Libya needs to make productive use of oil revenues
Thursday, Sep 18, 2008
Libya has decided to start distributing oil revenues among its citizens with effect from next year. The details of the project and how the revenues will be distributed have not been revealed.
This kind of distribution of national wealth does not apply to any of the well-known economic theories, from those of Adam Smith and David Ricardo, to John Keynes and the Neo-Keynesian Theory of Distribution.
There are many questions about the economic outcome and the expected effects of this move, especially that Libya did not invest oil revenues in the past 40 years to establish a diverse economy or an infrastructure for future economy.
During this period, the members of the Gulf Cooperation Council (GCC) were building advanced infrastructure upon which modern economic sectors could be developed.
Libya needs to make up for the years of economic stagnancy and increase investment in infrastructure. It must also work to diversify its economy through intensifying investment, attracting more foreign money and importing advanced technologies.
This plan will help diversify sources of national income and raise the living standards of residents.
It and must include implementation of housing projects, providing stable sources of income and qualifying hundreds of thousands of citizens to work in the new industries that will stem from local investments.
The distribution of oil revenues will come at the expense of these investments and cause dependency among Libyans, who will use most of their allocations towards buying consumer goods.
This will only increase the import bill as Libya relies heavily on imports to provide for its needs.
There is a Chinese proverb that says 'Don't feed him fish, teach him how to go fishing'. Thus, the revenues that will be distributed as a gift can be invested in many projects that will reflect positively on the Libyan economy.
It will also have a positive effect on people through providing employment opportunities with good wages. This will allow workers to increase their savings. This, in turn, will improve living standards and increase local investments and growth rates.
Libya's unemployment rate is pegged at 30 per cent, which is high for an oil-exporting country. The rate of investment in domestic growth is eight per cent, compared with more than 20 per cent in GCC.
There are many professional requirements and economic index ratios needed to create an economic balance. These are missing in Libya's case.
Further, Libya cannot permanently distribute oil revenues since oil prices fluctuate. At times distribution of oil revenues may have to be stopped to finance the government budget. The Libyan budget relies 90 per cent on oil revenues, which constitute 94 per cent of Libya's foreign currency revenues, 60 per cent of government revenues and 96 per cent of exports.
The decision to distribute oil revenues is more emotional than economic, as it is not based on scientific factors that create a diverse economy, which does not rely on depleting oil fortunes.
Previous experience has proved that it is hard to run economies based on banners, and this keeps getting more complicated in the age of globalisation.
Nevertheless, some of the previous experiences, especially in the GCC region, can provide valuable lessons on establishing local economies with a strong infrastructure and allow the development of diverse economic sectors.
Raising the living standards of citizens is a global target. Yet reaching this target requires economic professionalism and creating a correct relation between the components of economic infrastructure.
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