An Empirical Analysis of the Growth and Structure of the Libyan Non-Oil Productive Sectors

In this study, an attempt has been made to quantify the main determinants of long-run growth in the non-oil productive sectors (agricultural and manufacturing sectors) of Libya for the period 1970-2008 using an aggregate production function in a neo-classical framework, as well as taking account some of growth theories such as new growth theory. Even though previous studies has shown that the Cobb-Douglas (C-D) production function is generally more suitable to deal with developing countries than the Constant Elasticity of Substitution (CES) production function, a statistical model was built in this research in order to determine the best fit function for the Libyan economy. Some statistical criteria such as values of elasticity of substitution between capital and labour, T- test ,F- test and R2 are used to discriminate between the above two functions. Moreover, two forms of production function with various types of technical progress with the assumptions of Constant and Variant Returns to scale were estimated, in order to determine the relative importance of factor inputs and technical progress to the growth of productive sectors. The principal findings of the analysis of the determinants of Libyan agricultural and manufacturing sectors are as follows. Firstly, a Cobb-Douglas form with Constant Hicks neutral technical change with the assumption of Variable Returns to Scale (VRS) fits the Libyan non-oil productive sectors (agriculture and manufacturing sectors) data. This suggests the existence of unit elasticity between the factors of production. The unitary elasticity of substitution between factor inputs was an obstacle to the growth of Libyan agricultural and manufacturing sectors. Secondly, the contribution of GDP with respect to capital is found to be higher than the contribution of output with respect to labour in both agriculture and manufacturing sectors. This indicates that the change in GDP is more responsive to change in capital input than labour and technical progress in the Libyan agriculture and manufacturing sectors. Finally, technical change which accrued during the period 1970-2008 was growing at constant rates in the Libyan agricultural and manufacturing sectors, and it positively affected the output in these sectors, but its effect was relatively small, this indicated by a low elasticity of GDP with respect to technical progress. The result of this thesis has important policy implications. It may be argued that high growth in the Libyan economy, especially in the productive sectors can be achieved by augmenting capital goods through imports, given the country's special circumstance because imported capital goods tends to embody advancement in technology that can be beneficial to production. It may also suggest that these sectors should concentrate a new product innovation, a crucial element of technical progress