Rogue Pragmatists
Despite its traditional image as an unpredictable rogue with ties to international terrorism, Libya’s growing pragmatism and efforts to reform its economy actually predate the WMD announcement. In 1997 the country’s rubber-stamp parliament—the General People’s Congress (GPC)—adopted Law Number 5, which opened the economy to foreign direct investment for the first time in decades. The effect was negligible because the international economic sanctions remained in place. However in March 2003, the GPC made a political overture to the West by adopting far-reaching liberalization measures. Three months later, Qadhafi admitted that his public-sector management of the economy had failed, and he set about abolishing it.

That same month, the GPC chose former trade and economy minister Shukri Ghanem, a proponent of liberalization and privatization, as prime minister. Ghanem, a technocrat formerly with OPEC, sees his top priority as removing the inefficiencies and bottlenecks the state-controlled economy created in the previous decades. Determined to implement badly needed reforms, but aware of the enormous resistance he would encounter from Libya’s patronage-driven system, he slowly set about trying to build a technocratic team. He restored the defunct Energy Ministry and appointed Abdallah Badri—another technocrat with considerable experience in the oil sector—to lead the country’s National Oil Co. and to negotiate the return of U.S. oil companies to Libya. For the first time, Libya accepted expertise from the International Monetary Fund, whose calls for wide structural reforms, improved macroeconomic management and the removal of trade barriers and price subsidies formed part of the GPC deliberations in March 2004.

Petroleum explorers have scoured only one-quarter of Libya’s territory to date. Conservative estimates of its reserves in that area alone run to 30 billion barrels.

Two decades of hardship caused by the sanctions, and the economic legacy of an inefficient state-run economy, made reform a political necessity. Furthermore, growing internal pressures from a burgeoning younger population with scant possibilities of meaningful employment (Libya’s 2003 unemployment rate was estimated at 30 percent; some 800,000 Libyans were employed by the state) inspired a number of reform-minded intellectuals and technocrats to push for change. The dire condition of the country’s economy steeled their resolve, and the lifting of the international sanctions has catalyzed their efforts.

At its annual meeting in March 2004, the GPC adopted practical measures to support the new economic strategy. The government envisioned the privatization of 360 state-owned companies. It promised to reform Libya’s banking sector and tax code, and to create a stock exchange. It also planned to relax rules for foreign companies and to promote the country’s almost nonexistent tourism sector. The final statement on the country’s ongoing economic reforms came this past January at the Davos economic summit where Saif al-Islam al Qadhafi, the Libyan leader’s son, announced a vast reform program for the economy under which Libya would avoid the pitfalls of earlier privatization efforts in other emerging economies of the region.

Banishing Shadows
However, in their plans, the younger Qadhafi and the GPC seem to have overlooked the legacy of three decades of disastrous economic management and a lack of political accountability. Libya must directly address the shadow of its past to enlighten its economic future—beyond the oil industry and some carefully controlled private sector initiatives. While Ghanem’s speeches and interviews are laced with the buzzwords of economic transition—deregulation, transparency, rule of law, property rights, efficiency, markets—his rhetoric ignores the fact that Libya has no history of making the necessary institutional, legal and bureaucratic arrangements that allow such reforms to succeed. Not surprisingly, two previous efforts at liberalizing the economy—in 1987 and the early 1990s—foundered.

The current economic and political climate in Libya is substantially different from that in the 1980s and 1990s when, as a result of anemic oil prices, bad management and economic sanctions, those earlier reforms faltered. The current climate appears more auspicious for change. Qadhafi has cautiously expressed a commitment to reform, and, so far, has seemed willing to curtail serious opposition to it. The continued visibility of reformers such as Ghanem—and perhaps Saif al-Islam—also augurs well for the implementation of the reforms, even if their positions remain precarious.

In 2003, Libya reached a financial settlement with families of the victims of the 1988 commercial jet bombing over Lockerbie, Scotland, leading to improved relations with the international community. (A Libyan man was eventually convicted of the crime.) With economic sanctions lifted, high oil prices—and the promise of sustained income far into the future—Libya’s economic fortunes are substantially better than they were in the 1980s and 1990s. The latest round of oil exploration agreements, announced this past January, show the extent to which U.S. companies are privileged partners in Libya’s economy. Of the 15 exploration licenses awarded, 11 went to U.S. firms, including Occidental, Amerada Hess and ChevronTexaco. Clearly one of Libya’s priorities is to bring U.S. firms into its oil industry, even if doing so comes at the expense of the European companies—particularly France’s Total and Italy’s ENI—that supported the country during the sanctions period.

Vested Interests
Since 1969, the Libyan state has served as an intricate channel of economic largesse for the Qadhafi regime’s clients. The government shields its revenues from public scrutiny, obscuring much of this maneuvering. Small coalitions of supporters and elites make decisions about economic policies and investments, and the country’s national budget is largely opaque. The enormous bifurcation between formal and informal politics remains a pronounced feature of Libya’s political life.

The country’s Law Number 1—the basis for “revolutionary authority”—and Colonel Qadhafi are the only political references allowed in Libya.

These enduring legacies of the revolutionary period continue to cast a pall over the current economic policies. Any serious reform will have serious repercussions for the political elite. The fact that the country’s political structures remain unchanged, and do not support the transparency and accountability that economic reforms necessitate, puts the future of the reforms in doubt.

Ghanem feels this dilemma acutely. Indeed, he had to intervene at a GPC meeting in January when reformers and their opponents squared off. Ghanem argued for the right of the prime minister to make his own cabinet appointments, and for substantially increased cabinet power to push the reforms through. He also argued for a clear separation of power between the legislature and the executive to ensure that proposed legislation would not be hostage to what he described as “invisible” forces. He also demanded greater power for the judiciary.

In words unimaginable a few years ago, Ghanem asked, in effect, for a constitution. His opponents responded, in blistering language, that there is no need for separation of power or for a constitution in Libya because the country’s Law Number 1—the basis for “revolutionary authority”—and Colonel Qadhafi are the only political references allowed in Libya. When Qadhafi attended the meeting toward its conclusion, he cautiously supported Ghanem in his reform efforts but left untouched the larger questions the prime minister had raised. For now—despite Ghanem’s candid demands at the GPC—the possibility of political reform that would strengthen the economic reforms remains remote.

In principle at least, Libya has two options for dealing with its ongoing dilemmas. It can pursue economic liberalization in earnest, giving increasing and real voice to the country’s reformers, fully realizing that such a pursuit will inevitably lead to further demands for accountability, transparency and perhaps greater political voice among the population.

Alternatively, it can pursue a type of state-led market reform—like that in neighboring Tunisia or Egypt—that leads to a highly authoritarian government, relying on cooperation between the state and a number of business coalitions. It would be guarded by the country’s own security organizations and fueled by oil. In this sadly familiar—and highly likely—scenario, Libya’s current economic reforms would, as in many other oil exporting nations, proceed haltingly and incompletely, subject above all to the political expediency of regime survival.

Diederik Vandewalle, an associate professor of government at Dartmouth College, focuses on development in the Middle East and North Africa.