Nations eventually respond to a balance of payments crisis with austerity measures. Therefore, when Libya was faced with such a crisis in the early 1980s as a result of the slump in the oil market, it was no surprise that the regime responded by adopting austerity policies to address the imbalances in the economy. However, the Qaddafi regime soon went further and adopted an economic reform program aimed at liberalizing and privatizing the economy. This was surprising given the Libyan regime's earlier policies and its ideological rhetoric that was highly hostile to private enterprise.
In fact after the 1969 coup, the role of the state in the Libyan economy gradually increased. Government expenditure as a share of GDP rose considerably. So did the number of jobs in the public sector. Ideologically the regime sought to dismantle the state and to create an image of a 'stateless society.'(1) However, ideological intent did not totally translate into reality largely because the huge external oil rents accrued directly to the state. As a result of the centralizing effect of oil revenues, the state acquired distributional and developmental functions, which in turn led to further expansion of the state machinery.
In its early years, however, the regime continued to support the idea of privatization. The state policy of supporting small Libyan entrepreneurs aimed to create a power base. As a result of subsidies and government contracts small businesses in particular prospered.(2) Nevertheless, after the consolidation of power by Col. Qaddafi a drastic political and socioeconomic transformation of Libya started in the early 1970s. In 1973 Qaddafi announced the 'cultural' or 'popular revolution' and introduced the concept of 'people's power'.(3) The economic policies that were implemented under the new jamahiriya system were designed to inhibit the private accumulation of wealth. In 1978 rental payments for property were outlawed; all enterprises were required by law to be run by 'worker's committees'; and the state took over responsibility for the importation of all goods and control over all foreign exchange. In 1980 all currency notes over one dinar were taken out of circulation. In 1984 state supermarkets were created and all private transactions became illegal. As a result of these policies virtually all sectors of the Libyan economy came under state control.(4) Against this background the significance of the recent shift in the state's economic policy toward more emphasis on the private sector is obvious.
This article attempts to explain the dynamics of economic reform in Libya. An analysis of Libyan economic reform highlights the possibilities and limitations of implementing these policies in rentier states. It also shows that the analysis of the interaction between international and domestic political economies is crucial in understanding the process of economic policy reform in Libya.
THE CRISIS AND THE RESPONSE
In mid-1986 the price of oil collapsed: spot prices, which averaged about $27 per barrel in 1985, fell to less than $10 in 1987. However, the slump in the oil market had started earlier. Since the end of 1980 there had been a decline in world oil consumption and especially a great fall for OPEC oil production from a peak of about 30 million barrels per day (mbd) in 1979 to about 17 mbd in 1986. Given Libya's dependence on oil revenues,(5) the oil price collapse caused serious cash flow problems and in general had adverse consequences for the economy. Export revenues were more than halved between 1980 and 1985, before being almost halved again in 1986. In fact, by 1985 oil revenues had fallen to their lowest level since the first OPEC price shock: They went down from $22.5 billion in 1980 to $15.7 billion in 1981 and $14.3 billion in 1982. As a result, the balance of payments surplus shrank from $11.5 billion in 1980 to $168 million in 1981. The current account surplus, on the …