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

Edwik, AA 2007, Oil dependency, economic diversification and development a case study of Libya , PhD thesis, University of Salford, UK.

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    Abstract

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

    Item Type: Thesis (PhD)
    Contributors: Ruddock, L(Supervisor)
    Additional Information: PhD supervisor: Professor Les Ruddock
    Themes: Subjects / Themes > H Social Sciences > HB Economic Theory
    Subjects / Themes > J Political Science > JQ Political institutions Asia,Africa, Australia,Pacific Area
    Subjects outside of the University Themes
    Schools: Colleges and Schools > College of Science & Technology > School of the Built Environment > Research Centre for Education in the Built Environment (RCEBE)
    Colleges and Schools > College of Science & Technology > School of the Built Environment
    Depositing User: Institutional Repository
    Date Deposited: 07 Jul 2009 16:14
    Last Modified: 18 Feb 2014 14:50
    URI: http://usir.salford.ac.uk/id/eprint/2189

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