon.the startling similarity in undesirableconsequences e. but rather a "cashed" value of a given are not stock of capital that is transformed from one form (oil reserves) to another (financial Unless these assets are further transformed into a sustainable revenue base.Second. assets). outlines some of the behind those plans. a limited domestic labour force and the initial lack of tradition of The oil sector accounted for more than 30% of the gross domestic product enterprise. (GDP).

particularly in the middle of the 1980s. as well as growth of Some modest progress has been made in privatization so far. the economic diversification processwas driven by a senseof uncertainty about the duration of the first oil boom. also During the last three decades Libya has pursued the above objectives with varying degreesof seriousnessand success. In addition to the continued expansion of the physical and social economic infrastructure.in the Libyan economy and made economic diversification one of the basic priorities of policy. The momentum of the process of and diversification has also varied over time. the development of petrochemical resources (albeit a heavy cost in terms of agricultural subsidies) and the agricultural the services sector. In recent years. a wide base of manufacturing industries. agriculture and services.There have been many impediments. manufacturing tourism. Subsequentsharp fluctuations in oil prices during the 1980sand outside 1990sgeneratedconsiderable instability.the limited human resourcebase the scarcity of agricultural the effective absence of a financial market. among them land and water resources. Increasing emphasis has also been placed on education and more recently. including financial services and. tourism. economic diversification in Libya has to encompassthe development of heavy industries. particularly petrochemicalsand basic metal industries. as well as other industries. to reduce the very large increase in the size of the expatriate for the non-oil training economy. Some of the main results and achievements of the last few rising decadeseconomic diversification efforts have included the establishmentof a successful industry. although the diversification back in force as a prime objective during periods of failing oil prices and priority sprang budgetary deficits. there has also been an increasing trend to relax and remove restrictions on foreign investment (Law No 5/97) in a bid to encourage such investments in diversification 94 .Libya's Economy From Dependencv to Diversification Chapter Five Initially. this was accompaniedby a rush to develop physical infrastructure in order to provide a basis for the development of the economy and social the oil sector.the domestic subsidies and the development of non-oil revenue sourceshave reduction of beenamong major statedobjectives of economic diversification plans. Periods of rising oil prices and revenueshave distracted Libya from pursuing economic diversification. including financial servicesand offshore banks. Privatization of public utilities and other government-owned enterprises.

`Diversification is the biggest challenge for Libya. and create jobs to meet the demands of the rapidly production and export increasing labour force. Within the to cater to the Libyan economy. however. (ii) the continuation of efforts to improve the legal and regulatory environment. as it implies sustained efforts to and medium-sizedenterprises in order to expand the country's non-oil promote small bases. and the awakened need to develop and diversify the traditional economy that lay beyond the rapidly growing hydrocarbon In the last three decades. economic diversification basically means context of development of the non-oil sectors and the reduction of the proportion of government from oil and gas. the economic instability inherent in the heavy dependenceon oil exports. since the first oil boom in the 1970s. central The International Monetary Fund (2006) noted that. in spite of the sharp rise in oil prices in 2006. it also means revenuesand export proceeds the public sector in the Libyan economy an objective which is reducing the role of to the ongoing efforts to restructureand liberalize the economy. 'pp 48 country's 95 . including the reform of the labour code.this policy has been pursued as a strategic objective. to sector.Notwithstanding moderateachievements projects and the last three decadesthere is still more to be done if Libya is to break away from its of heavy dependenceon oil and limit the impact of future oil price fluctuations on its The immediate challenge is to maintain the momentum of the economic economy.It was initially dictated by fears about the limited life of oil and gas reservesthat had brought the Libyan people sudden wealth. and overcome the rapid growth of the native Libyan population and labour force. Policies to expand the production baseshould be centred on (i) land reform. By implication. diversification policy's structural reform programmes. therefore.N Libya's Economy From Dependency to Diversification Chapter Five to expand local financial markets. `Economic diversification' has been the by-word and catchphraseof economic policy in Libyan economy besides economic self-sufficiency. and (iii) the reform and consolidation of the judicial system to streamline and speed up conflict resolution and improve the private sector's confidence in the legal institutions.

8 Develop an adequateand comprehensivenational system of education.3 Economic Development Objectives Common to all previous plans is brevity and lack of coherence. 11 Increase the economic development rate. in all Three Development Plans. the same precision fourteen points have been repeatedlystressed the objectives for development. 7 Achieve a more equitable income distribution. adequate 10 Provide adequatepublic servicesthrough: (a) Improved communication means.and sanitation facilities to all areasof the country. 12 Provide adequate power facilities. 96 . Maintain a relatively stable price level. sewage. Indeed. 9 Develop a comprehensivesystem of national health services to provide facilities to raise. 13 Encourage and promote private sector participation in all aspects of national developmentprojects. This can be seen from the no one overriding following fourteen specific objectives in the national development plans adopted by the government: 1 Diversify the economy and reducedependencyon oil. Raise per capita income through an increase of productivity.There is as development objective linking the others. 2 Reduce marked disparities in the prosperity and growth of different areas and in the country. (b) Adequate water. regions 3 4 5 Maintain a high level of employment.the levels of all aspectsof public health. (c) Drainage and irrigation facilities for agriculture development.Libya's Economy From Dependency to Diversification Chapter Five 5. 6 Encourage and foster good industrial labour relations to achieve increased efficiency and higher productivity. There is also little in the plan's objectives. 14 Increase and improve the standard of living and advance the quality of education.

any development initiatives.000 new jobs under the 2006-2010 plans.which startedin 1992 and lasted until 2002 resultedin the deferment of many projects. apart from the mining sector. objectives the absenceof feasibility studies and many other reasonsaccount for the credibility. Postponing would create the government more than 25. So far none of these have been achieved. Despite a long-standing pledge to poor performance of diversify the economy. have been postponed. Libya's progress in some major development areas. It is impossible to assess the success of Libya's plans in the absence of any development reviews since 1973. and designationof responsibilities. essentials capital important developmentdata.Libya's Economy From Dependency to Diversification Chapter Five The main problem with all national development plans is that they do not suggest how. the structure and characteristics of the economy. which the government plans encourage. the future employment patterns. Unemployment was increased to reach 20% in 2004. Implementation of agreeddevelopmentprojects. plans. these objectives can be met. whose functions include: (i) (ii) (iii) The formulation and revision of relationship developmentplans. the lack of responsibility. Perhapsthe UN sanctions. or at what pace. These plans are also missing the information. It was clear that there was a contradiction between the General Council of Planning and the Ministry of Planning. predicted decision not to go aheadwith the refinery and petrochemical complex in Sebha. General Council of Planning. In addition. Perhaps. and Moreover. In an attempt to streamline its development the government created the Economic Planning Ministry and later the policies. It was anticipated that the above projects affecting more than 20.000 new jobs.including projects. neither had ever assessedand revised previous it seemedthat any new plan would be an exact carbon copy of previous ones. will create thesejobs. such as electricity power and railway projects. Vital to create many job opportunities. commitment. has not been very impressive. The government has not them cost indicated which other productive sectors. the government's methods and private machinery to promote ambitious 97 . and is prevalent through the country. Co-ordination of technical assistance activities.

whereas the number of non-national workers 98 . the industry and agriculture.900 workers in 1975.5% between 1972-1975. Also. with a focus on the industry and have a clear impact on other non-oil economic activities.9% to 49. which to äccomplish a real grossproductivity growth rate for the national economy with aimed 36. in the transformation industry. to the growth rate of some of the main economic activities. This 1973-1975 plan was generated a change in the national economic structure that benefited the non-oil aimed at creating activities. in particular. As a result of this. a rate of In the agricultural field. This goal derives its accelerate strength from some of the main economic activities. the percentage of share in GDP was increased from 2. to meet the people's needs.3% to 3. Thus the plan fulfilling intention of creating a diverse economy.5%. forest and fishing sectors. based in the industry and agriculture. the oil exploration share of GDP declined from 57. needless 5.4.8%. the plan aimed to achieve more job opportunities for an estimated 125.4% between 1972 and 1975. The only positive worth mentioning was the man-maderiver project.1 The Third Plan 1973-1975 This strategy planned to achieve maximum economic growth rate. The plan was to increasethe number of national workers from 557.000 in 1972 to 682. It was a modest success achievement to say. it doubled the income gross from non-oil economic activities within four years. this rate of growth enabled the real domestic income to double within seven years. Moreover. On the other hand. In the agriculture. the percentage was increased from 2. and. the plan aimed to achieve self-sufficiency in the production of food-stuffs.4 The Development Plans: A synopsis 5.Libya's Economy From Dependency to Diversification Chanter Five development were inadequate.900workers. This structure saw a rise economic in non-oil economic activities from 42. with less dependence on oil activities. it was implementedby foreign workers.0%. Furthermore. any abrupt changes in the lethargic pace of development would not be well received by the elite authorities.6% to 3. The plan agriculture.2% to 50. in particular. Also.

which reflected the policy-makers intention to 99 .755 0. due to the workers increasedfrom 2. ministry Planning.5 1 502. These achievementsfell in line with the main purposeof the development.749 13.8 2 177.638 1 782.2 shows.Libya's Economy From Dependency to Diversification Chapter Five increasedfrom 80. and electricity 21%. The agriculture and national industry sectors had the lion's share.1 illustrates.5%. the other activities for the whole gross product increase 58. economic Policy-makers and planners aimed at finding a diverse economic base.8% planned period. 2 125 1 784 2 379 0.which aimed at emphasizingthe importance of fast development economic those production activities that had a considerable responsibility in expanding the of diversification base.8 1 330.893 0.000) 1975 Rate of growth% 1973 Gross Domestic Product in million Gross National Product in million Population (.4% in 1972 to 41.0 0.379 million in the 1975.3 Development for the third Flan 19 /i-1 y /J.5%.5 8.0 12.8 0I 1 573. transformation industry 24. with rate of growth 35% over the the shareof gas and oil in GDP declined from 49. construction rate and were as 23.8 2 084.1 Economic Goals in the Third Plan (1973-1975) Details 1972 1973 (.000 workers in 1972 to 133.5 8.2% in 1975 (Ministry of Planning).800 workers in 1975.8 4. which the economy could rely on as an alternative income to oil. the non-oil economic activities witnessed a considerable growth follows.818 689 .2 20.000) Per capita from GDP Per capita from GNP Source: Social and tconomic 1975 35. agriculture 4. At the same time. The GDP reached 2125.084 million in 1972to 2. Libyan Arab Republic As Table 5.0 33.0 14. in 1975.2 dinar in 1971 to 893.The GDP population had been increasedfrom 755.5 million dinar in 1975.5 18. as Table per capita 5.2 dinar in 1975.5%. reached Table 5.0 0.

6 2. whose plans aim to provide housing for all Libyan people.1 1.6 1.8 54.2 6.9 11.9 45.7 3.8 3.8 0. Libyan Arab Republic The facilities sector saw a continuing increasein spending.1 Overall Total Oil and gas exploration total. saw only moderate spending.1 0.0 Electricity and utility Construction Wholesale and retail trade Transportation and communication Banking and insurance Housing property General services (except education and health) Education services Health services Other services 0.2 4. The sector.0 16.7 0.8 15.0 11.0 100.0 3.3 1.Libya's Economy From Dependency to Diversification Chapter Five found a diverse economy dependent on multi-productivity economic activities. Other activities total 100. and the construction sector.1 3. The research and 100 . Ministry of Planning.1 0.7 11.9 4.5 11.4 5.2 Source: Social and Economic Development for the Third Plan 1973-1975.4 1975 3.4 0.9 1.9 4.0 49.7 1.also received a significant attention form the decision-makers.2 4.5 5.0 100. while the oil sector.2 Structural Change in Gross Product in the Third Plan (1973-1975) Percentage Activities Agriculture.6 1. which is highly dependent on other sectors.2 41.8 0.8 58.9 49.9 1. forest and fishing Oil and gas exploration Mining Transformation industry 1972 2.6 5.5 45.4 1 50.1 2.2 41.1 3.3 1973 2.1 1. communications Table 5.

particularly in the transformation industry. furthermore.6% in 1980.4. particularly in industry and agriculture.1% in 1980.Both the third plan and the fifth plan (1976-1980) made remarkable changesin the national economy. agriculture. For .Libya's EconomyFrom Dependencyto Diversification Chapter Five development sector also saw modest spending over the plan's period. and the example. createa 5.particularly the share industry and the agricultural sectors. The aim was to diversified economy. economy. The non-oil sectors raised their substantial amount due to the investments' incentive implemented in different sectors. It implemented an investment incentive aimed at creating a diversified based on industry and agriculture.through this strategy.-The policy-makers the industry sector had 3. So the agriculture sector was decision-makers aimed to accelerate the share of the main non-oil sectors by a through development programmes. through amending the economic structure. 4. providing an appropriate and convenient form of support for the and servicessectors.It aimed to generateand create income in the near future and could result in a significant modification of the economic structure. non-oil dependent.5%. 101 . to one that is dependent on product one diversification. altering economy from that is highly dependent on oil revenues. target was to increasethe non-oil sectors. different sectors.and their sharein GDP.2 The Social and Economic Transformation Plan 1976-1980 The third plan focused on the productivity sectors. and housing.the non-oil sectorsincreasedtheir sharein GDP to 54. transportation and communications.8% of GDP in 1975 and 9. the infrastructure which generates electricity. This considerable investment reflects the determination of the authorities to reduce The investment policy was targeted at redistribution among reliance on oil resources.8% in 1975 with expected figure at 5. As a result of the oil price decline in 1980.

1 Mining Transformation industry Electricity and utility Construction Wholesale and retail sale Communication and transportation Finance and insurance and business Housing property 1.6 9.6 22.6 23.4 13.1 4.3 6.8 7.7 100.0 11.0 1. The table shows the considerable amount which was 102 .0 8.Libya's Economy From Dependency to Diversification Table 5.9 9.5 100.3 2.2 General services ( except education and health) Education services Health services Other services Real gross product for non-oil economic activities Non-oil activities (except generals education and health) services.0 25. General Popular Committee for Planning (First part). Table 5.0 6.4 78.7 1.4 6. 1981-1985.1 6. forest and fishing 1975 start figure 4.2 3. education and health Source: 6ociai ana tconomic 25.4 General services.1 12.4 illustrates the volume of spending and distribution of the real aggregate investment which was implemented by the Economic Productivity Plan.8 8.6 21.4 1.1 3.5 1980 expected 5.7 100.0 1.3 Structural Change in Economic Activities (1976-1980) Chapter Five over the Transformation Plan Percentage Economic activities Agriculture.1 lranstormation Plan.8 68.2 0.2 31.2 16.5 0.2 5.8 1. 15.0 74.1 19.8 1980 actual 3.1 19.1 5.3 5.1 10.8 7. comparedwith the volume of spending and the planned distribution of the Social and Economic Transformation Plan 1976-1980.

1 6.2 305.5 1979 169.Libya's EconomyFrom Dependencyto Diversification Chapter Five and industry to accomplish a set of agriculture and industry spent on agriculture alongside many other projects in Libya.4 939.1 0.5 319.6 31.0 212.3 13.4 42.9 955 619.6 217.4 0.3 186.4 12.8 19.0 Housing property General services (except health ) education and Educational services Health services Other services Total 228.1 205.1 143.0 183.3 118.9 1978 185.2 911.6 1149.0 2.8 227.8 205.1 212.3 159.5 2.6 33.8 203.7 24.8 17.3 168.4 68.9 31.4 1208.9 0.3 1.5 29.3 6.1 1236.2 50.8 0.5 Total 888.4 Fixed Capital Formation by Economic Activity in the Social and Economic Transformation Plan (1976-1980) Million dinar Economic activities Agriculture.5 80.2 100.2 74.4 129.0 53.6 1118.4 2.0 6404.5 134.6 100.0 1977 169.3 156.9 68.6 148.8 Oil and gas exploration Mining Transformation industry Utility and electricity Construction Whole and retail sale Restaurant and hotels Transportation communication Finance.9 1980 201. 6.6 207.7 19.1 15.8 0.8 10.9 .2 39.1 Source: Social and Economic Transformation plan 1981-1985 General Popular Committee for Planning (First Part).4 1530.7 196.1 63.8 62.3 32.2 1. real estate and insurance (except housing) & 22.4 100.5 1. 103 .7 336.8 1.0 129.4 104.8 1.5 168.1 1.1 4. fishing forest and 1976 162.6 1.2 33.6 2.9 137. objectives Table 5.7 29.3 28.2 148.6 25.0 1280.

5 10.2 23.000 with an increase rate of 4. with an increase 677.9 532. Table 5. there had been significant developments.7 3.3 The Transformation Plan 1981-1985 The transformation plan 1981-1985 saw an accelerated shift to reliance on non-oil in the dependencyon oil. It rose from 35.2 488.Libya's EconomyFrom Dependencyto Diversification Chapter Five In terms of workforce.0 677.000 in 1975 to reach 532.1 532.4.7 3.8 Source: General Popular Committee for Planning.9 3.8 280. it can be seenthat Libyan women were introduced to the work force and causeda significant change in the Libyan work market structure.7%.5.1 3245. 1981-1985 The non-Libyan workforce increasedfrom 223.2 4.6 366.6 562.7 55.7 57. Moreover.8 454. at a rate of 3.2% annually.700).7 78.7 3.5 Population and Workforce in the Social and Economic Transformation Plan (1976-1980) Thousand Details 1975 1980 Increase Annual growth % Libyan population Non-Libyan population Total population Libyan workforce Non-Libyan workforce Total workforce Workforce male Workforce female Total Libyan work force 2316.900 in 1980.1 223.9 58.000 in 1975 to 280. This led to an improvement in the standard resourcesand a cut 104 .800 thousand in 1980 (an increase of 135.4 454.a rise of 75.0 812.100 workers in 1975 to 812.1 74.400 in 1975 to 58.5 reveals Libyan and non-Libyan developmentover the period of the Social and Economic Transformation Plan workforce (1976-1980). The Libyan workforce increasedfrom 454.0 135.7 2.1 418.6 441.5 2804.000 in 1980. Social and Economic Transformation Plan. 5. with an increaseof 23.2 2683.800 in 1980.9 3.8 473.500 as in Table 5.7 35.5 78. Table 5.8 3.

on sectorneeded Moreover.9 billion Libyan dinar. 105 . This gained the maximum benefit from product and through substantial investment. of which 72.300 housing units which had beenbuilt in the previous plan. with the rest financed by Libyan government revenues which comes from tax.7% was financed by oil revenues.4. skilled workers.200 housing units in addition to national economic 80.5 billion dinar. The plan focused on the agricultural sector services in essentialfoodstuffs. the plan built 206. This sector played a crucial role. However. technicians and skilled the main obstacles that impeded the transformation process. which had a direct influence on this plan. Moreover. particularly outside the cities.Libya's Economy From Dependency to Diversification Chapter Five living through accomplishing this ambition by concentrating more on industry and of Furthermore. expand the industry sector. it aimed to improve productivity ability. In workers represented to the plan's target of accomplishing a suitable growth rate according to the addition requirement. the most important of which were lessening the dependency on oil and gas revenues and increasing self-sufficiency. as Libya aiming self-sufficiency imports more than 40% of its goods and services. The productivity of the agricultural to be increasedand the dependence foreign imports neededto decrease. had been given a high priority. the most important of which was the sharp not accomplish decline in oil prices (which reached a low of US$12 per barrel). In brief. the plan gave more attention to the education sector due to the deficit in could have a crucial role in the economic transformation process. to volatile government alongside the considerable volume of carry-over liabilities. it achieved greater dependenceon goods and services which agriculture.4 The Plans 1986-2000 The Social and Economic Transformation Plan for the years 1986-1990 was allocated 10. which The deficiency in the vocational managerial cadres of teachers. which accounted revenues for more than 4. employment 5. the plan did this for several reasons. Another factor was the lack of clarity in the most important policies. ultimately. and focus on incentive training of the workforce and the creation of opportunities. the plan targeted the traditional sectors to accomplish many goals. The oil price fluctuations lead.

The planned project concentrated on the previous goals. previous It could be said that after 1986 there were no clear development instead an annual expenditure plan on economic development was set up as.2 billion dinar was allocated for this plan and.6 illustrates. Moreover.2 billion dinar came from government revenues and borrowing and the rest (5 billion dinar) came from oil revenues. monetary and trade policies.Libya's Economy From Dependency to Diversification Chapter Five Furthermore. and the creation of jobs. the 1996encountered 2000 plan was set up as a lead-up to prepare for new development. of this amount. The available data indicates that this plan did not achieve the targets. self-sufficiency. In addition it focused on investment and pricing policies. 1. 5. without given to further financial. 106 . diversification. table plans. The set up framework was established with 76% of the funding from oil revenues (about 3. 6. a social and economic transformation plan for the period of 1991-1995 was as the first part of a `comprehensive mobilization framework' for 1991-2000.1 billion dinar) and with 24% of finance from the government revenues and borrowing. particularly with regards to paying liabilities. None of the any consideration objectives were accomplished due to the high level of difficulties above which were with the Transformation Plan in the period 1986-1990. but most of the goals in this plan were supplementary to the current projects and paid off the previous liabilities and maintenance for earlier projects' assets.

0 66.0 0.7 10.0 28.3 145.0 0.0 844.0 343.0 70. Social and Economic Indicators 1962-2000 107 .0 270.0 18.1 6.0 4.0 275.0 136.0 75.8 140.0 82.4 1700.5 156.6 10.0 Sources: General Planning Council.0 133.0 0.0 900.6 270.0 204.0 0.0 57.8 3.0 26.0 10.3 6.0 203.0 12.0 5.0 13.0 88.0 160.0 70.0 42.0 0.0 5.0 8.4 267.0 0.7 98.0 619.0 188.0 22.0 31.1 28.0 1170.Libya's Economy From Dependency to Diversification Table 5.0 0.3 77.5 38.0 12.0 10.0 80.6 Transformation Budget Appropriations Chapter Five by Sector (1986-2000) (Millions dinar) Sectors 1986 1987 1988 1989 1990 1991 1992 Agriculture Industry Oil & gas Electricity Education & research Media & culture Vocational & training Health & social care Sport Housing & facilities Transport & 212.7 360.0 476.0 7.0 170.1 10.3 347.0 1.0 80.3 20.0 70.0 30.0 29.0 0.0 6.0 0.0 6.0 1005.0 0.5 70.0 0.0 0.1 273.3 207.0 4.8 140.0 8.0 1450.0 30.0 100.1 8.1 36.0 0.1 64.5 5.1 5.0 5.6 1855.0 19.4 8.0 224.9 130.0 4.0 76.2 100.0 75.2 160.9 60.0 141.0 0.5 97.0 70.0 12.3 95.0 0.0 19.1 communication Economics Planning Origins development Seawealth Justice & security Working groups Project reserve Total 25.5 30.0 115.0 6.4 2.0 133.5 20.0 0.0 12.0 0.3 53.0 12.0 2035.0 4.0 139.6 8.0 0.5 5.0 2.

0 1008 12.0 0.6 172.9 71.6 13.0 0.6 1907.0 59.8 Health & social care Sport Housing & facilities Transport & communication Economics Planning Origins development Sea wealth Justice & security Working groups 0.8 29.0 126.0 20.1 138.5 95.0 125.6 4.9 17.0 77.8 50.7 132.3 21.0 80.0 13.0 90.0 82.3 0.9 61.0 100.0 6.0 36.5 125.9 46.0 5.5 1748.0 895 1962-2000 13.0 735 9.7 30. However.4 169.0 57.1 77.0 20.5 sources: venerai riannmg 2.1 108.0 50.0 5.8 112.0 6.0 40.8 84.3 15.0 484.0 60.5 107.7 Transformation Budget Appropriations by Sectors (1986-2000) (million dinar) Sectors 1993 1994 1995 1996 1997 1998 1999 2000 Total Agriculture Industry Oil & gas Electricity Education & research Media & culture Vocational & training 71.0 98.5 0.0 1765 141.0 0. 2.0 145.0 21.2 63.7 251.0 0. the sharp decline in oil proceeds had a significant effect on 108 .0 95.7 24.4 20.5 8.6 249.4 2634.0 0.3 17752 100.0 5.0 23.0 100.0 40.0 182.0 6.0 8.3 17.6 3540.0 85.1 9.Libya's EconomyFrom Dependencyto Diversification Continued.7 75.9 256.0 3.0 130.6 7.7 75.9 20.0 51.0 137.5 2.4 82.0 6..9 40.4 101.0 10.8 115.5 1538.2 65.0 12.5 350 889.0 348.0 83.2 8.0 0.0 50.0 50.0 8.0 0.0 100.0 120.0 27.0 70.9 10.0 13.1 1323.8 168.9 890 Louncii.4 12.0 60.4 103.0 158.9 115.0 3.0 3.0 0.0 0.1 100.0 4.2 7.0 0.0 14.0 30.0 0.9 165.5 0.0 1073 14.0 24.0 0.0 60.. Chapter Five Table 5.0 5.7 1586.1 132.7 345.0 10.0 63.2 7. due to government reliance on these two sectorsto instigate crucial share of diversification (an alternative resource to oil revenue and the main goal of diversification).6 88.0 105.9 261.2 81.0 50.0 785 Project reserve Total bociai and Economic indicators From the above table it can 'be noted that industry and agriculture received the lion's the budget.0 5.0 0.2 20.0 149 20.0 0.9 9.0 97.0 10.

(ii) the over-aspirant goals.3 million dinar and subsequently. sector 109 . the state did not want to increase on expenditure on the development plan by borrowing abroad. the oil spent on still dominated all sectors. agriculture had only 120. Although the oil sector contributed a million to gross domestic product.2 critical share dinar.9 dinar and 26 million dinar respectively. The government concentratedon amount.Libya's EconomyFrom Dependencyto Diversification Chanter Five the development of economic expenditure. but then increased to 77. (iii) the lack of from policy-makers and the financial and economic decision-making real commitment on the development.1 million dinar in 2000.4 million dinar and industry just 201. it reached its lowest point in 1986 at only 1. increasing annual expenditure on housing and facilities and the government was given the amount of 2203.in 1995 they received 5. which was a modest million relative to its percentageof GDP contribution. In 1986. Despite the huge amount expenditure development programmesto increasethe non-oil contribution in GDP. There is no doubt that the sharp decline in expenditure on the Social and Economic Transformation Plan. For example. attributed to oil revenuesacute decline could be ascribed to and from: (i) the sharp decline in the oil price in the mid-eighties and nineties and resulted the negative effect on government revenues.5 million dinar over the planned period 1986-2000.

2 457. restaurant and 1116.5 604.0 458.1% Source: General Planning Council 2003 110 .1% 100 39.8 2892.8 721.3 6960.7 2.4% 6.0% 9.9 29.0 3.6 492.2 236.8% 5.5 457.2 % 6.3% 3.3% 2.6 % 5003.6 636.3% 4.2% 11.8 6180 1570 252.5% 645.8 % 37 % 58.4 8.6 450.5 and 484.1% 2.9% 1992 630.8% 5% 10% 203.8% 5.8% 304.5 1.0 1.6 0.2 8246.8 5.9 70.2 1570 25.2% 84.2 3.6% 125.2% 2.8% 1994 827.7% 8.4 % 423.8 133.3% 272.5% 100 645.3 4.4% 6% 137.2 413.3 % 6.2% 100 25.8 184.4 % 1.0 1148.7 31% 2892.5% 100 37.7% 7.0 3243.8 7.8 6.6% and fishing Natural gas and oil 2595.Libya's EconomyFrom Dependencyto Diversification Table 5.7 5.9 62.9 6.2 1133.6 544.1 359.5 1.9% 8.7 2.3 219.5% 9. forests 1986 384.6% 7.3 % exploration Non-oil economic activities ° 74.9% trade Transportation communication Business.0% 804.7 3.1 2.9 5.4% 2.4 859.1% 11.1 3.8% 747.9% 588.2 68.4 103.9 % 5.7% 2.6% 223.5 % 1988 423. insurance and money Housing property Administration services Education services 428.0% 1 .3 % 4364.4% 100 29.7 152.5 39.1 5.8% 1990 482.6% 333.1 205.2% 123.4 555.7 % 9.9 397.5% 237.8 789.5 3.3% 2925.4% 105.2 9231.5% 248.3% 5.9 % 8.0 1.7 gas and oil 2595.1 383.4% 308.3 % 1.4% 2.7 31.0% 6.9% 2.4% 6.6 2055.8 Economic Activities' Contribution Chapter Five to GDP.6% 6.5 179.2 8.9 9670.8 926.6% 1.5 233.7 174.7% 6.6 7.0 1.8 2.7 % 4616 515.1 60.7 % 6777.9% exploration Mining Transformation industry Water and utility Construction Hotels.8 493.6% 12% 360.2% 2.1 482. (1986-1994) (Million dinar) Economic activities Agriculture.7 % 6306.6% 169.3 °/ 544.9% Health services Other services GDP Natural 2925.3 226.1% 5.

2 1.5* 11.5 1488.4 2.9 506.1 6661.9 Economic Activities' Contribution to GDP (1996-2003) (Million dinar) Economic activities Agriculture.8 2.5 100 451.5 " 9.3 100 37.5 5. and fishing Natural gas and oil 3960.2 12610.1 2768.7 7.0 1167.3 275.3 12240.1 921.1 259.1 5.9 1183.7 439.5 420.0 303.5 24981.2 313.6 & 986.9 1348.6 13.9 5.4 481.5 364.4 3.9 2.8 427.0 1 .2 8.4 8.3 295.5 8.1 2089.3 1.2 5.9 713.4 2.4 287.1 5.0 15782.9 187.0 7.2 2.2 28006.9 1.4 3.6 Source: General Planning Council 2003 III .5 232.9 3.8 % 4.2 1252.7 2204.6 2.7 1262.1 5.1 880.8 1087.1 2859.9 1530.5 % 8.1 2910.3 gas and oil 3960.5 702.2 671.2 350.0 442.2 404.5 17620.7 2.7 321.0 37.3 % 11.4 exploration Mining Transformation industry Water and utility Construction Hotels. restaurant and trade Transportation communication Business.7 100 22.0 3.7 1.3 5.4 2.8 2.0 6661.1 4.2 1.6 293.0 2000 1439.0 813.7 1.6 56.5 972.2 1326.2 52.2 52.7 % 8.8 13164.4 534.0 5.6 9.0 43.Libya's EconomyFrom Dependencyto Diversification Chapter Five Table 5.7 7.0 1.9 1.6 100 56.2 2002 % 2003 1375.9 10.1 1429.6 1 -1 77.2 1.7 98.1 1700.3 2.7 6.0 9.7 exploration Non-oil economic activities 8367.0 479.9 1.4 Health services Other services GDP Natural 13164.4 100 32.a eaucation -1 -1 'inciuaing neaitn 67.2 12327.5 12.7 15782.2 1 11817.6 1.9 10959.0 22.2 779. insurance and money sectors Housing & property Administration services Education services 713.2 1 62.0 1.8 2.8 5.6 764.2 382.3 1237.0 2.3 32.0 7.5 forests 1996 1074.2 985.0 515.7 1998 1394.6 291.6 2768.6 6.5 1.0 337.9 9824.0 1712.0 47.9 1.0 414.8 5.

However. the sectorstargeted by the social and economic transformation budget period. improvement in oil prices. agriculture was not more 5. diversification process.5% in macroeconomic 2005.2% in 2000. 5. we find that the saw little improvement in 1986. it could be noted from Table 5. diversification process nevertheless. most plans by changes in the price of oil and reflecting the decline in oil production as a shaped economic sanctions enforced by the US and the UN since 1986. only to decline in 2000 to reach 8. with a peak of 13.5% in 1986.5% in 2000.have shown a poor performance. The consequenceof growth during that period was about 2. and then started a increase. If the oil sector contribution in gross domestic product an increases.2%.Libya's EconomyFrom Dependencyto Diversification Chapter Five In terms of the different sectors' contribution.showed poor performance over the study period.4.1998 and 1999. Whereas the industry sector slight than 5.6% in 2004. followed by a decline to reach 5.7% in contribution was not more 1993. Growth of non-hydrocarbon GDP acceleratedto 112 . the only sector agriculture sector contribution has seena real improvement is in restaurantand hotels.so do the government revenues. startedto suffered a steady increase to reach 6.6%. Their contribution to the gross domestic product is poor.2% in 1986. if we look at the year 2000.5% recorded in average 1991 and downturns in 1994. Real GDP growth was modest and volatile during the 1990s. Overall. which were targeted by the economic main.Any positive increase in the oil price has a despite the level of production remaining stationary over the study positive effect.5 Economic Development in 2000s Macroeconomic performance has been shaped by fluctuations in oil revenue (as with in the past).due to pervasive state controls and the decline was slow and volatile the government's revenues. of Libya's economic performance has improved in the late part of 2005. The dominant sector was which it representeda considerable share in the gross domestic product and was aided by oil.Reflecting significantly higher oil production and prices.9% and thereafter. During the 1990s.7 that the traditional economic activities.then increasedto reach its peak of 7. However. While the construction sector decreasefrom 7. The situation remains strong with real GDP growing at an estimated3. non-oil GDP growth at 3% on average. slightly down from 4. despitethe substantialexpenditurewhich was spent on them.0% to reach the bottom 3.

2005). in non-oil exports is indicative of increasing economic diversification. such as electricity. as this indicates success in the development of new non-oil sources. the objectives of diversification in Libya is to reduce dependence on since one of Another useful indicator here is the rate at which the non-oil revenue oil revenues. The changeis assessed the basis of initial conditions. Generally. base widens over time. Non-oil growth would need to further accelerate on a sustained basis to absorb the labour force which is projected to grow by 3. have remained tame.1% in 2004 and 4. However. since economic diversification in Libya implies 113 W . on of those sectorsover It is also useful to measurereal rate of growth of GDP by sector. (d) The proportion of non-oil exports and the composition of non-oil exports. reinforce changes (f) The change in the relative contribution of the public and private sectorsto GDP.5 Measures of Economic Diversification The following indicated measures may be used to assess if Libya has achieved in the diversification policies. as they could be due to fluctuations in oil prices and exports. Obviously this measureshould reflect and in the sector composition of GDP.as indicated by the per cent contribution of sectorsto GDP and the growth and/or decline of the contribution oil versus non-oil time. (e) The changeof total employment by sector.driven by construction and utilities. Non-hydrocarbon GDP growth was broad-based. reasonableprogress theseindicators can be applied in the caseof Libya. gas and water. Owing to the limited data available.Libya'sconomy From Dependencyto Diversification Chapter Five 4. growths in manufacturing and agriculture transportations and other services. but also trade. hotels. (b) The degree of instability of GDP and its relation to oil price instability. This is an important indicator in Libya. understood (c) The evolution of oil and gas revenues as a proportion of total government revenues. only some of (a) the rate and degree of structural change. however. rt 5. a steadyrise Short-term changesin this measuremay be misleading.6% in 2005. It is that diversification should reducethis instability over time.3% in the years ahead (Central Bank of Libya.

no single.there have not been any mid-term planning reviews. 5. ministries provide an opportunity to evaluate the delivery of the development such reviews would examine the extent to which budgetary provisions have been met. `development' issues remain fragmented between the different of government. Whilst the General Council of Planning retains a aspects degree of control. Nevertheless. development are enshrined has continued to suffer from a lack of monitoring of on-going development planning It may well be that such failures will be less likely. it is also important to look at the relative contribution of the and private sectorsto gross fixed capital accumulation and rates of changes public in this by sector. becauseof data limitations. overall body has been charged with all of development planning.6 Perspectives of the Development Plans Despite the progresswhich has been achieved in the implementation of the development the last three decades. (i) Production measures.Where data availability allows. (g) Pursuant to the above.Libya's EconomyFrom Dependencyto Diversification Chapter Five in the contribution of the private sector to aggregate or presupposesa growth economic activity. the absenceof any longer-term perspective plan. Also programme and this would provide Libyan planners with a useful mechanism for re-examining the the plans. but are difficult private sector to use in Libya. this provisions of could serve to outline some of the macro-economic objectives of planners as well as to develop some of the wider socio-economic objectives that providing an opportunity in the more detailed planning programmes. Whilst tighter 114 . given the emergenceof a projects. it is unfortunate that.there are some weaknessesand obstaclesremaining. Secondly. development administration with an increasingly well-trained personnel. Thirdly. employment and gross fixed capital formation. these measures can be applied to various activities in the its to assess rate of developmentand modernization. plans over First. these indicators can be used to assessthe degree of successof privatization programmesand to test and reinforce the validity of other that show changesin the contribution of the public and private sectorsto measures GDP. as yet. (h) Diversification of ownership of assetsbetweenthe public and private sectors.

three central themes of development planning are identified: objectives. articulated by government and by an increasingly well-trained cadre. of priorities In general. Constraints on development planning continue to impede the full administrative implementation of plans. remarkableprogress t> ý' 115 r rr. an increasingly development-focusedset is likely to easesuch obstacles. There exists a strong will for allocative forms of development. r` . that diversification is seen as central to a strategy of encouraging businessandjob creation. requirements It may be argued that recent economic and political trends in the state have led to a the objectives of developmentplanning. in order to establisha secureeconomic baseon which to build a distinctively Libyan culture and policy. Sustainability requires economic sharpeningof diversification. development planning and administration have undoubtedly progressedin Libya.1). In terms of both requirement and constraints.There can be little doubt that development planning in the state has made in the last two decades. Lines of responsibility are often reinforced by an autocratic of government and administration.Libya's EconomyFrom Dependencyto Diversification Chapter Five bureaucratic obstaclescan still be formidable. in which risk-taking and initiative are style discouraged. and constraints(Figure 5.

Minimising dependency is the means by which the government can reduce the burden on future generations. Policy Management level of investment the direction is less than that dictated by the need to should he changed. 116 . and the quality In the case of an oil resource based econoºny. it is the depletion ob' oil of' government expenditure that have the critical impact on future generations.Libya's Economy From Dependency to Diversification Chanter /Five Objectives " " " Self sufficient economy: Economic diversification Sustainable employment Development planning Requirements " " " " Will for development Political leadership leadership Administrative Trained. of policies its expenditure reduce in order to compensate intergenerational in order to increase saving.1 Attributes of Development Planning 5.7 Macroeconomic or required. compensate for oil depletion. The level of' investment l or the depletion of oil. which in turn would compensate equity. A main concern for Libya is the budget deficit which reached 50% of GDP in 2003 and the heavy dependence on the oil sector. qualified human economic Functions Ability to set objectives \ionitonn2 skills " Ability to accumulate physical resources resources " Productivity bas e Ability to implement decisions " Ability to innovate Fig 5. Libya should is important fur If the optimal.

5. Moreover. could the progressive future intergenerationequity? Although. which. tax system. if not remedied. Export diversification away from oil 117 . will lead to a number of economic inefficiencies in the future. by investing part of the oil revenue. an adequatelevel of saving government ensure and a progressivetax systemare neededto ensuresustainableeconomic growth. Libya is still heavily dependent on exports of hydrocarbons and in turn. and exchange earnings.8 Export Structure Although it is to be expectedthat Libyan exports are dominated by oil. Libya is in need of real exchangerate policies that would make goals produced by the private sector more competitive in order to encouragethe and services development of export industries. In turn. Moreover. mainly because the reliance on oil exports alone renders Libya extremely vulnerable to fluctuations in because as oil is depleted. the government has distorted the labour market. Nevertheless.one out that they can be sustained if the necessary institutions. market Although this list of recommendedchangesand incentives is surely not exhaustive. Within this realm. with should point transparencyin decision making. be achieved through current account investment. open trade policies and financial liberation are of essentialimportance. are established. use oil and gas as feedstock. Export diversification can petrochemicals.All these policies are essentialto bring in the structural changetowards diversifying the economy. the clear policy indication for a depletable resource-based economy is to attain growth through export diversification from oil. Libya has faced a critical issue which accompaniedthe oil revenuesthat of the problem labour market deregulation. Export diversification is important for Libya.Libya's EconomyFrom Dependencyto Diversification Chapter Five Whereas intergenerational equity is affected by the level of saving and the quality of equity can be addressedwithin the same generation by a broad-based expenditure. this wages above distortion. By acting as a last resort employer. it needs an alternative source of foreign the price of oil. which in turn would yield foreign investment income to the service sector's account. and by setting public of market rates.

cannot disguise the fact that the hydrocarbon industry alone will not be able to meet the rising demandsand expectation all sections of society.simply Furthermore. hydrocarbon revenues are sufficiently high to meet import costs. a state funded systemof health and free education and increases in material prosperity. There can be little doubt that the achievements the oil and gas industry has greatly improved the standard of living in expansion of Libya. at least until recent pursued the development plans paid little more than lip-service to such aims. However.anda vital role in the economy. clear strategies to achieve diversification under the state strategy. The about 118 . which represents 75% of the total. It reached5. clothing and construction.9 The Diversification Dilemma Economic diversification has been a constant element in the development strategies by the state in preparing for a non-oil future. one of the highest growth rates in the region. The export previous main goalsin mostplans. which at present. services. A changedexternal and internal economic environment amongst has necessitated diversification moves. Despite the refined attempt to increase the exports.Libya's EconomyFrom Dependencyto Diversification Chapter Five products has only been achieved in the area of petrochemicals.9. In the longer since term. the have been muted to say the least. Such import rises pose no difficulties for the balance of payments. most of the population are employed in the public sector. a elaborating diversified economic base was seen as vital. The need for diversification is thus prolonged period to meet the needsof the increasedpopulation. The oil sector employs a very small percentageabout 10%. No foreign debt. necessary.5 million in 2002 and triggered a sizeable demand for foodstuffs.1 Population Growth. as effortsareseen 5. Employment and Sectoral Growth Libyan population has grown at an average rate of 3. the results were disappointing. Rather than years. however. problems will arise when hydrocarbon reserves are depleted or if a of falling or low prices occurs. the 5.5%-4% per annum. Such real achievementshowever. In the almost thirty years since then. are met largely by imports.

bring in technology develop export potentials. The same may apply to the use of investment incomes from oil and gas. them.Furthermore. therefore. so there is little doubt that if part of such and funds were to be invested in industries that could generatelinkage. Furthermore. is held overseasrather than domestically. The rate of unemployment rates doubled in the last decade. Before oil was agriculture and manufacturing discovered in 1955. the benefits and multipliers to the country would transfer and be considerable. Indeed. the economy. Besides. do not necessarily which. However. These are invested primarily overseas. the massive rise in imports generate new (especially of consumer durables) indicates some of the effects of income redistribution in the state. the revenues which return to the do so largely in terms of a range of `trickle-down' welfare benefits state and population benefiting the local population in a very real sense. Libya faces from the structural imbalances in its economy with potentially serious problems in particular being very poorly developed. whilst income and job-creating industries. The unemployment problem is unemployment almost based and is due largely to the perception that employment in the private structurally implies poorer wages and weaker benefits than the public sector.The hydrocarbon sector and the revenues it generatesremain confined There are very few multipliers associatedwith the oil industry in to particular enclaves.9. by giving loans to young people to try to set up small projects managedby this amount Much of Libya's excessrevenue is banked rather than invested in development. barley. the values of imports have seen a substantial vegetables and increase. 5. large quantities of income and profits are scale 119 .2 The Fiscal Investment and Banking Dimensions has considerableincome which was put into a reserve fund where it remained for Libya Recently there have been some attempts to invest many years without any exploitation. there is a pressing need to diversify the economy to meet the increasingneeds. As a result of that. fish.Libya's EconomyFrom Dependencyto Diversification Chapter Five have been a cause for some alarm in political circles. a reduction of sector in the public and oil sectors coupled with rising unemployment has made it posts imperative to expedite the process of diversification. Libya was self-sufficient in foodstuffs such as wheat. investment incomes have not been employed to develop smallimport-substitution industries.

off-shore banking and other activities may also be investment-attractive. which can help in developing comparative advantage such as marine services. distorted population of labour force structures. Sectoral Choices and Promoting Sectors which Have a Comparative Advantage Selected The sectoral diversification choice is bounded by the availability of natural. offshore financial and construction activities. The expansion. job structures can be determined in the medium-term by training. Assuming that finance does not constrain investment affect the choice will take place on the basis of labour and/or capital intensity. of education and education.10 Diversification. may be most related.Remittancesfrom foreign workers in the state are either high and company profits are often repatriated in preference to investment in local companies. Libya has a restructuring in its geographical location. The trade-off between economic and social factors will structure of the choice of sectors. Because of under-appreciation and expected or potential unemployment.The state doesnot impose restrictions on this repatriation spent on repatriation for individuals or companies. The services sectors. The effort majority. appropriate 120 .Libya's EconomyFrom Dependencyto Diversification Chapter Five overseas. servicestransportation. shipping building and repair. the abundance of oil and gas still has great impact on the formation of programmes aimed at attracting foreign direct investment. as well as human resources in the short and medium-term. activities information. the first of which is the possibility of activities increasing its competitivenessin the world market. The abundance of oil and gas attracts investment competition under certain special conditions. where expatriates constitute the current will limit the expansion of labour-intensive activities and projects.restructuring and rehabilitation. for the absorption of the local force through training and institutional reform. Production is constrained by and market capacity. However. The most significant factor in restructuring the Libyan economy is the volume and the labour force. 5.

In an uncertain world.10. promising larger future flows of goods and services. the scope of constitution and expansion is subject to and local markets. the subsequent oil output three investmentsalternatives. However. rules will be neededfor what to relevant invest in and how. 5.1 How Should the Rent be invested? The appropriate shareof hydrocarbon rents to be invested dependson the right profile of income and the rate of return on investment. to be exchanged for current consumer goods and services.all of which are expectedto further the options represent developmentof national economy: (i) Oil can be left underground as a form of auto investment for future exploitation and use (ii) The proceeds of oil exports (beyond current consumption) can be used for domestic capital information. The achievement of this task (as with disposing of any windfall involves two essential decisions.and (iii) Oil revenuesnot currently consumedor domestically invested can be placed in foreign capital assets (real or financial) bearing future returns in capital goods. and other both the expected factors changeover time in unpredictable ways.Libya's Economy From Dependency to Diversification Chapter Five Data on the investment atmosphere in Libya indicates a growing trend in these investment channels. competitive capabilities Underlying the multidimensional national objectives in Libya (and in fact in all mineral is the concern with converting the predominant natural resource into a economies) base. and a skilled workforce capable of sustaining a viable and productive economic diversified economy. The level of public and private consumption. the or consumer investment and the appropriate sectoral priorities depend on magnitude of absorptive capacity. the pattern for source of wealth or gift of nature) and saving. and the allocation of saving so as to equalise the national consumption Once the essentialdecision is made regarding the magnitude of marginal rate of return. where the oil rent time profile of income and the rate of return on investment. The most basic choice is probably whether the funds should be 121 .

and to turn the exploitation of possible hydrocarbon resourcesinto a sustainableactivity. This is by no means a straightforward not The productive capability of an economy does not depend solely on investments choice. +100-X 122 .... exploitation of such hydrocarbons is not a sustainable By investing an appropriate share of mineral rents in productive assets. becausethe private return on such investment usually when is much too narrow a criterion for success. standardof For example. albeit in a different form. even long after the which has come to halt. it dependsno less on the educational level and the health of the labour force. How much would we mining activity have to save? We can find this in a simple way. Libya could build up an investment fund would allow us to spend the amount X per year in perpetuity.Libya's Economy From Dependency to Diversification Chanter Five invested in assetsthat yield a visible pecuniary return or in less-tangible wealth that may be measurableor yield a pecuniary return. Libya receives rent from hydrocarbons and wants to invest in financial with a fixed rate of return (a bank account or bonds). Given that oil revenuesare finite. Investment in education. If the rate of return on the investment fund is rx aside 100% the fund would have grown to at the end of the ten years period.. investment.. Each year we would spendX and put 100-X in an investment fund. to preserveoil wealth. Supposewe have revenues assets 100 million dollars per year for ten years. health and education may be. and infrastructure such as roads. provided we maintain the fund. Precisely becausethe but clear criterion of a pecuniary return on investment cannot be relied upon to narrow judge the desirability of such spending.such investment is typically the responsibility Income from taxing hydrocarbon extraction will make it possible to of government. there is reasonfor being cautious in using hydrocarbon rents for these purposes.the floodgates are openedfor abuse.it is activity. undertakemore of such Worthy as investment in infrastructure. airports and telecommunications. in the senseof permanently raising the living. health and infrastructure is seldom left to the private sectorand that happens.. We assumethe rent is fixed for ten years. of By investing a certain amount of revenue. F total revenue F=[100-X](1+r)9+[100-XI(1+r)8.only partially. in building and machines.

remains much the same despite these it is just more difficult to put it into practice. and the rate of return is also variable and uncertain. equal to rF gives X= 100 [ 1(1 +r 1] )10 Assuming a five per cent rate of return (r = 0. Fiscal policy to decide how expenditures can be planned and insulated from revenue makers need 123 . if the population is expectedto In that casewe would have to constantly invest some of the return on the fund (r grow.be 1 X=100[1. This is X the amount that could be consumed in perpetuity. in this particular example. in that case.10. saving the hydrocarbon wealth into a permanent wealth that would make it possible to turn to just under forty percent of the annual revenuesin perpetuity.2 Stabilization and Saving Funds Libya. it might be more desirable to go opt for an increasing consumption over time.61. setting X. We can make this example slightly more general by assuming that the extraction period lasts for T years.Libya's EconomyFrom Dependencyto Diversification =[100 XI {(1+r)1°-1) r Chapter Five From then on we could use rx 100 per cent of the fund annually. In other words. The principle.] (1 + r)T 5. however. can benefit substantially from them. Our formula would. just sixty percent of the mineral rent every year would. Reality is. For example. without dipping into the fund. we need not of for a constant consumption per year in perpetuity. with large exhaustible resourcessuch as oil. Furthermore.05). it is not known exactly ahead time. and in the real world where complications. but the revenues from exploiting these resources can pose challenges. we find X= 38. even spenda value equal if the revenue stops flowing after ten years. The flow of revenueis not even. of course a lot more complicated than this simple example. there is uncertainty about the future one may not exactly achieve what one set out to do. F) to keep it increasing.

some share of government revenues derived from the of a non-renewable resource should be put aside for when these revenues exploitation decline. the impact of a large inflow of resource revenues on exchange rate developments and the non-tradable sector needs to be carefully considered. or the resource has been depleted. budgetary and liquidity impact of revenues. or both. establishmentof a resourcefund is neither a necessarynor sufficient condition to addressthis problem adequately. governments have or are considering setting up. Libya. as the distribution of spending and the immediate social impact of resource well as industries. Stabilization funds aim to reduce the impact of volatile revenue on the and the economy. It is not necessarybecause.Libya's EconomyFrom DependencytoDiversification arising from the volatility and unpredictability shocks Chanter Five of resources so that they can be invested. policy should take account of the international distribution of income flows. As Davis et al (2001) argue. In some countries that are dependenton the export of oil and gas.in principle. Many countries have establishedseparatefunds for resourcespurportedly to tackle some of the problems accompanied with the resources. Third. or all however. "Dutch disease" (characterizedby an appreciating real exchangerate and the associatedadverse impact on the non-resource tradable sector of the economy) is an important issue for Libya. non-renewable resources to help in the established. which are subject to high and the price volatility or other fluctuations? Second. Savings funds seek to create a store of wealth for future government generations. to take measuresto stabilise resources. The general justification for such funds is how to deal with the huge saved and financial surplus. since the resources are unpredictable finite. implementation of fiscal policy. because the price of the resource has fallen.First. A clear policy framework that recognizes all of these issues is an essentialbasis 124 . in benefiting from large flows of revenue from the exploitation of natural needsto addressseveral important issues. all of the issuescan be tackled as integral elementsof government budget and fiscal policy. In addition.

Specifically: operation as 1. The guidelines should provide managers are accountable guidance on risks versus returns.Furthermore. and reports and audit results externally should be published. 4. and audited by an independentauditor.In theseit can be seenthat Libya is accumulating financial assets through saving of resource revenue. good practice should aim to integrate the revenue should.There should be a clear specification of responsibilities over spending and borrowing by resourcefunds.The fund revenues. 2. transparencyis arguable. such as the relative importance of saving and stabilization reflect and macroeconomic considerations such as the desire to avoid exchange objectives.Fund activities should be regularly reported to parliament and the public.An independent supervisory board should be appointed to give assurance of good governance.expensesand balance sheets should be presentedto the legislature and the public together with an annual budget. if such a fund is set up. Where the budget and is non-transparentand administration is weak. It is essential that the separateassetmanagementfunctions be carried out appreciation. 3. the argument is that a separatefund with clearly defined policy objectives some portion of resource revenue more effectively from political pressure can protect potential waste and corruption than the government budget. Most importantly. establishing a sound asset management becomes an important element of fiscal policy. Essentially. The strategy should strategy which the fund's objectives. The investment policies for assetsaccumulatedthrough resourcesrevenue are stated in the annual budget documents. clear investment guidelines that are available to the public. much as possible with the overall fiscal policy framework.Asset managementformulation should geographical 125 . such an argument has some environment but whether it is more effective to set up a resource fund rather than improve merit. types of assets allowed for investment and clear and currency composition of assets. it should be overall transparentin all respect and a clear statementof policy with regard to use of resource be established.Libya's EconomyFrom Dependencyto Diversification Chapter Five for design of an effective saving and stabilising fund and a clear managementsystemto deal with such issues. and that fund under for investment performance.

the policy objectives of Natural policy ResourceFunds could. such funds some of necessarily lead to higher saving. The conceptual Stabilization funds seek to shield the budget from revenue uncertainty and In the absence of liquidity constraints. in principal. If there are no liquidity constraints. price or revenue rules which signal the operation to accumulate or withdraw from the fund may be difficult to need establish. funds provide no direct mechanism to stabilize expenditure. Stabilization and saving funds designed to save for future generations face these problems. A "Financing fund" requires the Natural Resource Fund to finance the fiscal deficit (its resources permitting) and receive the surplus. natural volatility. Moreover.the authority could bypass the operation of funds by financing spending in other ways. resources Since resourcesare essential. and changes be delegated to the central bank or tendered to The operational management could investment companies professional (2000) argues that some oil exporting countries may still have to make Skancke to governanceand transparency accountability.Libya's Economy From Dependency to Diversification Chapter Five be in the hands of the Finance Ministry to ensure coordination with overall fiscal to assetmanagement policies should be clearly and publicly stated. Besides. These substantial progress with respect focus on building democratic institutions with transparent credibility countries should if attempting to implement a fiscal policy strategy that implies a and good procedures of governmentfunds. be achieved through implementation fiscal policy within the context of a medium-term budget of sound framework. however. Expenditure natural resource therefore requires additional fiscal policy decisionsbesidesthe smoothing of the fund. Furthermore this may be justified on political economic 126 . substantialaccumulation basis for thesefunds needsto be viewed with caution. policies. since the government could would not finance spendingby borrowing. A financing and saving fund provides an explicit link between fiscal stabilisation and assetaccumulation.

During public in oil prices.and non-inflationary economic growth. sound fund could. 127 . (iv) Such a fund can protect the budget from the uncertainty and volatility of In the absence of liquidity constraints. the existence of the stabilising and saving fund upswings help the governmentbetter manageits fiscal operations in line with could the country's absorptive expenditure stability and enable the government to implement strong macroeconomicpolicies necessaryto achieve strong. 5. and savespart of the oil revenue.2. volatile of makesa stabilization fund highly desirable.Libya's EconomyFrom Dependencyto Diversification Chapter Five Such funds may help the government to resist spending grounds. Such a framework can help countries with highly volatile revenues design stable expenditurepolicy (Davis et al 2001). the saving revenues. the willingness of the to progressively reduce the public sector's share in the authorities the need to shield the economy against "Dutch Disease" economy and (iii) the fund can be saved for future generations and could help the resist spending pressuresby formally limiting the resource government to the budget. thus dampening inflationary pressures and available containing the potential appreciation of the exchangerate. be achieved The policy objectives of a saving and stabilization implementation of sound fiscal policy within the context of a medium-term through budget framework. fund provides no direct mechanism to stabilize expenditure. stabilisation (i) The high dependence the budget on. sustainable.10.which (ii) The limited absorptive capacity of the Libya economy.1 Justifications for a stabilization and saving fund for Libya that can justify the rationale to establish the saving and There are many reasons fund. oil revenue. Such a fund for the commitment of the government to pursuing a cannot substitute fiscal policy. in principle. however. pressures A fund reduces the impact of volatile revenue on stabilisation and saving finance and the economy. if there are constraintson borrowing. and hence its vulnerability to.

Recently. in goods-producingactivities have been unsuccessful. the government embarkedupon transition mission through two clearly-defined. long-term objectives. The government took the leading role in utilities.The secondwas self-sufficiency. this transition was brought about by an expansionary fiscal policy and a sizeable public investment programme that the basic economic infrastructure upon which future development could be provided built.10. The first another to lessen the economy's dependenceon oil through the diversification of the was baseand the developmentof other sectors. However.Libya's EconomyFrom Dependencyto Diversification 5. from over 21% in 1979 to 15% in 1986 and plummeted to 8% in 1990. It dropped addition. and tourism through the establishmentof public authorities and wholly companies. With the evolution of the providing development mission through two plans from 1976 on. to public Non-oil GDP is clearly driven by government expenditures. the rate began rising modestly after 2001. to the relatively well functioning mixed economy of today. the government assumedresponsibility for or partially owned Libyans with free education and health services. manufacturing. It economic believed that these development projects would generate linkage to the private was business sector that would encourage it to invest in a host of related productive The ultimate step. interest in thesebusinesses private sectors. which banned the private sector engaging in phenomenon business following the sharp drop in oil price and revenues in 1986.3 Strengthening the Private Sector Chapter Five Since the early stagesof Libya's drive for modernization in the early 1970s. private sectorparticipation 128 . In the ratio of private investment to non-oil GDP has been falling. Reflecting the dominance of oil exports and skyrocketing oil prices. it is still below the 1975 percentage These results provide a strong indication that the government's policies to increase rate. so do private sector activities and private investment has weakened considerably.As public spendingrises. now under consideration. communications. transportation. would be the transfer of the activities.Through this. This is related to the legislations.the public has led the transition from the primitive market arrangements that prevailed sector initially.

and distort the priorities and allocation of resourcesthat would further the government's private sector development objectives. at the level of 4% of GDP. met. (a) As stated earlier. other policies distort relative prices.10. policies discriminate against goods production.The reasonsfor this are that producing activities. market-oriented improve the businessclimate. the government's social objectives are being reasonably well employment. It should that could only profit the impact of changing the present market structure on expatriate also consider Moreover. sanction monopolistic practices. resources. the role limits the investmentopportunities open to the private sector. which requires high growth investment on physical and human capital. 5. This reinforced the conclusion that diversification efforts. the contribution of the non-oil sector to GDP has remained disappointingly low and stagnant in recent years. perhaps the most important impediment to private sector development in Libya is the lack of economically viable investment Privatization of government holdings would provide the opportunities.g.However. especially into goodshave not been particularly successful. Furthermore.3.A full of public enterprises towards the private sector is achieving limited of assessment why government policy the dominanceof small-scale enterprisesin Libya and explore successshould recognize for promoting medium and large-sizedfirms engaging in goods production the potential through efficient managementand economies of scale. progress in developing a market standardsof welfare has been slow and discontinuous. but at an increasing cost in terms of sacrificed opportunities elsewhere e. 129 .Libya's EconomyFrom Dependencyto Diversification Chapter Five Despite its impressive growth since 1970. inefficient allocation among the public social service programmes themselves and for future generations. Libya needs strong sustained economic economy to meet the demands of its rapidly growing labour force. while current public expenditure/saving inhibit non-rent seeking investment. and an efficient use of the country's This can only be achieved through the implementation of far-reaching.1 Why should the government strength the private sector's role? Privatization of selected Libyan state-owned entities could certainly produce several positive results. structural reforms that would enhance the role of the private sector. and promote economic diversification.

3.Libya's EconomyFrom Dependencyto Diversification Chapter Five investment opportunities outside its traditional private sector with It would mobilize private resourcescurrently invested in lowactivities. and expanding the role of the private and sector in commercial-type activities. interest-bearing instruments for productive risk. 5. it the common stock ownership base among small Libyan would expand investors and create a motive for increasing private saving. profit-making ventures. as the entrepreneurial be determined on the basis of purely supply of private goods would economic criteria. Thus the key objective is to strengthen the most in order to facilitate and promote economic diversification. domestic. the sale of public shares-of these already trading companieswould undoubtedly revitalize the stock market. (c) By limiting the role of government. responsiveness dynamism of the overall economy would improve. thus reducing existing distortions in the employment labour market. (d) With privatization comes professional management at the top and middle levels. It is now elevated important government policy objective.10. the private sector 130 . concurrently clearly developing the economy's infrastructure. local and foreign. the earning of which would add to the of domestic private capital. the productivity.The early development of the Libyan economy objectives aimed at the promotion of non-oil activities as a major objective. These positions could provide the right motivation management for public managers and other aspiring public servants to seek needed in the private sector. pool (b) If privatization took the form of a public offering of government shares. If safeguards to condition the control of the privatized concerns by were established large investors. Successive development plans clearly with diversification as the infrastructural basewas approachingcompletion.2 Strategy for privatization As Successful privatization plan requires a clear statement regarding the government that privatization is to achieve.

Ultimately. and other Arab countries in the Gulf are able to direct their products to more advanced countries' markets. In addition. in order to the trap of selling to domestic markets only. shows an in educational and population structure. the other represent The important thing which fuels the successof this is that Tunisian goods exports over 1996-2000overtook Egyptian exports by about 62%. the Libyan population volume has been this 131 . Egypt. however this has led to a failure on domestic result of demand service. In spite of that.10. but should show all the immediate circumstances. two casesfrom which Libya can benefit. it will create more job opportunities and many more goals. In this scope it including the possible changes be best to look at different countries performance in oil management. Egypt and the Gulf statesin more advancedcountries. once established factor could be neutral. This needsto the be discussedwithin a topical climate and should not focus on the statusquo only. these countries can cast off due to manpower costs being lower than produce goods at a proportionally cheaperrate The caseof Tunisia on one hand. which is considered a productive sector and three has an effective role in producing the essentialgoods to meet consumption and generate income.Libya's Economy From Dependency to Diversification Chapter Five 5. suitable sectors for diversification in other Arab countries has been as a Successful experimentation industry-oriented planning.identify might in Libya which can be diversified. which lead to national economic structurediversification. (which industry in deterioration). Many countries such as Tunisia.4 The Role of Industry to Develop Alternative Income Instead of Oil The development and transformation plans which have been implemented over the last decadesdeal with the industry sector. This fact has substantial the period importance when it is noted that the Tunisian population was lower than that of Egypt by This situation indicates that although the population volume is important in one seventh. deciding the productivity lines and activities which countries can adopt. will To discuss the feasibility of continuing to adopt industrialisation in Libya and identify individual industries which will yield the highest return in the future.

Libya's EconomyFrom Dependencyto Diversification Chapter Five (when compared with material provision). along with the bottlenecks which can be outlined as follows :( Merza.500 dinars per worker in 1990 to 3. To achieve such goals. over 3-Workers' productivity decreasedin the transformation industry from 3. remains an 2003). 4-Productivity capacities decreasedfor the industry sector by more than 50% in 1999.the performance was has failed to achieve the main goal. in addition to contributing tax.8 billion dinar over the above period. compared with imported industry production. but is eclipsed by sinking proportionally Gulf Stateswhich have a diminished population.100 dinars in 1995. which was production and income very poor and diversification. the capability to encourage export production resource issue. more than 5 billion dinar over last three decades. 132 . Although the targets accomplished by this sector were a success. 6-Prices and costs increasedfor many domestically produced industry goods in with imported industry goods. 1-The diminishing of the real addedvalue contribution of this sector in the GDP. paying about 3. which was approximately 5. In addition.comparedwith 18% in Libya). comparison 7-Most assets were rapidly consumed in industry projects. there has been a substantial expenditure on a transformation budget. as the immigrant figures indicate many (75% of all workers in the Gulf States. 5-Quality and specification declined in production.8% over the period 1992-2000. despite the hypothesizedlifespan of more than 25 years. 2-The realisation of a real growth rate which dropped and sunk to less than 53% the period 1993-2000. which will lead to national economic diversification. This huge investment has enabled Libya the to establish a industry base that reached 3 billion dinar and also created more than 62.000 productivity job opportunities.

6. These would have 33% of total production from complexes and factories. 2-Insure that the private sector has an essential finance provision or warranty on loans for small firms who cannot get finance from a financial institution. require an earnest re-examination and suggestions of convenient and appropriate policies and procedures which could ensure in direction.Libya's Economy From Dependency to Diversification Chapter Five 8-A huge amount of manpower was employed in the administration. and increasethe customs tariffs on production industry imports and identification for domestic production.Grant exemptions from customs tariffs to the industry import sector in goods such as raw materials and operation necessaries. and activating will lead to the stimulation of the role of the public sector. and economic structure diversification on the other. This could then increase contribution in capabilities and a change GDP on one hand.cancel the production tax. The for more oil revenue alternatives to finance the public budget could be search through the following steps: achieved 1-Private and public contribution to the public industry firms targeting law number 92/95 which privatization after restructure. an new increasein efficiency and worker training. 4. linked to the exchange and provide freedom from rate. will create a competitive climate practices and aid in pursuing privatisation. managerial technical support for the industries. 3-Encourage foreign investment in the operation of current firms and invest in industry projects which will lead to the acquisition of technology. 133 .Restructure and reform industry through privatisation and transfer goods units to the private sector. and 9-The creation of 65 new complexes and factories ceased. monopolistic 5. but theseroles were not essential. represented These bottlenecks mentioned above.The gradual liberalisation of industry goods pricing. and others which this sector has suffered from for a long time.

This requires: projects Infrastructure promotion by the internet industry. This must be based on previous studies assisting the private sector in to playing a significant role. job opportunities and new industry establishment.Libya's Economy From Dependency to Diversification Chapter Five The application of such policies and procedures will enable the industry sector to increaseits contribution in GDP from 5% in 2000 to 9. Thousand of workers youth be employed in this emerging industry.Conducting a study to set up regional technology centres. 5.10. 5.Adoption of a pricing policy that can help and encourage internet users. Encouraging competition in communication sectors. Then market will it will be possible to choose and develop the appropriate industry units which are of being internationally capable competitive. The re-structure and liberalisation of the labour workers increase the work supply and will reduce immigrant workers numbers. computers. can 134 .2% in 2009 and increasethe share in non-oil growth from 8.5 The Industry Sector as a Pioneer for Diversification In spite of the status quo for non-industry in the public sector.2 Petrochemical industry 's intermediate and final goods Libya should focus on exploitation of the petrochemical industry's products. electricity by establishing a benefit fund and adopting a transparent policy to assist in such aided for a limited period. besides providing jobs for foreigners. exporting oil as a raw material. aimed at encouraging and including government assistance in helping the new industry which will be created. training. This will be electronics.1 Programming industries Libyan universities need to establish departmentallinks with programming. ab. instead of This has many advantagessuch as technology transfer. 5.10. c- d.5.5.3% to 13% in the sameperiod. and engineering at undergraduatelevel and beyond. it is possible to establish growth in the industry sector. directed at foreign markets with skilled evolution and and a liberalised labour market. which are prevalent in advancedand developedcountries.10.

and goods. which are then used in most production and consumption producing products There is no doubt that the competition in this regard is very strong and the products. contribution 3-Mixed textile products like cotton. 5. which are used in the textile industry in emerging countries should be encouraged with the gradual expansion of production in textiles and materials to ensure a of finished cloth to markets in developing countries. others sectors can gain. 135 . In particularly the comparative advantage is very high. pens. The preparationsof theseproducts are for the making of T. or other consumer products like credit cards. developing new industrial lines could be very appropriate. vacuums and spare car parts. furniture.which are required by different countries or regions. cars and other necessary goods.5. V. computers. It could start to undertake of high quality products and sell them to advanced countries which specific production use these products as necessities. computers. exports. the big added value in petrochemical industry is in ethylene. urea etc. propylene.3 Plastics industry 1-Plastic production is needed in many industries from simple uses to more complex ones. The production levels will increase and experience of complex skill production quality will be gained while at the sametime ensuring accessto diverse markets. units. It can be introduced for use in such products as televisions. and telephonesetc.stationary. for example. electronic circuit bases. radios. consumer 2-The production of high quality petrochemical textiles and woven fabric filaments such as polyester and propylene etc. options are very wide. transportation and It can transform the raw materials to intermediate products including communication. So. wool or silk with other petrochemical materials are used in cloth production.Libya's Economy From Dependency to Diversification Chapter Five Furthermore. Hence.10.

which suggests the predominance of on domestic firms. direct foreign investment is an important drive to transform relatively more to growth than does domestic investment. However.can absorb more foreign investment. composition and growth of the output of the host country also depends. A country with a comparative advantage in labour-intensive research and influence investment location for labour-intensive processes and goods can strongly component specialization with vertically-integrated 2000). According to Moosa (2002).to a the large extent. allowing greater furthermore. in comparison to other developing countries. modem technology is urgently needed. the effect of foreign investment on complementary effects level.Libya's EconomyFrom Dependencyto Diversification 5. provided it is as sufficient as any domestic meansof resourcesutilization. Direct foreign investment could animate per capita income growth in Libya. it can exploit resourceswhich are is capable of improving the efficiency of domestic resources currently unemployed. Furthermore. technology. expand job increase use of local raw material.10. technology. Although. Libya has yet to attract a significant amount of direct foreign investment. and in developing human resources training and stimulate investment in and could assist development. with its oil surpluses. legislation and laws in recent years (act number 5/95) target of encouraging and attracting foreign investment. the foreign inflow will aid in reducing financial shortages. create more Furthermore. job opportunities and reduce the gap between the rich and the poor. The benefit of foreign investment is to achieve full employment. This has the effect of increasing total investment productivity in the economy more than proportionately. direct foreign investment flow. In addition. and 136 . this has not been a success. The available investment data indicates that Libya has a poor.6 Attracting Directing Foreign Investment Chapter Five Libya needs more direct foreign investment flow in order to stimulate economic growth. the government introduced many amendments. on the macroeconomic policy in operation in that country. particularly with a direct investment. international industries (Du Pont. contributing Libya. and achieve higher than domestic investment. it must use modem opportunities and introduction of modem management and administration methods.

6. 5. and substitute the shortageand deficit in local savingsand 137 .Establish a scientific knowledge-sharing relationship between foreign branches and domestic research centres. 5.Direct foreign investment will contribute to economic accumulation capital.Foreign companies can provide for the requirements of local by in terms of equipment and technical accoutrements companies facilitating conditions in the local market to enable national to develop the goods and commodities.Set up competition between multi-national companies and national the local companies to attempt companies. bringing their knowledge of science. modern therefore. and hence be companies able to export such products to external markets.technical and managerial skills to national companies. international companies who have already established their technology and researchmethods.. 3.6. the ability of local companies to acquire a modern systemwill increase. which will companies' lead to gaining more advanced technologies. Workers can skills then move on. and then domestic output should rise. from.The training of domestic workers required for job opportunities in foreign companies and the acquisition of modern technology by using modem work methods and training. 2. 1 The advantages offoreign direct investment 1.Economy From Dependency to Diversification Libya's Chapter Five by shifting them from less efficient to more productive sectorsof the economy. particularly when the introduction of this information and how to use these products is essentialinformation from the producer. which will push technical and managerial systems and develop industry.10. 4.Foreign companies who sell to the local market contribute in transforming the knowledge and expectations of the consumer concerning technical information.

Support and aid the balance of payment which foreign investment influences. Thus the commercial prawn farm started in the early 1980s has a lack of manpower 35. The idea of exporting foodstuffs is addition. if the inflow through the industry sector and essential infrastructure projects setsup a modem economy dependenton itself. estimatedat about The wealth of the sea is very important to the national economy as it is the main and source of protein and provides more than 14% of gross domestic meat. The long tradition coastal areas fishing in the state gives it the potential to expand in a managed and scientific of The government made major efforts recently to provide supportive facilities. hatchery. The formation of fishing cooperatives has also been effective offshore marine Loans are given for the purchase of fishing gear. prawn and fish culture. because of the limited water resources. 7. and labour shortageshave prevented large-scale commercial operations. is not sufficient for local needs.10. fish ponds and training units have been establishedto promote aquacultureand fisheries. Therefore. However. management. initiated on balance of payment becausethe proceeds increase. this sector 138 . will disappearin the near future and the authority cannot dependon agricultural products to generatehard currency.7 Fishing and Marine Wealth To promote the development of fishery resources. boats and other and successful. In essential it still has an opportunity to provide jobs.a number of potential estuarine and have been identified for shrimp. There is a strong possibility that this investment will contribute to tackling the imbalances in the structure of the Libyan economy. the lacks of local expertise in the control of water quality. fishery necessities. A manner. will 5.000 workers. except for sea wealth.Libya's Economy From Dependency to Diversification Chapter Five invest profits back in to the Libyan economy. as agricultural activity after the population increase not possible.

3 dinar from the transformation budget.development. which will allow the sector to the surplus to the international market.Equipments perish and the property owners including factories.Enable the private sector to build new freezing complexes and managefish handling according to the technical and global standard.The allocation deficit for this sector is not proportional to its liabilities size. These impediments are as same follows: 1. 4. the sea wealth has promising possibilities. b. a- including the set up of maintenance. the authorities should embark on new projects relating to this sector. 3. 139 . which needs more focus and attention from the government. in the contribution in GDP and providing an extra income particular by pursuing the following resource which can support oil revenue policies: The government must undertake to implement and complete infrastructural projects. neglect essentialmaintenance.Libya's Economy From Dependency to Diversification Chapter Five The aggregateamount which was spent over the period 1980-2000 reached about 46. impediment in both the public and private sector. export The current factories' technical and health standardsare exceptionally low and the cmust undertake the development of the current fishing factories and government the private sector to establish new factories to contribute to other encourage fishing projects. the creation of job opportunities and the export of in recent years. Production and which of a suitable rate of food security will remain the important achievement issue. 2. The authorities face some difficulties in preventing the surplus increasing contribution in GDP and creating a significant resource as a support for oil However.There is a good skills shortage in the sea fisheries and there are obstacles have a negative impact on performance. in spite it suffering the revenue. It accomplished many achievementsin million fresh manufactured fish production. facilities and sea ports. Also.Delay in implementation of the import budget for the purchase of necessary equipment.

Fishing industry to substitutefor foreign imports and the excessto be exported to the global market. important role of providing job opportunities. with forest and diverse scenery. including specific plans with high must promote care paid to providing the essential data and suitable cadre. which starts with infrastructure such as resorts. Establish a new. Libya has started on this with special care in recent years.Each municipality should construct new local markets which fit according to the health featuresof fish marketing. including the vast desert.10. hotels. and net policy and transportation. rivers characteristics. given that tourism is a could be effective and efficient in developing a new resource promising activity which that could substitute for oil resources.beautiful coastline. sewageand payment systems. social option could provide a promising procedure. communication. in particular foreigner investors. 2. the substantial contribution tourism in GDP in some countries standsat more than 25-30% Abuharris (2005). In spite of and wide valleys 140 . a from analysing the current efforts to implementing projects. huge fish farm to produce intensive fish to export.Netting and fishing the immigrant tuna for export and manufacturing purposes. if and implemented and programmesdeveloped to help draw up appropriateclear policies were economic and social climate.8 The Role of Tourism as an Alternative Resource to Oil Revenues Tourism plays a significant role in the economic and social development of the global It brings a considerable income to government budgets. In this context the escope is: promising 1. marketing and furtherance.Libya's Economy From Dependency to Diversification Chapter Five d. in addition to the economy. with long beaches. It implies economic. It could create more job opportunities. this.This option may require many policies. Libya has distinctive features and an appropriate better than its neighbours.Fishermen should work with investment companies as partners. the authorities these fields gradually and steadily.Therefore. 3. Furthermore. 5. To achieve attention and high standardof performance is essential. This of diversification resource.

water and sewage.000 bed capacity it would increase its share in GDP to reach opportunities.Accelerate the pace of Libyan planning and issue legislation of the tourist places which will attract tourism.5 billion dinars in 2010 and create approximately 25. the sector may play a significant role 9. setting up a new 141 . approximately 130. resorts and rest houses. follow: 1. The provision of diverse income and creation of new and job opportunities may require introducing new policies. 3. through its plans and transformation budgets.6% sharein GDP in the sameyear. arrival and departure security. in both policy and 7% besides government commitment including a completion suggest plan as procedures. million The promotion and development of the tourism sector would contribute greatly to GDP help diversify the economy.000 job revenue of about With a 30. 2. such as restaurants.Simplify and facilitate all related activities such as land. There are some steps that should be pursued. number. have not been well managed and marketed to enable the sector to take off. villages. 4.The government should. such as hotels. electricity and combination. traditional. they in a suitable environment to achieve Therefore. in the same year.Libya's EconomyFrom Dependencyto Diversification Chapter Five the number of tourists who arrived in Libya in 2000 these sizeabletourism constituents.000 a moderate revenue of about 126 was still a modest dinars and 1.Issue a new law which could organizethe tourism activity. Libyan. and cultural policies of procedures. 5.Train and prepare local workers in the different scopes of tourism fields by college and faculty. changing economic and social likely to contradict the environmental. Although Libya has tourist facilities now. provide develop the infrastructure for tourism such as roads.Encourage national and international investors to implement tourism projects hotels. 6. tourism villages and resorts.

more generally. expanding and strategy issuesthrough studies which count tourism movement of links with other international institutions in order to set up suitable and make appropriate to attract more tourists and enhancevisits to more places in Libya. this implies setting up a timetable to implement such projects and allocate the finance and capital return by possession.9 Education and Economic Growth It is difficult these days to ignore the fact that education matters. The government used education to improve economic performance. 9. to develop society.Provision of cultural welfare tourism requirements.Maintenance and development of the arrival and departure outlets facilitating visa procedures and tourist safekeeping. The first departmentwill build up new projects and sell to the private sector. 10. the traditional culture Libya. support and financing of the general tourism plan. merchandise and the day to day running of the tourism marketing industry. to ensure they feel free to wear.The second department will concentrate on and promotion. the government should adopt tourism activity.Protect the ancient and historical places. In due time. drink and eat anything they want. Also. as public investment in education comes at public and private investments. The enthusiasmin promoting education is well-warranted. this department could be responsible for tourism.10. through provision.Identify the tourism constituencyand the required facilities by pursuing different marketing and promotion elements.The question is how to improve the the expenseof other 142 .Libya's Economy From Dependency to Diversification Chapter Five 7. which can increaserevenue as well as developing and enhancingthe traditional industries. The Libyan authorities have assumeda substantialrole in educating its citizens. social justice and. at least in the initial phase. This may benefit this plan if the government setsup two departmentsto care for and pay close attention to tourism. policy 5. and providing education for all is a central pillar of the economic development goals. but the fundamental question is how much the government should invest. A variety of motivations lead the Libyan government to provide strong support for schooling over the last few decades. 8. Furthermore.

a more educated society may lead to higher rates of innovation and invention. rather than Higher quality translatesinto greaterearning for individuals over their lifetime.9.10.1 Difficulties in achieving better quality Although many factors help determine cognitive skills. reflects a variety of factors . reforming school policies and improving performance are not just a of will. make everybody more productive by helping firms introduce better production methods. a society with a more educatedlabour force can also expect faster economic even if the returns may not be discernible for many years. If the effectivenessof different matter thereof.family inputs. the Libyan government's efforts for improvement focus on schools. and lead to more rapid introduction of new new and technologies. defined here growth. 143 . 5. health. as well as social gains. schooling. the importance of human capital. and so forth. Moreover. Most studies of the economic aspect of education focus on school quality of or the "quantity" of education. the clearest way to improvement lies in strengthening schools. While a variety of models and ideas have been developed to explain differences in across countries (Barro and Sala-i-Martin.or combinations strategy on credible knowledge about how best to use new resourcesto optimal reform improve the kind of educationon offer. the quantity of schooling is easily measured and readily tracked over time. 2003). or of providing extra resourcesto schools. it would be straightforward to define an resources. and others. Investment in education has a potential to deliver truly large economic.Libya's Economy From Dependency to Diversification Chapter Five education. both analysis and policy. Unfortunately. Quality. which is enhancedby a strong Education has the possibility of helping both the individual receiving education system. quantity. growth rates but are not limited to. by measured mathematics and science. were known. This appearslogical from the perspective of attainment. But it distorts policies and potentially leads to bad decisions. To advance the standard of living. The policy challenges facing Libya are those that have to do with quality. it. Specifically. they invariably include. the place where they have the most policy leverage.

aup new departmentsand delete others as labor market needsdictate.9.2 Education policy factors' suggestions The suggestionsare: Accept policy amendmentsin secondaryeducation. the sector came to play a core role as the "last in turn leads to redundancies in teaching and administrative resort" employer.the public sector cannot afford to accept all personnel free of fees.which represents about 60% of the total.Libya's Economy From Dependency to Diversification Chapter Five The most straightforward way to illustrate these difficulties is to consider the between resourceusageand studentperformance. b. The results were a failure relationship the explanation for this failure is simply that insufficient attention has been paid to and teacher and curriculum quality. Alternatively. which (Eken et al. which in the educationalprocess. Whereas students graduating in technology and sciencerepresentnot more than 20%. Clearly. Estimated differences in annual sector and make growth between an average and a good teacher are large. obstacles 5. achievement in Libya should focus on improving the overall quality of the teaching policymakers force. which facilitate graduation and provide an easy way to find a job.At the end of the secondaryschool stage students should be given vocational directed towards the labor market and identifying existing sessions to work as an individual or in a partnership. introduction to a training program framework for habilitation or rehabilitation. 2003). colleges and universities to do cincentive interviews regarding future vocational directions. which in the end should eliminate the unemploymentproblem. More attention should be paid to education. It is recommended to increase this percentage to 40% at least. it will need to push the private sector to participate with the public students the education sector more efficient. Achieve a direct corporate coordination between public. Also. particularly in primary and secondary have seen poor performance over time as a result of the existence of schools. In any case. 144 . set Currently most studentsgraduatefrom human and social sciences.10. choices Graduate students to visit secondary schools. colleges and universities.

Libya's Economy From Dependency to Diversification Chapter Five and firms.Computer usersneedto permeateall education stagesaccording to the gradual and education methods need to be developed which concentrateon plan. This would reflect the labour market needsfor work skills. More private sector involvement in the conservatism design of the curriculum. Moreover. and get help from technicians from these firms private schools to teach in colleges for specialization courses. and changesin remuneration policies to attract national scientists and researchers working or studying abroad will also be necessary. and regulations. despite training efforts. Libya encounterschallenges in adapting education Libya has been slow to react.between universities and the private sector. programmes in technical language learning. More attention assist to be given to studentswho are facing difficulties in education and cannot be accommodated in the traditional school educational system. researchpartnerships. this will improve the education standardand lower the number of school-leavers entering the labour market at an early age without sufficient knowledge to them in the labour market. developmentand vocational of factual interaction. skills developedin new technology methods. The to be developed and improved in different education curriculum needs in higher education colleges and specialized stages. special care for students who have special use incentives to learn foreign languagesand the setting up of special needs. to knowledge resourcesfrom society as the core concern. d. particularly secondary curriculum (especially technical and science specialization). As the economic changes and new information and communication environment technologies develop. 145 . staff must be retrained in different education stages. student's access In addition. in part because of cultural programs.

sources? The advantages of economic growth through oil are that an create other increase in real national income allows more goods for consumption. For the Libyan economy to grow. this could assist to establish Libya as a transit for many other countries.Libya's EconomyFrom Dependencyto Diversification 5. Growth is not an birthright for an economy. Many countries. therefore Libya. if they perform well.Certain proceduresshould be taken by the authorities such as lowering the This might create more job opportunities and subsequently tariff and visa requirements. these areas. ports. Libya has played a crucial role in the trade between sub-Saharacountries and Europe in the past. for instanceDubai in the Gulf and Singaporein South country Asia. particularly African countries. By exploiting these endowments Libyan can create more revenues in the economy as Diagram 5. resources it has to grow. therefore.10. increasemore income.10 Transit Trade Chapter Five As Libya sits in the "heart of the world". Economic growth refers to an increase in a country's ability to generate more So how can Libya achieve appropriate growth by exploiting oil revenuesto production. Growth depends.11. Existing facilities and infrastructure. thesesectorshas beenessentialto achieve suitable growth. will achieve port and increaseits revenues. by investing in this sector. include the oil the more potential (in Libya's case). and many advantages 5.2 illustrates below. the sources of growth. Growth and Diversification Oil revenuescan finance and promote different sectors. The better the quantity and the quality of the resources.which could have an advantage in increasing the percentageof growth.to a significant extent. growth 146 . roads and can help to build the entry port by investing a considerableamount in communications. The contribution of these to overall productivity growth increasedin several sectors. the right automatic for growth must be created. on the conditions that Libya already has. don't have a sea they lack the facilities. the development of sectors.

when the oil also US$12 per barrel. it makes possible a better. Libya has devoted a large proportion of total investment to the improvement of physical and social infrastructures. period. The most rapid expansion has been in construction and price reached Construction has emerged as a leading growth sector. as a result of tighter financial policies from the 1981-1986. water low pricing policies. and other services. The expansionary fiscal policies that followed the oil price rise product this development accelerated process and strongly stimulated non-oil economic Measured by the rate of growth of non-oil sector progress during the study activities. However. The weak domestic demands the average rate lead to the virtual stagnation of non-oil economic activity during 1986. or the eventual disappearanceof oil revenues. Strengthening non-oil sectors industry and agriculture will increase resistance to shocks and broaden the such as base. owing mainly to low investment priority. And of course. helped to raise the continued low level of economic activity in Libya. is to invest in the economic different sectorswhich can be an alternative for oil in the future. The relaxation of financial policies rate of growth of non-oil 1980-1990 oil price increase contributed to higher public sector following the investment. by improving the health system economic growth is stimulated by raising both labour education and the participation of the labour force. One way that Libya can encouragediversification and prepare itself for revenue downturns. this has been moderately successful. and of growth of the non-oil GDP declined. diversification has land. In addition.Libya's EconomyFrom Dependencyto Diversification Chanter Five In terms of diversification this is also very significant. agriculture sector 147 . Also. as has government services. the country's citizens and The primary economic objective of Libya has been modest economic growth and diversification. and a smaller proportion has gone into investment in productive sectors for diversification. more fulfilled life for economic improves the people's standardof living. the average annual GDP declined gradually. It promotes other sectors and productivity and institutions. in response to high demand growth supported by electricity. The share of the been constrained by labour shortages and limited agricultural in the economy has declined.

2 Shows the Relationship between oil Revenue and I"coºnomic (: rowlb 148 .Libya's Economy From Dependency to Diversification Chapter Five in total GDP were markedly affected by change in the level of crude oil output changes and oil pricing. Fig 5.

in terms of oil revenue exploitation how oil performance over is allocated and spent on development schemes. Libya as an oil exporting country faces economic problems about the in low growth in the non-oil sector and a lack of economic diversity. Also. the oil sector will remain dominant and government revenue Libyan economy for the next few decades unless crucial steps are taken shape the immediately. attempt to explore the real spent the oil wealth expectation Secondly. the Libyan economic the last three decades. the General Council of Planning and Libyan Central Bank in the mid of 2005. help Libya to overcome them by surveying the policy-makers' opinions and perhaps best solutions. Around fifteen people were interviewed from Ministry of Planning. discover and understand the The goals of the problem which accompaniesLibyan oil revenues. An analysis is shown below: 149 . these interviews are: Firstly. as encounteredby the nature of Libyan government and the policy-makers' responseto this.Libya's EconomyFrom Dependencyto Diversification Chapter Five 5. more than 65% of and over 40% of GDP. which are evident The oil revenues represent over 95% of the balance of payments.and whether Libya has over revenue to be considered.In addition. Libya.12 Interview Analysis Interviews took place in Tripoli. to search for suitable solutions to these problems problem with oil windfalls. the Ministry of Economics. to investigate. So.

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In the absenceof suitable avenuesfor resultant 153 . the economy Libya's policy-makers predicted that the unprecedentedtransfer of oil revenueswould Libya rich beyond belief. Revenuesin the form of have been run down.. Excessive dependenceon the hydrocarbon various societal. combined with a large GDP contribution. Sustainedeconomic growth has not been period of slow Libyan characteristic. through no fault of their own. Most of these predictions assumedthat oil prices would make decline and that government policies would effectively transform this revenue into not foreign or domestic assets. fluctuations in the barrel price of oil. explained The Libyan economy was totally dependenton a single commodity. low-skill labour oil revenue-based to advance their own or their children's education and earning power. the 1980s were a (at least per capita) real growth. Furthermore. Another related is that the authorities and other inhabitants become overconfident and therefore tend risk the need for good economic policies and institutions as well as to underrate or overlook for good education and good investments.Libya's EconomyFrom Dependencyto Diversification Chapter Five 5. productive Since that time. such the basis for future growth. in large part. and thus fail. however.13 Conclusion Oil has adversely affected economic growth performance. Widely fluctuating growth rates in Libya are. exports of crude Its revenue earning was related to the global demand-supply situation of oil and the oil. Libya has failed to widen the economic gap in its. e. create While economic growth during the 1970s was outstanding in Libya. thus reducing the economy's openness competing foreign trade and investment. i.too many people tend to become locked in to industries. with only limited conversion into other forms of oil reserves as the productive economic assetsnecessaryto guaranteefuture income and wealth. a by erratic oil production and prices. favour and Libya becameunable to diversify its economy away from oil. Oil revenue drives the real the domestic currency up to levels that other export industries and importvalue of industries find difficult to cope with. institutional arrangementsthat need to be strong for sector can weaken to grow briskly.

inter-alia includes the creation of infrastructural facilities. the of technical know-how. technical and vocational training institutes are expected to play an important in this direction. improvement in the infrastructure facilities in Libya. The starting point is of imported machinery and equipment. and skills required for the operation and maintenance of the plans. necessary skills indigenization takes place progressively. and the upgrading of indigenous technological acquisition levels. has been mooted to make foreign companies share the risks involved in the venture. In order to protect their investments. indigenous workforce. no real assets were created from the oil export earnings.Libya's EconomyFrom Dependencyto Diversification Chapter Five deployment of revenue. government role has been to keep the ownership of the downstream processing industry units. in Libya itself. Scientific. To create the base for indigenous entrepreneurial ism. This will be achieved progressively. in stages. The joint-venture concept. foreign companies are expected to given an all-out effort to make the The setting up of these joint ventures has brought about ventures successful. with foreign equity participation. Diversification of the economy. mainly 154 . The of capital and the large reserves of hydrocarbons were the strengths that availability to attract foreign companies in joint ventures with the were suitably exploited This can provide the transfer of technology and requisite skills to the government. it is linked to manufacturing development of a better overall level of technology and also to research and development efforts. This processis accompaniedby the setting up of capital intensive place industries which . by setting up industries which either use hydrocarbon (oil and gas) as feedstock and/or as fuel was the first step to converting hydrocarbons into value-added products instead of exporting raw materials for process in developed The value added tax which exists in developed countries is now being put in countries. improved the skills of the local in operation and maintenance of the plants through in-plant experience and also workers the creation of training programmes abroad. As regards developing capabilities for machinery. the tourism sector and transit trade. policy in the private sector. equipment. With the development of the the assembly and fabrication capability.

and will remain for the next and 155 . the economy should be gradually openedup through the tariff and non-tariff barriers. implementation of effective commercial law. in terms of the economic encourage diversification. appropriate regulatory the abolition of corruption. the government should pursue consistent policies through periods of high and low revenues. Also. In three decades. diversify out of oil and gas. privatization and/ or publicjoint ventures. In'the meantime. should private be perused. the impact of this action on the reduction of sector.Libya's EconomyFrom Dependencyto Diversification Chapter Five Diversification in Libya tends to be concentrated in oil-related industries such as fertilizers and metals. which enlarge the scope for private sector diversification.alike. should be dominant. an appropriate and stable real exchange rate. particularly move away from the `welfare state' model and encourage government should individualism. Furthermore. maintain However. Libya needs to emphasize the importance of petrochemicals. The government should establish benign investment environments.a substantial amount has been spent on the development programmes diversification plans. The national economy is still. This strategy aims to maintain reducing macroeconomic stability and rationalize the use of the country's oil wealth. reduction of given bureaucracy. However. Also the Libya government should focus agricultural activities the private sector or risk charges of favouritism by offering subsidies in order to on certain sectors. raising the investment rate. and on small companies in particular. needs to be carefully manufacturing Financial services should be liberalized and the Central Bank should monitored. high-productivity should not be ruled out. Priority should be to the establishment of regulatory and fiscal transparency. The `asymmetric policy response' common in the past. Libyan government policies. education and training should receive regimes and in the fields of science and technology.Libya needs a comprehensivemedium-term strategy to reform its economy better utilise its economic and financial potential by diversifying the economy and and the country's dependency on oil. diversification into non-oil related manufacturing and in particular. accelerate the transition to a market economy. In addition the special attention. and establish a solid basis for the developmentof the non-oil economy.

and many others raw commodities. to government revenue. communication. agriculture and tourism. cacao. not substitute 5. boost and restructure the national economy. which provide transformation budgetsfor the provision training infrastructure. income. public and foreign investment and production.Promote and encourage foreign investment to manage industry. and goals are to change the current economic needsto become able and efficient to achieve the diversification of the structure. and solve problems such commercial bank loans to individuals and small companies. which In addition to create new sourcesof income.which will as then enablethem to embark on new activities. dependent on a single resource (crude oil) to finance the economy. of a 4.Sustainoil allocations. This situation is a critical condition for the expenditure Libyan economy while many other continues have depended on a heavy single source for export such as oil. 2. These ambitious goals scope be achievedunlessthe following policies are pursued. this can be capable of economic structure. in the short and medium-term. in the most beneficial way to give the best chance to the Libyan mobilise oil resources to enhance.promote. In this case.Re-examinethe laws and legislation related to production.however.it will place the country in a negative position and threaten effectively There is an urgently need. Necessity requires research for a mechanismtargeting diversification. import and export. cannot 1. and and health services.Activate the law and decisions related to the private sector's contribution in selected economic activities such as tourism. Taking into account the fact that new resources will innovate energy the global level. re-open the economy to private.wheat. the oil revenue in the medium-term and substitute a full alternative in the supporting long-term. if Libya does not take suitable measures to utilize resources on its oil resources. diamonds. current and the development plans. it cannot changethings immediately. that can provide more chancesto people who are unemployed. 156 .Libya's EconomyFrom Dependencyto Diversification Chapter Five decades. This investment should complement domestic investment for it. education 3.Encouragean increasein employment opportunities.

prospects Many oil exporters have not performed as well as oil-poor countries over the past few decades. percentageof How well the oil sector performs in these countries depends critically on the industry This chapter examines the evolution of the Venezuelan economy in recent structure. Critical choices facing Venezuela in development strategy revolve around the years. diversification programmesin Venezuela. Venezuela's oil revenues has started since has been selectedas a basis for comparison with Libyan oil allocations due management both economic and political structure similarities as well as the features of both to The thesis has also. investigated oil revenues management and its role of societies. Some oil exporting important source of risk and derive about half their export earnings from the hydrocarbon sector. 2001). and limitation of their underlying economic structure as major exporters. when the oil has been discovered. this chapter has done to overcomethe issueswhich accompany oil windfalls. is of special importance to oil exporting countries as it accounts for a very high Oil GDP. governmentrevenuesand foreign exchangeearnings. the government Venezuelan government agrees that variations in world market oil prices are an The instability for oil exporting countries. considered aims to identify the problems which face Venezuela and consider that Also. whose countries 157 .especially when the massive receipts earned by these countries since 1973 are (Auty. for.1 Introduction Venezuela's economy has a long experiencedealing with oil revenuesmanagementthat 1920s.VenezuelaOil Contribution and Economic Development Chapter Six CHAPTER SIX: THE CONTRIBUTION OF THE OIL SECTOR TO ECONOMIC DEVELOPMENT IN VENEZUELA 6.

Up to that time. world. By 1925 oil became the and in 1929 Venezuela became the first oil exporter in the country's principal export. pressure on the Net International Reserves (NIR) of the Central Bank of Venezuela (CBV). In spite of that wealth. Important discoveries were made during the 1910sand major investmentsby Royal Dutch Shell and Stanford Oil of New Jersey caused output to boom throughout the next decade.VenezuelaOil Contribution and Economic Development Chapter Six volatile. by almost 10% a year and real prices generally increasing. and fiscal expenditure. suggest In reviewing recent economic development from 2001-2003. it can be seen that the Venezuelan economy was subject to oil price fluctuation and political instability and the these shocks were magnified by inadequate policy responses. both in terms of oil twenties. 2001). coffee and cocoa were the two major export crops. By early adverse effects of 2001. "Dutch Disease" had an impact on the oil boom in the 1920s. expansion In the early 1940s. the regulatory framework of the oil industry was redefined through longer term contracts. From 1943 up to 1957. and income tax. much data world prices are extremely that oil prices undergo long periods of rise and decline (Warner. economy benefiting from the oil price recovery. 158 . After the major boom of the development in the thirties took a much slower pace. declining GDP and waning confidence. that flowed to the Venezuela economy during the seventies The windfall of oil revenues officials with the financial means to stimulate the process of provided government development and enhancethe well-being of future generations. Nor is such volatility purely short-term. non-oil Venezuela becamea major oil exporter in the 1920s. However. Most oil concessionswere renewed for a period of 40 clearer and fiscal participation in the revenues was increased through royalties and years. The non-oil with output rising boomed through this period at an averageyearly rate of 9% (Hausman.2002). the economic situation was characterised by accelerating inflation. this produced a major expansion of the industry.

For example. 159 . the interest rate of foreign loans. a history of prudent economic development. fiscal the existence of large official financial assetsand/or a low level of public policies and debts has facilitated an orderly mix of adjustment and financing during temporary oil downturns. may have been subsequentlyproven the belief that the oil price decline could be short-lived. particularly in the accompanied by higher levels of unemployment. including Venezuela. increased. Expenditure has difficult to reduce during oil price downturns. combined with an increase in new loan applications has caused The latter has often been inflationary or has crowded out private sustainability concerns.VenezuelaOil Contribution and Economic Development Chapter Six Venezuela is showing an alarming negative trend in its rate of growth. poverty and income non-oil sector. growth In contrast. in a number of oil-producing countries. promoting the temptation to ride the downturn. However. inequality in 1990s. in Norway. Here. out The resulting fiscal deficits have been financed with external and/or domestic borrowing.notably through high government saving rates and the build-up of foreign assets. the solid financial position of the government price to a large extent the more fundamental long-term policy objectives of spreading reflects the benefits of oil over time . In some oil-producing countries. inability to rein in public expenditure at the time of rising oil prices.resisting potential damageto the non-oil tradable sector from Dutch Disease and being able to withstand negative oil market development. procylical fiscal deficits have led to less favourable financial positions and policies and persistent fiscal sustainability concerns related to the volatile and excessive use of oil recurrent A regular feature of fiscal policy in many oil-producing countries has beenthe revenues. sector accessto credit. The seem to have helped Norway maintain macro-stability and reasonable strategy choices rates in the context of an unfavourable oil market environment. because of the level of borrowing.

The oil sector plays a dominant role in Venezuela as it contributes (in real terms and 1999-2002) about 25% of its total GDP. Only massive new investments in exploration and the oil receipts entered development could have contained and reversed the trend. The oil sector the GDP of Venezuela is also highly correlated to oil price fluctuations. the Venezuela government is able to generate fiscal surplus during an oil boom the budget to withstand adverse oil shocks without falling into deficit that would permit in turn. leads to sustainability concerns. committed to serving interstes of the Venezuelan the rightful owner of the countries oil reserves. Venezuela's macroeconomic stability is revenues and about highly dependent on . Venezuela was into decline. the first task Petroleos de Venezuela Sociaded Anonima (PDVSA) who is National stated-owned corporation. over recent 6. 50% of public sector based on the period 80% of exports. As a result.2 Hydrocarbon Sector Development the world's largest oil exporter from 1928 to 1970. due to the controversy about oil exploration.This company public constitutionally.and therefore vulnerable to . confront was 160 . has developed ever closer links with the Venezuelan state that will allow coherent with presentnational project guidelines . After this. to contribute an analysis of the role of oil in the Venezuelaneconomy This chapter aims decades. volatility to the rest of economy. component of (Alferdo 2005). however.and managing the oil wealth had to connection to revive an industry in decay. fiscal policy tends to transmit oil which.VenezuelaOil Contribution and Economic Development Chapter Six Thus.the oil sector. Instead. in oil was completely halved. investment Hence. in the 1960s.

its importance had reduced further.000 Q 2. non-rent oil GDP was 25%. In that year. fields.000 0 1. Oil production reached an average of 3. to the impact of O1'I I' doubt due to the managerial problems of'I'I)VSA. in the 1980s. quotas. I lowever. Venezuela Possessesa substantial hno\en gas reserves in the world as Figure 6. Thereafter its importance declined. first because ut' higher gro%%th rates in the non-oil sector and later. At present. it is about to produce a barrel of crude oil as it was in 1970. It increased 1930 to 1970.500 2.500 2 1.1 Venezuelan Oil Production 1994-2005 (. slowly until I Ims. because of the industry's decay by 1975. Most of' the three times as costly decline has to be attributed to nature and.128 million barrel/day at a in 2005 (See Figure 6. as is But part of the decline is without by the surprising current success of private investors in managerial made plain The importance the oil industry of reached its height in 1950. and after nationalisation faster pace therealler. 000 b/(l) Non-rent steadily GDP per barrel can be used as an indicator oil from for productivity. with the ratio of non-rent/total GUI' having fallen to 7%.Venezuela Oil Contribution and Economic Development (hapi r si.2 indicates (OPFC. 161 .500 3. but has been decreasing ever since. Besides.1).r 3.000 500 0 s Oil Production 0 --r 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Years Sources: OPEC Annual Statistical Bulletin 2005 Fig 6. 2005). the industry began to recover its importance.

in Economic Development development of' Vencruela Inas Since the discovery been intertwined interaction the economic with exploitation of this national resource. In terms ofthe percentage of fiscal (in the this movement was compensated For by an increasing level oftaxation.200 4. early 162 .Venezuela Oil Contribution and Economic Development Chaplet-Six C 4. enc cu o.950 3.100 4.250 4. the picture is dii tcrent. since I'UVSA was able to 1980.2 Venezuela's Proven Natural Gas Reserve 1994-2005 (Billion standard cu m) Regarding excess profit in oil and fiscal revenues.900 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Years Sources: OPEC Annual Statistical Bulletin 2005 Fig 6. Since revenues.350 4.000 ------- I'm en Natural Gas ftc. The best depiction exhorts of this is Found in the relationship between petroleum and (i I )I' f Toni the 20`x' century to the year 2002.of' non-evil (I I )I'. there was one strong upswing and downswing regarding the percentage 1960s) before the peak in 1980 was reached. increasingly rely on excess probt for new investment in oil. They leaked in absolute and relative terms in 1980. 3. 4.300 4. representing 24`%. 4. 6.150 ..3 The Role of Oil Receipts of' oil in Venezuela. I lmaever.050 Z. of excess profits. but more so fiscal revenues. both percentages declined.

there was $16 billion of external debt overall in the public sector and $10 billion of private sector obligations. Yet production the country implemented its initial import-substitute drive during this period. sector. spurredby major devaluation of the Bolivar and the expansion of the Guayanaregion. another The country's wealth reached all social classes. Venezuelan public enterprises in the non-oil sector became net overseas borrowers from the International Commercial Bank (Carrillo and West. This toward oil conservation was followed by another prudent measure in favour of move foreign currency stabilisation. the oil windfall was used to raise wages. in which the contribution of oil in terms of accumulated with previous international reserves and tax revenues. 2004). through PDVSA. were put to good use. as slackenedand oil prices remained steady until the decade's later years. . public expenditure rose annually at double-digit rates. successfully According to Ammuzghar (2001). By 1979. while the VIF and the national oil company were still increasing their investments. In contrast a experience. government The nationalisation of the oil industry in 1976 favoured and facilitated this policy.so in order to ensure socio-economic democracy.VenezuelaOil Contribution and Economic Development Chapter Six The decade of thel960s constituted a waning period for petroleum in the country. because part of this profits did not flow abroad but rather to the the overall economy. because the thought the gain in exports made conservation both possible and affordable. Direct transfers to households during the first oil boom were also part of the windfall A similar expansive platform was adopted with respect to capital investment at use. As the windfalls surpassed the country's domestic capacity. in aggregateterms. workforce and output in the public Between 1976 and 1980. some of the new revenues were converted into foreign assets absorptive through the Venezuela Investment Fund (VIF) created for this purpose in 1974. which could only muster modest growth. the 1970s saw a monumental enlargement of petroleum sector exports that was not carried over as to the rest of the economy. petroleum exports suffered a This was partly compensated for by an increase in its contribution to relative collapse. After 1977 however.during the 1980s. state Venezuela's oil production and exports were reduced after 1973. 163 .

This largealuminium plants. price for more than 24% of GDP (at current prices). the Venezuelan government respondedto the first oil boom with caution. industrialisation drive was designed to promote new exports. Venezuela revenues from oil exploration for the last 20 years general public (1994-2004) are estimated at more than $310 billion but the oil receipts in 1993 were than in 1974. chemical. and to establish a domestic capital goods industry. economic increased domestic consumption and an ambitious public investment programme designed to diversify the economy. Investment and growth were both heavily influenced and sustainedby developmentsin The Venezuela government embarked on the expansion of their world oil prices. the the lagging agricultural sector and increasedeasy credit to the private sector. underground subways. The allocation of oil windfalls included saving abroad. over 70% of central petroleum accounted and about 95% of total exports. substitute some the The period from 1976-80emphasised improvement of the physical infrastructure.In 1974. Venezuelan dependenceon oil goes back to the late 1920s. 164 .3 indicates as a result of the oil price reached increase. Initially. apartment buildings. Venezuela GDP production government revenues its highest level in 2005. public investment.VenezuelaOil Contribution and Economic Development Chapter Six home. Annual income volatility was mainly attributed to oil only slight more fluctuations. public works and multi-level facilities. as Figure 6. and absorbing one-third of the total non-oil. revival of Much of the initial capital expenditure went into office towers. diversification. particularly in the expansion of steel. The nationalisation of the oil industry in 1976 allowed public enterprises to double their investment outlays. scale resource-based intermediate imports. highways and elaborate plants.

3 Venezuela's GDP at Current Market Prices 1994-2005 (m S) Kaster and Yergin (1983) state that the international oil market grew rapidly. N 60"o (d all j-c%cjijjc.011) the economy to make up for the decline in evil shares.000 140. revenues 1'rom the prices increases. Obviously. I his is suggested) other sectors of by the fact that total government revenue Icll sharply.000 GDP --/ - ---- - 20.000 120. Venezuela's budget became highly dependent on oil revenue and it can he said that the national Venezuelan economy became oil-dependent on a single economic activity.000 yr 100.000 40.4 Oil Wealth Impact.1. º At the beginning the 1990s. 6. the oil contribution of government.000 CL C) 60. by the Venezuelan received The receipts from oil windlalls during the late I 990s further enlarged the share of' government made In recent years. whilst the non-oil continued to expand vigorously.000 80. the government was having difI culty generating additional revenues 1.Venezuela Oil Contribution and Economic Development Chapter Six 160. that share rose as a result ol'ml oil sector. however.000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Years Sources: OPEC Annual Statistical Bulletin 2005 Fig 6. Expenditure and Investment was ncarl. Oil GIP controlled GDP grew in modest way. despite meinest growth in the non- 165 . which was by a multi-national oil economy.s in Vencrucl. and industry has benefited from rising international Venezuela's demand.

Here. This included which investment surveying. sub-national government play a relatively important fiscal role in Venezuela. this has been in decline over the years.5 Problems Which Accompany Windfalls the Management of Oil The main problem which accompaniedthe oil windfalls was the increasein net internal borrowing. but to the expansionof The second major use of oil sector investment was in refining. and extraction. in terms of revenues it generatesand the investment expenditurethat is fuelled by these revenues. change In terms of oil's contribution through investment. the current shares are some of the largest when compared with investment during the period between 2000 and 2004.The change in petroleum public from year to year explains about 45% (on average) of the variation seenin the revenues in capital expenditure. In fact. increased steadily over this period (2000-2004) in relative terms. The lion's share of oil sector investment was utilised in the production of petroleum. The only significant increaseshere were seen in early 2002 oil sectors of in the oil sector's contribution through taxes. highest sharesof investment spending in this category occurred in 1997 and 1998. According to Ahmed and Mottu (2002). This that a significant reallocation of spending had taken place. the reserves. Recently. the same years in which the oil investment rate hit its lowest level since 1992.when lagged one year (Baldani. the share of oil in total investment is quite impressive particularly the last decade. 2005). and oil investment declined due to overall fluctuating oil prices. This type of investment not only leads to further production of hydrocarbons. with emphasison suggests production and refining.VenezuelaOil Contribution and Economic Development Chapter Six the economy. with expenditure representing about one-third of expenditure and it is estimated about half of this expenditure comes central government from oil revenues 6. in 1990s. exploration. which leads to overspending policies in a number of oil and external 166 . as well as production.

Accompanied by inadequate and incompetent fiscal policy. even to the extent economic some observersto ask whether oil is a blessing or a curse of prompting 167 . According to (Jeffery et al.including Libya. 1997).VenezuelaOil Contribution and Economic Development Chanter Six countries . But as a result of the and adjustment in employment in recent years the percentageof government's economic has declined and has benefited in real-terms (World Bank. 6. though the governmenthad implemented a strict policy. declining non-oil GDP and waning confidence. poor The Venezuelan economy is extremely oil dependent despite efforts at diversification. the expansionary fiscal policy and the huge amount of credit investment in the oil sector. the Venezuelan economy has seen an increase on the balance of payment in the early eighties and fiscal accounts and showing impressive However. 2001). thereafter According to Hausmann (1995). The revenue from oil endowment causes wage to rise which leadsto a significant recovery in non-oil output. 2003) the prices performance of many oil exporters has been disappointing. Venezuelaneconomy will remain heavily reliant on world oil markets supporting strong for Venezuelan crude oil (NIGE. exporting Managing the debt becomes a significant macroeconomic problem causing inflation (Stephenand Robert. The Venezuelan economy suffered from inflation when oil prices decreasedin 19911995. The decline in oil prices 1986 and the lack of appropriate macroeconomic policies to foster diversification after productive employment caused poverty to spread. 1995). fuelled by an expectations increasein domestic expenditureassociatedwith higher real wages.6 Economic Performance and Development Goals Venezuela's growth generally has been slow since the 1970s. the unemployment rate rose in 1997 it declined somewhatin 1998 (IMF. Borrowing increases when oil prices decline. As a result of these. 2001). by early 1996 the was characterised by growing inflation. pressure on the net economic stabilization international reserves(NIR) of the Central Bank of Venezuela (CBV). the sharp increasein to the private sector. unemployment had doubled and inflation had remained high. even surplus.

in the process.9% for girls and 83. Also the net overall primary population in Venezuela in 2002 was 85%. The Venezuelan economy remains heavily depend on oil prices and the oil sector with major macroeconomic and structural imbalances. despite a affect high oil price (above US$ 50 per barrel on average). in the world wide. Second. largely explained by capita growth averaged about -2% per decline in productivity. and oil output continued to increase as a result of the investment drive initiated earlier in the decade. dependent on including a growing fiscal deficit and high unemployment. while 20% of the world children under age live on less than US$ 1a day estimated in 2002. Much of the public sector investment and the has been unproductive and. 86. In terms of the economic the current level indicates for instance in Venezuela 23% of Venezuelan's development lived on less than US$1 a day. largely due to unproductive public sector investment. While oil income fluctuations significant on macroeconomic stability Venezuela's fiscal stance. including the last decade. there are 400 maternal deaths per 100. and poor macroeconomic policymaking to cope with oil cycles. year over the last decade. the consolidate nonrelatively financial public sector registered a deficit due to an expansionary fiscal and suffered from the lack of a consistent exchange rate policy which has also contributed to fiscal that over half of fiscal resources depends on oil revenues which in turn instability.000 live births) in 1998. and real non-oil GDP per wealth. in to safe water in 58% (Jorge and Barnnadette 2005).000 live births. has destroyed human and physical capital Real GDP per capita growth averaged -1. The impact of the external oil shocks monetary policies and the economy. enrolment ratio Besides in Venezuela. In recent years. While Venezuela 81% of Venezuela's population had access to an improved water resource. given the exchange rate. inadequate and inconsistent fiscal exchange rate and have not been able to neutralize. they are not the only culprit.VenezuelaOil Contribution and Economic Development Chapter Six the oil sector in Venezuela over the last decade played a crucial role The performance of in the economy. The prevalence of malnutrition among population 5 decreased from 7% in 1990 to 4% in 2003. However.8% for boys.2% per year. Finally. has been performance of dismal. maternal mortality rate was (43 per 100. in rural areas. the the economy over the long-term. access 168 . Oil prices rose sharply to their highest level.

3% in 2002. Oil revenue alone cannot sustain growth. Although perhaps not as large as in very theory suggests this may be a sign of a maturing economy diversifying previous periods.1% in 2002 and increased relatively joblessness was one result of this. while absorbing a minimal of the governmentbudget. portion 169 . Unemployment rose from 11. even at a time of high petroleum prices.3% to an estimated 14. Most affected workers were outside the oil labour market. public Despite this. Banking difficulties exchange. Consequently.the reform of the social security system and the introduction of private funds will have a major bearing on the financial system. any fall in the latter expenditures have dire consequences for this fragile economy in terms of new capital formulation will The Venezuelan oil industry has contributed to the growth of other sectors. 2005). pension Economic turbulence and continuing inefficiency in the large public sector have to lower private sector productivity. unemployment rate 6. the real GDP rose by 20% in 1999 whereasthe non-oil economy grew very little.7 The Challenges Ahead ChapterSix The biggest challenge which faced the policy makers in Venezuela was to deal with the of exchange controls and legalisation of a parallel market for foreign relaxation This allowed for spill-over into the balance of payment.8 Conclusion It can be concluded that oil's contribution through the investment and fiscal sectorswas large indeed over eighties and nineties. This doesnot count workers in the informal economy. In addition unemployment rose to 10. from its staple. Its main fourfold: contribution was (i) The financing of the public sector and the provision of services of an essentially public character by the industry. finances remained weak and the inflation rate reached 57% recently.5% of the labour force (Alferdo. Looking ahead. GDP fell by an estimated 6. continued. Unfortunately. and that would be good news. since public away on capital appear to be largely fuelled by oil revenue.Development Oil Venezuela ContributionandEconomic 6. Venezuela's petroleum combined dependency has grown.

VenezuelaOil Contribution and Economic Development (ii) The foreign exchangeearning it supplied. in nineties with their share in total tax revenues increasing as well. and the strengtheningof the Venezuelancapital goods industry that it brought about. especially in helping to further the developmentof the construction and metal industries. (iv) The income and current-expenditure originating in the oil industry and the multiplier-accelerator repercussions they created throughout the leading to an increasein aggregatedemand and a large volume economy. extraordinary revenues Also. Another important contribution was the exogenous income expenditure injection of oil to the matrix of the Venezuelaneconomy. Taxes derived directly from the oil sector rose at an annual average compound rate of 106%. of saving Oil has also a contributed a large share to government revenues.For 170 . Chapter Six (iii) The increase in economic wealth and productive capacity of the nation tacking place through petroleum investment. foster and enhance the role of stabilisation fund and The government should The advantageis to generate a smooth consumption pattern and saving consumption. and depleting the funds balance in front of a price downturn. Despite the fact that the share of oil in total investment declined through time. clear and strict rules must be issuedto isolate the fund from political pressure. macroeconomic accountable and transparent government and promote and socially sustainabledevelopment. environmentally construct an efficient. Venezuela needs more efforts to create consensus around reforms that restore stability. The investment contribution of petroleum from 1990 to 2004 was quite as impressive. As in the balance of payments there were other effects of its public sector contribution contribution. the investment contribution of petroleum was still substantial. such as low tax on other sectors and the possibility of extending public services while averting pressure financing deficit. build a basefor economic diversification and competitiveness. which was quite considerable.

revenues. The traditional idea of stabilization funds may be quite unworkable.VenezuelaOil Contribution and Economic Development Chapter Six both the stabilisation fund and the hedging strategy can work as the caseof oil revenues than as a substitute. by fixing a baseline projection of oil income and then saves or the government starts dissaves the difference between that level and actual income.While the fund can work as the main recipient of complement rather hedging strategiescan be usedto manageshort-lived movement in prices. managinginstability in oil exporting economy is an unresolved problem. In this framework. 171 . It is quite clear.

production bottlenecks. Someweak of economic growth. authorities succumbed from above and force-fed through the bureaucratic process. every accomplishment social unease. estimated to be the fifth largest in the Middle East and North Africa. frustration and Looking back at the two decadesof the oil cycles. seemsto Libya has a substantial endowment of oil and gas deposits. to improve the welfare of the population to points of economic long sought-after projects of great popular appeal. have carried its own downside. and helped history to repeat itself.1 Introduction dramatic increase in oil revenues and the resulting windfalls in the The sudden and 1970s placed Libya under intense political pressureto move forward on three strategic developmentall at once. and to develop the undertake in such a way as to reduce future dependenceon oil.much development Directed but at an inordinately high overall cost and without any assurancesfor a took place. in eighteen century. The hasty expenditure of oil windfalls on a multitude of poorlyprosperous even more poorly-coordinated. Libyan dealing with to similar strong temptations. the early euphoria gave way to widespread disappointment. congestion and inflation were stoically tolerated by the rank and housing shortages. historical precedents from the failed policies of Spain and Portugal in Despite ample their New World gold and silver fortunes.port file in anticipation of better and happier days to come. All this was also to be economy losing traditional social and cultural accomplished through rapid modernisation without values. future. and development.Findings and Recommendations Chapter Seven CHAPTER SEVEN: FINDINGS AND RECOMMENDATIONS 7. public projects resulted in a feverish rate of planned. Oil production in Libya is projected to in 2006. particularly after the United Statescompaniesreturned increasesharply starting 172 . power blackouts. But when the oil boom turned into a bust.

aggregate increasedfactor productivity made little contribution to economic growth. an independently of oil resources. The analysis also demonstrates the national saving-investment the stable macroeconomic environment contributed favourably to Libya's growth that The challenge of the period ahead is essentially in sustaining growth in performance. within a framework of continued macroeconomic stability and a real diversified economy capable of averting the vulnerability to which a monoculture (in economy is exposed. their petroleum export revenue to develop the economic infrastructures will use part of future economic growth less dependent on oil sector exports.1 Findings Negligible Diversification in this thesis indicates that periods of real growth in income per capita The analysis a relatively rapid growth in investment that was able to maintain were associatedwith demand.Some observers have suggestedthat petroleum export be a mixed blessing. So far. the impact of fluctuation in oil this case oil-dependent) has been tempered by downturns of accumulated foreign assetsto sustain export prices 173 . given the known reservesand production over to peak during these two decadesand decline profile.2 7. oil and gas revenuesare expected thereafter (IMF. 2005) gradually the economies of oil-exporting countries built on petroleum exports is a Development of Sympathetic commentators claim that oil-exporting countries well-known phenomenon.Findinc sand Recommendations Chapter Seven the major western oil companies. Amuzugar. Furthermore. production is estimated to reach 3 million the barrels (as in the early 1970s)by 2010 following the development of a gas field located in the Hamadaand Murzk basin in south of the country. The expected revenue windfall to the government of Libya reach the next decadeis substantial. (1988).2. and the reservesare estimatedto 100 billion barrels. income per capita. that the economy recorded negligible diversification in real terms. and that that gap deteriorated steadily. revenuesmight 7. However. in the wake of the lifting of to the country alongside United Nations sanctions. and to needed to make economy self-sufficient enough to balance its international trade establish eventually.

The list of countries that failed to avoid simultaneous hydrocarbon resourceboom is long. without adverse aggregate for exchangerate stability. mismanagement 174 . the authorities are faced with the sector to external overall economic growth by accelerating the growth of the nonchallenge of sustaining diversifying its composition. third.in order to enable a steadyincreasein and the living standardsof the Libyan population. Given the vulnerability of the oil consequences factors beyond Libya's control. second. This is important not only becauseof oil the to price shocksand the temporary nature of oil revenue. vulnerability becausethe oil sector. is limited. effective mobilization of national the saving-investment gap. It is vital to the country's economic future that the potentially volatile this revenue in a way that allows the diversification of the economy government manage discovery of alternative revenueresources. clear economic faces the challenging task of reducing its dependence on short-lived and Libya oil revenue. oil sector and 7. Few countries that have been heavily dependent on the source of much have succeededin managing oil wealth in a manner that allowed the hydrocarbon sector developmentof the non-oil sector.2 Poor Management of Oil Revenues here of Libya's growth performance since 1990 indicates that a The review presented increase in income per capita would be contingent on the following points: sustained savings to allow higher levels of investment and First.Findings and Recommendations Chapter Seven demand. But the scope for continuing such downturns.2.but price volatility. implementation of a through structural reforms diversification strategy. while a substantial source of revenue for the country is not a also employment. It is critical that Libya the problems associatedwith designs and adopts prudent and coordinated macroeconomic policies and institutional that take into account these countries' experiences in order to avoid the reforms of national resourcewealth and its implications. efforts to enhance factor productivity to reduce and human resource development.

4 Oil Windfall and a False Sense of Security dependence on endowment tends to be directly associated with corruption.2. Heavy inequality. and political oppression. too many people tend to become locked in industries. Excessive dependenceon oil wealth can thus weaken various societal and that needto be strong for the economy to grow briskly. quick-money fever or the catch-as-catch-cansyndrome - 175 . risk. social. Oil wealth-basedactivity sometimes drives the real economic growth and domestic currency up to levels that other export industries and competing value of the import industries find difficult to cope with. authorities important assetmay develop a false senseof security.2. to advance their own or their children's education and Another related risk is that the authorities and other inhabitants of earning power. human physical and financial capital. The heavy dependenceon oil revenues may adversely affect performance.variously. Since then. that believe the hydrocarbon sector capital is their most Furthermore. By This new culture . Libya has in its possession abundant reserves of petroleum and natural gas. all of which can impede economic progress and Libya has suffered from theseobstacles. and this fails. become over-confident. growth. the stated goal of government economic policy production has been to expand to enable the economy to reach a stage of self-sustained economic independence.Findings and Recommendations 7. based largely on hydrocarbon industries by 1980. These raw the foundation of prospective economic development.3 Over Confidence in Oil Prices and Over-ambitious Chapter Seven Targets Libya was changing from a relatively poor agriculture country to one with a growing. materials are Oil windfalls bring. accumulation of far the most common outcome of the oil bounty was the rise of a new pctro-culture. intensive natural resource-based low-skill through no fault of their own. diversified and industrial economy. Furthermore. as well as good education overlook the need investment. including agriculture. and become negligent about the foreign. institutional arrangements 7. thus reducing the economy's opennessfor foreign trade and investment. build up the country's domestic market and improve income distribution. and therefore tend to underrate or resource-rich countries for good economic policies and institutions.

easy money budgetary allocation. or realistic changesand fees for social amenities. to reduced financial discipline within the bureaucracy. Reliance on oil money pre-empted any serious efforts to mobilise domestic resources taxation. encouraged rent-seeking activities beyond reasonable means of satisfying them. as a matter of birthright.With the state as the sole recipient and dispenser of the oil windfalls. but from obtaining a piece of the oil rent a special foreign exchange allotment. from productive economic activities. production becamenot only highly profitable financially but also extremely rent-seeking activities The highest returns to entrepreneurial talent did not came directly prevalent socially. this can lead to in turn. However. the wider the possibilities for such rent-seeking A common tendency in almost all oil economies is for the services preoccupations. and deprivation lowered the natural tolerance for and raised and austerity.or an exemption from repatriation of export proceeds. hard work temporary independent entrepreneurship. The state was elevated to an earthly deity. development. was planted. and for private entrepreneursto prefer sector industrial or agriculture endeavours. seeking easy Oil wealth is clearly capable of solving some socio-economic problems. Most manual work goods and services were had to be done by expatriateworkers. a lucrative government contract.The growth of a fully-fledged welfare state and the spreadof taxes throughout the state gave distributional issues greater prominence over welfare issues. commission The more absolutist and patrimonial the state became(where the nation's wealth was not distinctly separatefrom the ruler's). a on arms purchases. Chapter Seven It gradually weakened the traditional work ethic among the native population. reduced incentives for risk-taking. The shareof non-oil through in GDP fell 1980s. unsavoury practices and the allowance of careless The results could hardly be more injurious to normal widespread corruption.Findings and Recommendations nurtured and pampered by oil windfalls. popular expectations The new culture mindset intensified the desire on the part of the rank-and file for solutions through state intervention. Cost-free or lower price public taken for granted.was largely rooted in the high and quick trade over 176 . an important quota. waste. to gain prominence over other sectors.

The magnitude of the oil rent itself and the profits obtainable impetus afforded to rent-seeking ventures. confronted the Libyan government with an administration and impossible mission.6 Exchange Rate Overvaluation domestic currenciesto appreciatein real terms. Wages and salaries. genteel 7. businessmanipulations. diversification and industrialisation plans required a an 177 . devaluation unlessall other coursesof action were exhausted. In respect of lack of policy coordination.2. and humiliation. the petro-culture undermined the traditional virtues of both at the personal and national level.Findings and Recommendations Chapter Seven through clever `deals'. also created an inhospitable overall climate for `real' production. if not national pride. Worse still. securing inflation. new oil psychology also elites. who emphasisedeconomic growth as a pre-condition for human and progressive development. without having sufficient economic efficiency and enhancing technical capabilities.for example. it desensitisedthe people vis-ä-vis self-reliance. The double-barrelled aim of ensuring some cases actually distributional equity.and in policies adopted often proved aggravated internal crises. 7. Although wages rates did not catch up bonanza among people. the domestic macroeconomic inadequateto properly manage aggregatedemand. The drove an alarming wedge between the privileged. devaluation was considered a sign of economic weakness. were raised or allowed to rise for urban workers. the choice of import. welfare handoutsand big-brotherly tutelage.Furthermore. Yet an overvalued Rising prices caused rate was allowed to prevail unadjustedover an extended period for a variety of exchange The economic culture of a high domestic currency value was a matter of reasons. westernised.2. with a view to spreading the benefits of the oil public servants and the industry. Therefore.substitution strategy. any other policy ploy that was not so highly visible (even if no defensible and even more disruptive) was politically preferred to outright more .5 Lack of Policy Coordination A securejob in the bureaucracybecamea symbol of social standing and prestige. the increase in real wages was not accompanied by a correspondingrise with in productivity.

housing and other government the threefold objective of helping low-income consumers. national population was another unhelpful In the The objective was rationalised for a variety of reasons. larger birth rate were coveted and encouragedas a useful expedient and population and a be worried about. 2000s. interest rates on savings new countervailing deposits and investment loans were kept artificially low and totally divorced from the at home and abroad (IMF 2005). fuel. however.Findings and Recommendations Chapter Seven large degreeof home-industry protection. The policy was defended as a way of increasing national labour on in the service and productivity of development. which constituted a rather insignificant part of total national exports. Under strong political pressure from a largely poor.(Central Bank of Libya. For much the same reasons. It was considered a means of eventually reducing dependence not to foreign labour. opportunity costs of capital Equity considerations prompted the government to direct a sizeable chunk of the in to the creation of a western-stylewelfare state. frustrated and impatient population. domestic energy prices are still below cost in order to keep inflation down and enhance the competitiveness of their energy-based industries in world Pricing of energy products based on production rather than opportunity costs. without the benefits of prior windfalls industrialisation or adequate government machinery. Exchangeovervaluation was a subtle meansof implementing that strategy. early the desire for a larger. requiring public policy. markets. non-oil exports. electricity. Libya had a small a policy. and often faced low demand elasticity. the government found it necessary and expedient to increase direct the oil to poorer social and to expand the state. would from exchangedepreciation. recently. demanding to receive a shareof bounty. The average annual growth resources 178 . caused serious economic distortions in domestic resources allocation. 2003) not gain much In this respect. with activities and protecting infant industries against foreign of various economic competition.reducing costs amenities.At the sametime. It is essential for the transfer of oil resources to continue to give subsidies on food.

optimism about impact on economic growth has not been fully realised. However.during much 1990s. the benefit from oil of the world. drastically to preservethe fiscal balance in the face of weak oil revenues. failed to generate a sustained growth. the population produced significant open or concealed unemployment. (National for Documentation and Information Corporation 2003). Another key factor is Libya's ability to take advantage of increasing progress. due to the increase of the in oil revenues. or did not go deep may to address long-standing structural rigidities and distortions. 'Changes have been the main source of volatility of non-hydrocarbon GDP growth. 179 . Libya remains on a slow Despite efforts diversification trend. In the absence of appropriate educational and labour policies.7 The Failure of Policy-makers to Insulate the Economy from oil Receipt Swings Libyan policy has failed to effectively insulate the economy from the cycle of oil in domestic investment. the early aheadwith macroeconomic the depth of reform commitment of the government in Libya has waned. which is moving at a crawl effectively from globalization and the benefits of closer economic integration with the rest sidelined Although Libya still has an impact on the oil market. often had to be cut revenues. By contrast. Savings of domestic investment have been closely associated with volatility in oil Domestic investment. Libya moved integration. public investment has soared since 2000. about to create regional economic early The slow-down in economic reforms is no doubt a key factor. One reason and the expected be that the reforms did not achieve a necessarycritical mass. 7. still considerably higher than the rate of population global rate. swings. Complementary enough is important. had brought about a marked improvement in living conditions in the 1970s and that 1980s.2. with a multiplier impact on domestic demand. and structural reforms in the late 1990s. Growth requires a moderate degree of success in several policy policy because poor performance in one area can thwart broad-based areas simultaneously.Findings and Recommendations Chapter Seven in Libya from 1990-2000was 4%. dominated by the public sector. reflecting a growth path. to spur recovery and initiate structural reforms.

provided it doesnot lead to excessivedemand pressures. This way. has a economic and social goals financial position. that could raise the growth rate of non-oil GDP over time. Despite some progress with privatization. by international standards. so an increase in the non-oil fiscal deficit and be appropriate.1 In meeting these conditions. employer Libya continues to lag in the development of an economic and financial environment to entrepreneurship. the economy is still dominated by inflated state institutions and large public enterprise sectors. such as investment in key infrastructure and efficient social spending. conducive 7. the develop a stock of projects from which the highest-yielding government should be selected. when appropriate. inflating public payrolls and wage bills. would Oil Revenues Should Support Diversification 7. In the face of the public sector has increasingly served as the "last resort" rising unemployment. Another important reason is the dominant public sector. a significant part of the oil windfall could be used to finance additional high-quality expenditure. important infrastructure gaps hamper the development of the non-oil sector. Part of the windfall could be used to finance investment and public infrastructure.3 Recommendations Higher oil revenueprovides Libya an opportunity to increasepublic spendingon priority or. risk taking and private sector-led investment and growth. institutional reforms in areassuch as trade. in part.3. the financial sector and governanceare better to benefit from increased international trade and capital flow. oil productive be turned. with high rates of return. However. a sustainablefiscal position (taking into account oil relatively strong in the ground and net financial liabilities). countries that undertake policy and globalization. In Libya. could ones 180 . and are therefore equipped likely to experience higher gain in per capita income. into non-oil capital assets (both physical and in the ground would human).Findings and Recommendations Chanter Seven Although this has its risks. and a reasonablecapacity to identify reserves implement good spending programmes. Libya. reduce distortive taxes. To facilitate this.

3. Multi-year expenditure planning allows a better appreciation of changing oil future spending implications of present policy decisions. should A medium-term framework expenditure can help improve spending responses to revenues. Libya should give priority to undertaking expenditure that does not require significant. with sustainability concernsand a precarious financial position should save more the oil windfall. in the tax system. Higher oil prices provide an opportunity for Libya to strengthenits of 181 . including the recurrent the thus helping petroleum exports to avoid some of the mistakes costs of capital spending.In it could help finance a social safety net to protect vulnerable groups from the particular.Findings and Recommendations Chapter Seven 11 7. Libya. Spending' that creates substantial future entitlement permanent recurrent outlays may be difficult to scale down. Libya. One of the important fiscal may lessons to emanate from these experiences is that government spending levels policy be adjustedcautiously in relation to sharp rises in oil income. the civil service. if the need arises in programmes and the event of an oil price decline. For example. add urgency the quality of public spending. Also.2 Economic Pressure Needed for Restructure Reforms The oil windfall could also facilitate pushing ahead with reform agendasand tackling those structure problems that are a serious impediment to growth. commitments. could use part of the windfall to fund education reforms and training programs aimed at reducing such mismatches. 7. the oil windfall and the opportunities it createsfor to the need to improve fiscal transparencyand enhance greater corruption. and public enterprises. pension system. impact of such reforms. the past.3 Fostering the Role of Fiscal Policy formulation of an overall policy in responseto the problem of oil price volatility The be aided by a medium-term expenditure framework. Rising oil revenues make the formulation of a medium-term expenditure of framework all the more urgent. labour markets. with a significant skills mismatch between labour demand and supply.3.

this could be expansionary and might imply the need for offsetting monetary policy measures. abruptly and in a disorderly oil price fashion. The Libyan government relies heavily on oil revenues and should be encouragedto the scope of other incomes to hedge their budgetary oil price risk. As an oil exporter. or through reducing gross public debt. remain constrained 7.5 Adoption of a Sound Monetary Policy of the currency is to be expected. taking into accountrisk and the cost of liquidity.4 The Urgent Need for a Saving Fund in Libya Downturns should be preparedfor through sufficient financing capacity. and improve confidence. As the market develops. Specifically. real appreciation is inevitable.in casethe external environment turns out to be less favourable than anticipated. it may be possible for Libya to its saved reserve. 7. liquidity. Hedging can explore help the government manage oil price risk by making oil revenue streams more stable Libya should be encouragedto start building up technical capacity and and predictable. debt. when the next decline sets in. their 182 . Thus. Libya is likely to expand and protect by market size. The saving should be held abroad. however. Budgets should incorporate cushions. considering perfect capital mobility. although it may be Real and nominal appreciation to pursue monetary and exchange rate policies that slow the rate of real appropriate Provided that the public and private sectors spend at least some portion of appreciation.3. in place sound and transparent institutional arrangements to exploit efficiently put hedging opportunities over time. as well as transparentand well-specified mechanismsto deal with The government should also strive to build adequate revenue windfalls and shortfalls.Findings and Recommendations Chapter Seven financial position. taking due account of through assets liquidity A distinction should be made between repaying external and domestic needs. with potentially serious growth and social consequences. especially beyond the short-term horizon. given the different macroeconomic implications. it will be less in need of adjusting.3. reduce vulnerabilities. higher oil revenues.

Moreover. In addition. the authorities may want to counter this degree of monetary tightening. since that would bring about inflation. as oil exporting country. However. and the quality of state and institutions. reduction in unproductive oil revenue shocks and civil service reforms. It must fiscal policies and save its oil revenue windfalls at every opportunity. accelerated. to pursue prudent help cushion the impact of oil price declines and increase. That option is constrained be the quasi-fiscal costs of sterilization. and low levels investment. In response.the resilience of the budget to such as a broadened revenue base. These reforms must aim at support 183 . higher. Key constraints to growth included poor overall economic performance inappropriate economic policies. greater efforts are neededto acceleratetrade liberalization. governance. containing in As an oil exporting country both domestic and external factors contributed to Libya's in the 1980s.Findings and Recommendations Chanter Seven The monetary authorities should not generally attempt to resist this through unsterilised intervention. reform financial labour markets. fuelled by oil revenues. Libya. investment and private sector growth. thereby creating jobs for the population. It may also appreciate to the extent that there is a augment transitory component to the oil-related spending increase. Labour market reforms also need to be expenditure due to its significant role in the economy. inadequatehuman capital development. is likely to result in a strong aggregate demand. Economic liberalization should ensure fair and open competition. and improve transparency. where could create opportunities for more efficient allocation of resourcesand market places the private sector's investment and growth. some amount of sterilized intervention may be appreciated in due time for the trade goods sector to adjust and to foreign exchange reserves. faces a number of immediate challenges to oil's dominant role in its economy and the risk arising from the variability of related Libya has to accelerateits economy to reduce dependenceon oil by promoting prices. public and private spending. The need for such tightening is likely to effect with some be less when the monetary authorities have a relatively high degree of credibility inflation. of private Furthermore.

GDP and a3 percentage determined and sustaineddrive by the Middle East and North African countries A more Embracing the fundamental. transforming the emergence of the Libyan economy into the global employment generation and economy. the of important policy instrument in oil producing countries. (IMF. and strengthening investment and stimulate productivity growth. Fiscal policy. East and North African regions. a help diversify the economy and remove obstacles to developing the non-oil sector. The positive impact on encourage 184 . effects on issues of intergenerational equity in mapping out strategies for take account of investmentand financing of public sector operations. can competition.3. steps to isolate government spending from Although much more considered and comprehensive approach is needed to current oil receipts. needsto cushion the single most the economy of booms and busts in the oil market and. government spending. will make reform of the public and private the difference. the Libyan government has taken.6 to maintain macroeconomicstability and pursue structural reforms. It is the Libya needs sector institutions that. would decent dignified life. Reducing dependence on oil would also require establishing modem tax policy broad-based taxes and low rates. structural and institutional toward a more open society. Libya as an oil exporting country needsto conduct fiscal policy by taking a longer view it resource endowmentsand their impact on the country's welfare. could result in a 20-fold increase in real capita Middle point increase in growth of real per capita GDP. According to the International Monetary Fund (2003) there could be substantial for the Middle East and North African countries that introduce such economic gains Strengthening the quality of institutions in the advanced economies of the reforms. Opening the private sector to stronger higher growth rates. and a the institutions that support private markets. in the final analysis. with The Pressing Need for Macroeconomic Stability 7. therefore appear to be the best assuranceto achieve the potential for reform. over the longer term. 2003). structures and tax administration.Findinzs and Recommendations Chapter Seven the business and investment climate that is crucial to economic growth.

and reduce poverty economic growth 7.7 GDP Increase Per Capita has been encouraging. 185 . the government should achieve more intensify its efforts to createan environment that encouragesprivate investment. Libya. and more generally. and the outcomesof the economic analysis offer the following elementsof a In this respect. adequately good governance. flexible labour market regulations. Although private investment has increasedin Libya. It should create and maintain a transparent.1Enhance Libyan Libya's economic growth performance.Findings and Recommendations Chapter Seven in turn.3.the role of the public sector will need to be reshapedfrom signals. the purveyor of 7. Thus. real GDP unemployment. on a sustainedbasis. can be enhancedthrough targeted labour market reform. even-handed. such as employment. framework that could be implemented to promote sustainable economic growth policy in Libya. ratio of private in the oil industry in recent years. should seek to boost the To enhance investment to GDP. notably that promotes confidence in the sustainability of appropriate an environment and ensures that the necessary infrastructures and qualified macroeconomic policies. ensures enforces contracts. to provider of soundphysical and institutional infrastructures. to enable enterprises to respond to market more Through this process.3.Libya has a long way to go to make Although the recent recovery for lost ground over the past two decadesand to integrate itself fully into the world up In particular. jobs. it needs to rise much further to help to particularly dynamic and sustainable growth. Accordingly. growth rates are not high enough to make a real dent in economy. and framework and justice system that safeguards property rights efficient regulatory fosters healthy competition.7. this is an argument for the need to raise per capita. growth rates substantially. labour are available.

they should establish. the government should focus on delivering essential public and basic infrastructure. to implement promote structural reforms. indicators appreciably over the longer term.3. and economic efficiency and growth. macroeconomic in order to fully restoreand consolidatemacroeconomic stability. with a view to improving social care. in order to the growth of exports. well-targeted social safety nets to mitigate the possible adverse effects of adjustment measureson the poorest and most vulnerable groups: The government should also continue to implement sound. or reinforce. policies. Concurrently. administrations. however. The reduction could be achieved through a combination of including implementing tax reform. The government should increasethe quantity and quality of basic health and other high-priority services. increasegrowth appreciably. The evidence shows that the macroeconomic environment matters greatly for Specifically. on a more sustained basis.7. growth-conducive While some progresshas been made in recent years. and thus. reducing the ratio of the overall fiscal deficit to GDP can help to growth.Findings and Recommendations 7. government borrowing from the banking system should be limited overall thereby providing greater scope for banks' financing of the private sector or eliminated. strengthening the tax and policies and measures. monetary management. education. expand the scope for private sector activity. as well as promoting human resources and social services development. and curbing unproductive outlays. should be operated on a fully commercial basis. particularly privatization programmes. Enterprises remaining in the public promote overall domain. 186 . it is critically important for the and strengthening to pursue a realistic exchange rate within its equilibrium government level. the government should accelerate the restructuring and privatization of public enterprises. With a cutback of the customs' fiscal deficit.2 Government focus on public services Chapter Seven In support of these efforts. Moreover. in order to reduce reliance on budgetary subsidies and transfers. temporarily. with independentmanagersmaking market-orientedpricing and employment decisions. consistent with internal development goals.

Important regimes are too high and too dispersed. trade liberalization would also help improve thus 187 .4 Trade liberalisation Trade liberalization can also help accelerategrowth by promoting the competitivenessof up Libyan integration into the global economy. Chanter Seven increased savings. steps should be taken to: Ensure that the central bank is independentand fully accountable. would allow be substantially reduced. the central bank still lacks the necessary autonomy. In Libya. (particularly through privatization) and strengthen the legal framework for banking activities.Deepenand broadenthe financial market. ab.if not eliminated. and supervision d. and intermediation is attracting inadequate. domestic producersand speed trade liberalisation has advancedthroughout the country.Complete the rehabilitation of weak commercial banks and improve loan recovery. Financial sectors are not strong and have difficulty in mobilising domestic savings and foreign private capital. 7. preferable in the context of medium-tcrm tax reform Eliminating tariffs to be reduced more rapidly. permitting further enhancing growth. and piece meal exemptions. Banking institutions are fragile. becausethe government is very tariff rates remain this source of budgetary revenue of statutory. In addition. and containing inflation. relatively small size. At the same time. In part. Open the banking sectorto healthy competition and international best practices ein bank management.7.3. trade Although the processof still significantly more complex and restrictive than elsewhere. dependenton these exemptions. Therefore.3. and among other countries.Findings and Recommendations 7.3 Financial sector reform Financial sector reform can help to enhance growth by mobilising financing productive investments. taxes could integration could allow Libya to surmount the obstacles posed by its Efficient regional it to better realise its ability to trade on a global basis. Establish or strengthenthe institutions responsible for the prudential regulation cof banks. export programmes.7.

Findings and Recommendations Chapter Seven becausecomplex and discretionary tax regimes are prone to the quality of governance. budget. adopting a modern tax system. private sector improving tax administration. This could require targeting and reducing subsidies. facilitate sustained underpinned rapid growth. Moreover. building in a to face external shocks. fiscal policy must move forward more decisively cast in a physical. and improved incentives for of growth. common treatment of all investors including foreign investors . reducing current and redirecting expenditures towards capital formation. both human and outlays.This would require several steps. framework that assumes a conservative oil price.including privatization (i) Further reduction in controls and restrictions on private sector investment. for corruption. The following elementsneed to be included: Fiscal consolidation and structural strengthening of the budget to ensure longain line with intergenerational economic objectives. (ii) A well-defined framework for the privatization of state enterprisesto ensuremarket confidence and early correction 188 . consistent with market signals. domestic debt would precautionary saving be put on a sustained downward trend. abuseand create opportunities 7.Expansion of the private sector through legal institution reforms along with the of stateenterprises. insulation term sustainability the economy against periods of trade shocks.4 Looking Forward A well-sequenced reform strategy. speedy structural reform and privatization of state enterprises would help reduce subsidies and enforce market competition. to implement comprehensive structural reform over the medium-term. would help reallocate resources. by a structural strengtheningof fiscal position and thus.and guaranteed property rights to help establishwell-functioning competitive market systems. b. This approach is medium-term likely to reduce expenditure reliance on short-term oil revenue. thus providing greater fiscal space for Given the close independence of the public sector and the productive spending. In the process.

The longterm objcctivc forward more decisively by revamping education and training should move 189 . including further increasing the efficiency of the financial system at the level would help meet the increase in private national ' sector demand for credit and services.Findinzs and Recommendations Chapter Seven the divergence of input and output prices including the of long-term financing of utilities. (ii) relative to those for domestic investment. which may have discouraged private sector investment. for instance. be addressed through a long-term strategy to develop the necessary skills in the labour force. in different tax treatment despiterecent efforts to narrow this difference. Jobs need to be created for national workers entering the labour including those possibly displaced by state enterprise reform. integrating the presently segmented labour markets. Stepstowards such liberalisation could addressthree specific constraints: (i) The discriminatory rules and regulations governing such flow. (iii) The relatively undeveloped capital market in Libya. so that the neededcapital ctechnologies are available to support privatisation and private and associated sector development. Liberalisation of restrictions on foreign capital inflow. Other services ably provide the public sectorwith market-basedprices in order to reduce (iii) and appropriately target subsidies. An accompanying stronger regulatory and supervisory framework would be particularly important in the development of open and diversified financial markets dLabour market reforms. The lack of a level playing field for domestic and foreign investors.and Liberalization of restrictive. to prevent unemployment pressures from derailing the To avoid weakening competitiveness. Initiatives to address these constraints. domestic trade and competition practices. while market. this challenge may have to reform effort. as reflected.

working. moving from to demand-driven training. The significant pick-up in is neededto create more jobs over the medium-term calls for ambitious. rather than avoid job destruction. f. more private sector involvement in the design of research partnerships between universities and the private sector. but also collective policy reforms. This restructuring integration. In this process. will from ongoing globalization.Findings and Recommendations Chapter Seven toward building human capital. Libya needs to promote job creation. by creating a larger and more attractive market.The non-oil fiscal balanceshould feature prominently in the formulation of fiscal Decomposing the overall balance in to an oil/non-oil balance is critical policy. or studying Closer integration of the Arab Maghrib Union economies and coordination of will lead to an expanded regional market that will facilitate not only the policies. Attention should be on phasing out wage subsidies. as well as enhancing also help the Arab Maghrib Union countries to benefit fully competitiveness. Opening new and strengthening existing the institutions investment and stimulate productivity that support private markets can encourage growth. and expanding the information banks to bring sectors together job seekers and private sector employers. Moreover. steps should be considered to reform the labour market by market segmentation. Labor market needs reforms and redesign aiming to ensure that can adjust to market signals. 190 . growth broad-based reforms. modernising labour codes and the supply-driven developmentof affordable unemployment insurancethat does not create negative incentives for work. the role of the public enterprises to be reshaped from that of a physical and institutional sector will need infrastructure. the curriculum. This process could include progressively eliminating the de facto policy of guaranteedemployment to national job seekersin ending the public sector bridging the remuneration gap between the public and private for national workers. In addition. policies and redirecting government expenditure For the near term. and privatization process. in remuneration policies to attract national scientists and researchers and changes e- abroadwill also be necessary.

Findings and Recommendations Chapter Seven for understanding sustainability. In addition. especially It could also contribute to better integration into international trade. Libya should stimulate growth by using this saving to expand public investment in infrastructure.especially expenditure on the non-oil balance. the way that hydrocarbon social needs are intermediated. as is the case in Libya. whcrc may be acute. When the revenues hydrocarbonrevenuesare exclusively intermediated by the state.1 Policy Option A 1.5 Strategic Policy Options for the Use of Hydrocarbon Revenues for a Diversified Economy Libya's unsuccessful experiments with state-driven models of economic development based on import substitution. Public investment could help to upgrade and expand housing. Surplus oil revenues are being saved in associated the Oil Reserves Fund. Libya uses a large fraction of oil revenuesto finance current and capital expenditure and the non-oil fiscal deficits. Higher accumulated investment could generate productivity gains by filling the public "infrastructure gap" which may increase the cost of business operation in transport. production 7. and information and communications technology. 7.Using oil windfalls to fund a higher public investment. and determining the macroeconomic impact of fiscal policy. have drawn attention to the limits of using the oil revenue for financing investment of public enterprises in selected agricultural and industry the target the diversification process. there seems to Based on for using the large financial resourcesfrom oil as a meansto exist two strategic options foster the diversification process. The non-oil balance. sectors the experiencesof Libya and other oil producing countries. the government should should generally to accumulate substantial financial assets during the periods of oil strive to sustainfiscal policy in the post-oil period. affects economic performance.5. Furthermore. the pattern of expenditures and the amounts allocated to 191 . be adjusted gradually.

Experience suggeststhat often fail to do so. and with freedom of capital unsustainable in place. Temporary precisely in oil revenues. or governments becausethey find it hard to resist pressure from various constituencies financial when sizeable assets have been accumulated. will 2.Findings and Recommendations Chanter Seven investment may be different from the patterns that would savings and if the rents were transferred to the private sector. In the caseof Libya in particular. or through direct transfers. Libya is no exception to that rule.households. could thus spur saving rather than changes domestic expenditures. Hydrocarbon prevail be transferred to households and businesses through windfalls may different channels such as lower personal and corporate income taxes. with a view to stabilising expenditure which should be financed by the estimated. 192 . by contrast there is ample of evidence that the consumption behaviour of households is empirical groundedon their perception of permanent income. lower indirect and payroll taxes. either owing to poor governance. Thus. increasedhousehold savings could be diversified in movements foreign exchangeheld portfolio. Effectively insulating the economy from oil revenuescalls for temporarily saving revenues for the economy future. Although the instrumentshave a different impact. when hydrocarbon windfalls various to householdsand businesses. still another option would be to transfer to oil revenue householdsthe income streamfrom the accumulatedoil revenues. Thus effectively sterilizing the higher a inflows. direct transfers of hydrocarbon revenues to householdscould be consideredas a welfare-improving substitute to the distorting energy and consumption of food subsidies.permanentoil revenue stream. private consumption and investment accrue increasedirectly.Transforming oil windfalls to households may also better insulate the from the volatility of oil windfall. governmentsoften resort to procyclical policies that exacerbatethe cycle oil.

A variant of this option could stabilisation purposes. to facilitate the transition to a competitive. constraintsto the different use of resourcesand still functioning institutions (including the banking system) hinder the poorly of saving and private investment. provide the unlock initiative to strengthen the investment climate. This be especially relevant in Libya.Findin s and Recommendations Chapter Seven Direct transfers of oil revenue to households should be appropriately designed so as not to distort the incentive to work. or fraction of the oil revenue to be reinvested in the oil sector. economy. market-led economy. and necessary reform the efficient use of resources. higher household and business sector out of hydrocarbon windfalls may boost private consumption. if the investment climate is weak. promote 7.and are phasedin at the sametime. revenues but fail to be spontaneouslyconverted into productive investment.2 Policy Option B Using oil windfalls strategically. Libya has built a comfortable financial position. market1led economy. is a superior option for fostering non-oil growth and job creation. This option would call for using part of Libya's for designing an efficient safety net and enhancing the quality surplus oil revenue human capital. This would help greatly to step up the pace of of the an important condition for a successfultransition to a dynamic required reforms. thanks to high oil prices since 2000. Shifting to a different mobilisation intermediation of the hydrocarbon revenues may thus help model of the economy's long-term productive potential. to also allow some 193 . The rest of the surplus revenue should be saved for of for future generations. and can afford the cost of the safety net needed to cushion the adjustment transition to the market. In addition. Achieving fast and sustainablegrowth in non-oil sector over the medium-term for well-coordinated initiatives to accelerate the transition to a would call fully integratedwith the rest of the world. StrengtheningLibya's human capital assetsis also an market-oriented important requirement for improved competitiveness and successful integration in the international economy.5. where weaknesses in the risk may investment climate.

by insulating the fiscal from the volatility of fiscal revenues. which could put the reform programme and Libya's trade integration at a risk of back-tracking. (iii) Securing the sustainability of social protection expenditure and safety nets. non-oil most oil 194 . capital and Anchoring the transition on macroeconomic stability.Maintaining long-term fiscal sustainability would require a saving strategy time. expenditure pressure. to improve human build a social safety net for the transition. Increasing investment in the export sectorwould not risk boosting domestic costs disrupting competitiveness. Coping with domestic cost pressure that stems from the over-spending large oil revenues ("Dutch disease effect"). and securing fiscal stance in the face of a possible fall in the price of oil.as long as the extra oil revenues from greater and production capacity were saved. Libya. (ii) Hedging against external current account pressures in case of a sustained drop in the price of oil. Making strategic use of hydrocarbon revenue calls for the strengthening of public 2finance managementover the medium term. expand and moderniseproduction capacity.and Macroeconomic stability is an important anchor of the transition as it allows: (i) Improved visibility and mitigation of risks for investors. of Saving for future generations.can afford the "luxury" of a large. combined with expenditure discipline and sound practicesfor managementof oil windfalls. A prerequisite for implementing this is a serious reinforcement of public finance management.Findings and Recommendations Chapter Seven and take advantageof high oil prices. as over producing economies. sustainability 3. social sustainability the contingent liabilities of the public sector. would help meet several simultaneouschallenges: Establishing strategic priorities in the use of oil revenues. in order to secure long-term fiscal and encourageintergenerational equity. designedwith the aim of absorbing the social cost of the transition. becausehydrocarbon fiscal revenuesare exhaustible. A strong option framework for budget formulation and execution.

and the high unemployment rate. while. although in practice a sufficient and stable a long period of time. out of oil revenues. The alternative would be to finance the non-hydrocarbon deficit by assets once hydrocarbon gradually reducing accumulated are exhausted. to the extent that the revenuesfrom oil resourcescan secure financing over time. The level of required savings be different in each case. however. open to question. even after the country runs maintenance and would keep taxes flowing. This would allow the of a large non-oil deficit. This option might be if the real rate of return on accumulatedsavings (a mix considered bonds. when the accumulated savings are depleted. combined with 195 .with two options in mind regarding the at accumulating substantial thesesaving in the long term. the country should eventually for being an economywithout oil.Findings and Recommendations Chanter Seven fiscal deficit. Although different options and curricula are available for Libyan students. once hydrocarbon have been depleted. The saving strategy should aim prepare assets. based on oil reserves may extend over intergenerational equity considerations. In a sense.this strategy could aim resources transforming an exhaustible stream of hydrocarbon revenues at through appropriate saving over time.there are concerns about the quality of the content and to up-to-date knowledge and expertise in the the actual access of information technology. use of The income stream from the accumulated assets could be used to finance the non-hydrocarbon fiscal deficit. accumulationwould The question of education is. progressively resources increasingtaxation to ensure long-term fiscal sustainability. These concerns arc related to absence the country's isolation for more than a decade as a result of the UN sanctions. at the same time. However. stocks and real assets)was significantly lower than the of production of productive investments that would rate of return on be financed by drawing savings.

Analogous to standard permanent income for intergenerational a concern the preservation of wealth requires that consumption in each period be arguments. more 7. and with due oil revenues. is deciding how the government allocates wealth across generations. limited to permanent income or. however. issuewhich facesthe Libyan government is how best to manageits The most significant taking into account its exhaustible and depleteablecharacter. and private investment takes off. intergenerational equity. at the proceeds. Therefore. This essentially requires strong fiscal policy that attention to the preservation of the oil wealth's value. limiting consumption 196 . short-run macro-fiscal from doubts about such issuesas the future path of oil prices. especially for volatility of oil revenue. long-term. the implicit return on government wealth. should appropriately defined to include oil. The becauseof the swing in oil prices. This policy equity and general financial reflecting challenge.Findings and Recommendations Chapter Seven the displacement of local workers by foreigners from the curricula. focusing first on the long-term. is confronted with significant uncertainty relating to it oil wealth. be met by keeping a fiscal policy that preserves government wealth. therefore. Libya. management. inevitable that oil earning will. The education system will have to promote the kind of skills needed in an economy where internationally competitive services and the private sector have a dominant role. Libya would need a strong human capital foundation to respond to actual needs as the economy opens up further. the size of oil which stems and the cost of extracting them that are the most important considerations for revenue. in this case. dry up. a key challenge for fiscal some point. prudence. This could entail the government ensures to the permanentincome from total wealth.6 Conclusion The biggest challenge for Libya is how to use its oil wealth wisely without squandering Oil is exhaustible and it is. is problematic.But it is the uncertainty about oil wealth itself.

encapsulates 197 . roughly to optimise that wealth the nature of the challengefacing Libya.Findings and Recommendations Chanter Seven Estimating the size of the hydrocarbon wealth and designing appropriate policies for the benefit of present and future generations.

This price vulnerability further enhances the need for greater global through diversified exports. oil and gas) for wealth (i. including a relationship of complementary substitutability. lurking behind the emphasis on product variety. incomes and petroleum foreign trade. production plants and equipment. e. or to create extensive Finally. 198 . a common objective of some oil skills or is to adopt the diversification of their domestic production base as exporting countries Reinforcing the compelling need for adopting such a guiding principle their prime goal. the incentive for financial security inability. These interrelations from are linked with the wider economy. modem infrastructure.Conclusion Chapter Eight CHAPTER EIGHT: CONCLUSION 8.In following this policy.1 Introduction Oil prices have altered the perception and understandings of the role played by the and have made oil-exporting countries more aware of their external petroleum sector. and of the linkage between the petroleum sector and rest of the economy. hazards of exposing the country's development efforts to fluctuations in the were the demand for oil. when diversification policies being formulated. at least in the early phases diversification reflected petroleum's of development. technical man-made capital financial assets). dependenceon petroleum. These impacts needto be taken into account. The petroleum sector is linked in a variety of ways with the other productive sectors. e. employment opportunities. The results appear to show that increasing heavy studied dependenceon oil revenuesunderminesthe magnitude of the diversification plans and exhaustibility of oil reservesshould prompt Libya to follow an agenda of the eventual conservation. namely the exchangeof their natural wealth (i. Furthermore. The petroleum sector is parts of the petroleum sector linked directly and indirectly with other sectors in the economy. to generate production and consumption. The impact of changes in petroleum product prices has been are by several countries. so change in the also sector exerts multiplier effects on prices. output employment.

Moreover. discoveries. e. with a large fast-growing population. maintaining the balance-of-paymentequilibrium as a measure of financial external debt was an objective.the Libyan governmentwas compelled to place the objective commercial oil improved social amenities on their national agenda. (i. the included a narrowing of solidarity with political. cultural and intellectual was another emphasised or the citizenry was emphasised alluded to in the periodic economic and social of needs for Libya. Implied in the latter goal were both a guarantee of high employment and the development of skilled human power to meet the high-productivity requirement. Hence in Libya. emphasis had to be placed on the need to expand and and improve the quality of education and vocational training. Protection of the environment security and avoidanceof goal. Besides. Some of the corollaries of these basic objectives also development plans of the technological gap with the industrial countries. and satisfactory employment). defence were certain national external political commitments. Elevation of the spiritual. and improvements in labour productivity. and co-operation with maintenance 199 . more and better education. more decent housing. The realisation of these objectives required substantial modernisation and development infrastructural of facilities. and geographic allies. An essential concomitant of preparedness and diversification was the enhancementof national productive capacity and expansion of domestic output.Social of greater social welfare and fairness in income distribution thus becameother important. reduced dependence foreign (imported) manpower was a primary objective.Conclusion Chapter Eight security considerations such as food self-sufficiency. and increased access to on modem advanced technology was thus needed to gain greater national selfand in basic needs and expand home-grown research. equity and for Libya. A major task to be tackled was a full provision of basic human needs goals better nutrition and health care. common justice. social. sufficiency in the objectives of steadygrowth and high employment was a universal desire Implicit in real per capita income and palpable improvements in living for a sustainable rise Starting generally from a very low per capita income baseat the time of their standards.

is that the authorities and other inhabitants of oil rich countries become Another risk and therefore tend to underrate or overlook the need for good economic overconfident. and inadequateand poorly trainined administrators stagnation of throughout. the same time. improving living conditions (nutrition. dominant objective in the Libyan development strategy is self-sufficiency and The diversification by industrialisation. 200 . and maintaining establishedcultural value and social stability. with less emphasis and with varying degrees of firmness. with a correlative goal of expansion on intermediate industries. The attainment of these secondarygoals is crucial for orderly and sustained formulation. During the 1970s. Investment programmes were oriented toward social sectors. Libya. reducing economic dependenceon the outside the West. The problems are likely to be easedby carefully investing the and managers from the hydrocarbonsector (both oil and natural gas). health. These intermediate objectives included domestic pri ce goals as balance in foreign obligation. to advancetheir own or their children's education and earning powcr. educationetc). adopted as their national economic agenda such objectives as. housing. and improvement of the economic infrastructure. catching up with factors. skill shortages. At and Libyan planners are trying to deal with unemployment. including agriculture. and particularly Magrib countries. through no intensive oil resource-based fault of their own. and thus fail. large revenues the Libyan economy was characterized by extremely rapid growth of development of investment. a sustainable discipline. particularly housing. reducing income inequalities. increasing efficiency of world. emphasizing rapid development of heavy economic light industries. preservation of national currency value and avoidance of private capital burdensomeexternal debt. as well as fiscal and monetary stability. the agriculture sector. In short.Conclusion Chapter Eight developing countries in the North/South. in this other context. Too many people become locked in low-skill Hydrocarbon revenues industries. productive A successful achievement of these primary objectives necessitatedthe pursuit of other intermediary means. construction and bring risks.

as the state could lower its risk of so a state would not revenuesfrom oil windfalls aiming to diversify its economy. and are less likely to make this mistake. the value of non-petroleum exports has declined.the reduction of by creating new sourcesand spreading employment into various sectors. the country's objective must be the diversification of exports of oil in the form of other products. in order to help impact of the volatility of world demand on exports of crude oil. human and physical capital. Since petroleum accounts for almost the whole of Libyan exports. In other policies that believe that wealth is their most important assetmay develop a false words. economic policy They may find that difficult reforms do not pay . diminish the 1970 to 2000.Conclusion Chapter Eight and institutions. A worrisome strongly is the increasing dependency of private and public consumption phenomenon expenditure on petroleum revenues. oil-rich sense of security countries can live well off their oil wealth over extended periods. social. economic risk have "all its eggs in one basket". Therefore. Gross domestic product has been revenues dependent on petroleum exports throughout the entire period.2 The Goals of Diversification Most discussions of economic diversification are based on one goal .countries without hydrocarbon have a smaller margin for error.petroleum goods must volume of petroleum in government plans receive more attention from 8. and weak commitment to education. as well as good education and good investments. contain 1999). As the losing significant 201 -k . In resources oil-rich countries. awarenessof these risks. Exports of non. the country is heavily influenced in this sector by world market trends. However. Results of this study show the increasing dependency of the Libyan economy on the from the petroleum sector. whereas the increased dramatically. nations of foreign. even with poor management and institutions. is perhapsthe best insurancepolicy against them (Amuzegar and Mehran. 2005). as well as a conscious effort and ability to them. which was 95% from the total export export revenue in 2004 (Central Bank of Libya. Indeed.

2. monitoring. and including the establishment and development of a project evaluation. 8.Consolidate oil revenuemanagementand treat all oil revenue as one source of finance.Develop institutional capacities for project selection. capacity building in fiscal policy 202 . a thorough discussionof diversification should recognize other objectives as These include at least two others: well. and an However.Use the concept of a sustainablenon-deficit to provide an expenditure ceiling for the use of assets that is consistent with this long-term saving objective.2 Level of Expenditures 1.2.Develop and maintain a model for long-term projections of oil and gas revenues 3.Set expendituresof oil and gas revenuesthat are consistent with a long-term objective of conserving assetsfor the future.Conclusion Chapter Eight Libyan economy has been historically vulnerable to an oil price shock. as well as appraisal analysis. such as the tourism sector and petrochemicalindustry (ii) Set up new industries which can be competitive against current imports in the long-term. particularly given the saving nature of the windfall. The goal should be to ensure constant short-lived real expenditureout of oil wealth.2. worry. 2. the authorities must follow a of proceduresto solve theseproblems: set 8. (i) Create new sector substitutesfor the oil sector. this is a special important challengein this country. To overcome such problems associatedwith oil windfalls. department.1 Oil Revenue 1.

of excessive growth a rapid increase in consistent with this ceiling could exert substantial upward expenditures the exchange rate with all its negative consequences for the pressure on It could also strain the government's institutional capacity non-oil sector. future. based on updated information on oil and gas reserves. while excessive current have a potentially destabilising impact in the short consumption could Capital expenditures have the added advantage of substantial term.Avoid large fluctuations in the oil deficit.Take macroeconomicstability considerations to spend in the medium-term. import content. In particular.2. production patterns and price developments. for planning.Revise the estimate in the non-oil revenue deficit Chapter Eight in the light of new information. 1Expenditure on physical and human capital will provide a solid foundation for the future growth of the country.3 Composition of Expenditure Revenue should be utilised primarily for investment rather than consumption.Conclusion 3.The government should not borrow against future oil revenue to finance current spending. with strengthened much oil revenue betweenthe Ministry of Finance and the Libya Central Bank coordination (LCB) 8. 6. executing. and monitoring expenditure. The appropriateness of the sustainable non-oil deficit should be reviewed at regular and sufficiently spaced intervals. substantial 203 . resulting in substantial waste.As the sustainablenon-oil deficit provides only an expenditure envelope for do not increase expenditure to its ceiling in the near the medium-term. 4. providing an automatic means of sterilising part of the foreign exchangeinflows associatedwith oil wealth. 5. This would not be advisable given the macroeconomic implication in spending. into account when deciding how 7.

this will not be easy. However. Libya may succeed where Libya as well . it may manage to use its oil wealth to so many other oil-producing countries help develop the non-oil sectors of its economy.Conclusion Chapter Eight 2. at least in part. Failures are more common than success. living to the current population. Also. Furthermore. particularly 3. with the direct positive impact on competitiveness off-setting. the negative effects of real appreciation. necessary for improving the of the non-oil sector. resulting in new models and new partnerships.Reducing tax rates could be an alternative to increased expenditure. persistent 4.not just to future generation but to the current population of population rapid expenditure of oil wealth. and an efficient transport. in the regions outside the capital city. communications and service. This recurrent costs associated would increase transparencyof already committed resources.and ensure saving for long-term maintenance costs. Political pressures Successful long-run development of the economy will require that the government Nevertheless. including the reliable provision of competitiveness energy and water. demonstrateto the population not only that oil wealth is being saved for future need to but that it is also being used effectively to get benefit and improve the generations. there has been a dramatic increasein attention consequences to the issue in recent years. for excessive and speedy expenditure of oil wealth are inevitable.which paid 204 . oil revenue management is enormously important for oil dcpcndcnt developing countries.Capital investments should target the building and maintenance of a welldesigned physical infrastructure. they should succeed in explaining to the generate new employment the dangers . The policies recommended above (focusing standard of infrastructure development and protecting non-oil competitiveness) should help on opportunities.of excessively have failed. with adverse for development.A national investment maintenance fund should be established for meeting with physical infrastructure projects. The Libya government will withstand such pressures.

there arc a number of conceivable briefly discussedhere: explanationswhich are (a) The "Dutch disease". and suggest an interesting area of future economic shocks on economic For example. (b) Neglect of education. a potentially large trade-off exists betweenthe when from dependency and the risks from too little diversification in efficiency gains limited insuranceopportunities. Economies subject to uninsurable. Across various specifications. Indeed. the deep-rooted nature of the problem notwithstanding.abundanceand long-term growth. the ownership of natural of countries seemsto indicate that extensive natural riches experienceof a great number by a tendency towards slower growth in the long-term than is generally are accompanied in countries with no major oil wealth resources.For these inverse relationships the case between resources. which may result from the fact that the education demands of the workforce for primary production me generally lower than that for other industries. The Moreover. do countries subject to oil price fluctuation experience different research.Conclusion Chanter Eiczht hold promise for a future turnaround in this area. which reduces the availability of well-trained manpower to other industries. suggesting that the benefits of diversification are larger with greater insuranceis unavailable. However. the evidence consistently suggests that economic dependency can magnify the adverse impact of oil price fluctuation on consumption. developmentpatternsthan those that are more stable? wealth appears to be a mixed blessing. Therefore. and increasesexchange rate volatility. risky production for the diversify. economieswith These results lend support to theoretical approachesthat view this trade-off as important development process. which pushes the real exchange rate or wages upwards. these possibilities may optimally the long-term impact of oil price volatility and other results also raise questions about development. causing exports to decreaseand slowing growth. the negative impact of dependency appears less pronounced in economies financial depth. 205 . at the cost of lower productivity.

the Moroccan to Madrid wrote with discernible dismay of the Spaniards' apparent loss of ambassador interest in work. make 206 . psychologists He summariseshis argument about Spain as follows: "Easy money is bad for you. pp 56 This is by no means an inevitable outcome. from Nigeria to Norway.and others which may be subsequently advanced. for example. they learned helplessness. The Wealth and Poverty of Nations. These explanations.and However. as Spain chose to waste a and other natural resources. the idea that hydrocarbon abundance is a mixed blessing is not new. according to Lewis (1985) "rapid growth is available to those countries with adequate natural resourceswhich economic the efforts to achieve it" (pp 123). the oil-rich countries wealth and economic growth been reviewed -here vary so greatly from one another. 1999). Nonetheless. trade and industry. to try to learn as much as possible from both. In his book. which distracts the interest and efforts of society from creating wealth. Landes (1999) tells the story of Spain following the colonisation of South and Central America. will need closer in the coming years. lt that will be paid for immediate distortions and later regrets" representsshort-run gain (Landes. however. that it could be regardedas regard to their stageof highly questionable whether all of them. In 1690. however. and imagined invincibility. (d) Failure of economic organisation and policy. which could be the result of the false senseof security causedby abundant oil wealth. In short. which made Spain rich in gold Theseriches did not last.it would be inadvisable to ignore together indications which seem to present themselves from the experience of the oil-rich the A more advisable course appearsto be examining carefully the theoretical and countries. as economic research on the relationship between oil examination is still in its infancy. with which -have development and type of government. empirical argument.Conclusion Chapter Eight (c) Rent-seeking. large part of its new-found natural wealth on luxuries and wars.as modem might want to describethe phenomenon. should be grouped for drawing general conclusions. Furthermore.

recent development in growth theory and mounting indicate that Lewis was right. The key to understanding this is the empirical evidence that efficiency works like technology.new technology in order to grow faster.the large hydrocarbon resourceshave also meant excessivedependenceon attendant downside risks from oil price volatility. It will also help education. Over the past a single sector. the hydrocarbon wealth reserves could be seen as a mixed blessing. achieve economic Nevertheless. Lewis' qualifications concerning natural resources were because human resources are surely more important for growth perhaps unnecessary. whatever a encouraged through more. it has afforded the wherewithal to extend attain a financial aid to other developing countries. in large the measure. To grow or not to grow is. Even so. 8.4 Oil Sector-Blessing and Curse it can be concluded that the Despite the efforts toward economic diversification. does to become more efficient nation it to grow more rapidly for the benefit of all. with decade. increased realisation is a means of producing more output from given inputs or.Libya has focused on efforts to diversify its economy away from the oil sector. generous However. But it can be to adopt policies that promote economic efficiency. of efficiency fewer inputs to produce a given output.2. diversification. but not invent . Libya embarked on diversification plans over the last three decadesaimed to development processes and reduce oil sector contribution. a matter of choice. Like improved technology. it needs to be on guard against dangers that may accompany the gifts of nature.Conclusion Chapter Eight With the benefit of hindsight. Indeed. and better investment and trade liberalisation. Moreover. The abundance of has been a main source of large financial revenues and hard currency proceeds sector have facilitated the implementation of huge infrastructure projects and education that improvements and enabled Libyan society to build assets by establish a saving fund and high standard of living. than natural resources. A country cannot be advised to invent concept imitate perhaps. privatisation stabilisation. In addition. 207 . Therefore. equivalently. efficiency requiring is a broader than technology. and more powerful.

Conclusion Chapter Eijzht The results have been disappointing. The hydrocarbon sector still dominates the still representsthe lion shareof GDP and exports. economy and 208 .

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Map of Libya 12 Tunisia Zu .. ' Algeria Niger Chad 20 Sudan 0 1997 MAL. tLLAN Gcugraphix 5) 18D: 6685-3`07 vdmw maps orrm 0 2OOcm 15pm1 225 .. ancan 24" Sea Al Bayýa " "til Ivtrr. . Med. aha Awban" . ' .Appendices APPENDICES A. yal'ý' Al Khums h" `i arhuýý"*Misratah " va'. an P-3-I Wa Id Tarabulus 18r. acdan -Hu' ia: ý bb Libya dir " -Bra. taa<ýusa "Trnassa^ azirbu ha' a Al ad. Benghazi " (Benghazi) Gulf o' Sidra Ma sa al Burayqah narnah Tuhruq Surt 'Ghncam s Asr Shuoiýtyr. arch ©(Tripoli) AZZa..

Interview Questions QI. Do you think thesesanctionsplayed a vital role in affecting and affecting the development plans programme? [WsNO] 226 .To reap greaterbenefit from oil as a renewableresourcein the long-term searchfor other resourcesinsteadof oil wealth. Do you believe that Libya has achievedthese goals? LYcs Comment ------------------------------------------------------------------------------------Q2. Which potential income requires a have been considered? sourcesshould (a) Industry in which Libya has a comparativeadvantage (b) Tourism (c) Service and transit trade (d) Encourageforeign investment (e) Fertilizer and petrochemical industry No Q3.Appendices B.The goal of developmentplans was to researchalternativesto oil resources to finance governmentrevenuesand achieve income resourcesdiversification.imposedby the UN has a negative impact.The economic sanctions.

A stabilization fund has been used in oil exporting countries such as Venezuela and Kuwait.Appendices Comment ------------------------------------------------------------------------------------- Q4.Libyan economic performancehas beenpoor over recent periods. Do you believe that Libya needsto establishsuch a fund? Yes No Comment-------------------------------------------------------------------------------------- Q5. and growth was fluctuated. Do you think this can be attributed to: volatile and (a) Economic mismanagementof oil revenues (b) Oil price volatility (c) Others (pleasespecify) --------------------------------------------------------------------- 227 .To maintain sustainableeconomic development.do you think that it is necessary to createa programme developmentplan? establishand Yes No Comment-------------------------------------------------------------------------------------- Q6.

Appendices Q7.Do you support the view that the economic reform is in urgent need for oil countries rather than countries without oil windfalls? producing Yes No Comment ----------------------------------------------------------- -------------------------- Q9. health and the infrastructure.do you think that the Libyan economy can afford such reform? How could such reform be implemented? Yes No Comment ------------------------------------------------------------------------------------- Q8. besidescreating other sourcesof income to replace oil revenues.Economic reform is a significant processand it may also be painful process. creation Has Libya achievedthesegoals in your opinion? Yes No Comment --------------------"---------------------------------------------------------------- 228 .training. employment.Oil revenuesshould be spent on education.

To decrease unemployment rate for youth. how can policy-makers.particularly the export sector? Comment ------------------------------------------------------------------------------------- Q 13.Appendices 10. make this the high priority and amend legislation to achieve full employment? a Yes No Comment ------------------------------------------------------------------------------------- Q11.In your view what is the best rate of growth required to maintain a low percentagerate level? unemployment Li Comment ------------------------------------------------------------------------------------12.To which extent do you agreethat the existenceof an oil sector has diminished others Libyan sectors.The optimum solution to prevent reliance on one sector is diversification. I low Libya affect a healthy policy for exports? can 229 .

Appendices Q14.Do you think this action will must establisha private detractfrom the public sector? Comment ------------------------------------------------------------------------------------- Thank you for your help and co-operation Adwick Economic Researcher Salford University 230 .To assistthe economic reform processa restructuring of Libya's economy and financial market sectors.

Marsa El-Brega effective capacity is now 8. In addition. although it has However.000 barrels a day of lubricating oil for consumption. is located near Tobruk and produces The country's oldest refinery. both state-owned and private. as the oil companiesthemselves specific quantities handledexports at this time.400 barrels a day.000barrels a day. Shell was reluctant to proceed further with the it discovered oil in its two concessionssouth of Tripoli and in its single proposal as in the Western GhadamesBasin. In this it was unsuccessful. to El-Brega in 1963. the government sought agreementswith Europeanrefiners. a Zawia Refinery The Zawia refinery is the second refinery with a capacity sufficiently large enough to increasing domestic demand and to allow Libya to export products as well meet rapidly In mid-1969.Appendices C. This Esso refinery was built in Belgium and shipped morerefined product intact. was. capable of expansion to 40. whereby they would provide products for the domestic Libyan market in exchangefor guaranteedsupplies of crude oil.000 barrels a day The Libyan National Oil Company concluded an agreementwith Montedison whereby it would ship for processingto Montedison's Sincat refinery in Sicily. In the negotiations with Shell over the details of the construction of this refinery. in order to meet increased concession internal product demand. designcapacity of 10. Domestic Refineries Marsa El -Brega Refinery Marsa El-Brega. then more than 20.000 barrels a construction of a day at Zawia. By this time the Libyan government had set up their or-less baseon all oil production sold in Libya.000 barrels a day refinery. In the meantime. for export. Shell was to build another at Zawia to produce 600. it signed an agreement with Shell for the design. finance and as crude. largely because it could not guarantee a regular supply of effort of crude oil to any European refiner. which. pricing While the Brega refinery was standing idle. with product sent back to crude 231 . 25.

However. It decided to ship the output of this new field.Appendices Libya. produce Tobruk Refinery The Tobruk refinery was launched in 1985 with an effective capacity of 18. Plans for expanding and upgrading the plant through installation of a 3. a 6.000barrels a day. in payment for processingand surplus fuel oil at cost.300-barrelsday catalytic reformers have run into delays.200 barrels a day hydrotreater and a 4. two ENI send Snam Progetti and Saipern. In October 1979.000barrels a day of fuel petrochemical complex. partly as a result of increasedhostile relations between Libya and Egypt and Ras NOC's discovery of the large Messiah oilfields 12 miles North West partly as a result of Sarir field. 1982. 232 . the government moved the site of the proposed exports refinery at Tobruk to Lanuf. and engineeringcontract SebhaRefinery The construction of a refinery in Sebha.500 barrels a day catalytic reformer. The design for the work was awarded in November. Completion was scheduled for 1981. It was designedto The 124. taking surplus naphtha RasLanuf Refinery In 1977.000 barrels a day of Libyan crude. designed to process crude from the nearby Murzuk field has still not begun. Ras Lanuf refinery processesa mixture of Sarir and Mesla crude. The agreementcalled for Sincat to process30. Ras Lanuf did not reach its full capacity rate of 220. day Ras Lanuf export refinery.000 barrel a subsidiaries. through the Sirtica Pipeline to Ras Lanuf rather than production it to the terminal at Marsa Hariga. began the constructions of the 220.300-barrels hydrotreaterand a 3.000barrels a day. as well as incremental of the from the Sarir field. This refinery was fully operationalby the 1980s. near Tobruk. NOC awarded the engineering contract to CTIP in June 1989.000 barrels a day atmospheric distillation unit. The projected plant would have 20.

which remain the hub with its European network. so that the is now wholly owned by Oil Invest. Oil Invest also purchaseda 75% company interest in F. the Libyan Arab control of Foreign Investment Company (LAFICO) and the Libyan Arab Foreign Bank (LAFB). Tamoil Italia purchased the remaining 25% stake in Bortolotti. all Libya's foreign refining and distribution operations were by Oil Invest International. a holding company established in 1988 under the managed three Libyan state entities: National Oil Corporation (NOC). It is also investing in refining and distribution in Pakistan and of in the development of service stations and pipelines in Egypt. and controls both Tamoil refining. when Oil Invest acquired an 89. which is engagedin oil distribution. In October 1993.250 are in Italy. Petroli. Until September 1993.A. which operated a 105. Italy Libya gained its first foothold in Europe in 1988. and Tamoil Petroli. Tamoil is now 100% owned by Oilinvest. Overseas Refinery Distribution and Activities Libya started to invest in refining and distribution facilities in Europe in the late 1980s.Appendices D. the Oil Invest International subsidiary that held all its downstream interests in Europe. the operator of Italy's second-largestindependent oil storage facility at Porto Marghera. Libya relinquished control of Oil Invest Netherlands By. the acquisition of assets in Italy. 233 . Early on.5% interest in Tamoil Italia.000 b/d refinery in Cremona and a network of 1. which has a bulk plant linked to Cremoca by pipeline. In 1994. of which 2. and a 75% holding in Bortolotti and Company. Libya's distribution network in Europe now comprises of over 3.000 outlets.977 service stations and distribution centres throughout Italy. Tamoil Italia already held a 75% stake in Milan-based gas oil and fuel oil distributor Vulcan Oil. Bortolotti has a controlling interest in Decal. 455 in Switzerland. which runs the Cremonarefinery. Germany and Switzerland. 180 in Germany and 115 in the more than Netherlands.

barrels a day Collombey refinery and about 280 service stations and 14 terminals in Switzerland. which consisted of 177 outlets. It subsequently increased its in the oil distributor holding to 80% the remaining 20% belongedto the Managing Director of HEM. It receives 182 outlets and supplying another its refined products from the Holborn Europa refinery in Hamburg. acquisition TheNetherlands In May 1993. The boostedTamoil's market sharein Switzerland from about 8% to 11%. Rotterdam. Holborn European Marketing Company in Holborn Europa Holborn Investment Company in Larnaca. The company operates a retail and wholesale cooperative distribution network that includes around 115 service stations and its sales amount to 650.33% over a it control over three European affiliates of Coastal Corporationrefinery also gave Raffinerie in Hamburg. its initial partners in the acquisitions and set up a local Tamoil (Suisse) SA. The facility had been capacity of by Coastal Corporation up until then.000 tons per year. which has a most of 75.000 barrels a day and is controlled by Oil Invest. operating a network of HEM 200 service stations on a regular basis. Oil Invest acquired full ownership of Gatoil by taking over the holding of Saseaand Migrol. and Oil Invest's wholly owned and operated Coastal provided for it to increaseits stake in the refinery to a maximum with agreement five year period. Swiss service station network to TotalFinaELF. Cyprus. In September 2002.and Switzerland Tamoil acquired a 65% stake in Gatoil. In 1991.000 In June 1990. is one of Germany's principal independent distributors. Oilinvest finalized the acquisition of Cebeco OK. a member of the Dutch Cebeco Handelsraad. Oil Invest's acquisition of a majority interest in the of 66. whose assetsincluded the 72.Appendices Germany Germany market in 1992 through the acquisition of a 60% interest Oil Invest enteredthe Hamburg Eggert GmbH (HEM). some 234 . Tamoil agreed to purchase the subsidiary.

Benin In September 2001. 235 .000 barrels a day at Badin. Libya set up a direct subsidiary in Spain called Oilinvest Espana.although it is continuing to expand its Spanishoperations Slovakia and the CzechRepublic In the former Czechoslovakia. It has a capacity of 10. Pak-Libya Holding is also helping to finance the construction of US$91 million oil refinery with a capacity of 25. which is owned by National Refinery. The same month Libya and Zimbabwe deal providing for NOC to supply Zimbabwe with US$90 million worth of signed a gasoline.Appendices Spain In 1991.Oil Invest acquired a 90% participation in Tempo Spol in but the company was subsequentlydivided into two. Pakistan Libya and Pakistan establisheda jointly owned subsidiary. Tamoil Slovensko in Slovakia and Tamoil Prahain the Czech Rpublic.000 barrels a day of JP-1 jet fuel. Libya decided to build an oil refinery in Benin to serve as a distribution hub for the West African region. Oilinvest's original plan for building up a two retail outlets 5% within five years by opening some 20 stations annually soon fell market share of behind schedule. called Pak-Libya Holding to finance the construction of Pakistan's first jet fuel pipeline. The company provided the US$6 million International required for the construction of a 35 km pipeline Airport linking Karachi to the nearby Karachi refinery. like the country.which opened in 1992 and seven in 1993. becoming 1992.

30% owned by the Arab International Joint Investment Company (a private company based in Egypt which is by both Egyptian and Libyan interests) and 10% by the Egyptian moreover. service stations along the Egyptian-Libyan Petroleum Engineering and Construction Company. Netherlands. jointly owned by Egypt's Project and Libya's NOC. Delft. Economic Development and Diversification in Libya.Appendices Egypt Libya and Egypt set up a joint venture oil distribution company in 1992.Oil. University of Salford 2. Delft University of Technology. ] E. was created to build and maintain oil storage tanks. called United Investment Company. refineries and petrochemical complexes. University of Salford 3.The Management of Oil Wealth in the Context of Sustainability Presented at 5`h International Postgraduate Research Conference in the Built and Human Environment. Presented at 6`h International PostgraduateResearchConference in the Built and Human Environment.Economic Management in Selected Oil Exporting-Countries. Egypt and Libya are considering two pipeline projects that would cost an estimated US$1 billion and would enable Libya to supply oil to Egypt. Published Papers 1. owned General Petroleum Corporation (EGPC). 3-7/4/2006 236 . which is 60% owned by Oil Invest. A second venture. presented at 4`h International Postgraduate Research Conference in the Built and Human Environment. The company planned to build and operate 17 the coastal highway between Egypt and Libya.

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