The Impact of Political Relation on Economic Development between Libya

THE IMPACT OF POLITICAL RELATION ON ECONOMIC DEVELOPMENT BETWEEN LIBYA AND CHINA 12

The Impact of Political Relation on Economic Development betweenLibya and China

Abstract

The research is an analysis of the past political relation betweenChina and Libya. Further, the study explores how the politicalrelation impacts economic advancement amid both nations. In specificis political relation during the 2011 unrest in Libya. Using alreadyconducted research on China and Libya relations, the study aims atdepicting policies China needs to implement, to improve its relationwith Libya. As a result, ensure continuous economic growth betweenboth nations.

The political relation between two countries has an impact on theireconomic development. Where the political relations are positive, itis highly likely that the countries cooperate to develop theeconomies of each other and vice versa as is demonstrated by Chinaand Libya. China has always supported economic developments in Libya.However, owing to political unrests in Libya, China has beenreluctant to continue investing in the country. Although Chinademonstrates interest in investing in Libya, investors risk enormouseconomic losses in the event of unrest in Libya. The challengesassociated with political unrests are unavoidable. These involve therequirement to guarantee the protection of expatriate employees aswell as a reliable banking and monetary structure. In specific, the2011 political unrests in Libya negatively affected economic progressbetween the two countries.

Problem Statement

Libya has been marred by continuous political unrests. There havebeen interstate wars in the country, which have negatively affectedthe economic growth of the nation (Freedom House, 2012). Thisis especially after the overthrowing of Gaddafi’s rule. Despitehaving a rich resource of oil and gas, the country progresses to bepoor. Most of its population is illiterate, lack basic needs, andcannot afford decent housing while unemployment progresses to behigh. Apart from the internal challenges arising from Libya’s civilwars, there are external challenges. The country lacks a wellfunctioning government, which poses a risk to investors. China is acountry that has demonstrated interest in investing in China. Itseeks to benefit from the vast array of natural resources in thecountry. However, its investment faces numerous predicaments. Thepolitical relations amid China and Libya have not been perfect, owingto China’s non-intervention policy. Civil unrests in Libya resonateto immense economic losses for Chinese companies that have investedin the different sectors. Thus, resulting in the question: What isthe impact of political relation on economic development betweenLibya and China? By discussing this question, it results in analysisof what foreign policy changes China needs to implement in Libya tosalvage their relations.

Literature Review

The presence of China in African economies, such as Libya, isdeveloping as a significant trade partner and investor in thecontinent (Jinyuan, 1984).The presence is notable in sectors such as energy, infrastructuregrowth as well as retail development all over Africa (Liste, Kolster&amp Fundani, 2012). What is yet to receive recognition is theexpanding position of China’s organizations within themanufacturing sectors. Venturing in the African market has becomepossible for China due to the attractive financial agreements andsmart international relations (Naidu &amp Mbazima, 2008). Theoutcome has been a tenfold development in trade relations betweenChina and Africa, a rise “from US$10 billion in 2000 to US$127billion in 2010, making China the continent’s largest tradingpartner” (Liste, Kolster &amp Fundani, 2012). The trade issubjugated by trading resources for finished products, whereas mostChinese investment has concentrated on sponsoring resourcesextraction (Liste, Kolster &amp Fundani, 2012).

China has always invested in Libya, specifically in the oil sector,which has been a basis for the shared economic collaborationconnecting the two countries (Reuters, 2011). The collaboration hasresulted in mutual benefits for Libyans and Chinese people. China’slong-term investment in Libya has been supported by tremendouseconomic sources, technological knowledge and availability of cheaplabor, Chinese investors have ventured into Libya. These investors,both from private and government owned corporations, have investedprofoundly in significant sectors of the industry. Some of thesesectors are construction, telecommunications, real estate, railroadand oil (Kan &amp Yan, 2015). Mutual contracts were signed by Libyaand China to ease their trade relations.

China and Libya have always had an economic relationship from August1978. However, this relationship has been marred by unstablepolitical relations. Libya is a large territory with a smallpopulation. This is because the desert takes over 98% of the country(Khader, 2011). The country is among the wealthiest African nationsowing to the rich distribution of gas and oil in the desert (Wright,2012). Nevertheless, there is an alarming disparity amid resourcesand performance. The country progresses to be poor. There iswidespread unemployment, lack of education and poor housing. Moreworrying is the fact that the nation imports most of its foods andclose to all industry products, which includes needs (Khader, 2011).The challenges Libya faces are attributed to widespread politicalunrests in the previous four decades.

Libya became a sovereign state in 1951 (Khader, 2011). Prior to itssovereignty, the country was ruled by Spain, Italy, Roman and Britishkingdoms. Following the United Nations General Assembly decision tomake the country independent, it formed a government making Fezzan,Cyrenaica and Tripolitania self-governing states (Vandewalle,2011). The federal system of governance came to an end in 1963paving way for monarch rule. In 1969, Muammar Al-Gaddafi led somemilitia in staging a coup against King Idris I (Khader, 2011). Thecoup was successful resulting in the renaming of the “UnitedKingdom of Libya” to “Libyan Arad Republic” (Khader, 2011).Under Gaddafi’s rule, there were tremendous developments in thecountry. However, the country experienced a revolution in 2011resulting in Gaddafi’s murder (Ahmida,2009).

Research demonstrates that political insecurity has an unconstructiveimpact on economic development (Ianchovichina,Devarajan &amp World Bank,2013). It results inthe shortening of policymakers’ horizons resulting in temporarymacroeconomic rules. It could as well result in more regular changesto policies, in turn breeding volatility (Aisen &amp Veiga, 2010).Economic development is connected to political stability. Theinsecurity linked to a shaky political environment might minimizeinvestment as well as the pace of economic growth. Also, pooreconomic development could result in the collapsing ofadministrations (Alesina et al, 1996). When a country is faced bypolitical unrests, it means that it has unstable policies, and thusdoes not favor the interests of investors. This is because foreigninvestors favor an environment that is stable, as the policies arecertain (Bernal-Verdugo, Furceri&amp Guillaume, 2013).A country also suffers from having unstable infrastructure as is thecase with Libya.

The revolution has had a negative impact on China’s relations withLibya. China has a foreign policy of non-intervention (Liu, 2011).The decision by Beijing to not support rebels that were key playersin the overthrowing of Muammar Gaddafi all through the revolutionnegatively impacts China’s prospect trade with Libya (Sotloff,2012). Contrary to Western nations, China depicted unwillingness inbacking rebels from Libya when they sought intervention from theinternational community (Mason, 2014). Regardless of failing tosupport the NTC “National Transitional Council” rebels, Chinaengaged Libya’s then administration, via the Egypt and Qatarembassies (Sotloff, 2012). The relationship amid China and NTC wasmarred following the rebels taking over Tripoli.

The Canadian Newspaper depicted that Gaddafi officials had organizedmeetings with China’s government controlled companies involved inthe manufacture of arms, “such as the China North IndustriesCorporation, the China National Precision Machinery Import and ExportCorporation, and China XinXing Import and Export Corporation”(Sotloff, 2012). The newspaper depicted that these Chinesemanufacturers were willing to breach an arms prohibition enforced onLibya by the United Nations by selling weapons to Gaddafi (Wouters,Defraigne &amp Burnay, 2015). Although NTC officials condemned theallegations, Ali Tarhuni, then assistant Prime Minister, declaredthat such accusations could complicate the possibility of Libyasupporting prospect Chinese investment in Libya (Sotloff, 2012). Thisresulted in the storming of the Chinese embassy in Tripoli by Libya’scivilians.

Even prior to Libya’s civil unrest, the relationship between Chinaand Libya was not smooth. In 1980, Tripoli disengaged with Chinafollowing Beijing’s decision to supply Egypt with arms (Sotloff,2012). This is because Egypt and Libya had previously been engaged ina brief border disagreement. In a different incident, the ChineseNational Petroleum company consented to buy Libya’s assets from aCanadian organization, Verenex amounting to millions. However, Libyaimpeded the agreement, compelling the Canadian organization toinstead trade with Libya’s National Oil Company and at the sametime offer a discount (Sotloff, 2012). Apparently, China has torepair its relationship with Libya in order to continue investing inthe country.

Methodology

The research uses the literature review that has already beenconducted to determine the political relation of China and Libya.Further, the literature analysis is also used in demonstrating howthe political relation affects economic development. The literaturereview acts as qualitative data by providing insight on the views ofdifferent authors concerning the political relations between Chinaand Libya. Different authors have their different views, and it isimportant to review the different views in order to determine whetherthere is agreement on the research topic. The literature review aswell acts as a source of filed study. This is because the informationprovided by the different sources contains information that hasalready been researched and conclusions have been made. Analyzing theliterature makes it possible to come up with results and a conclusionon the research topic.

Results and Discussion

The literature review demonstrates that China has a keen interest ofinvesting in African nations. In specific, China is a significantplayer in Libya’s market. For instance, “In 2010, China consumed11 percent of Libya’s oil exports” (Sotloff, 2012). It acts asTripoli’s second biggest supplier following Italy, “accountingfor 10.54 percent of Libyan imports in 2009” (Sotloff, 2012).Additionally, China has noteworthy trade prospects in Libya (Xinyu,2011). These businesses include railroad projects as well as sellingautomobiles. Most of China’s exports are focused on thetelecommunications and construction industries. Prior to the 2011civil unrest in Libya, Beijing had trade agreements with the countrytotaling to twenty billion dollars. This can only mean that Libyaacts as a profitable market for China (Sotloff, 2012).

China looks forward to continued investment in Libya especially nowthat the country appears to be stabilizing from years of civilunrest. An end to the unrest has resulted in recovery effortsimplemented by new governance from the National Transitional Council.NTC approximates that Libya will require to invest close to a hundredbillion dollars into home infrastructure projects. It sums up to morethan five times the overall value of already established investmentby China in Libya (Kan &amp Yan, 2015). Demand for investment is notjust in oil and gas sectors, but other developing sectors liketourism, wind as well as solar energy. Investors from China are at abetter position to invest in Libya because they have thetechnological knowledge as well as monetary resources required inmeeting the demand in new and conventional sectors.

Notably, during the 2012 “International Infrastructure Investmentand Construction Forum of the China International ContractorsAssociation”, it was apparent that China was shifting away fromconventional EPC agreements (Kan &amp Yan, 2015). As a result,Chinese investors have the capability to invest in more profitablePPP or BOT projects, which Libya might be required to provide withthe objective of enhancing financial requirements management. Chinahas a proven track record of investing in Libya. It already hasongoing projects in different sectors, most of which were signedduring Gaddafi’s rule.

Although China views the prospect stability in Libya as anopportunity to advance investment in the country, it is faced bynumerous challenges. The NTC declared its commitment to honor alltrade agreements made during Gaddafi’s leadership. Realistically,every agreement will require to be re-negotiated under the adventadministration owing to changed trading circumstances. Nevertheless,Libya’s new government has declared its initiative to offer specialtreatment in prospect to countries that supported them during therevolution (Sotloff, 2012). Bearing in mind that China had anon-intervention policy during the revolution, they stand to lose ifLibya decides to adhere to its special treatment policy (Horesh &ampKavalski, 2014). Without a doubt, China’s political relations withLibya, pose a challenge to China’s prospect investment in thecountry.

A different challenge derives from the changes to the legal system byNTC. The new government has declared Sharia rule as the foundationfor its legal structure. In addition, the government has promised tomake the judiciary self governing, which will result in respect forinternational laws. Although these are important changes, it cannotbe ascertained that NTC will adhere to the new practices. The outcomeof these new laws is that Chinese investors’ agreements with theadministration will have excluded provisions. The provisions arecrucial because they provide performance guarantees like advancepayment and security deposit. Supposing that a contract disagreementensues, investors from China might face hardship in pushing for claimagainst Libya. Notably, in such a case Libya’s judiciary may feelcompelled to vote in support of its country.

Conclusion

It is clear that China has a tainted reputation in Libya owing toits non-intervention policy. This means that China lacks a guaranteefor future investment in China, in addition to having to deal withthe challenges discussed. China must work towards improving itsrelation with Libya. China must revise its non-intervention policy todemonstrate to Libya that in the event of prospect unrest, it willintervene and help NTC. Libya faces a challenging task ofreconstruction that will require international assistance. Bearing inmind that China has the needed resources and knowhow it has theadvantage of successfully investing in Libya. China must demonstrateits endeavors in Libya towards economic advancement. This willenhance trust amid both nations, improve their political relation andin turn ensure economic advancement amid Libya and China.

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