October 20, 2011 2:17PM

Advice to a Free Libya on Turning the Resource Curse Into a Blessing

Former Libyan dictator Moammar Qaddafi is dead. The Transitional National Council can now get on with the challenges ahead, including setting up elections for a future government deemed legitimate by Libyans.

At the heart of Libya’s many problems is the so‐​called natural resource curse. Libya’s economy is based heavily on oil and gas. Yet the abundance of natural resources like oil or minerals has often slowed growth, over‐​expanded the state’s role in society and strengthened authoritarianism in places as diverse Russia and Iraq. In developing countries with weak institutions, such resources tend to be channeled, if not monopolized, through government, which then becomes corrupted, less responsive to the desires of citizens, and less interested in advancing policies and institutions that create wealth.

But not all resource‐​rich countries suffer from the curse. Chile overcame the resource curse while Venezuela has not. A study by the Fraser Institute used measures of economic freedom, including rule of law measures, to find what set successful countries apart from the rest. The difference was the level of economic freedom or institutional quality. On a scale of 0–10, where 10 represents better institutional quality, the paper found a resource curse threshold of about 6.9—the level above which countries broke the so‐​called curse. More economic freedom turns the curse into a blessing.

The graph below shows selected countries and regions with regard to the resource curse threshold.

Media Name: Resource-curse-and-institutional-quality.bmp

For lack of reliable data, the Middle East and North Africa indicator does not include Libya and a number of countries in the region whose scores would surely bring the region’s average down notably. What is clear is that the region is below the point at which countries can take advantage of their riches to also make their people rich. Libya’s new leaders should pay heed to the central role of economic freedom in political and economic progress. After all, as our friends in the region remind us, the Arab spring began when Tunisian street vendor Muhammad Bouazizi set himself on fire after he was prevented from selling his goods, i.e., after being denied his economic freedom.