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Libyans Need Economic Freedom

Wednesday, November 9, 2011

A ‘time bomb’ of youth unemployment, particularly for university graduates, is a growing crisis throughout North Africa. Here’s how to defuse the bomb.

As the dust settles on Muammar Gaddafi’s 42-year regime, ordinary Libyans turn to the country’s interim National Transitional Council (NTC) to guide them to a better future. Libyans would be right to feel anxious. From Cairo in 2011 to Kiev in 2004, the world is all too familiar with images of cheering throngs who think they have broken free of tyranny, only to have those revolutionary dreams repressed by political chaos, corruption, police violence, economic inequality, or otherwise. The NTC’s pledge to hold elections by June 2012 is a step in the right direction, but the NTC must know that Libyans’ dreams will not be realized until there is economic freedom as well. This is a tall order for a country that ranked 173 out of 179 on the Heritage Foundation and Wall Street Journal’s 2011 Index of Economic Freedom (IEF), the worst score of any country in the Arab world.

What is economic freedom? The IEF assesses it by calculating ten factors such as business regulation, trade liberalization, and property rights. To the university graduate reduced to driving a cab, however, economic freedom is little more than a general feeling that hard work can deliver a middle-class lifestyle, and that there is some semblance of fairness in the distribution of jobs and wealth. Such freedom is notoriously difficult to achieve in a command economy and petro-state like Libya, where a single resource, oil, provides 70 percent of GDP and accounts for nearly all exports and government revenues. Oil extraction also requires little creativity or innovation on the part of its workforce. Until the NTC uses oil wealth to invest in economic diversity and middle-class entrepreneurship, the economic freedom that Libyans desperately seek will always be lacking.

Far too many countries in the Arab world are blessed with the gift of oil, but cursed because it entrenches a corrupt leadership that has little incentive to reform, particularly when prices are high.

Traditionally, Libyan oil wealth has funded the government’s budget, all infrastructure spending, and free healthcare and education for all. While liberals in the West would praise such an arrangement, the problem is that it creates a wholly paternalistic relationship between the state and the people, giving the state license to amass wealth to its leaders and to maintain its authoritarian grip on all levers of the economy and civil society. The state trumpets its benevolence, giving people just enough public goods to keep them pacified, while people lose their incentive to take action for their own interests. Oil wealth also allows most Libyans to pay no taxes. While conservatives in the West would rejoice at such circumstances, the problem is that when people do not pay taxes, they demand less accountability of their government. In these ways, oil wealth created the murky swamp of corruption in which the Gaddafi regime enriched itself for decades at the expense of the Libyan people. While the national GDP churns at about $14,000 per capita, one of the highest in Africa, the distribution is such that an income of around $4,000 would put someone in the top 10 percent, according to the World Bank.

The event of regime change by a homegrown revolution gives the NTC the best possible opportunity to nudge this unhealthy social contract in a more positive direction. While exact statistics are hard to pinpoint, policy experts agree that a “time bomb” of youth unemployment, particularly for university graduates, is a growing crisis throughout North Africa. Using oil revenues to create venture capital funds for graduates is one of the most significant actions the NTC could take. Many skilled graduates find themselves underemployed in an economy where the only attainable jobs are in the bloated government bureaucracy, and few at that. Hardly any venture capital funds oriented towards startups or small enterprises exist in the Arab world, and particularly not for entrepreneurs without prior connections. The NTC should focus on high-value sectors like media, technology, chemicals, and financial services, where existing graduates have under-utilized skills. These ventures would form the nascent seeds of a private-sector economy that would create jobs and be an engine of middle-class growth.

Foreign governments and aid groups, including USAID, should also participate in supplying venture capital as a form of economic aid. In April 2010, I argued in City Journal that the hundreds of millions in microloan dollars that USAID has directed towards impoverished rural Egyptians, while well-intentioned, give the United States very little return on investment. By redirecting development funds (either equity or debt) to university graduates–the same people who started the anti-Gaddafi movement in Benghazi, and who occupied Cairo’s Tahrir Square and brought an end to Hosni Mubarak–the United States is investing in and building loyalty among an entrepreneurial and educated class of people who have the means to affect their country’s future and who are arguing for change from within. This ultimately builds the middle class, which is the cornerstone of civil society and a cushion against tyranny, because its fortunes and livelihoods depend on the quality and transparency of leadership.

Foreign governments and aid groups, including USAID, should also participate in supplying venture capital as a form of economic aid.

Such investment cannot occur in isolation. The NTC must also institute or revise a raft of economic laws to support private enterprise and economic freedom. While Libya scored well in the IEF on trade freedom (tariffs are low), fiscal freedom (taxes are low, when they exist at all), and monetary policy (inflation is a reasonable 4.9 percent), there are areas where government policy all but kills any attempt at entrepreneurship. Gaddafi effectively eliminated private property rights in 1978, and the government has the right to renationalize what little private property remains. This extends to a history of expropriation of foreign company holdings. (Foreign companies must also have at least 35 percent local ownership, which hinders foreign investment and technology transfer in any sector beyond ultrahigh-grossing oil). The labor market is also tightly regulated, with rules specifying wages, work hours, night shift rules, and termination. Finally, business registration is exceedingly difficult. The loosening of property, labor, and business registration rules are therefore equally important for the NTC to build a culture of economic freedom. Without them, private enterprise and meaningful work for the unemployed will not take root.

Far too many countries in the Arab world are blessed with the gift of oil, but cursed because it entrenches a corrupt leadership that has little incentive to reform, particularly when prices are high. If the NTC really wants to liberate the Libyan people from decades of tyranny, it will take a few basic steps to build a diversified private sector. This will develop economic freedom, foster a more resilient middle class, and leverage what is truly Libya’s greatest resource—its unemployed university graduates who only want to rebuild and take pride in a better country.

Jay Hallen advised the Iraq Stock Exchange and various financial institutions in Egypt on behalf of the U.S. government. He currently does financial consulting for a major New York firm.

FURTHER READING: Dan Blumenthal writes “Why It’s Still a Unipolar Era” and Alan W. Dowd discusses “Retiring the World’s Policeman.” Danielle Pletka asks “What's Next for Libya?” and says “Shrinking America's Role In the World Is the True Obama Doctrine.” Paul Wolfowitz describes “America's Opportunity in Libya.”

Image by Darren Wamboldt | Bergman Group

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