(note to self, cross-posted at troppo)

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.

6 Responses to Will the resource curse stifle democracy in Libya?

  1. Paul Amores says:

    I’ve often wondered why you would have a country made up of many disparate groups; surely it would be better to form several  smaller countries with homogeneous populations? Obviously there are a few caveats to this (economies of scale in decision making, the assumption that similar people tend to live in the same geographic region and that dissimilar people tend to live in the seperate geographic regions), but they don’t seem so unlikely as to be unreasonable. Is the desire for natural resources the reason why dissimilar groups are competing to occupy the same land?

  2. Paul Frijters says:

    Paul A,
    the history of these places is very complex and the reasons for the current borders include accidents, foreign powers, defunct kingdoms, etc. The question is what prevents countries from breaking up along ethnic lines and other divisions. Think of incentives: why would people in charge allow a chunk of their territory and thus influence to break away? It needs a virulent separation movement to overcome that inertia.

  3. Paul Amores says:

    You make a good point; what’s relevant is the question of why existing countries don’t split up.

    But arguably the people in charge don’t have much influence in some of these chunks. Given the cost of trying to quell and subjugate the insurgents, surely it would sometimes be easier to just give them their own country?

  4. Paul Frijters says:

    yes, sometimes it is easier, though of course you do have to put up a fight because if you dont put up a fight you get seen as a weakling by the other people in charge and you lose your position, so you cant let go without a bit of bloodshed.
    In the end though, you indeed just have to suck it up which is why we now have over 200 countries whereas we had closer to 50 in 1900.

  5. DavidN says:

    Paul Amores if you’re interested there’s a book, ’The Size of Nations’, by economist Alberto Alesina that’s relevant. I haven’t yet managed to read it (though I’ve had it for a while) but Joshua Gans has previously blogged here about this book.

  6. M says:

    In most nations there is a dominant faction that doesn’t want to let any of their territory or influence erode.

    Classic case is Indonesia which is from what I’ve heard a fairly diverse conglomeration with any number of groups who’d like to not be ruled from Jakarta. See East Timor (oil), West Papua, Aceh, etc…

    They can’t let even seemingly valueless territory leave since that sets a precedent.  e.g. Can’t let Tasmania be independent because then WA would be next.

    The lesson of Alaska is never give away land, even when it is seemingly worthless.

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