The Relationship between the Investment in Petrochemical Industries and Economic Development - Research Proposal Example

The Relationship between the investment in Petrochemical Industries and Economic Development [This paper attempts to find out the possible relationship between investments in petrochemical industry and economic growth. The findings from the study will enable the researcher to propose a plan for tapping the petrochemical reserves in the country to achieve balanced growth.] Table of Contents Table of Contents 2 Introduction 3 Research Objectives 4 Literature Review 4 The Research Questions 6 Hypothesis: 6 Study Methodology 7 Issues arising out of the research design 8 Scope of the Study 9 References 9 Introduction Economic development is a process which takes the national economy from underdevelopment to a situation of development. The change is from a backward social situation to more advanced one. Such a move calls foe radical change in the production methods (means of production and production relationships which suit the means of production development steps. Changing the production means refers to the correction of faults in the structure of the economy or elimination that problem (Omar Mohyee Adeen, 1976). One of the major factors that affect the changes in the national economy is that of investment decisions (Krosinsky, and Robins, 2008). Often the discovery of an abundant natural resource in one country leads to tremendous investment in the resource and decline in the manufacturing sector. This scenario which is called the Dutch disease is a common effect in developing as well as developed countries. It is necessary that the development of an industry following the discovery of a natural resource is accompanied with a balanced development of manufacturing and the small industries. This will lead to generation of employment and diversification of the source’s income. With the availability of abundant raw materials, natural gas and cheap workforce the petrochemical industry is the best industry that shall be developed to grow the economy (Rooney, 2005; Sari, 2009). With this framework, it will be interesting to analyze if there is any relationship between the investments in petrochemical industry and economic growth. Besides this, the author will try to find out the possibility of a Dutch Disease taking place in the Libyan economy. The author will also try to find out the possible ways to prevent it and achieve a balanced growth of economy. Key Words: Petrochemical industry, National Growth, job opportunities, Small industries. Research Objectives The aim of this research is to understand and explore the potential impact of the discovery of petrochemical industry resources in Libya. The author aims to achieve the following objectives through the research: The definition of economic status, past and present for the manufacture of chemicals and petrochemical industries, and smaller industrial in Libya. The effect of the development of petrochemical industry on other industrial sector’s size and profitability. In particular, the author aims to find out the affect on smaller and manufacturing industries. The effect of the development of the petrochemical industry on the functional distribution of income. The possibility of a Dutch Disease taking place in the Libyan economy and the ways to prevent it. Literature Review Often, the discovery of a natural resource in abundance leads to high economic growth. The local income in U.A.E rose to 7% in the nineties and the reason was the rapid diversification towards the non-petroleum sectors specially the petrochemical industries which depend mainly upon energy fertilizers, cement and aluminum (International Bank, 2003). Countries like Canada Holland, Norway and Sweden have benefited from the existence of their natural resources to realize a permanent development through the investment in such resources and directing their incomes to investment in a certain economic sector and developing it, which in return has participated in the advancement of the other factors (Ogwumik et al., 2008). However, natural resource driven growth comes with issues as well. The concept of Dutch disease has taken a lot of interest over the last few years. The term came into existence to describe the impact of the discovery of Natural gas in the North Sea on the economy of Netherlands (Economist, 1977). The appreciation of the currency following the gas export boom lead to reduction in the profitability of manufacturing and service sector exports (Corden, 1984). As Adam Smith (1776) had pointed in his work: Government bounties towards one industry hurt other industries as well as the national economy. The situation becomes extreme in case of industries where the nation-wide negotiations and wage settlements are set by the natural resource industries. Example of such a system is the Greenland (Paldam, 1997). Studies have suggested that abundance in natural resource influence some variable which impedes growth (Zoega et al., 2001). Resource-abundant growth may also lead to rampant rent-seeking behavior on the part of producers in the absence of strict legal structure, and ill-defined property rights. This may divert resource away from fruitful economic activity (Auty, 2001). Resource abundance is also inversely related to the number of school enrolments (Gylfason et al., 1999). However, some researchers argue that Dutch disease may not harm the long-term prospects of a country’s economy. Barder (2006) proposes that the harm is mitigated because of three reasons: it is not necessary that the exports are adversely impacted; investments in the infrastructure, education etc will result in productivity benefits for the whole economy and; the welfare is dependent on consumption and investment and not just on output. Petrochemical industry leads to more types of national income, Overacting for export and to reduce dependence on imports, and decreasing the importance of obtaining one type of income which is exporting the crude oil which will be affected by the fluctuating prices and reflects negatively upon the national economy (Rooney, 2005). Different countries have shown different consequences of economic growth because of natural-resource abundance. An example for the same is Norway which has charted a long-term oriented, tax-based and market friendly legislature to manage its vast oil reserves. This has helped the country prevent itself from the curse of the Dutch Disease. However, abundance in natural resource may not always turn into economic growth. Example of such countries is Iran, Venezuela, Iraq, Nigeria etc (Gylfason, 2001). The Research Questions The author expects to find the answers to following questions: What is the nature of the relationship between the petrochemical industry and realizing a permanent economic development in Libya? Is there a relationship between investments in the petrochemical Industry and creating new job opportunities? What should be the policy framework to attract foreign investment in the country? What are the necessary steps, the Government should take to prevent the occurrence of the Dutch Disease in the country? Hypothesis: Based on the literature analysis and the research problems, the author proposes following hypotheses: H1: There is a positive relationship between the investment in petrochemical industry and the economic development in Libya H2: There is a positive relationship between the investment in petrochemical industry and the varying of national income resources in Libya H3: There is a positive relationship between the investment in petrochemical industry and the employment generation in Libya Study Methodology The study methodology of a research project shall be according to the research objectives and shall be suitable enough to answer all the research questions. For the purpose of this research, the researcher proposes to use a combination of quantitative and qualitative methods to obtain the necessary data and statistics that will help to understand and find solutions to the questions mentioned. The first step in the study will be to conduct an extensive literature review. The literature review will provide a basic ground for the research. The author proposes to read research that has already been done in the field related to above. The author will, in particular, identify the various variables that might be of interest during the main research and the various ways of representing them. The author will also analyze the past experiences of countries such as Norway, Nigeria, Iraq, UK, Australia etc to see the framework and the affects of resource-driven growth. The second step in the analysis will be that of quantitative analysis. The data source will be primarily secondary in data. The researcher will collect secondary data from Government sources. The data collected will be on the rate of economic development (GDP), employment rate, investment in petrochemical years, and the FIIs and FDIs in the country over a period of 15 years. The researcher will also collect data about the various small industries whose output depends upon the petrochemical industries. This data will be used to analyze the nature and extent of various variables as proposed in the hypotheses. The author proposes to use SPSS 16.0 for the quantitative analysis. The techniques that the author proposes to use are: Regression, Correlation, and conduct hypothesis test for the results obtained. However, mere quantitative analysis of the data is not enough. There is a need to analyze the findings from the real world’s perspective. The author proposes to use qualitative analysis technique for this phase. The source of the data will be compiled through a questionnaire, either through direct personal interviews or through postal questionnaires. The questionnaires will consist of open-ended questions that try to find out the possible insights into the research problems. The author also proposes to conduct some semi-structured interviews. Questions will address directly the importance of investing in the manufacture of chemicals on the national economy through diversification of sources of national income and reduce the countrys dependence on one source of income and the contribution of industry to create these new job opportunities by stimulating other economic sectors. The respondents will be personnel who are related to the field of petrochemical industry. These interviews will help the researcher to assess the situation of the Libyan economy by examining the impact of petrochemical industry on the national economy at large and to the extent of its contribution to the development of small industries. In summary the researcher can develop a set of recommendations on the importance of investing in the petrochemical Industry on the national economy in general and describes the micro-industries in particular. Issues arising out of the research design Every research design raises certain issues that are core to the research design. The research design chosen by the author also has certain limitations and issues that may arise while conducting the research. The first issue that arises is about the cost. The researcher requires access to data such as GDP, FII, FDI, employment rate etc. This data is freely available at government portals. The author will also require access to journals and magazines which are available in the library. The research design calls for semi-structured interviews and questionnaire filling my managers and personnel relating to petrochemical industry. It is very difficult to persuade these people to participate in the research because of their busy schedules. However, the researcher will teach the participant the importance of the research and is hopeful that he can persuade a decent enough size of respondents. A major ethical issue that may arise out of the research design is related to the semi-structured interviews. Often, managers may leak some classified information which can be misused. The author will make sure that such a situation does not arise. In case a manager says something that may be used against him, the author will maintain complete confidentiality of the responses of the interviews. Scope of the Study This study will examine in the case of the Libyan economy and focus on the chemical industry and their impact on other economic sectors during the period 1995-2009. I have selected this period because the manufacturing sector, specifically the petrochemical industry has seen significant changes in this time, which include the most important contracts for development and expansion in the petrochemical industry in Libya. References Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, R. H. Campbell and A. S. Skinner, eds., Oxford University Press, Oxford, 1976, Vol. I, p. 521. Adeen, O.M. (1976) .Backwardness and investment, Lebanon – Beirut Auty, R.M. (2001). “The Political Economy of Resource-Driven Growth,” European Economic Review. May Edition. Barder, Owen (2006), “Are the planned increases in aid too much of a good thing?”, Center for Global Development Working Paper #90, Washington, D.C. July 2006. Corden, W.M. (1984). “Booming Sector and Dutch Disease Economics: Survey and Consolidation,” Oxford Economic Papers 36, pp. 359-380. Economist. “The Dutch Disease”, The Economist November 26, 1977. pp. 82-83. Gylfason, T. (2001). Lessons from the Dutch Disease: Causes, Treatment, and Cures. Institute of Economic studies, Working Paper, 2001. Gylfason, T., Herbertsson, T.T. and Zoega,G. (1999). “A Mixed Blessing: Natural Resources and Economic Growth,” Macroeconomic Dynamics 3, June 1999, pp. 204-225 International Bank (2003) "The economic investment in the Middle –East and North Africa: Trade, investment and development in the Middle East and North Africa (reaction with the world). Krosinsky, C and Robins, N. (2008) sustainable investing, first published by Earthscan in the UK and USA in 2008 Ogwumik, F.O. and Ogunleye, K (2008) "Resource - led development: an illustrative example from Nigeria" African Development Bank (2008) journal compilation by Blackwell publishing ltd,9600 Garsington road, oxford ox4 2dq UK Paldam, M. (1997). “Dutch Disease and Rent Seeking: The Greenland Model,” European Journal of Political Economy 13, No. 1, pp. 591-614 Rooney, P.( 2005). Factors That Influence the Petrochemical Industry in the Middle East, Chemical Market Associates, Inc (CMAI) Middle East in Dubai, the article available from http://www.mees.com/postedarticles Sari, Y. (2009). Catching the Asia petrochemical Boom: A polyolefin perspective, Indian oil corporation limited, report available from http://www.petrotech2009.org/upload/P-681corrected.pdf Zoega, G and Gylfason, T. (2001). “Natural Resources and Economic Growth: The Role of Investment,” CEPR Discussion Paper No. 2743, March 2001. Read More