Libya - Growth and Structure of the Economy

Growth and structure of the economy

At the time of independence, the Libyan economy was based mainly on agriculture, which was divided more or less evenly between field (including tree) crops and livestock products. Agriculture provided raw materials for much of the country's industrial sector, exports, and trade; employed more than 70 percent of the labor force; and contributed about 30 percent of the GDP, dependent 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 agricultural area was held on a tribal basis and was being used inefficiently. Rainfall was unpredictable, except that usually it was scarce and ill-timed. When the rains did come, however, they were likely to be excessive. Groundwater was in short supply in the agricultural areas. In some locations it had been so excessively drawn upon that it had become brackish or saline and was no longer suitable even for agriculture. Because the country has no perennial rivers, there was only limited potential for irrigation and even less for hydroelectric power. At the time of independence, the apparently abundant subterranean water supplies located in the Lower Sahara had not yet been discovered. Even if officials had known about the water, its presence, while encouraging, would not have been very helpful in the short term because of lack of development funds and inadequate transport and storage facilities. 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 expansion of cultivable land, but reclamation and irrigation schemes and the introduction of modern farming techniques held promise for the future.

At the time of independence, Libya possessed few minerals in quantities sufficient for commercial use, although iron ore was subsequently found in the Wadi ash Shati in the south-central part of the country. In turn, because of the absence of coal and hydroelectric power, the country had little energy potential. In the modern sense, Libya had practically no industry and, given the limitations of the agricultural sector, could produce few exports to be exchanged for the import commodities the country needed.

At independence, illiteracy was widespread, the level of skills was low, and technical and management expertise and organization were at a premium. (The lack of sufficient numbers of skilled Libyans in the labor force remained a problem in the 1980s; despite large sums of money having been spent on training Libyans, the government still relied on foreign workers.) A large part of the national life was lived under nomadic or seminomadic, rather than settled, conditions. The high birthrate added to the country's poverty. The rapid population increase strained the agricultural economy and resulted in the drift of excess unskilled laborers to urban centers, but these centers, too, lacked sufficient adequately paid employment.

In terms of resources, including human resources, the outlook at independence was bleak. Throughout the 1950s and early 1960s, international and other foreign agencies--mainly the United States and Italy--continued to finance the gap between Libya's needs and its domestic resources. The foreign community was not in a position, however, to undertake an across-the-board and sustained development program to set the economy on a course of immediate self-sufficiency. During much of a 1950s, the country's administrative apparatus was unable even to utilize all the resources made available from abroad.

During the decade after the discovery of petroleum, Libya became a classic example of the dual economy, in which two separate economies (petroleum and nonpetroleum) operated side by side. For practical purposes, no connection existed between them except that the petroleum companies employed limited quantities of local labor and 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 nonpetroleum economy but rather from outside the country. Although this sharp dichotomy was in the process of relaxation after 1965--perhaps especially after 1967-- it appears not to have been attacked conceptually, at least not with fervor, until after the 1969 change of government.

The laissez-faire arrangement came to an end with the military coup d'état of September 1, 1969. The previous government's personnel and much of its administrative framework were scrapped, and the oil companies were put on notice that they were overdue on large payments for unpaid taxes and royalties. In other respects affecting the economy, the new government marked time, except for its policy of "Libyanization"--the process of replacing foreigners and foreign-owned firms in trade, government, and related activities with Libyan citizens and firms. In mid-1970, the government embarked on a program of progressive nationalization.

In addition to establishing at least a temporary veto power over the activities of the oil companies, the nationalization program included sequestration of all Italian assets, socialization (state ownership) of the banking and insurance system, Libyanization of all forms of trade, and steady substitution of Libyans for foreign administrative and management personnel in resident foreign concerns--another aspect of Libyanization. In the petroleum sector, the government put a constantly increasing financial bite on the companies. By the end of 1974, the government either had nationalized companies or had become a participant in their concessions and their production and transportation facilities. The regime thus had a larger share of the profits than under the previous royalty and tax arrangements. However, despite varying degrees of nationalization of foreign oil firms, in 1987 Libya was still highly dependent on foreign companies for the expertise needed in exploitation, marketing, and management of the oil fields and installations that remained the primary basis of the country's economic activity.

After 1972 the government began supplementing its policy of nationalization with an ambitious plan to modernize the economy, modeled largely on neighboring Algeria's experience. The key component of this plan was an intensive effort to build industrial capacity, placing a special emphasis on petroleum-related industry. The industrialization program had two major goals: the diversification of income sources and import substitution. In this latter respect, the plan met with some success, as several categories of imports began to decline in the late 1970s.

In 1981, when oil prices started to fall and the worldwide oil market entered a period of glut, the present phase of independent Libya's economic history began. The decline in oil prices has had a tremendous effect on the Libyan economy. By 1985 Libyan oil revenues had fallen to their lowest level since the first Organization of Petroleum Exporting Countries (OPEC) price shock in 1973. This fall in oil revenues, which constituted over 57 percent of the total GDP in 1980 and from which, in some years, the government had derived over 80 percent of its revenue, caused a sharp contraction in the Libyan economy. Real GDP fell by over 14 percent between 1980 and 1981 and was continuing to decline in late 1986. The negative trend in real GDP growth was not expected to reverse itself soon. .

The decline in real GDP placed great strain on government spending, reduced the level of imported goods available in Libyan markets, and increased Libya's debt repayment problems--all of which combined to lower living standards. The decline in oil revenues also caused the Libyan government to revise its somewhat haphazard way of making economic policy decisions, because it no longer possessed the financial resources to 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 1970s. As of 1987, however, it was too early to judge the effectiveness of the government's response to falling oil revenues.

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