Courtesy of Foreign Policy, a report on Libya’s economic paradox – it’s rich but broke:

Libya has been an especially difficult place to live over the past few weeks. With a string of high profile assassinations, a jailbreak, and a series of sometimes thwarted car bomb attacks, there is plenty for Libyans to be exasperated by. Yet amidst the lawlessness of recent weeks, nothing has frustrated the Libyan streets more than the daily power outages, sometimes running up to an excruciating 16 hours at a time.

The government has offered explanations, from overconsumption in the summer months to lack of maintenance, a legacy underinvestment in the network, and even sabotage by Qaddafi loyalists. This may be post-Revolution Libya, but given the country’s vast riches, a lack of electricity is a problem that seems especially hard to explain away. 

The country boasts some of the world’s largest proven oil reserves, substantial capabilities for natural gas production, $168 billion in foreign assets and an enviable 2000 km-plus stretch of coast on the Mediterranean. For all these assets, Libya (pop. 6.4 million) also has a relatively small number of mouths to feed. In other parts of the world, the combination of small population and ample natural resources has generally proven a surefire formula for success. Why does Libya fail to follow suit? 

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During Qaddafi’s reign, at the very least it was clear why infrastructure and public services were lacking: the Colonel and his cronies were visibly enriching themselves on the back of oil exports, leaving little of the country’s bounty for the average Mohammed to enjoy. Now that the Qaddafi family and their business associates are gone, however, the lack of public investment is more puzzling. In a nascent democracy, it is also far less tolerable. 

Truth be told, conditions for ordinary Libyans have not improved in the two years since the Revolution. The hospitals are “unfit for human beings,” in the Health Minister’s own words. The schools are decrepit. Sewage spills pungently into the once-pristine Mediterranean shoreline. Even an internet connection is a serendipitous occurrence. For Libyans and observers alike, it is not immediately obvious why Libya should be in such dire straits. 

Incompetence and widespread corruption top the list of popular explanations for the country’s current condition. Both are, to some extent, true. Emerging from dictatorship, public servants are equal parts unskilled and corruptible. But the reality is that even a competent and fully transparent government would find governing today’s Libya an impossible task. The reason is simple: despite its apparent wealth, Libya is broke. 

All you have to do is run the numbers. The country’s projected national budget for 2013 amounts to some 67 billion Libyan dinars (or $52.5 billion), 90 percent of which will be derived from the export of oil throughout the year. Of this, LYD 20 billion ($16 billion) is earmarked for public sector salaries and a further LYD 10 billion ($8 billion) for subsidies and transfers. After operating expenses, what’s left for “development and reconstruction” is LYD 19 billion ($15 billion) — a meager LYD 3,000 ($2,300) per head — to basically build a country from scratch. 

The figures are frightening, but the current government can’t be blamed for them. Libya’s fiscal policy is largely inherited: the hefty salaries and subsidies are the remnants of the country’s recent socialist past. Unlike its Arab Spring peers, Libya hasn’t only emerged from political autocracy. Perhaps more importantly, it is also emerging from Qaddafi’s most indelible of legacies: decades of Soviet-style command economics. 

A young Qaddafi, the son of a camel herder from a rural central Libyan village, was taken, during the 50s and early 60s, by the ideas of the iconic Egyptian president-cum-dictator Gamal Abdel Nasser. Among them, a distaste for monarchies, the dream of a powerful United Arab States, and a fervent anti-capitalist sentiment. Years later, after his successful 1969 coup, Qaddafi published his own synthesis of the Nasserite ideology in his now-infamous “Green Book.” 

Part desert-inspired philosophy, part political and economic manifesto, the Green Book with its grandiose “Third Universal Theory” laid the foundations for Qaddafi’s brand of socialism. It contains such maxims as “land is the private property of none” and “wage earners are but slaves to the masters who hire them.” These and other Qaddafi aphorisms were taught at every level in Libyan public schools, with students learning to recite them by heart. In Qaddafi’s visionary society, citizens would want for nothing, for controlling another’s need is akin to slavery. The state would necessarily be the sole provider because workers — now “partners” — would freely associate for the benefit of the collective. 

Under Qaddafi, the state indeed became the near-sole provider of jobs; even today, between 70 and 85 percent of the Libyan workforce is employed by the state. Large-scale subsidies (applied to everything from petrol and electricity to rice and tomato paste) kept Libya well isolated from the world: the state monopolized imports, buying in bulk from abroad and setting up state-run cooperatives in each city where ordinary Libyans could buy their subsidized basic staples and foodstuffs. These hugely discounted goods equally served a political purpose: they kept Libyan mouths just about full enough not to be inclined to speak out of turn. 

At the same time, Qaddafi engaged in an all-out witch-hunt against the “evil bourgeoisie” with their exploitative profit motive. The wealthy Libyan merchant families that emerged during the toppled Kingdom of Libya (1951 – 1969) saw their assets (lands, businesses and homes) confiscated wholesale by the regime. Many then fled the country — largely to Egypt and the United Kingdom — only to be subject to often very public assassination attempts by Qaddafi envoys mandated to nip the cash-rich, foreign educated opposition in the bud. 

Monopolize the labor market, implement far-reaching subsidies, crack down on private enterprise; rinse and repeat over four decades, and what you end up with is a population with a deeply entrenched cultural and economic dependence on the state.  

Of the various interim governments since the Revolution, Prime Minister Ali Zeidan’s, so far, has the best grasp of the problem. His predecessors made matters worse by initiating a system of stipends for the fighters and injured of the Revolution. “This predictably spiraled out of control; amongst the 450,000 registered claims, tens of thousands of names were found to be duplicates, fakes or long deceased.” 

Zeidan’s cabinet, on the other hand, has shown more wisdom, cracking down on the abuses to the stipend system and announcing the phasing out of oil and food subsidies by 2016 (only partially replacing them with a monthly cash transfer). This is a bold policy for a shaky government, one that aims straight at the root of the problem. If implemented successfully, this move would substantially relieve the budget, which could then be meaningfully redeployed towards infrastructure, health care, and education — the visible improvements so coveted by the Libyan electorate. But at a time when people expect more, not less, from the government, subsidy reform is a hard sell. 

Zeidan himself has gone to great lengths to explain why the money isn’t there. A roundtable discussion on the budget was held on national television, featuring the Ministers of Finance, Oil, and Planning. The topic of the budget is a must at the prime minister’s Sunday press conferences where Zeidan spends much of his airtime explaining the bureaucratic impediments his Cabinet face. These obstacles boil down to two: Libya’s interim legislature, the General National Congress (GNC), has set up and given a powerful mandate to an “Audit Bureau” to review, sign off, or veto every planned government expense. The Audit Bureau has been notoriously slow in approving spending requests and the government has called for its restructuring to resolve the impasse. On top of this, the GNC has also denied the government the ability to shift spending between the line items on the budget: where one item records a surplus, the country’s executive body does not have the authority to shift the monies to another more needy area of the budget. 

What’s more, oil production fell below 1 million barrels a day in June this year for the first time since the Revolution (from a peak capacity of 1.6 million barrels). The government sounded the alarm that a “crisis” level had been hit. At the lowest point during the Revolution, oil production briefly came to a total standstill. Libya’s rapid recovery, within a few months, to 100 percent of pre-Revolution production levels was astonishing and the subject of much international praise. 

These days, “crisis” level has been redefined: oil production has plummeted dangerously to just 30 percent of capacity due to violent unrest and strikes. The government has already warned that it won’t be able to meet its commitments for the year: between salaries, subsidies, and discretionary infrastructure spending, the latter will no doubt be the first on the chopping block. 

This leaves Zeidan between the proverbial rock and a hard place. He will remain weak and untrustworthy so long as he can’t produce visible results which require spending, but at the same time, he can’t spend so long as he’s untrusted by the bureaucrats at the GNC and the Audit Bureau and weak in the face of the security situation (therefore not credible enough to enact the all-encompassing fiscal reform that can save his government). The man doesn’t stand a chance. 

But the underlying problem — Libya’s severe fiscal imbalance and unsustainability — has little to do with Zeidan and everything to do with the essence of the modern Libyan state. Culturally and economically, the Libya that emerges post-Revolution is consistent with the Libya pre-Revolution and indeed the Libya pre-1969: the country is and remains the quintessential rentier state. 

The “rentier state,” a concept first postulated in the 1970s, describes a country owing the vast majority of its wealth to the “rents” it earns from the sale or lease of an abundant resource to an external party. That has come to describe many of the Middle Eastern nations that depend on the sale of oil to foreign buyers for their livelihoods. The literature  goes further, describing a rentier state as one in which the government earns the rents and therefore controls and administers the nation’s wealth. Few locals are meaningfully employed in the rent-generating industry and there is no real need for taxation. 

As a consequence, a dysfunctional social contract between governor and governed arises: the state doesn’t need the citizen in order to exist, while the citizen is destitute without the state. Implicitly then, the state is not subordinated to the demands of the citizen — beyond the bare minimum to avert revolt. Because of this, scholars have to support the idea that prototypical rentier states face disproportionately bigger obstacles to achieving democratization. 

This dysfunctional social contract has existed in Libya ever since it — well, became Libya. King Idris al-Senussi I, Libya’s first and only monarch, was the Mohammed bin Rashid al-Maktoum of the 50s and 60s. Like Maktoum, Dubai’s present day ruler, Senussi was a benevolent dictator with a vision for his people: he took the rents earned from newly-discovered oil and turned them into streets, hospitals, and schools. Then came Qaddafi, who kept the “dictator,” saved on the “benevolent,” and used the increasing oil rents to prop up his loyalists and cronies, crushing the rest. With the collapse of the Qaddafi system in 2011 came the National Transitional Council and Libya’s post-Revolution transitional governments, who scratched the dictatorship while reviving the benevolence, distributing oil rents to the fighters, injured and more recently, every child under the age of 18. For this is precisely what a rentier government does: it distributes its money as it sees fit — always with an eye to keeping just enough people happy to preserve its power. 

Yet even in country with Libya’s ample natural wealth and small population there are inherent limits to the largess — and they are now making themselves apparent. The combination of a frighteningly low rate of oil production and the inherited “big government” budget means that there is no longer any money to distribute. People’s expectations do not change overnight, however, and frustration is mounting as a consequence. 

For the moment, the lack of visible improvements will be seen as Zeidan’s failure and his failure alone. Yet there is something much larger at stake. Subsequent prime ministers are fated to run up against the same systemic constraints, and frustration will build accordingly. There is a risk that people will begin to see the lack of progress not as the shortcoming of a particular government, but as the failure of democracy itself. Eerily, we could see replicated in Libya the street interviews that sometimes crop up from post-Saddam Iraq — riddled with violence, power outages, and poverty — where the neighborhood butcher, once enthusiastic about freedom, looking dejected sighs “at least I could put food on the table when Saddam was alive.” 

If democracy is to have a chance, Libya’s fiscal policy must be reformed in a manner that addresses the underlying social contract wrought by rentierism. Several crucial reforms are needed in order to achieve the paradigm shift that was promised but not delivered by the February 17 Revolution. The government must make itself smaller. Policymakers must make oil less important to the economy and swing the balance towards private sector growth. 

Shrinking the government means staying the course on subsidy reform. It will be painful: prices will rise quickly and families will feel the impact at every gas station and supermarket. But there is no choice. The budget can no longer afford subsidies, and every oil price shock or day of strikes makes the public wallet lighter. It will take a sense of civic duty and all the political will Libya can muster to see subsidy reform through to implementation. 

At the same time, it’s important to recognize that subsidy reform isn’t enough by itself. Removing subsidies must be paired with instituting a credible social safety net to catch those at the bottom of the economic ladder who can’t afford to absorb a price increase. Money no longer tied up in indiscriminate subsidies (disproportionately benefiting the rich) can be redeployed towards more targeted welfare schemes, based on income level, geography, or otherwise-determined need. 

Beyond subsidies, the temptation to keep spending remains, particularly around election time or when the government runs out of better ideas. Every new financial commitment adds to the cost base, reinforces the current dysfunctional social contract, and hammers another nail in the coffin of economic development and intergenerational equity. To prevent this from happening, Libya’s Constitutional Assembly must adopt a fiscal discipline rule in the new constitution it is creating. 

Fiscal discipline rules vary, but the basic idea is to impose limits on how much a government can spend or how much debt it can incur in a given year. The key aspect of these rules, and why it is essential they be enshrined in the constitution, is that they impose a discipline that lasts longer than a government or an election cycle. Importantly, they stop a government from doing the politically expedient thing in times of plenty: overspending to secure reelection. With a fiscal discipline rule, the constitution would better serve its stated purpose: to safeguard Libya’s prosperity both today and tomorrow from political exploitation. 

The number of countries adopting a fiscal discipline rule has increased dramatically in recent years from just five in 1990 to 81 in 2012 — notably several Latin American countries have adopted them to curtail runaway inflation and restore investor confidence following a series of currency exchange crises. As a case study, Brazil has adopted fiscal discipline rules enshrined in law, demanding that the government establish a three-year rolling target for a positive primary budget surplus (government revenues minus expenditures, before interest payments, must be positive). 

While they are not a panacea, fiscal discipline rules can at the very least serve as early warning signals. In the last two years, $300 billion Brazilian real ($131 billion) have been spent by the Brazilian government on fiscal stimulus programs (for instance, subsidized home mortgages). Over the same period, however, annual GDP growth has declined from 7.5 percent to just 0.9 percent, meaning essentially that the stimulus hasn’t worked. Without a fiscal discipline rule, the government would have the option to continue to ramp up spending — as far as incurring debt — throwing good money after bad. 

Bound by fiscal discipline however, Brazil is mindful that in 2012 the primary budget surplus stood at 2.4 percent (officially 3.1 percent) and at the current pace of spending is projected to reach 0.9 percent in 2014 — an election year. As a consequence of this trend, Standard & Poor’s have downgraded  the outlook on Brazil’s credit rating from “stable” to “negative” and President Dilma Rousseff’s government is now scrambling to restore fiscal credibility accordingly, by instituting budget freezes and spending cuts. This means Rousseff won’t be able to spend her way to re-election. Libya, with its immature and fragmented political spectrum and inexperience with democracy, would benefit hugely from curtailing politician’s ability to overspend around election time. 

Beyond this, Libya must learn to embrace private enterprise. The government has no capacity to continue hiring, the oil industry is capital-intensive (read: not a big job creator), and youth unemployment stands at a staggering 30 percent. The only practicable way to relieve the pressure on the budget and bring about greater and more inclusive growth over the long term is to lay the foundations for a thriving private sector. The government can start with the low-hanging fruit: privatizing a number of state-owned enterprises like the General Posts and Telecommunications Company (the owner of the country’s two mobile operators) and pushing the fifteen commercial banks it majority-owns (who are sitting on LD 40 billion of idle cash) to lend to small and medium enterprises. 

Strengthening the private sector doesn’t just generate more money and jobs. It changes how the individual views himself: not as a vulnerable recipient of state largess but as a maker of his own destiny through the sweat of his brow. Combined with taxation and the ballot box, this then lays the foundation for a renewed social contract between governor and governed: the citizen creates the wealth and pays a portion to the elected government, which is then accountable for the provision of the public services the citizen demands. 

It’s unquestionably asking a lot for Libya to relinquish its legacy political, economic, and social order all at once. But for February 17’s political promise to be fulfilled, for democracy to be seen and believed to be viable in Libya, people need to sense the economic improvement first hand. Development needs investment, and investment urgently needs fiscal reform. Libya must move ahead now, while there is still time.