Oil development and Libyan economy : the structural manifestations of the “dutch disease"

الملخص EN

This paper investigates the historical significant role of oil sector in the economic development of the Libyan economy, the potential adverse (manifestation of the Dutch disease), and positive effects of the oil sector upon the non-oil sectors.

On the demand side, the paper finds that oil revenue (revenue effect) has created rising demand for tradable and non-tradable goods, in particular that of the services sector resulted in a higher domestic price level (spending effect) and cause an appreciation of the real exchange rate of the Libyan Dinar (an exchange rate effect).

This, in turn, caused a loss of competitiveness of non-oil exports and contributed to non-oil trade balance deterioration.

Also, an increase in real income arising from the boom in the oil sector (income effect) stimulates non-oil imports, which, in turn, further contributes to the deterioration of the non-oil trade balance.

Furthermore, the huge inflow of foreign exchange, arising from balance of payments surpluses (trade or current account effect) during the boom period causes a temporarily higher money stock in an attempt to maintain the fixed nominal exchange rate policy, leading to an increase in the domestic price level and a further appreciation of the real exchange rate.

On supply side, the accumulation of foreign asset stocks canexercise a major influence upon non-oil output supply through financing capital imports (technology effect), particularly technology and services necessary for economic development.

Oil sector development exerts a crucial influence not only upon the accumulation of foreign asset stocks through the current account, but also through accumulation of physical capital stock and human capital stock via the investment in infrastructure, education, and health care (a labour productivity effect).

This could be referred to as a long-run sustainable impact of oil production upon non-oil output supply.