THE TIMES KUWAIT REPORT
A strong industrial base is instrumental in ensuring economic development, and in promoting inclusive and sustainable development of countries. The United Nations 2030 Agenda for Sustainable Development reaffirms the importance of boosting industrialization, in its Sustainable Development Goal 9 (SDG 9), which calls for building resilient infrastructure, fostering innovation and promoting inclusive and sustainable industrialization.
Goal 9 also underlines the mutually reinforcing relationship between social and industrial development. According to the UN, industrialization has the potential to promote, directly and indirectly, a variety of social objectives, including increasing productivity, creating jobs, generating higher income that contributes to addressing broader, inclusive and sustainable development goals. In addition, industrialization provides opportunities for social inclusion, including gender equality, empowering women and girls, and creating decent employment for the youth.
Industrialization or structural changes within industries that are needed to ensure economic development and promote SDG9, depends to a large extent on the type of trade and specialization that a country follows. Countries such as Kuwait that rely mainly on trade in natural resources, tend to have weak industrial sectors and an economy that fluctuates widely between highs and lows based on international market prices for their commodity, as these prices are dependent on extrinsic factors such as geopolitical events and elasticity in global demand.
On the other hand, industrial product exporters usually enjoy stable and higher prices for their products, as demand tends to be more steady, which ensures a relatively more balanced economic development. To address any trade gaps, as well as security challenges that could arise from a stoppage im import of manufactured goods, natural commodity exporters will have to either ensure their commodity prices remain steadily high, or promote industrial development to domestically produce import-substitute products, and increase export of industrialized goods. Traditional trade theory emphasizes that under an open trade regime, and in order to ensure higher economic growth, countries tend to specialize in the production of commodities for which they have a comparative advantage, and import commodities which are relatively expensive to produce within their borders. However, specialization in resources by itself does not necessarily lead to higher growth rates.
Kuwait is possibly a good example of how specialization in a primary product has not promoted sustained economic growth. Ever since the discovery of oil in the mid-1930s, the country has specialized in the export of oil and its derivatives. However, with the international price and demand for oil fluctuating, at times widely — based on externalities over which the country has little or no control — the economic growth of Kuwait has see-sawed between upswings and downswings or suffered from extended periods of stagnant growth.
Economic reliance on export of a single commodity and its derivatives has also led Kuwait to become a poster-child for a rentier state, where people have become complacent living off the welfare state that was built on high prices commanded by its hydrocarbon exports.This complacency has over the years led policymakers to ignore diversifying the economy, with the result that the country today has a weak and undiversified industrial base.
Existing industries in the country are largely centered around petroleum and petrochemicals, along with a scattering of energy-intensive industries such as cement production and steelmaking, as well as a few factories producing select construction materials. Along with a desalination industry that provides the country with much of its potable water, the state also has a token food processing industry and limited shipyard work.
According to World Bank data, the value added percentage of GDP of industry in 2020 was 45.4 percent, down from the 66.1 percent a decade ago, and a sharp fall from its height of 74.8 percent in 2012. The Bank’s figures also show that the value added annual growth percent of industry, including construction, at the end of 2020 was minus 12.2 percent down from the high of 15.5 percent in 2010. The only time that the country recorded a positive figure in industrial growth over the past decade was in 2016 (3.5%) and in 2018 (2.2%).
Realizing the unsustainability of continuing to rely on a single commodity to fuel economic growth, the government developed its strategic ‘Vision 2035’ that underlines the need to diversify the economy. First envisioned in 2010, the ambitious strategy received a makeover in 2017 to emerge as the KD30 billion New Kuwait infrastructure and economic development plan. However, despite enthusiastic espousal of the plan at the highest level, in recent years economic exigencies and political instability have led to a slowdown in the pace of many development plan projects.
Latest data from relevant government agencies show a significant decline in spending on development projects by various public sector entities. The most recent figures reveal that, with just three weeks remaining to the end of the fiscal year 2022-23, total spending on approved projects amounted to KD338 million, out of the KD1.3 billion provisioned in the current budget for these developments. This expenditure, at just 26 percent of total allotment, is the lowest spending ratio recorded in the past 13 years.
The new government that took office in October 2022, but resigned in January of this year and currently continues in a care-taker capacity, is reportedly looking to ramp-up spending on development projects, following the approval by ministers of an action plan to implement the Kuwait National Development Plan (KNDP) over the 2022-26 period. The plan aims to expedite the implementation of economic, fiscal and socio-political reforms, including by stimulating the private sector, augmenting and expanding non-oil income streams, expanding the stock of housing, and developing the northern area of Kuwait into an economic zone. In this regard, the BF9 Industry Day Summit and Exhibition, held in Kuwait at the start of February is highly relevant, as it brought together participants from the government and industry to collaborate and network on issues of mutual concern.
The event was organized by the Business Forums 9 (BF-9), which includes the business councils and forums of nine countries — The US, The UK, Spain, Portugal, Lebanon, Germany, France, Canada, and Australia. In his keynote address at the Summit, Secretary-General of the Supreme Council of Planning and Development, Dr. Khaled Mahdi, pointed out that the long term ‘Vision 2035 New Kuwait Development Plan’ seeks to diversify the economy beyond hydrocarbons, incentivize the private sector so as to increase its growth and participation in GDP, transform the government’s economic participation to that of an enabling role, achieve sustainable development goals, and improve Kuwait’s global competitive index.
Acknowledging the World Bank figures that show value-added manufacturing’s contribution to GDP fell from 7.5 percent in 2017 to 6.6 percent of GDP in 2020, Dr. Mahdi indicated that the mid-term KNDP 2022-26 would attempt to address this shortcoming. Among the policy initiatives aimed to boost value-added manufacturing are developing economies of scale, aligning and incentivising priority sectors, developing a national industrial strategy, and establishing sector-specific industrial parks.
Speaking on the same occasion, and underlining the importance of industrialization and investments to help diversify the economy, Assistant Director General for Investment Operations at Kuwait Direct Investment Promotion Authority (KDIPA), Sheikh Abdullah Sabah Homoud Al Sabah, noted that Kuwait has several projects in the pipeline that aim to bring in more foreign direct investment and diversify the economy away from its reliance on hydrocarbon revenues. Pointing to upcoming projects such as the Abdali Economic Zone in northern Kuwait, Al Naayem Economic Zone around 75km to the west of Kuwait City, and the Al Wafra Economic Zone in the south, Sheikh Abdulla indicated that the economic zones, along with other projects coming up, would help promote industrialization, catalyze economic diversification of the country’s economy, and create employment opportunities for citizens.
He predicted that these projects would also increase the role of private sector in the economy from its current 30 percent to over 40 percent by 2035, create more than half million new jobs, and increase the number of citizens employed in the private sector to 69 percent. Sheikh Abdullah added that this would support the transformation of the current national employment scenario, where only 5 percent of the national workforce are employed in private sector, while nearly 80 percent opt to work in the public sector.
In the second session of the Industry Day summit, Eng. Nayef Alhaddad, head of Research and Strategic Planning at the Kuwait Authority for Partnership Projects (KAPP), elaborated on the country’s public-private partnership (PPP) framework, and highlighted some of the milestones that Kuwait has achieved through the Public-Private Partnership (PPP) program. He also revealed some of the upcoming projects in the pipeline, including Al Zour North phases 2 and 3; Al Khiran phase 1; Al Shagaya Renewable Energy Complex phase 2 and 3; North Kabd and all related works; and the Fixed Communications Network Project.
The economic diversification plans being implemented and on the anvil, such as the upcoming new industrial zones and new public-private partnership projects, promise to attract foreign investments and provide employment opportunities to nationals. However, attracting citizens to work in the private sector will require more than just providing opportunities to work, these potential jobs will also have to be saddled with the right work conditions, and salaries and perquisites similar, if not better than that offered by public sector entities.
The significant disparity that exists in salaries and benefits between nationals working in public and private sectors has been a major deterrent to more citizens opting to work in private enterprises. In this regard, media reports indicate that among the reforms and aspirational objectives being considered by the new government as part of its mid-term 2022-26 development plans are restructuring public sector wages and tapping new sources of financing, including through debt issuance.
But both these reforms are highly contentious issues that have been stonewalled by legislators in parliament over the past many years.
It is obvious that attaining any aspired reforms and implementing planned developments to diversify the economy will be largely contingent on the government reaching an amicable understanding with the opposition in the National Assembly to embark on a new era of positive, constructive cooperation. Achieving the aspirations of Vision 2035 will also involve engaging with all elements of society, and will need everyone to work together for the overall benefit of the country and its sustainable future.
However, viewing the prevailing political environment, it appears that realizing the aspired development goals anytime soon will remain as distant as ever.