Structural changes in Libyan economy and it's survival between 1963-2008

by

TABLE OF CONTENTS

INTRODUCTION1

OVERVIEW3

STRUCTURAL CHANGES IN THE LIBYAN ECONOMY4

THE LIBYAN ECONOMY DURING THE PRE-OIL ERA4

THE LIBYAN ECONOMY DURING THE PERIOD 1962-20088

AGGREGATE DEMAND12

Consumption13

Government current expenditures on goods and services19

Fixed capital formation20

The balance of payments (BOP)24

AGGREGATE SUPPLY28

Production in the agricultural sector33

Production in the manufacturing sector34

Production in the oil sector36

Production in the construction sector38

Production of the services sector39

Population, Labour Force, and Employment40

Population and labour force40

Employment42

Income distribution44

Public finance45

SUMMARY50

REFERENCES52

STRUCTURAL CHANGES IN LIBYAN ECONOMY AND ITS SURVIVAL BETWEEN 1963-2008

Introduction

The last quarter of 1961 marked a new era in the history of the Libyan economy, during which the first crude oil shipment left for Europe. Since then, the Libyan economy has in effect undergone a structural change. Not only has oil become the leading sector in the economy, but it also enables the government to actively participate in the economy.

One of the main problems that oil has brought with it is the relative factor endowment problem. In the pre-oil era, labour was the relatively abundant factor of production, while capital was the scarce one (Wagner 1997 592). This situation has reversed since 1962, and labour has become the relatively scarce factor.

On the other hand, the last quarter of 1973 marked a new era in international economic relations and in particular in the international oil business. As a result of the OPEC decision to increase oil prices, many and diverse impacts were observed in the oil exporting countries, and Libya was no exception (Ronald 2002 256). The rapid expansion of oil exports resulting from the increase in oil prices increased the influx of foreign currencies, which were used partially to finance domestic development programs as well as to finance the imports of goods and services. Moreover, the high price of oil enabled the government to increase sharply its expenditures on domestic development programs, which in turn stimulated internal industries (Steven 2003 191). However, the absence of both an independent monetary policy and a well developed financial market made the expansion in the money supply proportional to the expansionary monetary and fiscal policies.

Despite the huge amounts of public investment injected into the economy (which was followed by similar private investment), domestic production was and still is unable to meet the demand for goods and services. 'The constraint on production, during the sample period of this study, was not the lack of capital, but rather it was the shortage of labour supply due to the small size of the Libyan population. This has led the country to be highly dependent on the foreign sector to provide imported goods and services as well as foreign workers. The latter, in 1977, constituted 35 percent of total employment (Maurice 2008 310).

The magnitude of these impacts and their interrelations has not been estimated, and they raise many interesting questions. To capture all of these effects, the economy should be viewed as a system of quantitative relationships. The specifications of all these quantitative relations, tests of the model's reaction to policy variables, and the ...