Source of Growth in Libya: Is MRW Model Still Applicable for an Oil Based Economy? Keshab Bhattarai 1,* , Abdelatif Taloba 2 1 Faculty of Business, Law, and Politics, University of Hull, Hull, HU6 7RX, UK 2 Faculty of Economics and Political Science. The University of Misurata, Libya and PhD student at the University of Hull, UK *Corresponding Author: K.R.Bhattarai@hull.ac.uk, A.I.Taloba@2015.hull.ac.uk Copyright©2017 by authors, all rights reserved. Authors agree that this article remains permanently open access under the terms of the Creative Commons Attribution License 4.0 International License Abstract: Growth and fluctuations in the Libyan GDP depend on oil prices and oil revenues. With data on oil revenues, GDP, capital and labour inputs spanning more than five decades we find that labour has been the most important source of growth of the per-capita income in Libya over this period. While the role of capital accumulation has been less important but positive, the contributions of TFP to growth are negative more often. Based on our analysis we conclude that the Mankiw, Romer and Weil model of economic growth [42] is not applicable to Libya, which is one of the oil-based economies in the Arab World. Keywords: Sustainable Growth, Oil, Libya JEL Classification: O1, O2, O3, O4 and O5 1. Introduction The major objective of this paper is to determine the source of growth in Libyan economy and to understand if there are any sources other than oil affecting the growth in Libya. For Libyan economy, the oil revenues provide an opportunity for both growth and development. Throughout five decades of oil abundance, there was almost no other sector than oil that contributed to GDP in Libya [54]. The main question is what are the shares of labour and capital in the Libyan GDP? Are they similar to those in other oil-based economies? Is MRW model applicable to Libya? These questions will be answered in this paper by estimating the output function for Libyan economy up to 2014. Results illustrate to the relative significance of each source of economic growth. Based on our analysis we conclude that the Mankiw, Romer and Weil model of economic growth [48] is not applicable to Libya, which is one of the oil-based economies in the Arab World. 2. Theoretical Framework Mankiw, Romer, and Weil suggested a model based on Solow model [56].They examined whether this model is consistent with international variation in the standard of living, and they argued that an augmented Solow model with human capital as well as physical capital provides an excellent description of cross-country data [48]. Jones enriched this topic in his empirical study emphasising on human capital measuring [35]. Masanjala et al. [43] applied Cobb-Douglas and CES production functions for basic and extended Solow model for 98 countries. Collins and Bosworth [24] investigated the source of growth among 88 countries; results mainly toggled capital accumulation. For emerging East Asian economies, [38] find that 90 percent of the growth in output per worker is attributed to total factor productivity TFP. While [37] found TFP likely to play the main role in growth in the developing economies, the capital accumulation was more important in emerging and advanced countries in Bhattarai [16]. In essence, the TFP and capital accumulations are the main drivers of economic growth in the long run and short run respectively [7]. On the other hand, the results vary between TFP and physical capital accumulation as an accounted source of economic growth, depending on the type of production function in use [46]. [29] showed that in the high growth years the TFP seemed to be the main contributor, while the labour is the main one in the slow growth periods, and capital is a more important source for the modest. For oil-based economies; Abu-Qarn et al. [1] investigated the source of growth in 10 MENA countries which for the period 1960-1998 under neutral technological progress, and found that capital accumulation is the lead driver of the growth and more contributor rather than labour on it. Also, others found that TFP contribution is negligible, and even negatively in all countries without exception [45], [1], [7] found that economic growth stems from capital accumulation rather than from TFP. Their study included some non-oil economies such as Israel, Turkey, Morocco and Egypt. For Israel and Saudi Arabia, the situation was reversed, TFP is more important than capital [7].