Libya - The Economy Role of the Government

Role of the government

Mainly because of Libya's strategic role in World War II, the Libyan government had come to depend on foreign patrons for its financial needs. During the Italian occupation and in the immediate postwar period, first Italian and then United States and British grants kept the Libyan administration solvent. After 1956 the need for direct foreign subsidies declined as the international oil companies began to invest heavily in Libya--causing substantial capital inflows. During the 1960s, the investments of the previous decade began to pay off, and the country experienced the fruits of rising oil wealth. This trend not only reduced the government's need for foreign assistance, but also generated a huge increase in taxable domestic income. However, Libyan physical and human resource development continued to lag, necessitating sustained reliance on foreign technical assistance. This pattern of dependence on foreigners to perform crucial skilled functions, which subsequent governments have been unable to eliminate, has made Libyans acutely aware of their subordinate status in the world economy in relation to the industrialized West.

Consequently, the Qadhafi government has assigned high priority to the achievement of what it perceives as "true economic independence." This theme has been one of Qadhafi's staple arguments and underlies much of the post-1969 revolutionary government's economic policies. Qadhafi's other principal economic objective has been to promote equity, which he equates with socialism. Because of Qadhafi's unique conception of the character of the state, his distrust of the private sector, and his abhorrence of the profit motive, he has maintained that it is only through massive state intervention that economic independence and equity can be attained. Thus, the state has taken control of virtually all economic domains since Qadhafi came to power.

Soon after the revolution, a major Libyanization drive was initiated, which involved the expulsion of the remaining Jewish and Italian communities and the nationalization of the country's banks, insurance, and petroleum-marketing companies. Other measures were enacted to restrict the activities of foreigners in commerce and industry.

Throughout the 1970s, the government expanded its role to take control of Libya's economic resources. The public Libyan Petroleum Company (LIPETCO) was supplanted in 1970 by the National Oil Company (NOC), which became responsible for implementing policies decided upon in the Ministry of Petroleum before the latter was dissolved in March 1986. Similarly, the government exercised effective control over water rights and created a large number of state-owned enterprises to oversee Libya's basic infrastructural facilities, such as highways, communications, ports, airports, and electric power stations. Public corporations were also created to run the state airline and to import certain restricted goods. The public import company, the National Organization for Supply Commodities (NOSC), was given a monopoly over the import and sale of many basic consumer items. In 1975 the government became the sole importer and retailer of motor vehicles. The domestic marketing of certain commodities and the provision of certain services were restricted to the public sector. By 1977 these included construction materials, livestock, fertilizers, fish fodder, insecticides, insurance, banking, advertising, and publishing.

Since the late 1970s, the Libyan government has accelerated its assault on the private sector in a determined attempt to stamp out what it identified as bourgeois exploitation. This renewed effort followed the codification of Qadhafi's economic theories in the second volume of his The Green Book, published in 1978. Many of the regime's most radical economic policies began soon after that date. The first concrete manifestation of Qadhafi's new economic militancy occurred in 1978, when he outlawed rental payments for property, changing all residential tenants into instant owners. The private sector housing and real estate industry was thus eliminated, and the new owners were required to pay monthly "mortgage" payments--usually amounting to about one-third of their former rent--directly to the government; however, families making less than the equivalent of US$500 a month were exempted from this obligation .

Qadhafi initiated another major innovation in 1978 when, during a speech, he urged workers in both the public and private sectors to take control of the enterprises in which they worked by following his dictum: "partners, not wage laborers." This new idea went much further than an earlier law in 1973, which had merely instituted mandatory profit-sharing. Now workers were urged to involve themselves in the day-to-day management of the enterprises in which they worked. Within 3 months of this speech, workers in 180 enterprises had formed "workers' committees" which, in principle at least, ran these concerns.

The most ambitious of the 1978 measures, however, was the attempt to do away with all private commerce, retail as well as wholesale. In that year, the responsibilities of the NOSC were considerably enlarged because the state took over responsibility for the importation of all goods and control over all foreign exchange transactions. In theory, all private commercial transactions became illegal as the state began to open centralized supermarkets run by local people's committees with the aim of undermining the numerous neighborhood shops that previously had catered to the daily needs of most Libyans. Eventually, there were 230 such state-run supermarkets in various parts of the country. Although no one expected such a small number of stores to replace fully the thousands of private sector merchants, state planners hoped that the stores would constitute enough of a market presence in each location to exert a downward pressure on private sector prices for competing goods.

The hostility of Qadhafi toward the private sector was based on his view of merchants as nonproductive parasites; he ignored their role as distributors. In fact, many state proclamations explicitly stated that government policy was designed to do away with the whole merchant class. One newspaper editorial emphasized that "One of the goals of these consumer centers is to cut down on the huge number of merchants who are a burden on productivity." The only type of private sector enterprises that the government did not actively seek to eliminate were small service-providing firms, which were not viewed as inherently exploitative. By 1980 it was clear that Qadhafi's assault on the private sector was not proceeding as fast as he had hoped. Even in a time of relative wealth--oil revenues were nearing their peak and the state had enough revenue to fix the prices of certain goods--the public sector was unable to satisfy demand for many consumer items. The unsatisified demand left room for private sector activity at various levels of legality. Continuing his attack on the private sector from another angle, in 1980 Qadhafi demonetized all currency notes above one dinar (for value of the Libyan dinar (LD), see Glossary). His action was designed to encourage those holding large quantities of dinars to deposit them in the nationalized banks-- thus increasing state control over private sector assets. Many individuals with large cash holdings were reluctant to deposit their savings, however, since withdrawals in excess of LD1,000 were prohibited. They also feared that large deposits could be used against them as evidence of their having engaged in illegal commercial transactions. The main result of the 1980 demonetization, therefore, was a rise in conspicuous consumption, as individuals sought to transfer their savings into material goods, and an increased demand for black market foreign exchange, as persons sought ways to export their dinars.

Most of the post-1977 economic policy innovations of the Qadhafi government were designed to inhibit the private accumulation of wealth and promote an equitable distribution of the national income. The principal vehicles for fostering economic independence in this period have been two five-year plans (1976-80 and 1981-85), which were aimed at directing investment to areas that would contribute to economic autonomy. In the 1976-80 plan, agriculture and industry received the largest share of investment, whereas the 1981-85 plan allocated more funds to industry and public works, with agriculture coming in third.

Most of the planned agricultural investment has been directed to the development of oasis agriculture and irrigation. Ambitious schemes were launched during the 1970s to use the underground fossil water resources of the Tazirbu, Sarir, and Al Kufrah oases to grow wheat and animal fodder crops. Similarly, work has begun on the Great Man- Made River (GMMR) scheme to tap desert aquifers to bring water to the coastal agricultural areas where shrinking aquifers and rising salinity threaten to lay waste to historically productive agricultural lands.

Industrial investment has been concentrated on several large- scale projects at industrial centers along the coast. Existing industrial facilities are located at Marsa al Burayqah, Misratah, and Ras al Unuf. Further expansion of these facilities as well as the creation of new ones was a principal objective of the 1981-85 plan. Most industrial projects were designed to create downstream petrochemical employment, satisfy internal demand for processed petroleum products, and take advantage of cheap energy to build export-oriented manufacturing capacity.

The contrast in approaches between the relatively conservative development plans, with their emphasis on investment and resource mobilization, and Qadhafi's more radical "socialist" policies, which seem to sacrifice efficiency for equity, produced inherent tensions in economic policy-making. In certain respects, the pursuit of equity has hindered Libya's quest for economic independence by discouraging private sector growth.

The political climate of Libya in the mid-1980s placed numerous obstacles in the way of private sector development. The 1978 law requiring all enterprises to be run by workers' committees made effective management almost impossible. Furthermore, since workers' committees rarely accepted economic efficiency or profitability as valid objectives, many enterprises no longer had a clearly defined role in the economy. The result of such policies has been to stifle most dynamism in the private sector. Consequently, when the government needed to ensure the accomplishment of key economic tasks, which it was incapable of doing for itself, it had no choice but to turn to foreigners.

Those Libyans possessing managerial experience or engaged in performing key economic activities prior to 1978 became increasingly alienated by the subsequent directions of government policy; many even left the country. Thus, with a severely handicapped domestic private sector and few competent Libyan managers, the completion and operation of practically all key industrial projects depended on foreign expertise. Furthermore, because the post-1978 economic environment had provided little incentive for the training of Libyan managers, there was little likelihood of easily reversing the shortage of indigenous managers.

Some foreign observers have suggested that the sharp drop in oil revenues, which began in the early 1980s, may lead to a re- evaluation of many of Qadhafi's more radical socialist policies. Such reassessment could reduce some of the private sector's problems and actually contribute toward economic independence. There were some indications that this was indeed happening in the mid-1980s, as many projects of doubtful economic value were postponed.

Because of declining revenues, the government has been unable to finance much of its ambitious drive to replace the private sector. The expansion of the state-run supermarket system ended as funds grew tighter. By 1985 the stores were unable to supply most basic consumer items, thus failing to drive down private sector prices. Similarly, the government was compelled to expel many foreign workers who had been the mainstay of the economy. Between 1983 and 1987, the number of foreign workers in Libya fell drastically, going from more than 560,000 to about 200,000. This decline was achieved primarily by cutting the number of unskilled foreign laborers employed by the public sector to perform basic service tasks--jobs that many Libyans could fill. Whether the increased demand for labor in the wake of these expulsions will result in a greater Libyanization of the work force, or merely in a rise in the number of unfilled jobs will depend largely on how much the government relaxes its restrictions on private sector employment. In the mid-1980s, few public sector funds were available for hiring Libyans at the higher salaries they would require.

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