(note to self)
Just a week ago, the betting markets still gave Gaddafi a 40% chance of remaining in charge till the end of the year but now the markets have given him up for a lost cause. The Arab Spring can hence boast another regime change, and this time one that is quite complete: there is almost no existing government bureaucracy that remains in place after the change because there was no Libyan government bureaucracy in the first place.
It is also a victory for French and English pride: as I predicted 4 months ago, the European countries caved in to their own need to keep face once they started interfering and they thus armed and trained the rebels, whilst NATO acted as the rebels’ air force. They said they wouldn’t arm the rebels at the time but it was obviously more important to win than to stick to that promise. And it must be said, the victory has been well-managed so far with few reprisals. It is a good day for international justice.
What next for Libya? If you read the constitution that the Transitional Council has put up, you get to read a carbon copy of the constitutions of Western nation states. If nation building was hence only about laws, the Libyans are going to be just like us. With a GDP per capita of around 20% of that of the US (which is high but still down from 100% in 1980!), an urbanisation rate close to 80% and a relatively large tertiary student base, no government debt worth talking about, and more revenues than running expenses, you would think that if any Arab country could pull off a modern democracy it would be Libya.
Libya will be a good test of the political-economic theory of the ‘natural resource curse’ which holds that a country with weak institutions burdened with a lot of money flowing in for no effort is going to end up very corrupt and un-democratic. There are many variations to this theory (for an example paper of my own on this issue, see here), but the essential story is that the rents created by the resource lead to a political system oriented solely around fighting over those rents, leading to exclusion of losing groups and of the non-resource sector. Under the curse, it is too hard to develop a vibrant manufacturing or export-oriented service sector when the natural resource rents make the exchange rate high and gives the politicians too little incentives to provide public goods oriented towards the non-resource sector. Having to fend on its own and surrounded by rent-seeking politicians looking to tax anything visible, the modern sector dies in childbirth and the country remains poorly educated and un-versed in the ways of the modern economy, merely living off the resource rents while they last.
There are two scenarios for Libya, one in which it overcomes this curse and one where it once again succumbs to it.
The first scenario is that Libya can skip the century or so it normally takes for good democratic habits to become ingrained and immediately mimic a country like Norway. The way to do that would be to actively reduce the degree to which the resource rent affects the exchange rate too much. A national fund that buys up overseas assets and that re-invests any dividends in increases in the fund is one way to do this. The government can otherwise invest in the kind of things needed to get modern sectors up and running, including a more developed education infrastructure, independent competition regulation, modern tax codes, etc.
The second scenario is that the many different groups that make up the transitional government, before and after elections, fight over the spoils and all demand their group gets a share. If no group trusts the other groups and there is insufficient national identity to trust anyone calling themselves ‘non-partisan’, then things like a national future fund cannot be set up and maintained as each group in power would simply raid the fund immediately for its own benefits. There might be then some prestige projects (like ‘broadband for all’) that a national government engages in, but every check and balance in the system gets manned by individuals foremost identifying with their group. The oil contracts are of course the main things over which the groups would fight, and deal-makers on the side of the oil companies will look for long-standing political connections to safeguard their own interests.
The essential question is whether Libya has the centre-group it would need for the first scenario. It would have to be a centre-group not associated primarily with a particular city, not encumbered by the demands of their family and communal structure for jobs and influence, and not identified with any particular grouping.
Such a group does not exist in Libya: land-holdings are still primarily based on kin-ship, i.e. family and community ties. Cities have strong independent histories and are made up of patchworks of overlapping tribe-like communities. Even if you have the odd individual who himself really wants Libya to become like Norway, the reality of the situation is that such a person would only have political support from his community and would be expected to reciprocate. If he doesn’t, he is out.
So, my prediction on the eve of its introduction is that Libyan democracy will fail. There will probably be an election in which some coalition of interests will win, after which there will be a gradual sifting-out of alliance members who are not needed to hang on to power. More and more of the best jobs and transfers will go to a smaller in-group defined by family, ethnicity, and, most-importantly, region. That group will subvert the democratic process such that Libya becomes a kind of small Egypt with oil, a mini-Russia at best. The internal divisions in Libya are not strong enough to expect blood-shed of the type you see in Nigeria, but true democracy is going to have to wait in Libya. In 20 years time much of the current tribal and ethnic structure should be destroyed by economic forces that make land irrelevant and that will replace most of the other tribal economic aspects with purely monetary aspects (greatly aided by the internet). With any luck, Libyan oil has run out by then.
Is there a way in which truly far-sighted decision makers could avert the resource curse? What the Libyans should realise today rather than tomorrow is that their oil fields are their curse. They should immediately outsource the running of their oil fields to some international organisation that pre-commits to hoarding most of the oil wealth generated from these fields for Libyans in the future. It won’t happen though: it goes against human nature for the victorious Libyans to recognise what they themselves will become if they don’t remove the temptation, and there is no international organisation that has the ability to credibly pre-commit to doing the right thing by the Libyans such a long time into the future.