How Libya Can Avoid the Resource Curse

Libya needs institutions that ensure their oil riches serve the long-term interests of their people.

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The death of former Libyan leader Moammar Gadhafi has created a sense of elation in Libya. Leaders of NATO countries are also congratulating themselves on a limited and successful mission, achieved without a single coalition casualty. However, the strategic objective of the intervention in Libya was not to kill Gadhafi and destroy his army, but to protect civilians and, in doing so, facilitate Libya's transition to democracy. In this regard, Libya's future remains fraught with risk. Left to its own, Libya may soon find itself again run by an autocracy, ruined by a civil war, or both. It is critical now, more than ever, that Libya and the international community consider how to design institutions to ensure a stable and prosperous future for the country. Specifically, Libya should establish a national resource fund (overseen by an independent body) to manage government profits from the oil sector, with a set percentage of the interest reinvested in infrastructure and education.

Libya is plagued by a toxic mix of underdeveloped political institutions, tribal and ethnic fractionalization, and oil-dominated economics. Unlike other states liberated by the Arab Spring, Libya's economy is heavily dependent on oil. Libya is the world's 17th-largest oil producer. Revenues from the oil sector account for 95 per cent of its export earnings, 25 per cent of its GDP, and – most significantly – 80 per cent of its government revenue.

Oil and accountable government rarely mix. Lucrative and accessible natural resources free leaders from relying on taxation, and therefore from public opinion. In short: no representation without taxation. These resources, and the military equipment they afford, also permit leaders to buy off or repress demands for representation. Finally, natural-resource dependence leads to the "Dutch disease," where natural-resource exports inflate the value of currency, making other products less competitive in international markets, and this, in turn, reinforces dependence on natural resources. Current Libyan leaders are publicly committed to freedom and democracy, but there are no guarantees that future leaders will be so restrained, especially if they can exploit resources for themselves and break their dependence on their constituents.

When a state relies heavily on natural resources for revenue, these resources become a coveted prize for political contenders. This increases the likelihood of coups or separatist civil wars led by groups wanting to control resource-rich areas for themselves. This is precisely what occurred in Libya, where oil was discovered in 1959 and the government was overthrown in a coup in 1969. The risks of coups in civil war are magnified in Libya, which is riven by tribes and ethnic groups, many of which have lost power with the demise of Gadhafi. The current nationalist euphoria masks underlying social fissures. For instance, there is evidence that rebel general Abdul Fatah Younis was killed by members of an allied militia. With a common enemy defeated, goodwill will start to dissipate – especially as groups begin to negotiate the distribution of power and resources. The spotty human-rights record of the Transitional National Council, reprisals against alleged regime loyalists, infighting among rebel forces, and the apparent execution of Gadhafi provide no reason to be optimistic that such negotiations will proceed smoothly.

What can be done to avert the risks of autocracy and civil war? Robust political institutions to maintain democracy and the rule of law are clearly essential. However, as the cases of Venezuela and Russia demonstrate, they are also insufficient. What are needed are institutions to manage the interaction of political power and natural-resource rents.

In this regard, Libya should follow the example of Norway. When Norway came across a natural-resource windfall in the 1960s, it deliberately avoided the bonanza that had ruined other countries. Instead, it restricted the exploration and access of oil fields to lessen the debilitating effects of currency appreciation. It mandated that a certain percentage of profits be put aside to fund future exploration and the renovation of oil facilities. Most importantly, profits from extraction were held in a national resource fund (NRF), known as the Government Pension Fund, with the government only being able to access the interest on this NRF. By limiting political access to natural resources, it forced leaders to actively seek the support of their constituents. The NRF provided Norway with some protection from fluctuations in oil prices, limiting dependence on natural resources and creating space for a more diversified economy. For less-developed countries, restricted access to resources would make the state a less attractive prize for those seeking to seize it.