9 November 2012

Could Oil Shine Like Diamonds - How Botswana Avoided the Resource Curse and Its Implications for a New Libya

Photo: WDC
Loose round brilliant diamonds.

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At the heart of the socio-economic grievances that led to Libya's revolution was the rentier economy of the regime. Though oil resources had permitted Libya to accumulate wealth, the country suffered from a number of macroeconomic concerns.

By 1973, Libya had a dualistic undiversified economy dominated by the state, afflicted by pervasive rent-seeking and regulatory deficiencies. The effects of the rentier characteristics of Libya's economy permeated both the economic and political structures of the country. Excessive oil resources had allowed the political elite to hallow out governmental institutions allowing those in power to operate without oversight.

Though the system remained in place for over 40 years, as the revolution demonstrated, Libya's social contract was untenable: the unequal distribution of wealth, the country's poor track record on transparency, governance and corruption, as well as diminishing opportunities for the development of human capital created grievances against the former regime which could not be acquiesced in the usual manner. No longer able to buy the support of its citizens, the former government was confronted with a revolution.

Unfortunately, Libya's story is not unique. Traditional economic theory would suggest that the macroeconomic imbalances of the Libyan economy and the social unrest that ensued were unsurprising. Rather, Libya's political economy followed the usual trajectory of resource abundant economies. Though large number studies have found strong evidence that resource abundance leads to poor or unequal growth and political instability, there are exceptions to this rule. Botswana is case in point. Though the country is one of the world's largest producers of diamonds, it is one of the few countries that has managed to turn its resource into a blessing rather than a curse.

Botswana went from being one of the 25 poorest countries in the world to becoming an upper-middle income economy in 1998.

The question that then presents itself is how did Botswana escape the pitfalls of the resource curse, ensure stable growth, and save its wealth for use by future generations? And what lessons can be applied to Libya in its transition? This paper address these questions by explaining the dynamics of the resource curse, its manifestation in Libya, and contrasting Libya's experience with Botswana's wealth management.

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