Sunday, March 20, 2011

Why is the War of Libya being fought?

We think it is a war between the rich nations and a despot ruling a poor African country, in order to free them from, among other things, economic hardship. Right?
What is a rich country? A country whose income is far in excess of its spending. That is how we define a rich man, right? A man who earns more than he spends, by a wide margin? 
A good proxy for that at the country level is Current account balance (Percent of GDP)
Look at the table below: It is a report from the IMF's World Economic Outlook database, October 2010 edition.

Guess what? All the countries in the list are those who are actively fighting in the early part of the war in Libya. It clearly shows that Libya is the rich guy; and all the others are the poor guys, who are spending in excess of their incomes! For the last 3 years, and were it not for the war, that is what would be happening next year too, according to IMF estimates.
Not fair, you may say. What you should look at is the net indebtedness of the country, as a percentage of its GDP. That is a true indicator of who is rich, and who is not. Let us look at that, then, from the same source.

Guess what? You're right! Libya, again, is the richest among these countries - it had positive forex and gold reserves (not net indebtedness) to the extent of 88 to 100% of its GDP ! Indeed, Italy is getting as poor as Libya is getting rich by this definition, for the last 4 years!
But then you may say, what we need to see is whether the citizens of the countries are becoming richer or poorer; not whether they are rich or poor.

Surprise!! The average Libyan is getting richer (except in 2009 when international oil prices dipped) and citizens of all the other countries seem to be getting poorer, over the last 4 years.
No, you might say, is the country growing or not? And which country's economy is growing faster? That is a good indicator of economic well-being. 
Yet again, it is Libya that comes out on top, with an estimated 10% rise in GDP in 2010. 

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