Libya: Can Oil and Democracy Mix?

December 05, 2011

Libya’s oil puts at risk its hopes of becoming a democracy.  If easy oil money is captured by a few people, and they then control politics, Libya will end up  looking more like Angola and less like Norway. 

But there is a way out.  Libya has yet to write its own Constitution.  It’s not too late to incorporate directly into its new Constitution the idea that Arvind Subramanian and I proposed for Iraq way back in 2004 (go here).  Todd Moss has given the idea the apt title “oil2cash” (#oil2cash on twitter) and he and others are exploring how it could work in Ghana, Bolivia, Mongolia and beyond.

The idea in short: (1) a large portion of the net income government accrues from oil should be distributed as cash to the people on a per capita basis and (2) as a complement a reformed system of taxation, to give citizens a tool to make their new government accountable to them, should be a top priority.

If the United States, the International Monetary Fund and the World Bank are asked to provide advice by the new Libyan government, let’s hope they consider (this time, though they didn’t for Iraq) something new. 

For more on this see a recent article by Michael Roll on the future handlings of Libya’s oil revenues, which appeared in the Financial Times Germany. Here’s an excerpt from that article (in a rough translation that is not great, but you’ll get the point).

‘Through the pay-and-tax model, each political ruler would be deprived of exclusive access to oil rents. In addition, they would be forced to maintain a modicum of legitimacy in the eyes of their citizens in order to successfully demand taxes from them. The population would also have a heightened interest in how the government uses their tax dollars. The transfer would also help to alleviate widespread poverty and strengthen the local economy through investment and consumption. So the population, regardless of tribal affiliation, would benefit most directly from the oil wealth of the country.  To improve the effect on poverty, the payments could also be subject to certain conditions, such as children's schooling or health screening. As in other resource rich countries, the percentage of oil revenues that should be paid to the population of Libya should be determined. A portion should be paid in a currency stabilization fund and future fund. Also, urgently needed infrastructure could initially be funded directly. But in the medium term, taxes should account for the bulk of government revenues. Only then may a relationship of dependency and accountability develop between the state and its citizens.’


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