VZCZCXRO6257
OO RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHTRO #0402/01 1371312
ZNY CCCCC ZZH
O P 161312Z MAY 08
FM AMEMBASSY TRIPOLI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3450
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHFR/AMEMBASSY PARIS PRIORITY 0476
RUEHLO/AMEMBASSY LONDON PRIORITY 0798
RUEAIIA/CIA WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEHTRO/AMEMBASSY TRIPOLI 3954

C O N F I D E N T I A L SECTION 01 OF 03 TRIPOLI 000402 
 
SIPDIS 
 
DEPT FOR NEA/MAG AND INR (SWEET, HOFSTETTER) 
 
E.O. 12958: DECL:  5/13/2018 
TAGS: PGOV PREL ECON ETRD EINV PINR KBIO LY
SUBJECT: POLITICAL-ECONOMIC REFORM, JAMAHIRIYA-STYLE
Q: A) TRIPOLI 199, B) TRIPOLI 227   TRIPOLI 00000402 

001.2 OF 003

CLASSIFIED BY: Chris Stevens, CDA, U.S. Embassy - Tripoli, Dept of State. REASON: 1.4 (b), (d)

¶1. (C) Summary: A private sector interlocutor involved in Libya's chambers of commerce described dramatic calls for reform in a recent speech by Colonel al-Qadhafi as "a return to the natural order of things" that existed before the 1969 military coup that brought al-Qadhafi to power and inaugurated thirty-plus years of revolutionary governance and economic experimentation.  By the 1990's, it was clear that the ill-defined "Jamahiriya" system of governance was incapable of effectively distributing oil wealth or diversifying the economy; U.S.-led sanctions delayed meaningful economic reform for a further decade.  Government ministers tasked with effecting al-Qadhafi's plan for radical privatization are ill-suited to the task (they typically carry out orders rather than formulate and implement policy), and are confused and uneasy.  The private sector is concerned that overly rapid privatization, in tandem with more direct distribution of oil wealth and proposed restructuring of the government, could prompt significant economic disruptions, including inflation, and has counseled a more gradual approach.  There is concern that old guard elements resistant to economic and political change could seize on inflation as a pretext to roll back reforms.  Trimming a corrupt, inefficient public sector, defining and protecting property ownership laws, and revising the commercial and tax codes are other key areas of concern for the private sector. Our interlocutor's comments suggest that a shift may be underway towards a healthier balance between a centralized, suspicious government and an increasingly robust, organized and vocal private sector that is willing and - to an extent at least - able to advocate for issues of common concern.  End summary.

¶2. (C) In a meeting with Pol/Econ Chief and EconOff on May 4, xxxxxxxxxxxx(strictly protect)discussed the context of Colonel Muammar al-Qadhafi's March 2 speech to the General People's Congress, in which he called for radical privatization and restructuring of Libya's government. As discussed in reftels, al-Qadhafi called for the system of General People's Committees (GPC's) that have formed the basis of government since the late 1970's to be completely dismantled by year's end and replaced with an as-yet undetermined structure.  He also advocated the direct transfer of oil revenues - he suggested the amount of 5,000 Libyan dinar per month - to Libyan families in tandem with privatization of most public services, to include education and health care.  There have been serious concerns in the business community about the capacitQthe GOL to effect simultaneous, broad political and economic reforms.  A RETURN TO THE NATURAL (ECONOMIC) ORDER OF THINGS

¶3. (C) Conceding that al-Qadhafi's March 2 speech had been "surprising" in its scope, xxxxxxxxxxxx described proposed privatization measures as "a return to the natural order of things" that existed before the 1969 military coup that brought al-Qadhafi to power and inaugurated thirty-plus years of revolutionary governance and economic experimentation. (Note: The coup is described as a people's revolution that prompted development of the "Jamahiriya", an invented term translated to mean "a state of the masses".  End note.)  In the period immediately after the revolution, there was a heavy focus on the government as the guarantor of social and economic justice; however, the success of Western capitalism and failure of the former Soviet Union and other statist economies underscored the shortcomings of that approach, according to al-Usta. Referencing xxxxxxxxxxxx political-economic treatise, The Green Book, he noted that state structures were not intended to play a central role in politics or economics.  Al-Qadhafi's speech was best understood as representing a shift in philosophy over a period of many years, as opposed to a sudden about-face.  JAMAHIRIYA NOT UP TO TASK OF GOVERNING ECONOMY

¶4. (C) Calling for privatization and government restructuring was a return to the principles of early revolutionary thought, xxxxxxxxxxxx argued.  Law Number 9 of 1992, which relaxed strictures against private property ownership and rolled back more pernicious aspects of Jamahiriya thought, represented the key juncture at which the thinking of al-Qadhafi and influential quarters of the regime had changed.  Faced with the fact that Jamahiriya thought was ill-suited to diversification and modification of Libya's state-dominated, hydrocarbon dependant economy, the regime realized in the early 1990's that a new approach was needed, but U.S.-led international sanctions against Libya in the 1990's delayed economic reform efforts because the country was "on an emergency footing".

TRIPOLI 00000402  002.2 OF 003

CONFUSION & CONCERN AMONG THOSE TASKED WITH IMPLEMENTING AL-QADHAFI'S VISION

¶5. (C) Al-Qadhafi's March 2 speech "created considerable confusion" within the government and private sector, xxxxxxxxxxxx said.  The initial shock had worn off and skittish investors had taken initial comfort in the fact that the existing system of GPC's had not been dismantled overnight; however, chaos continues to reign in the GPC's and in the five committees tasked with recommending how to implement al-Qadhafi's plan. (Note: As reported ref B, contacts at the MFA and Central Bank told us that five committees - responsible for the budget, economy, administrative structure, wealth distribution and legal reform - were constituted after Qadhafi's speech to formulate plans for dismantling the GPC's, standing up alternate structures and implementing direct distribution of oil wealth. Final plans are reportedly due by September 1.  End note.) After years of having only to implement plans made by others in Libya's highly centralized power structure, ministries are now being asked to formulate plans and policies that they themselves will have to implement.  Unused to planning and possessed of limited human capacity, senior officials in the ministries are "very nervous", he said.

GOVERNMENT STRUCTURES MAY LACK CAPACITY TO UNDERTAKE REFORMS

¶6. (C) Careful to avoid blaming al-Qadhafi - who has historically combined rhetorical calls for decentralization with a practical approach that features monopolization of real decision-making authority - xxxxxxxxxxxx blamed ministers themselves for the government's lack of capacity and current difficulty in implementing al-Qadhafi's vision as expressed in the March 2 speech.  The speech represented not just a change in law and structure, but a shift of responsibility for governance.  With his "Zuwarah Statement" in 1975, al-Qadhafi suspended then-extant laws and government structures; in 1977 he established the GPC's and the first General People's Congress convened.  Now, he was tacitly conceding the failure of the GPC structure he effectively designed and was calling for a new, as-yet undefined substitute.  The General People's Congress of 2008 had assessed the failure of the GPC's to distribute and manage Libya's oil-generated wealth; the GPC's now had to focus on policy formulation (effectively how to dismantle their own organizations and spin off their functions to as-yet undetermined bureaucratic structures) and implementation (actually dismantling the GPC's).  Responding to P/E Chief's question as to whether the GPC's were up to the task of simultaneously undertaking radical privatization and government restructuring, he conceded there "could be" problems with lack of government capacity.

INFLATION, CORRUPTION & PROPERTY PROTECTION ARE PRIVATE SECTOR'S KEY CONCERNS

¶7. (C) xxxxxxxxxxxx said the private sector in Libya agrees that there are three main economic challenges at present: managing inflationary pressures; a bloated civil service resistant to privatization; and defining and protecting property ownership. Distribution of oil wealth and privatization are cornerstones of al-Qadhafi's new vision; however, undertaking both simultaneously - and as the government potentially radically restructures and relinquishes centralized control - could foster significant inflationary pressures.  The government needs to encourage production and incentivize and reward economic success as counterweights to inflation.  xxxxxxxxxxxx agreed with the concern the Minister of Economy recently shared with us that many Libyans would simply choose not to work if they received a direct monthly stipend from oil revenues.  Concerned that significant inflation could prompt old guard regime elements to roll back economic reforms, the private sector has recommended more modest wealth distribution through tax holidays, customs exemptions, and vouchers for education and health care.  (Note: xxxxxxxxxxxx strongly criticized al-Qadhafi's call for total privatization of education and health care, flatly stating that "Libyans just aren't ready for that kind of responsibility after 30 years of a state-dominated system."  End note.)

RENT-SEEKING BUREAUCRATS WORRIED

¶8. (C) A problem, according to xxxxxxxxxxxx, is that the majority of Libya's public sector employees are essentially political creatures used to only carrying out orders, vice technocrats who are responsible for thinking issues through and recommending policies.  Noting that there is "a big difference between making changes under martial law and in a more natural economic and  

TRIPOLI 00000402  003.2 OF 003

political environment", xxxxxxxxxxxx said private sector actors are pressuring officials to carefully consider the pace and scope of reform.  A key problem is that Libya's bloated civil service fundamentally distrusts the private sector and views any privatization as a threat, in large part because of concerns that their ability to extract rents and other "commissions" would be threatened.  Al-Qadhafi's March 2 speech was designed in part to address the problem of a corrupt, bloated bureaucracy; however, members of the Tripoli Chamber of Commerce and other chambers in Libya are concerned that rushing privatization and government restructuring (xxxxxxxxxxxx was dismissive of "shock therapy" approaches advocated by U.S. economist Jeffrey Sachs) could create serious economic disruptions and have counseled the five implementing committees to take a more measured approach.

PRIVATE OWNERSHIP, TAXATION & COMMERCIAL CODE ARE KEYS TO FURTHER REFORM

¶9. (C) A critical issue in which corrupt, ineffective public sector employees have prevented further reform is in defining and protecting property ownership.  Establishing a legal and regulatory framework that defines and protects ownership of private ventures is a major impediment to further meaningful economic reform, he said.  In other states, a businessperson's stature grows as he becomes richer; however, in Libya, greater wealth only makes that individual a bigger target for corrupt officials seeking rents.  Noting that "there should be no limits to the aspirations of businesspeople in Libya", he stressed that a goal of al-Qadhafi's March 2 speech is to "unleash private entrepeneurship".  xxxxxxxxxxxx said a new, integrated commercial code under consideration contains - in its current iteration - clearer, stronger property protection provisions. (Note: Libyan commercial law currently comprises a confusing and sometimes contradictory patchwork of laws, regulations and edicts, some of which date to the 1950's.  End note.)  A revised tax system - separate from the commercial code effort - is also under consideration and government officials have pledged to xxxxxxxxxxxx and other senior private sector actors that private businesses will receive a five-year tax holiday as part of the package of privatization incentives proposed in line with al-Qadhafi's March 2 speech.

¶10. (C) Comment: Intelligent, well-spoken, thoughtful and urbane, xxxxxxxxxxxx is one of the more insightful Libyan interlocutors we've dealt with, and is certainly more candid in his analyses and criticism of the existing system than most.  He receives no compensation for his work with the Tripoli Chamber of Commerce and the unified chambers; his private business interests include serving as the registered agent and distributor for electronics and appliances company Phillips. His comments likening al-Qadhafi's call for privatization and government restructuring to a return to the natural (pre-revolutionary) order of things are among the most forward-leaning we've heard.  Like some western scholars of Libya, he essentially believes that by the early 1990's, it had become apparent that the ill-defined Jamahiriya system of governance had failed to manage oil wealth or diversify the economy beyond hydrocarbons.  His description of profound unease and confusion among government ministers and members of the committees tasked with implementing al-Qadhafi's vision for reform accords with the consensus here.  Perhaps most significant was the extent to which xxxxxxxxxxxx and other senior private sector actors appear to be engaging the government on issues of economic reform, to include implementation of al-Qadhafi's March 2 speech and tax and commercial code reform. That they are doing so suggests a shift towards a healthier balance between a centralized, suspicious government and an increasingly robust, organized and vocal private sector that is willing and - to an extent at least - able to advocate for issues of common concern.  xxxxxxxxxxxx remarks criticizing a bloated, corrupt public sector and the need for better property protection laws are consistent with other observers' insights. His analysis of the possibility for significant inflation and of the old guard's potential to exploit that issue to roll back reform efforts was a new line of thinking that will bear further tracking on this end.  End comment.

STEVENS