| Summary: | In a developing oil-based economy like Libya the availability of finance is largely
affected by the availability of oil revenues which are subjected to disturbances and
shocks. Therefore, the decision to save and invest a certain ratio of the country's
aggregate output is, to large extent, determined (and affected) by the shocks in the oil
markets rather than the requirements of economic development.
In this study an attempt is made to determine the optimal rate of saving and
investment, both defined as a ratio of the aggregate output, according to the
requirements of economic development. For this purpose, a neo-classical Ramsey-type
model for Libya is constructed and applied to obtain theoretically and empirically the
optimal saving and investment rate during the period (1965-1991). The results reveal
that Libya was investing over the optimal level during the oil boom of 1970s and less
than the optimal level during the oil crisis of 1980s. In addition, an econometric
investigation of the determinants of actual investment by sector (agriculture, non-oil
industry, and services) is carried out in order to shed lights on how possible it is for
Libya to adjust actual investment towards its optimal level. It is found that, as expected,
the most important factor which can be used in this respect is the oil revenues or,
generally, the availability of finance. In addition, the study reveals that investment in
agriculture is associated, during the period of study, with a very low marginal
productivity of capital whereas marginal productivity was higher in both non-oil
industry and services.
Finally, the study investigates also the future potential saving and investment rates
and concludes that the economy, which has already reached its steady state, can be
pushed out towards further growth if the economy can be able to increase the level of
per worker human capital, proxied by the secondary school enrolment as a percentage of
population. === Secretariat of Higher Education in Libya and
Libyan Interests Section in London
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