This study seeks to inform the Libya socioeconomic dialogue participants on the costs and losses associated with conflict in Libya when discussing alternative socioeconomic frameworks for the country’s sustainable development.
The past economic performance
Did the economic factor contribute to the crisis and the fall of the old political regime? For some analysts, this factor played a little role, considering that the Libyan economy had hydrocarbon resources that enabled it to meet its financial needs. However, we consider in this report that the high dependence on hydrocarbons was at the root of the ills of the rent economies, or the Dutch Syndrome, that contributed to the destabilization of the former political regime and its fall in 2011.
The Dutch Syndrome was at the origin of the three ills of the Libyan economy before the revolution, notably the heavy dependence on the economic dynamics of the hydrocarbon sector and its high volatility, the low diversification and rigidity of the economic structures, and the country’s closure to reforms and change.
These three ills have weakened Libya’s economic system and contributed to the destabilization and downfall of the political system. The first consequence of this economic system is its dependence on the level of prices on international markets and, above all, its high volatility as a result of this dependence.
The impact of this dependence can be seen in the growth rates of the Libyan economy during the last decade before the revolution. That decade can be subdivided into three periods. The first, 2001-2002, was a weak period of growth due to low international oil prices. During the same period, there was also a stagnation in government revenues, more than a third of which was spent on current expenditure. The state budget surplus was positive, but remained relatively limited.
The current account surplus was also positive, but remained limited as well. The second phase, covering the period from 2003 to 2007, was marked by a rapid increase in oil prices on international markets. This development marked Libya’s major macroeconomic trends. As a result, the gross domestic product (GDP) growth picked up again, reaching a record high of almost 10 per cent in 2005.
It should also be noted that overall GDP growth was driven by hydrocarbon GDP growth, although growth in other non-hydrocarbon sectors remained high. This period was also marked by a rapid growth in inflation due to the increase in the supply of money on the local market. That period also saw a rapid increase in government revenues, from 43.1 per cent of GDP in 2001 to 62.9 per cent in 2005.
It is also worth noting the increase in government revenues from hydrocarbons, from 29.1 per cent in 2001 to 54.5 per cent in 2007. However, the most important trend during this period was the rapid increase in capital expenditure. Indeed, while overall government spending remained relatively stable relative to the budget during this period, capital expenditure increased rapidly, from 10 per cent in 2001 to 21.1 per cent in 2007.
This dependence on hydrocarbon revenues was also evident in the major macroeconomic balances. Thus, the surplus of the State budget peaked during this period, rising from 1.2 per cent of GDP in 2001 to 31.4 per cent of GDP in 2006. Similarly, the current account experienced a large surplus, increasing from 3.9 per cent in 2002 to 50.1 per cent of GDP in 2008.
The third period extends from 2008 until the outbreak of the revolution in 2010. We would describe this period as characterized by the slowing down of the economic model. Two factors contributed to the crisis in Libya’s economic model.
The first was external, concerning the subprime crisis, which turned into a global crisis and caused a great global recession with the decline in aggregate demand, leading to a fall in oil prices since 2008. However, external factors were not the only cause of the slowing down of the Libyan economic model.
It is also worth mentioning the internal factors that led to a sharp decline in growth dynamics from 2008 on, which were the weakest since the beginning of the decade, despite a large budget and current account surplus. This period witnessed the launch of a huge programme of nearly $100 billion in large public investments, which would be stalled after the eruption of the conflict. Overall, this decade has demonstrated a strong dependence on the growth dynamics of the Libyan economy relative to world oil prices.
Nevertheless, despite the increase in these prices at the end of the period, the average growth of the Libyan economy during the pre-revolution decade did not exceed 5.4 per cent on an annual average, despite an accumulation of large budget surpluses and a significant increase in investment spending during this period.
The second consequence of Libya’s economic system and its heavy dependence on commodity prices is its low diversification. This characteristic appears throughout the decade and can even be seen strengthening during periods of rising international prices. The role of the hydrocarbon sector strengthened in the 2000s, from 37.5 per cent of GDP in 2001 to more than 70 per cent in 2005. Over the decade, the hydrocarbon sector accounted for 53.46 per cent of GDP.
Other productive sectors, particularly industry and agriculture, remained marginal. Thus, manufacturing activities did not exceed 3.92 per cent of GDP during the period from 2000 to 2010, while agriculture’s share was limited to 4.1 per cent of GDP over the same period. Only the service activities played an important role during this period, representing an average of 37.7 per cent of GDP.
This situation is not unique to the Libyan economy, but, rather, is a characteristic of the economies suffering from the Dutch Syndrome and a dependence on commodity prices. The marginalization of the producing sectors is structural and is explained by the increase in revenues related to the export of hydrocarbons. These revenues were the basis for a large increase in reserves and a revaluation of the local currency against foreign currencies.
The Libyan dinar rose sharply against the dollar during the pre-revolution decade, from an exchange rate of 0.6 in 2001 to 1.31 in 2009, with an average of 1.21 over that period. This revaluation of the Libyan dinar has led to a decline in the competitiveness of industrial and agricultural activities and their marginalization from the hydrocarbon sector, resulting in an increase in imports to meet local demand.
The third characteristic of Libya’s pre-revolutionary economic model is its rigidity and hermeticism against reform and change. Libya’s economy has seen several attempts at reform, but they have all been doomed to failure. The first wave of reforms took place in 1987, following the United States sanctions on Libya.
That wave was marked by the emergence of the private sector, notably in cooperatives, or Tasharukiyya, enterprises, retail businesses, and professionals’ and farmers’ markets that were banned during the revolutionary decade. This first wave, which also saw the end of the state’s monopoly on foreign trade, has had some success with the emergence of nearly 140 small and medium-sized enterprises.
This first wave of reforms was reinforced by a second, more prominent wave, starting in 1990. During this new wave, the State committed to closing state-owned enterprises with large deficits, and raised the prices of certain state-subsidized products, such as water and electricity.
In order to reduce its budget deficit, the State also reduced the number of civil servants. Several other reforms were adopted, including the opening of foreign currency accounts. However, these reforms and laws were not widely implemented, and the system remained tight in regards to any change and reform.
The third and final wave of reforms began in 2003. The new government conducted negotiations with the International Monetary Fund (IMF), making the Washington, D.C. institution’s requirements during the 2003 review the roadmap of these economic reforms. At the macroeconomic level, the government has committed to unifying the exchange rate, resulting in a devaluation of the Libyan dinar by indexing it to the IMF’s Special Drawing Rights (SDRs).
The Libyan Government has also committed to privatizing a large number of state-owned enterprises, and a list of 360 companies was published. The government has also committed to macroeconomic reforms and to the prudent management of major macroeconomic balances, along with a reduction of subsidies to the state budget.
These reforms also included those that have affected the financial sector, such as the creation of the financial market in 2008. The financial market was used for the privatization of some state-owned enterprises from among the list of 360 that was published.
All of these reforms, and the roadmap set out with the IMF, were adopted by the General People’s Congress, the legislative body at that time. But then again, this new wave of reform has failed following the dismissal of then Prime Minister Choukri Ghanem and the dissolution of the Council of Ministers in 2008.
Despite these difficulties in implementing the reforms and resistances of the political regime, an effort has been maintained in this area, notably with the financial market law or the foreign investment law. This experience of reforms, and the inability of the various Libyan governments to bring them to an end, can be explained in the economic literature by the weakness of institutions in economic systems of rent, or as suffering from the Dutch Syndrome.
In these systems, the economic literature has shown that, unlike productive regimes through a multitude of institutions and a quest for representation, renter regimes are characterized by weak institutions and the refusal of political authorities to be accountable to their citizens.
Thus, the great dependence of the Libyan economic system on export revenues and, especially, hydrocarbon prices, the weak diversification of the economy, and the weakness of these institutions and their hermeticity in relation to change, have all led to a shortening of the economic model, which has been an important element of the political instability that Libya experienced with the revolution.