By: Adnan A. Albahar 

-Advisory Board Member, Reconnaissance Research

Kuwait and The Road Forward  

All societies go through periods of prosperity and periods of financial challenge and setback that require them to return to reality after a drift in the world of fantasy.  

In this paper I will attempt to:  

1. Clarify some basic concepts about Kuwait.  

2. Then I will walk you through the process by which societies deal with a financial shock.  

3. After that I will look into how economies solve for a challenge such as the need to migrate to an alternative source of income,  

4. And finally, I will seek to draw a roadmap of the path that Kuwait will most likely follow over the next two decades.  

First and Foremost:  

It is important to understand that the Kuwaiti economy is a one hundred per cent oil based economy. What some describe as non-oil economic activity, is nothing more than activity that serves the oil industry, its employees and those that service it and what some call non-oil revenues mainly taxes and duties are, as they stand today, are nothing more than a method of reducing public expenditure, as it is nothing more than taking back some of what the oil based state has spent.  

The reality is that should oil revenues disappear Modern Kuwait will be poorer than pre-oil Kuwait as it has lost the skills of the past.  

This is the real problem of Kuwait all other issues, such as good or bad governments, wasteful and less-wasteful governments, corrupt or non-corrupt governments, are issue’s that will simply bring the problem forward or postpone it a couple of years. 

Second:  

Societies only reform when pressured by need and I have yet to find a nation in recent history that had lost its financial and competitive edge after a long period of abundance yet was able to reform before reaching the edge of the cliff.  

For people (citizens) – and hence their political representatives and Governments -  dislike disturbing the status quo and the comfort of stability with change, and will only resort to change when forced by circumstances. 

Consider the United Kingdom’s example, a nation we today seek advice and expertise from. The UK coming out of world war I kept on broadening the role of the well fair state and its ownership in the economy until the UK economy approached collapse and the treasury approached bankruptcy. Only then at the edge of financial failure did voters accept the gravity of the situation and the majority voted the reformist Margaret Thatcher as Prime Minister with a mandate to restructure the economy and shrink the role of the state, which eventually lead to the revival of the British economy’s agility and competitiveness.  

Yet despite the strong political mandate, the first few years of Mrs. Thatcher’s rule, did not go through without strikes and a near paralyzed economy.  

More recently, we have Greece, another nation that needed to reach to the verge of financial bankruptcy, face three years of chaos and change three governments, before voters accepted the European economic reform programme.  

There are plenty of other examples Spain and Ireland after 2008, before that the collapse of Soviet Union and more recently Lebanon, etc.  

Third:  

Societies need to work their way through a difficult reform process that requires them among other things to review their existing economic model and sometimes their existing socio-political pact in order to create the foundation for the resumption of growth. 

Societies will usually go through four phases in the process:  

i- Denial:  

Refusing to accept the existence of a problem, a phase that Kuwait has and is still experiencing today.  

ii- Anger: 

At this point societies are starting to accept that there is a real problem and anger starts to take over. This is the most difficult and the most delicate stage, it is here that governments fall and societies start looking for scapegoats among politicians, lawmakers the executives and their agents or partners.  

The extent of damage in this phase differs from one society to another depending on the severity of the problem and the nature and structure of that society and the nation state. 

It can be as sharp as a fall of a powerful empire like the fall of the Soviet Union, or  the fall of three consecutive governments, like in the case of Greece, or ending up  paralyzed with no solution in sight like Lebanon, Venezuela and Iran or go through  3 to 4 years of instability, unrest and economic close down like the UK in the early  days of Mrs. Thatcher, but it also can be less violent like in Spain, Ireland, Morocco  and Iceland after the 2008 financial crises, however all were painful.  

iii- Acceptance: 

 At this stage the country is beyond anger and is starting to heal and commence workout on a new social, political and economic pact that would help it to move forward and avoid the mistakes of the past.    

iv- Dealing with the problems “Execution”  

Now society is executing solutions based on a new national pack, in most cases, many of those solutions have been on the table for a while but were either not accepted or ignored at that time. 

Fourth:

Although economists and politicians keep talking about the need for alternative sources of revenue, the oil exporting countries of the GCC will solve for most of the fall in oil revenues over the next two decades through raising their levels of productivity, efficiency and competitiveness. In other words, raising the national product they derive out of every dollar of oil revenue. 

Let’s consider the western economies experience in seeking to find an alternative source of energy to oil.  

For a starter, the west only began dealing with this issue seriously after the shock of the 1973 oil embargo. This shock with the associated pain and anger was necessary to bring the issue to focus and determine its priority.  

Then at that point Western Nations started talking about the need to find alternative sources of energy however, only today some fifty years later are we seeing the seeds of viable alternative energy solutions and it still requires another 15 or so years and plenty of new capital before those start to take serious roots. 

However, the west achieved a great deal in the area of improving efficiency. 

According to the World Bank, the rise in efficiency in the use of oil over the last fifty years exceeded 400%, meaning the world today produces between four to five times the GDP out of each barrel of oil compared to what it did in the mid-seventies.

The Future Path for Kuwait 

It now seems logical to conclude that moving forward Kuwait, consciously or unconsciously (forced by need), will seek to raise its productivity and competitiveness levels over the next two decades by around 400% and only then and when productivity and competitiveness levels approach the Global Average, will Kuwait start to see the early signs of non-oil based exports of goods and services.  

A legitimate question can be raised at this point: Is there a real opportunity for the Kuwait to raise it levels of efficiency, and competitiveness by anything close to between 400% and 500 % during the coming two decades? 

Based on my observations I would say certainly yes!  

Current productivity and competitiveness levels of the Kuwaiti economy are way behind the Global average or even the GCC average. The UAE is at least 300% more efficient than Kuwait today, meaning that had the Kuwaiti economy today been as efficient and as competitive as the UAE economy, the Kuwaiti economy would be three times its current size, but of course with a much higher level of serious work hours and a much lower level of extravagance and waste at all levels the state, the individual and the family. Hence it is reasonable to assume that under enough pressure Kuwait can achieve a 400% to 500% improvement in efficiency, productivity and competitiveness in 20 years. 

In the process Kuwait will realize that raising efficiency, productivity and competitiveness can only be achieved through raising the level of domestic competition to the highest possible levels but definitely to levels higher than those in a nation it is benchmarking against.  

So, say Kuwait wanted first to reach- or exceed - the level of efficiency, productivity and competitiveness of the United Arab Emirates, it must then raise internal competition in its key economic sectors to levels higher than those in the UAE. 

As such, and since the UAE has two competing stock markets (the Dubai bourse and the Abu Dhabi bourse), Kuwait must seek to have at least three directly competing stock markets and three clearing companies. Kuwait must also encourage local airlines competition, for there are four competing airlines in the UAE, Kuwait Airport Terminals T1 to T4 must be transferred to privately managed competing  companies, Each striving to attract airlines, passengers and air freight services, for  in the United Arab Emirates, there are three competing airports and more than three  competing seaports, hence the three ports of Shuwaikh, Shuaiba and Mubarak in  Boubiyan should be transferred to three competing privately managed ports, and the  same applies to the different sectors of the economy including the health and  education sectors. 

And to attract capital to invest and help make-up for the shrinking public investment and spending and to aid in creating new employment opportunities, Kuwait will need to reduce its excessive bureaucracy, improve its business environment, reduce its permits management red tape and liberalize its government processes.  

And because subsidies (such as, a reduced electricity price, free lands, work permits and customs exemptions) are the cause of most red tape, seeking unsuccessfully to prevent miss-use of subsidies, Kuwait will find no other way but to cancel all forms of commercial, industrial or agricultural subsidies. 

In any case when was subsidy and protection (including License issuance control and Monopolies) beneficial, all they do is cause additional bureaucracy, lower efficiency and destroy quality and competitiveness, on top of that most subsidies are misused and misappropriated.  

Protection and subsidy did not help the Kuwaiti Capital Market from dropping to the number Four GCC Market and handing over it historic Second largest GCC market and The GCC’s Regional Capital Market status to the Dubai stock exchange which is living a much more competitive local environment.  

Similarly, years of protection from the competition of GCC and foreign banks did not help the Kuwaiti financial sector from a similar fate again dropping from second largest and most competitive GCC Banking sector to the Fourth and handing over the second position to the UAE which tolerated and allowed much more regional and international competition locally for years. 

And years of protection, billions of KD’s in government subsidies, priority to government travel business, free land and buildings, did nothing to help Kuwait Airways maintain its number One GCC airline position. As a matter of fact, the more protection and subsidy, the worse the result and Kuwait Airways obliged by dropping from the number ONE GCC Airline to the absolute bottom of the GCC airlines ranks. while Emirates Airline which had to deal with a much bigger International and gradually local competition, took the lead. 

In general, as a result of vision or the pressures of need, all forms of subsidy and protection will disappear, free work permit will be halted and will be replaced with a price per work permit system replacing today’s heavily miss used and black market controlled pricing, and changing that price per license up or down to control the size of the expat community and the level of the total population as per national Goals.  

Now with the growing role of the private economy, voters will demand stricter enforcement of antitrust law’s combating monopolies and monopolistic practices such as price fixing, and making sure open fierce competition is not inhibited. 

But the most important achievement and challenge will be dealing with the biggest spoiler of competition, the competition of the state. Because all economies, once they start seriously seeking to attract capital to invest and create job opportunities will find that capital does not like to compete with the state or state owned enterprises for several reasons: 

1. A state-owned competitor is ready to sell below cost price as profit-making is not a priority and not a prerequisite to attaining capital (capital is provided by the state) and should it experience any serious loss the state will compensate it and on top of that they get all forms of support and subsidies in the form of interest free funding, free land, priority to business etc. (Kuwait airline today is the perfect example).  

2. No economic game can develop, when the organizers and managers of the game are at the same time the owners of a major competing team. I mean who in his right mind will play in a football tournament where the referee’s and the federation have a competing team. 

The tightening finances of the state will in all cases push it to shrink its ownership  of economic enterprises either by selling them or closing them down, and in sectors  where it cannot completely exit, like health and education, measures will be taken  to encourage fairer competition between the governmental and nongovernmental  players, such as expanding free health insurance policies to all Kuwaiti’s and  requiring employers to buy health insurance policies for their expat employees, this  will level the playing field between the Public and Private health service providers  in the eyes of users as both are now free and that should ignite competition in quality  and cost (seeking profit). 

Additionally, the administration of those sectors where the state cannot totally exit will be removed from the competing ministries, in this case health and education, and placed with independent administrative bodies that would be mandated to manage those sectors and prevent government players from activities that undermine competition. 

This in brief is the road that Kuwait will have to follow, however the speed at which Kuwait will move forward on these reforms and the depth it will go to in its reform will depend on how fast oil revenues fall and how low they will go, the more severe the faster the pace of reform and the deeper those reforms will be.  

Summary: 

Nations lose their way at times especially times of plenty, they tend to wake up when at the edge of the cliff, and after a period of anger and pain, will start to walk the hard road of reform.  

Crisis like these are important, for they focus attention to real priorities, put an end to sterile philosophical debate, and reignite the entrepreneurial and risk taking spirt of a society.  

Through this process societies will rediscover that the only path to building and maintaining a sustainable prosperous future is by maintaining competitiveness and diligently combating corruption and exploitation in all forms.  

Same will be true for Kuwait, after going through shock, pain and anger, Kuwait will begin a reform process that will eventually produce a new socio, economic and political pack that should set the stage for the nation to start work on a much more efficient and competitive economy. An economy that can produce much more from a dollar of oil revenue than what it currently does, hence managing to sustain economic growth with lower oil revenues, and with time as the levels of Kuwait’s competitiveness and productivity approaches global level’s one should start to see alternative revenue sources emerging.