Seung Jin Baek, Ph.D.
Chief Economist
United Nations in Kuwait

When deciding how to diversify Kuwait’s economy, I would start by focusing on three core areas. First, Kuwait can aim to reduce oil-related activities. However, the question may then ask whether the country would simply force oil companies to reduce their oil refinery and production volumes? If oil companies were willing enough to do so accordingly, then Kuwait is likely to experience serious, albeit short-term, fiscal challenges given the fact that around 90 per cent of the country’s fiscal revenues currently stem from oil export revenues. In this regard, Kuwait would most likely prefer to redirect oil-related activities into more sustainable ones by institutionalizing the following three modalities.

The first is to provide incentives to oil companies, which could fill the expected revenue gap resulting from the reduction of oil activities, for instance, through tax incentives or regulatory governance that can allow their operations to be expanded into the non-oil sector. This can be considered an initiative towards “diversification” while at the same time balancing the sectoral shift.

The second is to promote carbon tax initiatives and Environmental, Social and Governance (ESG) reporting as well as possibly supporting the adaption of green technologies that can be of immediate benefit to business operations. Such an approach will be the first yet the most fundamental step towards putting the country on the path of “green growth”.

The third is to implement awareness raising initiatives related to the reduction of CO2 emissions and further link these to public health concerns. These initiatives should primarily target the general public, academia, civil society organizations and especially youth. This approach is particularly crucial as community-demand can be one of the most effective nudging tools for behavioral change at both the consumer and corporate level.

Second, Kuwait can simply target an increase in non-oil sector activities. Considering the relatively small domestic market, it is wiser to focus on two development dimensions in this regard, namely the construction sector and private sector engagement.

Construction can be one of the most effective sectors for non-oil sector growth in Kuwait. However, question marks may be raised as to where the technical engineering capacity would come from with respect to handling such projects. Unfortunately, the most likely answer is abroad, meaning that Kuwait may have to rely heavily once again on technical expertise from outside the country. As a result, Kuwait is unlikely to establish a core of expertise, and therefore the vicious circle of relying on external engineering expertise is thus also likely to continue for a while.

It should be of the upmost urgent consideration to develop a home-grown engineering capacity capable of internalizing this up-until-now external expertise and strengthening the national knowledge base accordingly. This is not a simple task and requires mid- to long-term investment in education especially in the area of Science, Technology, Engineering and Mathematics (STEM). In this regard, only about 30 per cent of students major in STEM-related subjects whereas the majority are enrolled in the field of arts and humanities, with the aim of finding public sector employment after graduation due to higher wages.

In a broader sense, making human capital more productive and relevant to the labor market context is imperative. It may be somewhat surprising that for Kuwait, only 24 per cent of national wealth comes from human capital accumulated internally whereas the global rate reaches over 60 per cent. Tackling this would require interconnected interventions into various dimensions simultaneously, including early childhood development, pre-primary, primary, secondary and territory education systems, and even Technical Education and Vocational Training (TEVT) to align with labor market needs. In addition, maximizing human capital for youth and women should also be a critical consideration.

As for private sector engagement, attention should focus on how this can lead the country’s development process. Three key aspects can be explored in this regard.

The first is to create a conducive environment where private companies can easily partner with oil companies who plan to expand their business into the non-oil sector. This should be further encouraged by various government authorities in the form of Public-Private Partnerships (PPPs), which can be expanded into collaborations in social infrastructure projects regarding the likes of school, university and medical facilities, among others.

The second is to remove any unnecessary regulations and administrative requirements that would not be beneficial for the private sector to respond timely to the rapidly changing business environment. As such, it would be practical to address a number of factors affecting institutional bottlenecks, clearly articulated by sub-indices under the ‘Doing Business Index,’ as part of efforts in reshaping sustainable and innovation ecosystem.

The third is to prioritize the national policy agenda for attracting foreign capital. Note that Kuwait is ranked last among its GCC peers in terms of foreign direct investment performance. In other words, it is widely accepted that the less the inbound foreign capital is, the less likely innovative ideas and technologies will contribute to the development process.

Embracing this logic can further imply that the private sector in Kuwait may not be competitive enough to compete in the global market. Partly owing to such, this may explain why the country’s youth would prefer to work in the public sector than in the private sector or why many of the country’s young people appear to lack an entrepreneurial spirit with innovative in mind.

Lastly, most of these societal problems and the persistent challenges surrounding diversifying Kuwait’s economy are likely associated and/or embedded in the country’s rentier welfare system. Kuwait’s rentier welfare system appears constrained by a path dependence (e.g. oil-based and an external knowledge-dependent growth model), implying that a societal shift moving away from an exclusive focus on such traditional growth model will likely encounter strong resistance to change. With this in mind, restructuring the rentier welfare system cannot be done in the short or medium term.

The positive news is that the Kuwait National Development Plan 2020-2025 is already in place. Mindful of this, a type of transformational process will likely be determined not externally, but rather internally. In the next few decades, Kuwait’s economy will be greatly shaped by development planning strategies of integrating, prioritizing and/or sequencing policy interventions among the three dimensions of sustainable development (social, economic and environmental). So, let’s start with gradual change, and embrace the digital transformation era that is already upon us, and to collectively envision Kuwait’s society underpinned by the core principles set out in the country’s Vision 2035.

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