Libya’s economic reform programme and the case for a stock market

Libya is still in the early stages of its financial liberalisation and reform following eleven years of political chaos and nearly three decades of central planning control. However, it is advancing as a result of the removal of UN and US sanctions during the last few years, and there are signs of rapid development. Despite these advancements, no study has been found which explores the readiness of the Libyan financial market for the establishment of a stock market. This thesis was undertaken to develop a conceptual framework for a research model with a specific focus on the Libyan economic reform
programme and the development of the Libyan stock market between 1999 and 2008.

The empirical study investigates the determinants of economic reform and stock market performance
within the Libyan economy utilising data from three different sources and a multi-method approach.

Self-administered questionnaires were distributed to the entire target population of the Libyan financial market, banking sector and a number of companies. A total of 330 questionnaires were distributed and of these, 203 were returned completed and usable, a response a rate of 61.5 per cent. Fourteen semistructured interviews were held with managers in a subset of companies, selected via a stratified sample of respondents to the self-administered questionnaires. The third method of data collection used financial market data over the period 1995-2006 from 42 emerging market countries. This data was analysed to examine whether best practice from emerging stock markets is transferable to the Libyan
context. As a result, this study provides some knowledge that might usefully be generalised to other developing countries, particularly to those with a similar economic structure.

The primary contribution of this study lies in the fact that it is the first attempt to study the impact of stock market development on the economic growth process of a specific-country experience and evaluates the success of the economic reform programme and Libya’s readiness to complete its transition to a market-based economy. The key findings are; first, the economic reform programme variables have an impact upon various features of the stock market performance variables within a linear regression model; second, stock market development has a significant effect on economic growth, and this effect remains strong even after controlling for banking sector and other control variables using a growth model; third, although the evidence largely supports the view that there is a stable, long-term equilibrium relationship between the evolution of the stock market and the evolution
of the economy, it provides no support for the view that the stock market is a leading sector in the process of Libya’s economic development. The evidence supports the view that the relation between stock market development and economic growth in emerging economies is bi-directional.

The findings describe that the stock market and the banking sector in Libya in particular and emerging economy in general are complementary rather than substitutes in providing financial services to the economy.

This study seeks to make an original contribution to knowledge on the academic and practical levels as one of the first attempts at empirically investigating the impact of an economic reform programme on stock market performance in an emerging economy. The research represents an applied study of a type that has not appeared elsewhere, and the framework offered may therefore not only be appropriate to Libya as a case study, but also to other countries in similar circumstances. The research provides an
important introduction to this area and has attempted to explore its significance for both the economy and business. This research adds to the existing body of literature regarding development and application of a series of models of economic reform programmes, stock market performance and economic growth in a developing country. Additionally, brief recommendations are offered regarding potential useful directions for future research arising from the conclusions of this research. These develop into a strategic framework for the improvement of an economic reform programme and stock market performance.