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Rebuilding the poor oil-rich country of Libya

Libya's economy is mostly state-run — though poorly run— with little private enterprise to take up the slack. The infrastructure was rickety even before the war, and it could take years to ramp up oil production to pay new bills. By Kari Huus.
Image: An oil terminal is seen after it was retaken by rebels
An oil terminal at Zueitini, 528 miles east of Tripoli, photographed March 27 after it was retaken by rebels from Moammar Gaddafi's forces. Suhaib Salem / Reuters
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Let's imagine that post-Gadhafi Libya avoids devolving into chaos. For the new leadership, there's good news and bad news. The good news is black gold. Libya has some of the finest oil in the world to generate revenue. The bad news: The economy is in a shambles and needs to be recreated from scratch.

After four decades under the corrupt and repressive leadership of Moammar Gadhafi, most of the economy is state-run — though poorly run — with little private enterprise to take up the slack. The leadership inherits a damaged infrastructure that was rickety even before the war, and it could take years to ramp up oil production to pre-war levels. To build a healthy, diverse economy will require an overhaul.

“It's going to be a tough economic situation,” says Mohsin Khan, a senior fellow at the Peterson Institute for International Economics. “The new Libyan government will have a choice to make — which way it wants to go. That's critical in determining how it rebounds.”

As it stands, Libya has a highly centralized economy that relies on oil exports for 95 percent of its revenues. About 70 percent of the population relies on government paychecks, many through money-losing state-owned companies.

Before the conflict, the country was able to produce 1.8 million barrels of sweet light crude oil a day, but billions in oil revenues were diverted into the pockets of the leadership or spent on the military. The country's schools, hospitals, roads, ports, sewer systems and other facilities have badly deteriorated.

“To Libyans, it's shameful that many countries have developed in the last 20 to 30 years, and we are still backward,” says Idris Traina, a longtime opposition leader and president of the Libyan American Association of California. “They didn't spend enough on education or health. For any significant sickness, most (Libyans) go outside the country — to Tunisia, Europe, Jordan or Switzerland.”

After a young Col. Moammar Gadhafi rose to power in 1969, he imposed his own brand of socialism, one that morphed into a kleptocracy at the top. For many years, Libya was under international sanctions for its role in terrorist activities. Gadhafi began reopening the door to private enterprise only in 2003, when he was trying to revive relations with the world, but the private sector remains marginal.

“Despite modest improvements in the business climate, Libya's bureaucracy remains one of the world's most burdensome,” according to the conservative Heritage Foundation. In the Washington think tank's 2011 ranking of economic freedom around the globe, Libya was 173rd, the lowest in the Middle East and North Africa region.

So far, the members of the National Transitional Council have largely been consumed by driving out Gadhafi and have given little hint of who or how they hope to manage the economy.

Traina says his contacts in the council are leaning strongly in favor of a free market for Libya that taps into its citizens' latent potential. As it stands, many Libyans are unemployed or underemployed.

“Usually, people who live under dictatorship for a long time, they lose their creativity. I think if people are given the freedom and the corruption is minimized, I think Libya will be in very good shape,” he says, noting the immense enthusiasm he saw on a recent trip to rebel-held areas. “People are looking forward to working hard and changing the country.”

To move or dismantle Libya's socialist economy is likely to dislocate many people who have been working in Libya's state industries or simply warming chairs in its vast bureaucracy. Libyans talk about diversifying — into tourism or alternative energy, perhaps, but those industries don't yet exist to absorb workers.

“Gadhafi ran a very complicated patronage system that guaranteed people jobs,” says Khan. “That's why it worries me that the new council, when it takes over, will not want to upset the people (by) taking hard decisions of letting people go from government employment.”

Spending decisions will also be difficult.

Libyans “are concerned about food prices, jobs, subsidies, employment schemes. The new politicians coming in will be promising them that. As a result, spending can be fairly high right away,” says Khan. Unless they can be fiscally conservative, he says, they risk wiping out their existing national wealth.

Because the oil industry has been largely shut down during the fighting, Libya will need to rely initially on an estimated $150 billion in assets that were stashed overseas and have been frozen by the international community, according Khan. The process of unfreezing those funds for Libya's use is just beginning.

Before it runs out, it will be imperative to get the oil industry up and running again, since there's essentially no other source of government revenue.  It could take many months — or years, depending on damage caused by the war — to make necessary repairs, get the oil engineers back in the country and ramp up production.

“It's not as if they can just open the spigots and the money will come flowing in,” says Khan of the Peterson Institute.

Another legacy of the Gadhafi era is the corrosive force of corruption.

Traina, an optimist, believes most Libyans are fundamentally averse to corruption and hopes the new leadership will shun it.

Gamal Khalil, a Libyan-American scientist doing research at the University of Washington, says the problem has spread well beyond Gadhafi's inner circle. He says he's seen it even within his own family in Libya.

“It's becoming so that if you haven't got yourself a piece of the pie here, some people would call you a loser. There's so much money around, and you didn't take advantage of it,” he says. “It's definitely a challenge.”

One thing that everyone seems to agree on is that Libya's new leadership needs to tackle first is restoring basic infrastructure, which sustained $15 billion in damage during the conflict, according to an estimate by Libya's Central Bank.

“It is in really poor shape,” says Khalil, who spent part of his career teaching in Libya. “For that, a lot of well-established companies from the West and China will need to come forward. The money exists — that's the good news.”

There's another reason for optimism about the economy, at least in immediate post-war period.

“The only good news about wars is the economic boom that follows,” says Khan. “Rebuilding infrastructure creates jobs.”