Is Libya Really Changing?

We have seen many changes coming out of Libya lately. Their leadership has opened many doors to the U.S. to information on, and equipment and parts related to, their WMD programs. About 50,000 pounds of these are in Tennessee being analyzed. Weapons inspectors are now combing the country. Libya has been helping the U.S. out on the war on terrorism with intelligence and, possibly, in other ways. Libya was not part of the"Axis of Evil" speech by the president for the latter reason. The country has also paid enormous amounts to the survivors of Pan Am 103, which was blown up over Lockerbie, Scotland. There have been mixed signals, as usual, coming out of Libya, such as when the Prime Minister recently said that Libya was not guilty of the Pan Am 103 bombing, and then he softened that approach. (Libya must pay the survivors and admit criminal guilt before some U.S. sanctions are lifted. Libya, in turn, will not pay the full amounts to the survivors unless certain U.S. sanctions are lifted.)

The U.S. has five diplomats officially in Tripoli for the first time in four decades. The U.S. has recently lifted some of the travel bans and has started to loosen up slightly on some sanctions against the country. Investments, banking transactions, even third-party ones with Libyan banks, amongst other activities, are still banned for U.S. citizens.

Why would the U.S. be sanctioning Libya ? Libya supported and helped train groups such as the IRA, Abu Nidal, the Moro Liberation Front, and other such dangerous and violent groups. Bombings in airports in Vienna and Rome had also been tied to Libya by the U.S. . The 1986 bombing of a disco in Berlin that killed U.S. service persons was also blamed on Libya, as were the notorious bombings of the UTA flight over Niger and Pan Am 103. Libya has also often run counter to any peace efforts between the Israelis and the Palestinians, including support of terrorist activities in the past.

A large proportion of the significant oil revenues of Libya had been spent by Mohammar Ghaddafi on"third world revolutionary causes," including those mentioned above and other activities in sub-Saharan Africa and as far away from Libya as the Philippines. Libya imported a significant amount of weapons from the USSR and the east block up to 1990 to support these and other causes. Many of the people of Libya resent the fact that so much was spent on these causes, and not on the development of Libya and its people.

Libya is a country of about 5.5 million people, with one of the lowest population densities in the world. It has 48 trillion cubic feet of known commercially recoverable natural gas reserves, and over 30 billion barrels of known commercially recoverable oil reserves. Only about 25 percent of the country is fully explored for oil and natural gas, and there could be a lot more there. The country has a potential for a strong tourism industry with its long coastal beaches, historical sites, and potential desert tourism. Its population is one of the most literate in the region. Libya is also strategically located for trade and development, being close to Italy and the rest of Europe, and being a possible bridge between Africa and Europe .

Libya also has a massive underground water aquifer that it shares with its neighbors. Mr. Ghaddafi has a project called the Great Man Made River to bring water from the southern desert. (Yes, these massive water reserves are under the Sahara and could give at least 150 years of significant water flow to Libya .) So far about $35 billion has been spent on this project. Libya has only a small strip of land along the coast and a few small oases that are arable (about 2 percent of all of Libya ), and needs to import most of its food. Mr. Ghaddafi wants to green half of the country and import Egyptian and other labor to work the newly reclaimed farmland. This could be a form of madness, or genius. It is hard to tell so far. But spending so much on what could be a"white elephant" is another reason for Libyan resentment against"The Great Leader."

To be fair, one has to admit that Libya has made great strides since 1969, when Mr. Ghaddafi took over. In 1969 it was a desperately poor country. One of its major sources of income was the rent paid by a U.S. air base. The air base was shut down shortly after the revolution. Literacy was extremely low and the health system was abysmal.

The improvements since then in literacy, health, life expectancy, and more are much better than many other Arab and African countries in relative terms. But, then, the population of Libya with such large oil and gas reserves is much less than that of Egypt, for example, which has a population 70 million and less oil and gas reserves. Yet, its people seem to want more, and indeed, given Libya's resources, deserve more.

Even with the low population and the large wealth reserves in the ground the country is suffering economically. Part of this has been brought on by the U.S. sanctions over decades. There are: the Iran Libya Sanctions Act (ISLA); various forms of the International Emergency Powers Act, the 1997 Omnibus Appropriations Act; the Foreign Operations, Export Financing, and Related Programs Appropriations Act of 1996; the Antiterrorism and Effective Death Penalty Act of 1996; the IRS Code; the DOD Appriations Act of 1987; the Defense Authorization Act of 1996; various Foreign Assistance and Foreign Relations Acts; the Arms Export Control Act; the Export Administration Act; Presidential Executive Orders from Reagan onward; and more. Other parts of the economic stress were brought on by the severe multilateral UN sanctions (UNSC 731, 748 and 883) during the 1990s that Libya is still recovering from.

Some of the most important industries that have been targeted by unilateral and multilateral sanctions have been aircraft, oil (especially refining), finance, tourism, and insurance. These are"leverage industries" tied into many other parts of the Libyan economy in many important synergistic ways.

Companies from the European Union have taken the place of U.S. companies, especially after the end of UN sanctions, but the Libyans want U.S. companies back. One major indication of this is that Libya has held in escrow the oil, gas, and other physical assets of the U.S."Oasis Group" of oil companies until they come back. Every so often they threaten to sell the assets off, but this has not happened in over two decades.

Most of the economic stress is due to mismanagement of the economy by an unpredictable and mercurial leadership. Laws have been changed overnight sometimes. The actual regulations and laws sometimes do not seem clear or credible by potential investors, or even by the people of the country.

Large swaths of the government were essentially dissolved, and many of the ministries were shut down in recent years."The Great Leader" controls just about everything in the country with a rubber stamp from the General Peoples Committee and the Peoples Committees of districts in Libya, which are convened only at the request of Mr. Ghaddafi. Most industry is public sector. Most jobs are in the government. Red tape and delays for investment are often as significant as they are unpredictable in size and scope. There have been times when"The Great Leader" has asked for privatization and private-sector development, only to have this followed by the establishment of anti-corruption committees, and then these followed by"volcano committees" to root out the excesses of the anti-corruption committees, which were there to root out the"excesses" of privatization. Price rises usually start off the process.

Mr. Ghaddafi and Dr. Shoukri Ghanem (who has a Ph.D. from the Fletcher School at Tufts), the new Prime Minister and former economics minister, seem to be finally getting the point when it comes to the importance of using the formidable assets of Libya for Libya, and its peoples' development. They also seem to be getting the point that reforms are needed at just about every level of government and legislation.

There are some arguing that Mr. Ghaddafi's change of heart is due to the Iraq war and the humiliating ouster of Saddam Hussein. There may be a connection here, but most of the reasons for his opening up to the world, and especially to the U.S., are internal and have been going on for a long time. Mr. Ghaddafi also wants to leave the reigns of power to one of his sons, most likely Seif Al Islam Al Ghaddafi. Domestic politics and economics are driving these changes. The process started well before the recent war in Iraq.

Mr. Ghaddafi has his own homegrown radical Islamic rebellion, mostly based in the northeast quadrant of the country around Bengazi. Libya's unemployment rate is about 30 percent. For younger people (over 50 percent of the population is under twenty years old) the unemployment rate is about 70 percent. Even with this labor problem, like Saudi Arabia, which also has a massive unemployment problem, Libya imports a huge amount of foreign labor. Many Libyans resent the imported labor. Sometimes violence occurs towards them.

GDP per capita is about ½ of what it was in 1982. Libya's population has grown from 2.8 million in 1982 to 5.5 million today. That is, it has nearly doubled since the boom days of very high real oil prices. The economy has mostly stagnated during the same time period, with some good years and some bad. But overall the economy has fallen behind compared to what it should have, and could have, done as its population grew. The airlines, road networks, and more are a complete mess. The Great Man Made River project has helped drained the government coffers. The UN sanctions, in particular, hammered them. Poverty has been increasing in a country that has the highest current account positive balance to GDP in the world.

Some international investments have returned since the lifting of UN sanctions in 1999. But this is a very tough place to invest, not necessarily because of the U.S. sanctions, but because of the Byzantine, and sometimes inexplicable laws and regulations in the country, as well as a general lack of rule of law and corruption at many levels. Investment laws have sometimes been changed at a whim.

The government declares balanced budgets, but the reality is that they are balanced by creative oil revenue accounting. There is a huge reliance on oil and gas, which are notoriously volatile in their pricing and revenues. Seventy-five percent of government revenues and 95 pefcent of export revenues come from oil and gas. Sixty percent of the government expenses go to paying salaries for somewhat unproductive government labor. Government salaries have been frozen for many years at a time. In real terms they are extremely low for a state with such huge oil and gas reserves.

The fact that most working Libyans work for the government shows how weak the private sector is. This is a distributive economy, not a productive one. The only developing private markets are the black markets.

Libyan oil fields are still in a state of disrepair and some resources have been damaged over the years. Huge investments are needed from the outside, and significant reform is needed from the inside. One has to wonder, however, how much change can occur if Libya is still to follow the guidance of"The Green Book," Mohammar Ghaddafi's treatise based on a personal mixture of"Islam," socialism, and Bedouin philosophy. ( Many Muslims, and importantly his homegrown"Islamist" enemies, consider his book to be heretical, not true Islam.) Market-based capitalism is not to be found in this text. In many ways much of the rest the Arab world went one way, and Libya went another.

It is the economy and business, and retaining power and handing over the reigns of power to the"right" people that seem to count most now for Mr. Ghaddafi and his"gang of five," the most important leaders in the country other than he, including his son Sief Al Isam and his intelligence chief Musa Kusa. Mr. Ghaddafi is getting older. He is now sixty-six years old. He wants to leave a legacy. He wants one of his sons to take over. Mr. Ghaddafi finally smells the coffee of change that has been brewing since the early 1990s in the region.

As one eminent commentator said recently:"Mr. Ghaddafi now is wearing a business suit." Yes, he is. This suit seems different than the business suit he wore in the 1970s through the 1990s. Change is in the air in Libya. One can hope that it will continue and that Libya will finally find its place in the world, and its people will prosper as they could have in the last decades.

Libya has the potential to be a leader in the economic development of the region. With its small population, significant natural and historic resources, it could be a catalyst. However, as with many other countries in the region, its leadership and its policies could hold the country back.

And its people will get angrier. Then we will all have a big problem on our hands. The population growth rate of the country is about 3 percent per year. Unemployment is growing. Demographic bulges of young people will land on the labor markets in the next decades. We can either have a prosperous and peaceful Libya, or a revolutionary one once again right in the middle of North Africa and not far from Italy.

Has Mr. Ghaddafi changed his heart? Maybe. We should all look at these changes with hopeful caution. Was it due to the Iraq war? The answer is: mostly no. Libya has had enough developing and brewing economic and political problems.

Post hoc non ergo propter hoc.