Is the Dutch disease ample evidence of a resource curse? The case of Libya

The Dutch disease refers to an appreciation of the real exchange rate resulting from increased exports and capital inflows within a country with a booming natural resource industry. This elevated exchange rate feeds back into the rest of the economy and can crowd out domestic manufacturing and other exporting sectors, leading to what has been ascribed as the resource curse. This paper attempts to contribute to the literature by shedding some light on the existence of this mechanism in Libya over the period 1970-2010. It applies a time series approach to explore the relationship between oil price, gross domestic product, and trade balance as independent variables and real exchange rate as dependent variable. Theoretically, a resource boom leading to the general appreciation of the national currency negatively affects the economy, but this theoretical hypothesis is not evident in the case of Libya. Our results suggest that a country may experience a resource curse, but this may not be as a result of the Dutch disease of an appreciation of the real exchange rate.