An empirical analysis of economic growth in Libya

Abstract

This thesis investigates different aspects of the relationship between economic growth and mainstream macroeconomic variables, using time series data. The time series data is used to attempt to incorporate the major characteristics of the Libyan economy for the period 1962 to 2009 into a macroeconomic model, one objective of which is to estimate the relationship between the three mainstream macroeconomic variables: RGDP, inflation and unemployment, by using some extensions to Okun's Law (1962), Phillips curve (1958), and the Cobb-Douglass (1928) and Solow (1956) growth models. Using a recent econometric approach of co-integration, Vector Error Correction Mechanism (VECM), Generalised Method of Moment (GMM), Ordinary Least Squares (OLS) and Impulse Response Function (IRF), we can estimate an extended production function to analyse the long-run growth effects of important macroeconomic factors such as inflation, oil revenue, foreign direct investment, trade openness and government expenditure. The Libyan economy, like that of other developing countries in North Africa and the Middle East, has been subject to a multitude of structural changes, as well as of the fluctuation in oil prices during the sample period. Thus, after applying conventional unit root test like ADF and Phillips-Perron (PP), we find structural break in the time series selected. The Chow test (1960) for the presence of one or two structural breaks in data is considered appropriate for this study. The analysis is divided into two time series to get the best results for the models by employing different techniques of econometrics such as co-integration, VECM, GMM, OLS and IRF. The results show that there is a relationship between RGDP, inflation and unemployment. Additionally, the determinants of total factor productivity (TFP) are found to vary from one phase to another, and both foreign direct investment and open trade have a positive effect on both long-run and short-run growth in the Libyan economy. The empirical findings of this thesis indicate that in order to achieve high and stable economic growth and protect the economy from the negative effects of oil price fluctuations, the Libyan government should continue its quest for more efficient and effective non-oil export promotion policies as well for diversification strategies aimed at weaning the economy from its dependence on the oil sector. Economic growth has become an important aim for almost all countries in the world; it is of particular concern for developing countries, which need more growth in their RGDP. This study uses time series data from 15 countries from the Middle East and North Africa (MENA) from 1970 to 2010, adding to the growing literature on the issues of economic growth by throwing light on the Cobb-Douglas production function (1928). To find the stationarity of the variables selected, the Dickey-Fuller test is utilised with the Generalised Least Squares (Df-GLS) unit root test to deal with unknown structural breaks in data. Co-integration, VECM and IRF are employed to estimate the production function in the short and long run. The results show there is a relationship between the effects of capita and labour on growth in some MENA countries. In addition, the growth of capital in some oil-exporting MENA countries is growing faster than the labour supply in contrast to the situation in the non-oil exporting countries. Further analysis and research is necessary into these methodological issues, which is beyond the scope of a single contribution.

Date of Award	2013
Original language	English