Could Oil Shine like Diamonds?

At the coronary heart of      diamond shape         the socio-monetary grievances that brought about Libya’s revolution become the
rentier economy of the Qaddafi regime.
Though oil resources had approved Libya
to accumulate wealth, the united states of america suffered
from a number of macroeconomic
worries. By 1973, Libya had a dualistic
undiversified economic system ruled with the aid of the
kingdom, by using pervasive hire searching for
and regulatory deficiencies (Vandewalle,
2011). The outcomes of the rentier characteristics of Libya’s economic system permeated both
the economic and political systems of the
usa. Excessive oil resources had allowed the political elite to hallow out governmental institutions – allowing the ones in power
to operate with out oversight.
Though the system remained in place for
over 40 years, because the revolution validated, Libya’s social contract was untenable:
the unequal distribution of wealth, the united states of america’s terrible track document on transparency, governance and corruption, in addition to
diminishing possibilities for the development of human capital created grievances
towards the previous regime which could not
be acquiesced inside the standard way. No longer capable to buy the support of its residents,
the former government turned into faced with
a revolution.
Unfortunately, Libya’s story isn’t always particular.
Traditional economic principle would endorse
that the macroeconomic imbalances of the
Libyan financial system and the social unrest that
ensued have been unsurprising. Rather, Libya’s
political financial system accompanied the usual trajectory of aid ample economies (Collier and Goderis, 2007 and Ross, 1999).
According to the theory of the useful resource
curse, resource ample economies tend
to grow less swiftly and are more vulnerable to
battle than useful resource-scarce economies. It
has been argued that this is because resource abundant economies tend to go through
from Dutch disorder; inadequate financial
diversification; hire searching for and conflicts;
corruption and undermined political establishments in addition to unfastened monetary policies
(Iimi, 2007). Indeed, Libya’s financial system, suffered from all of these symptoms.
Though massive quantity studies have discovered
strong evidence that aid abundance
ends in poor or unequal increase and politiCONTENT
1 Introduction 1
2 What is the herbal
aid curse? 2
3 The Manifestation
of the Resource Curse
in Libya 4
four How Botswana Escaped
the Resource Curse 6
five Good Governance:
A Pre-Condition
to Successful Wealth
Management 12
6 Policy Recommendations
for Libya 13
7 Conclusion 14
Mthuli Ncube
Chief Economist
and Vice President
+216 7110 2062
Zondo Sakala
+216 7110 2001
Jacob Kolster
+216 7110 2065
Steve Kayizzi-Mugerwa
+216 7110 2064
This document became produced with the aid of Paula Mejia (Economist, AfDB) and Vincent Castel (Principal Program Officer,
ORNA). Overall steerage become obtained from Jacob Kolster (Director, ORNA). This paper was inspired via Mr.
Festus Mogae (Former President of Botswana) presentation as a part of the ECON-AfDBs Eminent Speaker collection
in 2008. The Authors would really like to thank Wilberforce Aminiel Mariki (senior Economist, SARC) and Ebrima Faal
(Director, SARC) for his or her contribution. The evaluation and findings of this record displays the critiques of the authors
and not those of the African Development Bank Group, its Board of Directors or the international locations they constitute.
Could Oil Shine like Diamonds?
How Botswana Avoided the Resource Curse
and its Implications for a New Libya
Paula Ximena Meijia & Vincent Castel
A f r i c a n D e v e l o p m e n t B a n okay
cal instability, there are exceptions to
this rule. Botswana is case in point.
Though the u . S . A . Is one of the
international’s largest manufacturers of diamonds,
it’s miles one of the few countries that has
managed to turn its resource into a
blessing instead of a curse. Botswana
went from being one of the 25 poorest
nations inside the world to turning into an
top-middle profits economic system in
1998, reaching a in line with capita GDP of
nine,two hundred USD in 2004 (Transparency International). The query that then affords itself is how did Botswana
escape the pitfalls of the useful resource
curse, make certain strong growth, and keep
its wealth for use by way of destiny generations? And what training can be applied to Libya in its transition?
The following sections of this paper will
cope with these questions by using first explaining the dynamics of the resource
curse, its manifestation in Libya, and
contrasting Libya’s experience with
Botswana’s wealth management. It will
be argued that with a view to control its
herbal useful resource wealth, Botswana applied a three-pronged method.
First, it aimed toward pursuing pursued financial di versi fication, 2nd, it de-related expenditure from sales and
evolved other expenditure smoothing
mecahnisms so one can render it much less
susceptible to alternations in sales referring to the rate fluctuation of its useful resource. Finally, it invested surplus
revenues for the use of destiny generations. Moreover, the paper will explain
that the reason those policy techniques
worked in Botswana while they’ve didn’t produce comparable consequences for other
international locations is due to Botswana’s appropriate governance. A variety of policy suggestions for Libya will then be
presented, drawing from Botswana’s
a hit wealth control regulations.
2 What is the natural
useful resource curse?
Since the 1970’s aid wealthy nations
within the growing international have constantly underperformed resource negative
countries on the subject of economic
growth, earnings inequality and true governance. According to Wienthal (2006),
it’s been properly set up that –
controlling for income – the extra excessive
a rustic’s reliance on mineral exports
(measured as a percentage of GDP), the
greater slowly its economy grows. In truth,
among 1960-1990, the GDP in step with capita of mineral wealthy countries accelerated
by using 1.7% as compared to the 2.Five-three.Five%
increase of mineral terrible international locations.
These counter-intuitive tendencies but
are greater complex than the ones figures
advise. The abundance of a resource
is in any case, now not the reason of terrible boom.
Rather, the abundance of a aid
creates incentives for bad wealth control which in flip result in much less as opposed to extra growth.
Governments depending on few commodities are in particular liable to a
wide variety of macroeconomic challenges.
The first is the excessive volatility of commodity charges. According to Asfaha, this
has had excessive implications for commodity-based nations – this is, nations
whose national sales are specially
drawn from the export of a particular resource – because cycles of booms and
busts in actual country wide incomes create problems for macroeconomic control.
Short-term sales instability is a mainly hard context for macroeconomic making plans and especially financial
policy control for the reason that expenditure styles in these nations have a tendency to
follow sales patterns. Cycles of
booms and busts inside the commodity
fee translate into cycles of booms and
busts in economic fees. “As a result
economic coverage becomes pro-cyclical, implying that sending goes up (and taxes
down) during periods of booming prices and
spending goes down (and taxes up) in
durations of charge busts”(Asfaha, 2007).
Moreover, the costs of seasoned-cyclical fiscal rules aren’t necessarily green. It has been observed that spending
regularly fuels expenditure at the modern-day
account and a low-go back on public funding programs. This approach to
economic control is an understandably common pitfall when checked out from
the attitude of the governments,
which regularly operate on a short-time horizon. Always searching for to increase their tenure (be it thru elections or rentier
kingdom policies), governments are probably to
spend providence sales quickly and in
an inefficient way together with with the aid of growing wages and subsidies, which for
those identical political motives are difficult
to lessen once revenue dries up. For
instance, in 2005, Libya spent five.Five bn
USD on gasoline price subsidies, of which oil
subsidies comprised 42% at 2.Three bn
USD and energy subsidies accounted
for a similar quantity at 2.2bn. Problematically, Libya’s gasoline subsidy inefficiencies do no longer stop there. Because the
General Electricity Company of Libya
(GECOL) makes use of subsidized fees for oil
and fuel inside the technology of electricity,
for the stop client strength is doubly subsidized. As a end result, consumers
pay less than the real backed price
of the deliver, and consistent with a Monitor Group evaluation (2006) many do now not
pay at all. Illustrative of the inefficiencies
and losses created via this machine, GECOL’s transmission and “other” losses
quantity to 40%.
Investment in low-go back and over-ambitious tasks, is any other common
Chief Economist Complex October 2012
Could Oil Shine like Diamonds: How
Botswana Avoided the Resource Curse
and its Implications for a New Libya
A f r i c a n D e v e l o p m e n t B a n k
Chief Economist Complex October 2012
Could Oil Shine like Diamonds: How
Botswana Avoided the Resource Curse
and its Implications for a New Libya
wealth management mistake made by means of
aid-ample economies. Asfaha
notes that most public funding initiatives related to commodity
booms in maximum international locations have been determined to
yield minimum, zero or in few instances negative quotes of go back.
Though Libya did not be afflicted by overseas
debt accumulation, many useful resource
considerable countries can blame their
terrible growth in this tendency as well.
Foreign debt accumulation takes place due to the fact many resource-ample economies don’t forget busts to be transient
and booms to be long term. As a end result
they begin to borrow on the strength of
their properly-acting commodity and
continue to achieve this as a method to finance
their deficits whilst their commodity performs poorly and their sales drops.
Yet any other common problem that
contributes to the resource curse is
Dutch ailment. As the united states of america’s management focuses greater on the booming
area, the competitiveness of different
sectors, in most cases manufacturing and
agriculture, diminish attributable to the
charge appreciation of the foreign money at some stage in resource booms.
Related to this issue is the problem of
restricted economic diversification. Resource ample economies generally tend to
over emphasize the significance of useful resource extraction of their economy
which in flip reinforces their dependence on that product and its place in
the marketplace cycle.
Perhaps one of the maximum complicated
problems attributable to resource abundance and the bad control of aid wealth is institutional weakening.
There is a bent for huge windfall sales to weaken institutions. For times, direct get right of entry to to profits from
the commodity reduces the incentives
for a central authority to set up a tax system. At the identical time, however, the implicit reciprocity among tax collection
and the social services supplied by means of the
country are severed. Commodity booms
thus inspire lease-seeking and patronage networks by way of casting off citizen
participation inside the creation of nation revenues and therefore render the nation
decreasingly responsible to its residents.
Finally, the macroeconomic and fiscal
policy demanding situations created by way of aid
abundance are in addition said by using
the uncertainties surrounding the longterm sustainability of some herbal sources. Economies dependent on
non-renewable sources, which include
Libya and Botswana, constantly face a
trade-off between current sales and
future sales. That is, they’re no longer
handiest challenged by inter-temporal finances constraints, or the effect of boom
and bust cycles on their revenue, but
on intergenerational fairness.
In spite of the various challenges related to useful resource abundance, Botswana has controlled to conquer some
of challenges normally posed through the “useful resource curse”. Botswana’s revel in
is also a precious counter-instance of
the capability Libya has concerning its useful resource wealth management. Indeed,
Botswana and Libya shared a number of
of traits before the discovery
in their herbal sources.
The first obvious similarity they share a
pretty small population. Botswana had a
population of approximately 2 bn in 2010, at the same time as
Libya had 6.Three bn population. More importantly possibly, the two countries
shared the same inherent constraints to
development upon independence: limited human capital and bad bodily infrastructure.
When the u . S . A . Executed independence, most effective 22 Batswana had graduated from University and a hundred from
secondary school. Meanwhile the
usa had just 12 km of paved street
(Acemoglu, 2001). Libya commenced off
with similarly terrible situations, besides
that considering then the us of a has been
unable to improve those constraints. Libya’s universal infrastructure was low,
always ranking inside the backside of all
metrics of infrastructure great (Monitor Group, 2006) a situation that has
simplest been augmented with the current
revolution. While the Libyan work pressure
has, on the other hand, finished a
suitable primary degree of education and
boasts excessive literacy quotes, the excellent of
training could be very negative and as result
there remains a scarcity of advanced
abilities wanted in the hard work marketplace. According to the Libyan Business Execu

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