The Impact of Contractionary Policies vs. Developmental Policies on the Path of Libyan Economic Reform: An Econometric Study for the Period (1984–2024)

Abstract

 This study aims to explore an alternative model for economic reform that transcends the limitations of traditional contractionary approaches, seeking to achieve sustainable developmental stability in Libya. The study relies on Kaldor’s Magic Square model to evaluate macroeconomic performance during 2011-2023, and employs the Johansen Co-integration methodology along with the Error Correction Model (ECM) to estimate equilibrium relationships in both the long and short run for the period from 1984 to 2024. The results indicate the failure of structural adjustment programs to achieve stability; the year 2020 witnessed severe structural imbalances manifested in hyperinflation, high unemployment rates, and a sharp decline in GDP per capita. The study demonstrates that the apparent improvement in the trade balance was not a result of productive efficiency, but rather the outcome of fluctuating oil prices and contractionary monetary policies that eroded citizens' real incomes through repeated currency devaluations. Econometric analysis further confirms a positive relationship between oil exports and the public budget, contrasted by the negative impact of political instability and oil price volatility, with no significant role for non-oil revenues in addressing the fiscal deficit.