The Socioeconomic Background of Kuwait - Term Paper Example

The Socioeconomic Background of Kuwait Introduction: Kuwait lies on the northwestern shore of the Arabian Gulf. Saudi Arabia abuts to the south andwest. Iraq also borders Kuwait on its northwest. The country of Kuwait covers 17,818 km2 or about 7,000 mi2. Its mainland terrain is mostly flat desert, but Kuwait also owns several islands in the Gulf such as Bubian, Warba, and Filikah. The weather is typical of the desert with hot and dry days in the summer (35° -- 49°C) and cool in wintertime (5° – 18°C). At the end of 2004, the population of Kuwait stood at 2.75 million (Public Authority for Civil Information, 2004) with more than 60% being foreigners working in the oil-based economic sector. Kuwait’s official language is Arabic, but English is widely spoken. The Kuwaiti Dinnar (KD) is the official currency, and it is further divided into 1,000 Fils. The average exchange rate is 0.3KD:$1.00US. Kuwait is an Islamic country. Most of her citizens worship in mosques around the country and follow the principles of Islam which also provides a legal foundation for the country. Kuwait adopted a democratic constitution in 1962 that guarantees freedom of liberty, speech, press, and worship. Kuwait is governed by an emir of the al-Sabah dynasty and a fifty-member National Assembly. The National Assembly holds much of the power and has played a critical role in the political, economic and social development of Kuwait. Much of Kuwait’s importance derives from its geographical location as the gateway to the Arabian peninsula. Linking the desert and the ocean, its strategic position has led to Kuwait’s development as a significant trading center. The Early Years: At the beginning of the 1700s, immigrants from Saudi Arabia came to the area that is now Kuwait. They settled in small villages and at that time only a few thousand people lived there. They took advantage of Kuwait’s strategic location and began trading goods. In 1756, the leader of the al-Sabah family became the first Emir of Kuwait, and his ancestors have ruled continuously to the present day; the current Emir is sheik Sabah al-Sabah, the thirteenth in the line. Kuwait continued to grow as a commercial center in part because of political turmoil and war between Persia and the Ottoman Empire. This caused a number of trading families to relocate, and these families played anbig role in the commercial development of Kuwait (Alsabah 1980). England’s East India Company also fled the instability in Basra, Iraq and set up a new headquarters in Kuwait to act as a terminal and staging area for goods from east India to England. In 1875, the Suez Canal opened, and the East India Company left Kuwait, but by then, the country had grown and developed. The economy had also diversified somewhat. Pearl diving, fishing, and sea transportation became the foundation of the Kuwait economy. Small family-run businesses carried out these activities without large amounts of working capital; income on a per capital basis was low. The most important industry was pearling which was the economic base of Kuwait and the entire Arabian Gulf. Pearls were exchanged for primary products and consumer goods from India and Bahrain. Pearling employed the most people and also contributed the most to the economy. For example in 1920, 25% of the population was employed in pearling (Al-Fraih, 1993). The industry declined in the 1930s when Japanese pearls overtook the world market. Kuwait’s strategic location was also conducive to seafaring and trade. Kuwaiti vessels plied the entire Indian Ocean carrying passengers and cargo among Iraq, India, and the east coast of India. One of the principle commodities was date; they were loaded in Basra Iraq and traded throughout the Arabian Gulf and India. Of course to carry out this trade and collect pearls, the Kuwaitis became excellent boat builders. Indeed, Kuwait became the boat-building hub for the entire Gulf. Woods for construction was imported from the coast of Africa and south Asia. Fishing -- another related activity – also became an important means of employment. The Arabian Gulf contains rich fishing grounds, and seafood is a major part of the Kuwaiti diet. In those early days, the private sector with its numerous family businesses dominated the economy, and government revenue depended on corporate and personal taxes. Before oil was discovered, the Kuwait economy depended on fishing, pearl diving, seafaring, boat building, and sea trade, all of which supported the Kuwait economy, from its establishment in the 1670s until the outbreak of the Second World War (Alsabah, 1980). The Discovery of Oil: In 1934, the world’s industrial economies needed oil to continue expanding. The Anglo-Persian Oil Company which is now known as British Petroleum Limited formed an equal partnership agreement with Gulf Oil Company and the Kuwait Oil Company to drill for oil and develop the world market for Kuwaiti oil. By 1938 commercial-sized fields had been drilled, and the first commercial quantities were shipped in 1946. By 1948, Kuwait had awarded concessions to a US company Aminoil for offshore exploration and production, particularly on Kuwait’s islands. Then, in 1958, a Japanese trading company created a subsidiary called the Arabian Oil Company which also received a concession for offshore exploration and development. Two years later, the government formed a 60%/40% joint venture with the private sector called the Kuwait National Petroleum Company (KNPC). By 1975, the Kuwait Oil Company had taken over the partnership with British Petroleum and Gulf Oil and became the sole owner. In 1977, the Kuwait government took over the reins of Aminoil bringing the entire oil industry – except the Arabian Oil Company – under its control. A few years later, the government formed a holding company Kuwait Petroleum Corporation (KPC) to unify the industry. Now KPC pumps, refines, and sells oil on behalf of the people of Kuwait (Al-Omar 1990). The discovery of oil and its associated revenue led to many changes in Kuwait. Not only has national income increased but also the entire society has been transformed. The revenue has enabled the building of infrastructure and has facilitated the whole process of nation building. After reinvestment in oil production, Kuwait has had the opportunity to develop its infrastructure and to invest in other sectors of the economy like education, real estate, finance, and health. Further, the economy has grown at exponential rates, attracting additional foreign investment into the country. The increase in international trade has enabled Kuwait to increase imports of luxury food and consumer goods. With all these strong effects, it is not surprising that scholars divide the Kuwait economy into two periods: before oil when resources were limited and after oil when the economy has grown and brought prosperity (Alsabah 1980; Alkurafi 1988). The Domestic Economy: After the discovery of oil, the national income of Kuwait rose steadily. During the 1970’s the price of oil went to relatively high levels with a corresponding increase in GDP. For example, data from the Ministry of Planning and the Central Bank of Kuwait show that GDP grew from KD 3,485 million in 1975 to KD 7,755 million by 1980 a 123% increase. During this time, all sectors of the Kuwait economy grew rapidly. In fact, the non-oil GDP grew by 160% over the same time period. Kuwait witnessed a huge increase in government investments in both the oil and non-oil sectors. The Kuwait government pumped money into highways, health, education, water systems, and electricity. In the 1980s the world price of oil began to decline, as did the national income of Kuwait. However, the government had already committed to high levels of expenditure. In 1981, the Iran-Iraq War began, and the Kuwait government had to shift more and more resources to arms and the military which put a huge strain on the financial sector. The war also severely inhibited trade in the region making it even more difficult for Kuwait. In late 1982 the stock market of Kuwait began to plunge and soon collapsed. With the crash which was called the Mannak crisis, came a screeching slow-down of the economy that lasted for years, and a huge number of businesses were forced to declare bankruptcy. During this period, the price of oil dropped to below $10 per barrel. This steep decline led to a decrease in revenue from $6,000 US million in 1982 to $3,000 US million in 1989 with a concomitant drop in GDP of 46% from KD 5,997 million to KD 2,805 million (CBK Quarterly Bulletin). Then Iraq invaded Kuwait in 1990, and everything fell apart. Iraqi troops poured over the border and occupied Kuwait for nearly seven months until US troops drove them out in the Desert Storm War. The invasion and its aftermath destroyed much of the productive capacity of the oil sector along with roads, bridges and other infrastructure. More than 700 oil wells were destroyed. The period after the War was difficult for Kuwait. Reconstruction depleted most of the country’s financial reserves, and Kuwait’s position in the world economy suffered. However by 2000, the economy had more than recovered, and GDP reached KD 11,356 million. Although GDP fluctuates from year-to-year according to changes in world oil prices and Kuwait’s share of OPEC production, GDP has risen steadily over the last four years, and the economy has diversified. Indeed, more than 50% of GDP in 2000, for example, came from non-oil sectors. Of course, the current sharp increases in oil prices will continue to benefit the economy and people of Kuwait. Unique Features of Kuwait’s Economy: The economy of Kuwait is unbalanced because of oil’s domination and the fact that the Government owns the entire sector. Indeed, the Government has become one of the largest employers in the country and controls much of the country’s economic and financial development. In fact, the Kuwait Government has an ambitious human resource development programme to ensure equal distribution of the wealth among her citizens. The programme provides free education, health care, and interest-free housing loans. These social services are Government’s major priority and carry a correspondingly high expenditure. Even so, Kuwait maintains a very low tax regime. The best-paid jobs in both public and private sectors are reserved for Kuwait’s citizens. This is an important policy because Kuwait’s investments in its citizens have attracted many immigrants. The total population has risen very sharply from 150,000 in 1949 to 2.75 million people in 2004, but only 40% is Kuwaiti. The influence of foreign workers becomes apparent in labour force statistics: in 2005, 75% of the 1,634,000 workers were non-Kuwaiti (Public Authority for Civil Information 2005). Rapid expansion of the economy led to creation of jobs that Kuwaitis cannot fill because the domestic population is just too small to satisfy the demand. The Government employs about 80% of the Kuwaitis; foreign labour is almost exclusively restricted to manual jobs in the private sector, particularly the oil fields. Experienced labour from overseas is therefore essential to the Kuwait economy. Oil still dominates in Kuwait. It is the main source of revenue for the entire country and the funder of goods, services, wages and other development initiatives. Oil accounts for 90% of exports, 88% of Government budget revenue, and 50% of total GDP (Central Bank of Kuwait 2004). This leads Kuwait to maintain a very open economy because the country depends on the rest of the world to satisfy its consumption needs. Indeed, with so many expatriates living and working in the country, imports of primary and consumer goods is even more important. So far, the Government is committed to maintaining high levels of imports, but it is a weakness. The Kuwait Government is also committed to diversify and is currently investing in non-oil development to reduce dependence on oil. Even though prices are currently at historic highs, the price of oil depends on world supply and politics and cannot be controlled by Kuwait. Kuwaitis remember well the late 1980’s when the price of oil dropped to below $10 US, and Kuwait could not maintain its development programs. In the long term, stability of the economy depends on diversification. Conclusion: Before oil was discovered in Kuwait the economy depended on small family-run businesses. Trade and marine activities like pearling, boatbuilding, and fishing were pillars of the economy, and incomes were small; Government depended on tax revenue. After the discovery of oil with windfall profits for Kuwait, infrastructure and more comprehensive development plans have been put into place. In the long term, Kuwait needs to diversify its economy and reduce the domination of oil. Read More