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Optimal investment in an oil-based economy. Theoretical and Empirical Study of a Ramsey-Type Model for Libya.

By Omar Othman Zarmouh

Abstract

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

Topics: Economic growth, Human capital, Investment, Modified golden rule, Libya, Oil exporting, Optimality, Ramsey-type model, Savings, Oil revenues, Economic development
Publisher: Development and Project Planning Centre
Year: 1998
OAI identifier: oai:bradscholars.brad.ac.uk:10454/4401
Provided by: Bradford Scholars

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