In this part, we will examine the economic effects of peace in Libya on the rest of the world. In our study we examined the effects of peace on Libya’s main trading partners at both the international and regional levels.
All the results show that peace in Libya will have positive economic effects on Libya’s main trading partners, notably Italy, France and Turkey. In this study, we will focus on the effects of peace on regional cooperation.
At this level, our results show that peace in Libya will affect different levels, including growth, investment, employment and trade.
A. The growth effects
Our simulations show that the four countries in the region, Algeria, Egypt, the Sudan and Tunisia, will experience a gain in growth relative to the baseline scenario of the continuation of the Libyan conflict, while peace in Libya will have much greater cumulative effects.
Thus, the gains in the Sudan over the period 2021 to 2025 will be equivalent to 6.72 per cent of GDP per year, compared to the baseline scenario. This average could reach 4.46 per cent in Egypt, 3.80 per cent in Tunisia and 2.67 per cent in Algeria over the same period.
We were also able to estimate the gain in the value of peace in Libya for all economies. Our estimates show that Egypt’s gain over the period 2021 to 2025 will be $99.7 billion. The Sudan’s gain over the same period will be $22.7 billion, Algeria’s $29.8 billion and Tunisia’s $9.7 billion.
The total gain of peace in Libya for the region will be $161.9 billion over the period 2021 to 2025, or an annual average of $32.38 billion in gain in regional GDP.
Ultimately, the return of peace will have an important macroeconomic impact on the countries of the region that we have called the growth effect. It will result in faster growth, lower unemployment and a rapid increase in investment in the four neighbouring countries.
Thus, peace in Libya will result in enhanced regional cooperation and a great economic benefit for the region.
B. The effect on employment
Our estimates show a significant drop in unemployment in the countries of the region resulting from the growth gain that will take shape in neighbouring countries, as well Libya’s opening up to the region’s labour force following peace.
The Sudan will experience a significant drop in unemployment, estimated at -13.93 per cent over the period 2021 to 2025. The decrease will also be -8.84 per cent in Egypt, -6.07 per cent in Tunisia and 2.18 per cent in Algeria.
C. The effect on investment
Similarly, investment will increase in the various countries of the region once peace is established in Libya. This increase is the result of export growth to the Libyan market.
Compared to the baseline scenario, the Libyan peace could generate an annual increase in investment averaging 5.98 per cent for Egypt, 5.49 per cent for Tunisia and 2.01 per cent for Algeria.
The effect on trade
Another major effect that our study highlighted is the effect on trade. Our results show that peace in Libya will promote greater cooperation among the countries of the region.
Our estimates have shown that the peace agreement in Libya will increase trade for the benefit of neighbouring countries, compared to other regions of the world.
The reduction of trade costs that will follow the opening of land borders, and the increase of tariffs imposed by the Libyan Government on non-PAFTA countries, will give a serious comparative advantage to Tunisian, Egyptian, Sudanese and Algerian products.
Egyptian exports to Libya could increase by 413 per cent, while Tunisian, Sudanese and Algerian exports could increase by 308 per cent, 117 per cent and 443 per cent, respectively.
The increase of exports to Libya will boost the total exports in most of the neighbouring countries. Tunisia’s exports will be on average 3.59 per cent higher annually than the scenario of the continuation of the conflict during the period 2021-2025.
Algeria’s annual average growth rate of total exports will be 1.7 per cent higher than the baseline over the same period. Only Egypt and the Sudan will experience a decline in their total exports.
In fact, remittances by Egyptian and Sudanese workers in Libya will generate an appreciation of the real exchange rate that will affect the volume of exports and imports in these two countries through negative impacts on competitiveness.
Egypt’s total exports could decrease by -0.85 per cent in average, while the Sudanese exports could decrease by -4.1 per cent.
For Tunisia and Algeria, total exports will increase at an average rate of 3.59 per cent and 1.7 per cent, respectively, during the period 2021-2025. This trend will be more pronounced when looking at imports.
Thus, peace in Libya will have important effects and will result in an increase in Egypt’s imports by 5.86 per cent on an annual average, compared to the baseline scenario.
The increase in imports from the Sudan, Tunisia and Algeria will be 12.7 per cent, 6.31 per cent and 0.36 per cent, respectively.
D. The sectoral effect
Our estimates show that the end of the conflict and the establishment of peace in Libya will lead to an important sectoral effect and the consolidation of the diversification efforts of the concerned countries.
This trend can be seen through the study of the evolution of value added in the various neighbouring economies and the evolution of their sectoral exports to Libya.
In terms of value added changes, there has been a rapid increase in the value added of the cereal sector, considering Libya’s food needs and deficit.
The average annual increase over the period 2021-2025 will be 1.19 per cent for Egypt, 1.36 per cent for Tunisia, and 2.65 per cent for Algeria.
This increase is not limited to the cereal sector, but also affects other agricultural activities. Compared to the reference scenario, the value added in the agricultural sector will increase by 1.33 per cent for Egypt and 1.12 per cent per year for Tunisia on average during the simulation period 2021-2025.
Growth in neighbouring countries will not be limited to the agricultural sector but will also affect sectors that are at the heart of the economic diversification of these countries.
In Egypt, for example, the machinery and equipment sector will gain almost 1 per cent per year over the period 2021 to 2025.
Similarly, manufacturing industries will experience rapid development in Tunisia following the peace agreement in Libya. Thus, the agri-food industries will experience an average annual growth of 1 per cent, while other manufacturing activities will grow by 1.37 per cent and construction activities will grow by 1.07 per cent over the same period.
Algeria will experience the same trend during the same period, with an average annual growth of 1.38 per cent for the textile industry, 1.69 per cent for the chemical industries, 2.6 per cent for the electrical equipment industries, 2.02 per cent for machinery and equipment and 0.87 per cent for other manufactured products.
In parallel to the end of the conflict in Libya, the preferential access of exports from the four neighbouring countries to Libya could generate important economic gains for these countries.
There are four major sources of gains from a deeper integration between the four countries and Libya:
- The first is directly linked to the positive impact of increasing exports on economic growth, which would boost productive capacities and job creation.
- Second, an increasing openness to foreign products and services usually generates additional dynamics in the business climate, which could in turn boost investments, both local and foreign.
- Third, deregulations in the context of free trade agreements (FTAs) and access to larger markets will encourage foreign investors to invest in member countries of an integrated region.
- Fourth, the inflows of FDI would facilitate the transfer of technology and know-how.
Accordingly, reinforcing integration between Libya and its four neighboring countries, either through the existing initiatives, PAFTA or AfCTFA, or through new integration plans could represent an important avenue for initiating important transformation processes in Algeria and the Sudan on one hand, and reinforcing the presence of Egypt and Tunisia in the Libyan market on another.
However, regional economic integration between Libya and its four neighbouring Arab countries should not be limited to a simple opening of the markets for trade of existing products, but should also be accompanied by a battery of macroeconomic and sectoral reforms able to develop domestic productive capacities through a deep integration of the four main pillars: trade in goods, trade in services, movements of capital and movements of persons.
Peace in Libya will significantly boost exports of most Arab neighbouring countries. However, due to the structural problems of the Sudan and Algeria in terms of low diversification and poor business climate, their gains are relatively small compared to those of Tunisia and Egypt.
The poor diversification of the economies of Algeria and the Sudan show how important it is to redefine the development model of these two countries beyond the exploitation of natural resources.
The impacts of the peace process in Libya, with the reinforcement of its integration with the four Arab neighbouring countries, are positive in terms of exports for the four countries. The gains, however, are not shared by all neighbouring countries in a similar way.
For instance, Tunisia and Egypt will gain the most, while Algeria and the Sudan will achieve relatively small gains. The best winners are those with the greatest capacity to export a large group of products to Libya, while the smaller winners are those with the lowest level of diversification in their export baskets that are usually dominated by mining and agricultural products.
Changes in exports to Libya confirm the overall economic impacts of peace in Libya on GDP and investments in the weighbridge countries. Moreover, an important part of the increase in exports to Libya is due to the reduction in transport costs and to diversion effects.
On the sectoral level, our estimates show that the manufacturing sector will achieve the highest gains from the recovery in Libya. For Tunisia, the electrical equipment industries, capital goods and machinery industries and other manufacturing activities will achieve the highest gains in terms of exports to Libya.
Similarly, in Egypt, exports of capital goods to Libya will significantly increase. Algeria will also benefit from the peace process in terms of exports. But the expected increase is much lower than those expected for Tunisia and Egypt.
Finally, changes in export from the Sudan to Libya will also increase, but at a low level compared to the three other neighbouring countries. In addition to the poor diversification level of its economy, the Sudan will experience a relative decline in its international competitiveness on the Libyan market, largely due to the real exchange effects of peace in Libya, which will limit the gains during the transition period.
Conclusion and Policy Options
This study allowed us to measure the impact of a peace agreement and the end of conflict in Libya on regional cooperation. But before proceeding with this assessment, we examined the nature of Libya’s external trade and the state of its cooperation with neighbouring countries before and during the conflict.
A. Libya’s external exchanges and regional cooperation
Libya’s external trade grew rapidly from the turn of the century, as exports increased from $13 billion to $62 billion between 2000 and 2008. The great financial crisis of 2008 led to a significant decline in Libya’s trade, which was further worsened by the outbreak of conflict.
The countries of the European Union, in particular France and Italy, are Libya’s main trading partners.
While Libya’s exports are concentra more diversified due to Libya’s dependence on the outside world for its goods. However, these exchanges have been marked in recent years by the rise of new trading partners, particularly Turkey and some Asian countries, notably China.
Despite the importance of the European Union countries and the rise of other countries, neighbouring countries have seen an increase in their participation in Libya’s external trade.
Despite their still low share in imports from Libya, Egypt and Tunisia have seen a steady increase in these trades.
Regional cooperation has not been limited to trade but has also seen significant participation in the labour movement. Egypt, Tunisia and the Sudan recorded the largest money transfers from Libya.
B. The effects of the conflict on regional cooperation
The outbreak of the conflict has had four important effects on Libya’s external trade and regional cooperation.
The first effect concerned a high volatility of Libya’s trade following the conflict and the halting of oil production during the most difficult periods of the war.
The second effect was related to a major change in Libya’s trade structure. Indeed, while the countries of the European Union, and in particular France and Italy, still hold the top spots, they have seen their shares fall sharply to the benefit of the Asian countries and Turkey.
The third consequence concerned countries in the region that have seen their share of Libyan imports remain at their pre-conflict levels.
The fourth effect was the decrease in transfers of migrant workers, particularly to Egypt and Tunisia, as a result of a massive departure following the outbreak of the conflict.
C. The effects of peace on regional cooperation
Our assessment of the effects of peace in Libya has allowed us to highlight important factors that must strengthen regional cooperation. Peace in Libya will have significant gains in growth, employment and investment for the other countries neighbouring Libya that we have examined, namely, Algeria, Egypt, the Sudan and Tunisia.
We also highlighted the effect of peace on trade flows. Our estimates have shown that countries in the region will benefit from a diversion of trade flows in their favour, at the expense of other regions.
We also indicated the sectoral effect of peace in Libya. Our results have shown that the return of peace will lead to a strengthening of manufacturing and industrial activities that are at the heart of the diversification efforts of neighbouring countries.
Our results clearly demonstrate that peace in Libya will benefit the region’s economies and regional cooperation. Ultimately, the end of the conflict and the return of peace to Libya will be major developments with vast and significant consequences.
Peace will bring an end to this destructive conflict that has come at such a high cost for human life and progress and will subsequently promote the return of security and order throughout the country.
Peace will save the significant cost of this conflict on the Libyan economy and society. The resulting gains can once again be invested to meet the needs of the Libya’s economy and allow the country to return to its path towards achieving the SDGs.
This study allowed us to focus on the regional dimension of peace, which will benefit neighbouring countries and strengthen regional cooperation.
From this point of view, it is important that countries in the region are increasingly and collaboratively involved in finding a solution to end this conflict, as they will also benefit from the dividends of peace.