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Libya: change of the political-economic system is the real opportunity for Italian SMEs
   
 
 
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Libya: change of the political-economic system is the real opportunity for Italian SMEs

 
Saturday, 16 April 2011 09:05
 
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by Corrado Campobasso (EPOS)
EPOS Insights

One day after the recognition by Italian Government of the Transitional National Council (TNC), and about three weeks after the UN resolution we may give one thing for granted: the Libyan-Italian relations are unlikely to be as before and this not only in political but also economic terms. In the Libyan case the political sphere has a clear primacy on economic and thus the political factor - namely the role and responsibility of Italy in the intervention following the UN resolution 1973 - was not weighing in Italy’s favor cause of the initial lack of initiative and the apparent absence of an appropriate and timely action in one way or another. Now becoming the second European country after France and the fourth ever to recognize the government of Benghazi, the Italian Government has made a precise choice of field, recovering the time (and image) lost.

 

As far as economic relations are concerned some general remarks can be made:

a) the Libyan crisis, along with his features, also shares common traits with the current MENA (Middle East and North Africa) countries crisis: the demographic factor ( young educated population, conscious of the international context and with a youth unemployment rate of 25%); demand for reforms frustrated and exasperated by the repeated ad-effects of the last decade; the failure of the approach of economic reform without political reform (" bread before freedom ") because of the reforms capture by ruling elites.

b) structural differences are nevertheless significant. For example, dwelling on population size and allocation of resources heterogeneous situations are present in the area. An example is Egypt, with no energy resources but rich in labor force and with a population of 83 million inhabitants, almost 14 times higher than that of Libya, economy rich in energy resources but with a population of just over 6 million inhabitants and a GDP per capita equal to two and a half times the Egyptian one ;

c) the impact of the crisis in Libya, rather than from the EU, will also be felt by many Middle Eastern and African economies dependent on the participations of Libya through the Libyan Investment Authority with regard to important sectors such as telecommunications, power distribution, the hotel and food industry. The countries where there is a significant presence of Libyan capitals (holding company Libyan African Investment Portfolio) are primarily Uganda, Rwanda, Zambia, South Sudan, Sierra Leone, Ivory Coast, Niger, Guinea Conakry and Benin.

A synthesis of the Libyan economy transition process and the economic relations of our country with Libya, and Italian companies could be used to make some educated guesses. A general observation that can be done is that the political variable played a major role over the economic variable and economic diplomacy in the relations of Libya with the rest of the world even in the last decade and especially after September 11: energy , migration and internal control of the Islamic Front have prevailed in Western countries on the readiness and ability to assess the real extent of the reforms announced gradually.

Did the reforms - undertaken in the previous decade and accelerated in 2010 - constitute an attempt, more uncertain then promising, of transition from the unsustainable Jamahiriyah (State of the masses) model to another or were simply an aesthetic, useful both to the internal control and the external image? You can see Jamahiriyah, in a few (synthetic and approximate) words, as a mixed system of rentier capitalism and socialist policies. The rentier capitalism is often characteristic of mono-oil producer countries; often in these countries much of domestic demand is satisfied by imports, preventing the emergence of a private productive system.

It is certain that these reforms, if implemented effectively even if gradually, would have significant political effects in the medium term, as it would have fundamentally altered the economic mechanisms of national income redistribution at the basis of the political consensus.

The conditional is a must in a situation where the ads were often not followed by the implementing phase and the system of power and patronage of the Jamahiriyah often blocked or weakened reform efforts. In addition to the parasitic elite impeding reform, the personalistic and ideological nature of the Jamahiriyah model makes every attempt to reform an indirect criticism of the leadership that has continued to hold firmly in control the economy and even instances of reform, personified by a Colonel Gaddafi son, Saif al-Islam. Only then Gaddafi’s inconsistent statements and declaration on renationalization reforms, public administration abolition, allocation of resources to the population of the country, etc. become understandable.

The first elements of reform, often presented as social capitalism experiments in the Jamahiriyah spirit were introduced with the privatization in some relevant sectors (banking, insurance, tourism, hotels, services, agro-food), the creation of investment funds similar to the pension funds and social funds and the opening of the Stock Exchange in 2006, followed by the reform of the banking sector in 2007. A Foreign Investment Board was created in those years. This has led to a recovery of FDI inflows in 2007 (stocks stood at 6.58 billion dollars in 2007 and at the end of 2009 (UNCTAD, World Bank) amounted to 9.53 billion dollars. The Gulf countries were the first investors (banks, real estate, tourism, oil extraction. However, official data give a picture of a more closed system, where in the period 2005-2009 the year inflows have never exceeded 2.5 % of GDP and it appeared that at the end of 2010 it had signed eight bilateral investment treaties (52 Italy, 125 Germany, 124 in England). Moreover, the same privatization with the increase of international competitiveness seems to have more a strategic importance (kind of “geopolitics of prestige") in the area and also in this perspective should be seen the big plans for infrastructures (airports, highways, water networks, housing and tourism).

At the end of 2010 the Libyan government had presented a 150 billion euro infrastructural program over 5 years. A series of laws passed in early 2010 seemed rather promising for the development of the private sector and foreign investors attraction. However, its implementation required a phase of institution building (implementing agencies and monitoring) and coordination with firms unfeasible in the light of the economic and institutional situation. Elements of change have appeared in the urban economy: a widespread network of retail stores and meeting places, as well as new constructions.

Given these quite positive records, the constraints should be mentioned that would have affected even the effectiveness of reforms and their final outcome in a model of "market democracy", let say the creation of a private sector concurrently with that of a civil society.

First of all the reform process has become opaque and inconsistent since 2006, with the removal by the Gaddafi of Secretary-General Sukri Ghanem, a reformer and staunch supporter of free markets. The economy remains one of the least diversified economies within MENA countries. Freedom of enterprise was still limited at the end of 2010 (IMF relations, Heritage Foundation), also because of constraints on bank credit. Rule of law is still rather weak and procurements have often been affected, frequently for a lack of real capacity to control and knowledge of the contracts legislation. No coincidence that Libya had not yet signed the international treaties in the hands of the WTO and World Bank. To complete the list of constraints to development the insufficient protection of private property and the red tape level have to be quoted. To date, the institutional setting (defined as the country's political system) and the legal framework (understood as the set of laws that affect investment decisions) deter most of foreign private initiatives aimed to create industrial settlements in Libya.

The lack of a private sector, as in a vicious circle, prevents the implementation of policies for the restructuring of an inefficient and bureaucratic public sector, as public employees cannot be removed and relocated in private companies. According to the IMF only a quarter out of thousand public employees transferred from public office would have "reportedly" found alternative employment. Despite the ambitious program of privatization of the banking sector and the development of a financial sector, private sector credit is still rare due to operational and informative constraints while the capital market is underdeveloped. The job market is not very structured and rigid with a training system that does not allow the acquisition of sufficient skills, hence the difficulty in finding local staff for foreign enterprises. But the privatization process is selected and controlled, just to offset the destabilizing effects on the system of an too rapid expansion of the private sector. It is not coincidence the very large use in the recent programming of the free zones, enclaves to foreign entrepreneurs with strong customs tax exemptions, but with limited spillovers on the economic system, hence the risk of a two-tiers economy as in CEECs at the beginning of transition.

The Italian economic cooperation will be influenced by recent events in the MENA countries area: even if this markets add up a share of a mere 8% on Italian export, strong growth (Italian exports increased by 18% yearly in the period 2006-2008) makes them strategic as Italian SMEs struggle to reach the too far new global development centers in Asia. Libya in itself absorbs 0,8% of the Italian export.

The characteristics of the Italian economic cooperation with Libya are:

a) foreign trade’s steady growth between 2001 and 2008 from 6,8 to 20,1 bn. euro in 2008 (in 2008 imports from Italy accounted for 20.2% of total imports) was discontinued by the global crisis (12, 7 billion euro in 2009 and 14.5 in 2010). Italy shows a structural deficit with the ratio of imports to exports in 2009-2010 equal to 4.3. Strong concentration in the import: crude oil, natural gas (about 13% on gas imports in 2010) and products derived from oil refining add up to more than 95% of total imports, while Italian exports are quite differentiated between products derived from oil refining, mechanical and electrical engineering, etc..

b) the flow of foreign direct investments is negligible, with a wide gap – even compared to other North African countries - between Italy’s foreign trade and foreign presence in the form of foreign direct investment. In particular the presence of SMEs is thin compared to neighboring countries even though in 2010 there were many initiatives. According to official Libyan records in 2009 two Italian-Libyan joint-ventures were running.

c) Presence, well documented in the Italian Institute for Foreign Trade’s country report, of major Italian groups for the most part in the form of contractors and sub-contractors, manly due to government procurements.

d) Presence of the Libyan capital in Italy has been strengthened during the financial crisis, when the contribution of the resources of Middle Eastern sovereign wealth funds helped to stabilize or reinforce many European financial institution and markets. The most recent operation (July 2010) was the achievement of the majority of Unicredit (7.1% share).

Above mentioned points prompts two considerations. The first consideration regards the gap between trade and investments flows. This gap is due not only to the characteristics of the Libyan economy but also to the known deficit of the Italian system to outsource. Italian companies permanently present in Libya add up to one hundred (oil industry, infrastructure, engineering, products and technology for development), and among them around twenty mixed capital companies (the presence of joint ventures in Turkey, Tunisia and China is far more consistent). However, companies making direct investments are few and cumulative FDIs at the end of 2008 did not exceed 60 million €. But this figure could be higher because of the difficulty of recording FDIs in sensitive sectors and the inadequacy of the detection system of national accounts. Furthermore, the data do not account for large companies operating in the country (energy, construction, engineering and facilities, transport, telecommunications) that work directly on large orders and procurements. Recent government initiatives, culminated in the Treaty on Friendship, Partnership and Cooperation between Italy and Libya signed in Benghazi in August 2008 led to an increase in missions. With regard to the five-year investment plan of 150 billion €, orders for Italian companies would have summed up in 2011 to around EUR 1.5 billion. In addition, the Libyan government had devoted a major opportunity to create an exclusive zone for Italian SMEs. A supplementary program relevant was that training on the job in Italy of a a thousand Libyans workers who afterwards would act as facilitators for the establishment of Italian companies. Other business groups have asked the government financial support for the realization of feasibility studies and representative offices.

The crisis has obviously discontinued if not compromised a number of projects and joint-ventures involving Italian SMEs and SME associations such as those regarding the naval mechanics and shipbuilding cluster in Liguria region. Certainly the area will experience in the current year a significant slowdown of growth and in particular the situation in Libya, if continued, will have major economic impact for Italy, especially in terms of energy supply and, of course, consequences for breaking procurement on infrastructure and cooperation projects launched in 2010. The negative effect on exports should be contained: if an halving of exports to the whole Middle East area is assumed the negative impact on the three major regional economic realities (Lombardia, Piemonte and Emilia Romagna) should not exceed 3%, while GDP and employment would contract by 0.3%. The actual negative effect is that of the slowdown of a fast growing area that is easily accessible and so an important market for them the system of Italian SMEs companies that are struggling to project to long distances.

We could say optimistically that the meeting between Italian SMEs and Libya is postponed, hopefully in a context of relationships and a more appropriate framework to free enterprise. It is trivial to note that so far the business relationships, trade agreements etc. took place in the presence of a strong political control where the governmental concession come before and replace free enterprise. The private Libyan economy, first and foremost that of SMEs, is to be built from scratch within a framework of economic and political relations at all different. Similar considerations, but probably more nuanced, as Libya is also a borderline case between the economies of the Middle East, is included in a document that goes beyond the EU's Mediterranean Union launched during the French EU presidency in 2008. The report acknowledges that the EU should act as a intensification factor to generate employment, and innovation and therefore growth. The document recognizes the importance of aid to the creation of entrepreneurship and SMEs as a tool for job creation. Other key issues are education, vocational training, social justice. The issue of strengthening the democratization process is also present, given the EU experience of institutional capacity building and institution-building in Eastern Europe.

If the Italian foreign economic policy will implement properly, not only in Libya but throughout the area, this co-development strategy then for the Italian SMEs important business opportunities will open up.



Last modified on Wednesday, 11 July 2012 14:00
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