Abdallah al-Kabir shows me around the city of Misrata and the major sites of the revolution-war of 2011 that ended with the overthrow of the Gaddafi regime and the death of its leader. On al-Tarablous street in the city centre we see four destroyed tanks which took cover in the vegetable market, but still could not escape being bombed by Nato planes.

The improvised museum of the revolution-war holds the famous sculptured fist holding an (American) plane that had been transported by the Misratan rebels from Bab al-Aziziyeh in Tripoli as a trophy. But as my questions pile up in search of the causes and the socio-economic underpinnings of the unexpected explosion in Libya, my guide becomes irritated. Suddenly he stops, looks directly at me and says: "Our revolution was about freedom, not money."

I do agree with al-Kabir that the revolution in Libya, as well as in the entire Arab world, was and is about freedom. For decades, Arab dictators had humiliated, manipulated and intimidated their own citizens. Mostly they ruled by repression, which could be toppled only by an upsurge of popular will - including in some cases, such as Libya, popular violence. But the Arab spring is about something more than that: it is the result of the failure of the economic model and role of the post-1945 Arab state, which could not provide its people with even a minimum necessary and decent livelihood.

The legacy

Many interviewees tell me that the Libyan people are both peaceful and patient in nature, and that this helps explain why for four decades they did not revolt against the eccentric colonel with his bizarre ideas and experimentation. But in the last years, the corruption and incompetence of the regime began to touch their standard of living more and more. "Why should we live in poverty when we have the means to live like the Gulf countries?", many ask.

The Libyan revolution, again like the entire Arab revolution, is about failure in two areas: political and economic. So it is also necessary to study the economic record of the old regimes in detail, to understand exactly what went wrong and how their failures played a part in triggering the revolutions. Such scrutiny could open a debate about future economic choices, a debate that seems momentarily to be overshadowed by more immediate political concerns. In Libya, as perhaps in Egypt, people expect a rapid amelioration of their economic condition - yet the lack of discussion about which economic policies could deliver this is striking.

This is related to a lack of understanding about how exactly the old regime failed. Libya under Gaddafi was not a poor country; the regime held large capital assets outside the country (following a United Nations Security Council resolution, assets worth $165 billion were frozen in foreign banks). Yet its people were poor, their villages left without services and their cities lacking basic infrastructure.

The general impression in Libya is that there was a purpose in Gaddafi’s reluctance to develop state institutions, and in his decision to spend much of the country’s oil money on providing a well-connected elite with lavish lifestyles (as well as on foreign political and military adventures). This legacy has encouraged in the popular imagination a certain nostalgia for the monarchy which Gaddafi overthrew in 1969.

The model

There are, though, other views on the relation between past and present in Libya. In his book Libya Since Independence, Oil and State-Building (1998) which examined the relation between the evolution of state institutions and oil income in Libya, the historian Dirk Vandewalle comes to the surprising conclusion that there is a structural continuity between the monarchy and the military dictatorship, in both of which institutions of state existed only as channels to distribute oil income. Vandewalle argues that this is the opposite of modern western states where the state bureaucracy is set up primarily to extract taxes from its citizens - not to distribute money to them.

By performing this function, the modern western state accumulates knowledge about its citizens’ economic reality, which in turn creates a capacity to formulate economic policies that will encourage productivity - in order to increase state income through taxation. Whereas in Libya, where oil income poured out of the ground suddenly and without any preparation, the then very weak state institutions were flooded with oil money - and faced the problem not of how to tax their citizens but of how to disburse oil revenues to them.

This occurred within the context of a coercive apparatus that identified its own interests with those of "Libya" as a whole. In consequence, money was distributed in order to buy loyalty or to punish the disloyal by cutting off funding from them, their village, town or region. This linkage of state function and state power (or, in another aspect, weakness) thus created a continuum between the monarchy and the Gaddafi dictatorship.

Libya is a state where the income source lies outside its own society (in 2009, 95% of Libyan exports and 80% of its government revenues were oil-related). The temptation for its rulers has been to spend the proceeds on political ambitions beyond (often far beyond) the country's borders, or on pharaonic dreams such as the "Great Man-Made River" (what the colonel called the "eighth wonder of the world").

From an economic perspective the latter project does not make sense: apart from the initial investment of $27 billion (more than twice the planned $10 billion), it works by using non-renewable hydrocarbon fuel to transport underground water through leaking pipelines hundreds of kilometres through the desert to be used mainly for agriculture in the northern regions. No state based on economic logic would invest in such an initiative.

The temptation

The oil sector in Libya is being rehabilitated faster than had been planned. In December 2011, it produced 1 million barrels per day (mb/d), and by the end of January production had reached 1.3 mb/d; soon, it will reach the pre-war level of 1.6 mb/d. The country has much more productive potential; even under the king in the late 1960s, Libya produced 3 mb/d, most of it ready for export. In the Gaddafi era, foreign companies were afraid to invest in such an unpredictable environment; political stability would create great opportunitis for new investments in exploration and infrastructure. No wonder foreign delegations abound in Tripoli - the lobbies of luxury hotels are full of them. Soon, Libya will be inundated with petrodollars, and the country urgently needs a debate about what to do with the money.

In an atmosphere of political uncertainty, the same temptation among those who control oil income to purchase loyalty by distributing cash to favoured associates remains strong. True, after what its people suffered in 2011, Libyans probably need some "distributive measures". Yet even to be able to do this job, the country needs a solid administrative structure, something that it lacks at this point. 

There are revelations of corruption within the National Transitional Council (NTC), which tarnish its legitimacy: a state fund distributed $800 million to wounded fighters, yet reportedly only 15% of the money reached the target. The disbursement of oil money is also at the heart of the debate on federalism (or self-rule, which has been demanded in the eastern region of Barqa where most of Libya’s oil reserves are located).

The options

A debate on how to use the oil income should start by acknowledging the negative effects of unexpected and instant wealth. For such a rapid accretion of wealth has political, economic and social consequences. In economic terms, oil income "overheats" the economy, raises prices, and makes local production uncompetitive against foreign imports (a phenomenon referred to in political science as "Dutch disease" in light of the negative impact of North Sea gas income on the Dutch economy). As a result, while income grows the economy does not progress but rather regresses in complexity and development.

In social terms, an oil-based model leads to a reliance on cheap foreign labour as well as expensive foreign expats who corner educated nationals into administrative positions. Even as Libyan youth were suffering from massive unemployment, the Libyan economy depended on foreign workers to run things.

Yet in Libya today, no one seems to be presenting such arguments; on the contrary, expectations are very high and people are full of hope about the chances of accessing a share of petrodollars.

The voices calling for federalism - not secession - recall the political system that existed in the country from its independence until 1964. That reflected the geographic specificity of Libya’s three regions (Tripolitania, Cyrenaica and Fezzan), but in addition the multitude of clans, tribes and ethnic groups throughout the country. It was the discovery of oil, and the pressure of foreign oil companies, that led to the cancellation of the three autonomous structures and the establishment of a centralised state -which eventually fell into the hands of a young army officer. Today, Libya is destroyed, effectively divided - and oil-rich. It needs to heal its wounds and reconstruct its cities, and to build its state institutions from scratch.

The question is, what kind of political order will be achieved at the end of this process? In particular, can a state which is both financed by foreign oil exports and pours subsidies and salaries over its citizens also be a democratic state? Libya’s experience (and that of other countries) suggests the answer is negative. Such a state tends to concentrate power, whatever ideology it claims: monarchic, pan-Arabic, nationalist, Islamist or democratic. The political stakes in Libya are high, and so is the need for debate about its economic options.