The Rentier State of Kuwait

Prepared for
DR. Marta M. Trynza

By
Group # 10
Mohammed Mal-allah
Mohammed Hussein
Saleh Al-Rashaid
Mohammed Al-Hayyan
Abdulla Al-Oraifan

16th of July 2012

Abstract
Kuwait is state country used to get its income through sea activities like Pearl diving and trading with other countries like India through Families of traders. These families have provided the necessary tools for the country to survive and providing products and service that.
After the discovery of oil in 1930s, the country has enjoyed a new source of income that would make the government independent from taking taxes the private sector.
Currently, the state is having great resources of funds that would provide an easy life for the citizen, since the price of oil went on increasing through the last century. Until recently, 2008-2009 the price of oil has declined and it was a warning that the state is actually depending on oil too much.
This paper I will discuss the rentier state aspects in Kuwait and the process that under gone to become one. By describing the both Public and Private with the Kuwaiti society. And finally, suggestion to mitigate the effect of the rentier effect on the Country.

1. Introduction
Rentier state is an economic term used prevailed in the20th century. Describing the states which are dependent on external income and revenues originated from the process of selling abundant resources or renting. In our case, we will talk about Kuwait and how close to the reality of Rentier state aspects.
Hazem Beblawi addressed 4 important properties that distinguish a rentier state from normal one:- 1- The rent represents and has substantial presence in the economy of the state. 2- The government (or state owned company) is the recipient of the income. 3- Minority of the population work in the rent process. 4- The rent process predominate the economy, but not necessarily pure rentier economy.
In this paper we shall connect the dots of the rentier state and show how Kuwait does fit as an example. By analyzing the aspect of Society, public and private sector. And suggest the proper corrective actions.

2. Brief history of Kuwait’s economy
Al-Sabah, before the discovery of Oil, never had the resources nor the funds to take care of the state. At that time, the ruler were dependent on funds and taxes that came from traders such as Al-Khorafi family and Al-Ghanim family. Also, it was very common of the Al-Sabah to take advice from the members of the private sectors.
At during 1950s, the traders created the necessary means of life in Kuwait and by establishing companies that provided country with service and jobs to the state’s citizens, for example Kuwait airways and KNPC. Furthermore, these establishments were created jointly with government by using the income originated from Oil sales. Also, the state bought out the shares from its foreign partners BP and Gulf Oil Co., so that the state can control and cease reliable source of income.
Later in the 1970s, when the oil prices spiked from 3$ up to 12$, as a result of increasing the income of the oil, the government went ahead and bought crucial facilities and entities that were partnered with the locals. Most important were oil related companies, such as Kuwait Oil transportation Co. (vessels), of Kuwait National Petroleum Co. (the refineries) and most importantly Kuwait Oil Co. This step, the government pushed the private sector from the process extracting Oil and processing it.
These actions made the local entrepreneurs shift towards different range of markets in Kuwait, Mainly Real Estate, Hospitalities and financial markets in 1970s. this process made the state independent from the private sector, and eliminated the need of imposing taxes on them. At that time, Kuwait government have gained the control over the crucial facilities in the state and monopolizing it, such as providing gasoline, water and electricity. Being the sole provider of crucial services and fund provider.
This led the citizens and private sectors to grow more dependent of the government in taking of the problems that were created by them. For examples, 1980s Kuwait’s financial meltdown “Al-Manakh” took place and resulted the government to intervene and fix the mess.

3. The Public sector
The government plays a major rule the theory, where it sells oil and related product on average of 2.5 million barrel per day. Being that said, the sales from Oil are the most major, if not only, income for the Government. When, the price of energy commodities is most fluctuates according demand and supply, therefore, the country’s wealth is neither inconsistent nor stable.
Last decade, the country enjoyed boom in oil prices, reaching above 100$ per barrel. Although, there were no significant development in the state ,unless it either took longer than any other neighboring countries, or being finished with unmet results. For Example Jaber Stadium. Also, lack of leadership in a bold sense that not only to address these issues but to take action. This can be described as the Paradox of the plenty.
Public service and facilities which were built 1970s, such as hospitals, electricity and higher education facilities, cannot meet current needs and demands. New blocks are being built with no hospital to accommodate, nor electricity to meet new resident’s needs and demands. For Example, Jahra in 1980 had 100,000 residents, and in 2010 that number reached over 400,000. All pressure on a single hospital.
In 2007, there was an automatic cut of electricity by the Ministry of electricity and water. Until now, there aren’t any significant developments for that matter.
Kuwait remains and considered a classic rentier state with depending and living only on the petroleum resources and that has to represent 90% of the all revenues for the state without any ability to diverse the income. We can assume the following of Oil dependent state * Advantages: * Getting easy money and high revenues from oil extraction. * Giving more stability and security for the citizens because most of the necessary services and products are supported. * Citizens are not asked to pay the taxes. * Disadvantages : * Depending only on one resource price put the state under risk of oil prices. * It frees the government from accountability and lead to a group of power. These will be shown in following table and charts.
Summary table of Kuwait’s government income and spending
In Kuwait the government using and benefiting oil revenues in spectacular ways ,The ministry of finance in Kuwait shows the oil revenues figures since fiscal year 2007 to 2011 going from 17 Billion, then peaked at 19 billion, on the following decreased to 16 billion, and by 2011 ending 8 billion KD .All figures come from oil income and the government earnings share has been over than 90% until 2011 which ended 89% . with all this Kuwait still a rentier state which that figures shows that almost 90% of government income comes from petroleum accounts .
It is very clear that the government or the public sector in Kuwait has a lack dependency on citizens support, because the state relying directly on the oil and country like Kuwait which almost all exporters come from oil has and get all the revenues from it, has to support most of goods and services that provided to citizens, such as electricity, water, education, health care …etc. , The government and public sector are playing the biggest role for on this .

The image reflects the Income of the government. The blue represent the contribution of oil income. And the red is the other income, from taxes and fees.

This charts compares between the total income and the total spending of the state. As you can see, by 2011, government’s spending overcame the income of the state, due to oil prices as Minister of finance explained.

In order tackle this issue, it should promote and emphasize other external sources of income on national level. The government should be a major player, as it is a major provider of Oil and energy. As for the spending and expenditure is to have an efficient and effective government control over the spending and development of the state. Also, implementing a taxation system to private sector. That is to diversify their source of revenues.

4. Society
As a state provided great benefits to the citizens such as providing homes and sending patients abroad for medication. Even it went beyond that, the country dropped service bills like phone and electricity usage on citizens. Such decisions will encourage the mentality of the rentierism, as it gives the citizens the impression that the government should spend all its income on the citizens’ welfare.
Also, some Kuwaitis abused their right and benefits. Such abuse can be describe as selling “rights” of lands to others after acquiring from the state that almost costs nothing.
Furthermore, the there’s lack of basics Financial-knowledge in the state among the young. For example, when I used to work at the bank, most of customers were grade school education. Single 18~20, they almost always took the maximum allowable loan. And what’s worse, they waste money on travelling and living a false dream for a month. Then they come back accusing the bank of stealing his money. That became the norm among Kuwaitis and an anxiety. Even a parliament member cried out”drop the loans” as a campaign. Due to that, the government created a fund to reschedule to anyone who has problems of paying debt, and put new restriction and rules on banks for handing out loans.
In short, people always call the government to solve their problems, in the same time, they abuse their given privileges.
As the wages of oil sector labor increases, triggered others to display demonstrations and artificially raises their salaries (Public demonstration of teachers, Customs..Etc.) To a stage that the income does not reflect the actual performance of positioned employee. For example, the demand for increase in the pay slip of teachers can be met with an extra hours of tutoring in order to meet price of the raise.
The skipping work and Calling-sick have become the normal behavior for society as a whole. But what are worst, Faking sick leaves has become the norm, and also as an excuse to run from any questionable act or serious of misconducts. The number of sick in year 2012 were approximately 420,000 days, which costs the government over 5 million KD according CSC.

On another case, most of the work forces in Kuwait work force 78% of them are in public sector and the rest in the private. Reason is that most of workforce prefers an easy job that doesn't have many demands or job requirements which directly can be reflected lack of "competitive spirit”. In which the working in public sector gives almost similar benefits and rewards for who works in private sector. Therefore, avoiding market risks and working hard in competitive market can be a reason of avoiding the sector as a whole.
The mentality of rewards and incentives in Kuwait, as work performance is not connected with reward. Showing at work is enough to earn a bonus and "excellent performance" certificate at any public authority or state owned company.
Almost everyone is a white-Collar; there aren’t enough local workforces with technical knowledge or the skills to engage in the process industrialization of the country. Then, in order to meet the domestic needs, foreign professionals and skilled workforce hired.
True development of a state can be reached by embracing the work ethics and emphasize the ideology of rewards and incentives to who achieves the target. Also, the managers and the supervisors should be accountable when giving bonuses. Finally, there should a clear message and rules when in labor law.

5. Private Sector

As mentioned before, the private sector played a crucial role in providing the necessary tools for the government of creating myriad of crucial facilities and establishing them such as the oil companies.
Yet, after the government bought their shares and compensated them, the private shifted towards different markets, but mainly Finance and real estate.
This shift surely did benefit the entrepreneurs on different levels, but not the state and the citizens. The banking sector in Kuwait one of the biggest in the Middle East, and enjoyed in relaxed regulation from the central bank in selling loans, which a payment of could take up all the salary. This created the problem of inability to cope with such condition. Also, almost all banks encourage and push employees to sell loans targeted toward younger customers. Selling them false mains of wealth and ruin their lives. That resulted some anxiety and some social unrest and demands were raised by the parliament to “Drop Loan”. Due to that, the government created funds and programs to help the Kuwaitis with loan payment difficulties.
On the other hand, the real estate prices have been increasing during the during up to a level that no one could afford the necessary funds to acquire, by taking a loan from the government and another from a bank (during the relaxed restrictions). That resulted inflations in prices of lands. Also, the supply of land low in Kuwait against to ever increasing demands for homes.
Besides these two markets, the Kuwait State another problem, the leakage of funds. Can be described as the following: a retailer imports good for example 100 KD, and sells it locally for 120KD. Then, the net income for the importer would 20 KD. But the process resulted a leakage from Kuwait funds of 100KD to the imported country. This can have discouraging impact on Kuwait’s GDP. Since most of the goods and products are imported from abroad.

As you know that the state of Kuwait offers a lot of advantages for private sector .Perhaps these advantages may not exist in other countries. Despite that the government offers to private sector, however, the share of private sector from the total Gross Domestic Product do not represent only small percentage 8.8%.
The reason for this decline due to poor planning in the development of private sector and also depends on oil sector wholly owned by government. The percentage of total revenue from oil sector about 95%, which makes it extremely risk, especially as the oil prices are always fluctuating. There are several factors provided by the state to the private sector such as Tax exemption, the provision of industrial land, subsidy of electricity and water, fuel prices, support the national labor force and government financing.
The emergence of oil changed the mechanism of Kuwait, which the rent became first source of the revenues and Kuwait became a rentier state because its income depends on specific sources such as oil. The revenues from oil increased from $760 thousand in 1946 to $567.5 million in 1965 and in 1976 the revenue was $9.8 billion which it represents 70% of the total GDP, and this income is distributing to its citizens. The following chart shows the percentage of each source that Kuwait depends on it in 2009:

5.1 Encouragements to enter the private sector

This increase can affect the income because as a rentier state, Kuwait depends on the increase of the oil profits.
As you know that the state of Kuwait offers a lot of advantages for private sector. Perhaps these advantages may not exist in other countries. Despite that the government offers to private sector, however, the share of private sector from the total Gross Domestic Product do not represent only small percentage 8.8%.The reason for this decline due to poor planning in the development of private sector and also depends on oil sector wholly owned by government. The percentage of total revenue from oil sector about 90%, which makes it extremely risk, especially as the oil prices are always fluctuating. There are several factors provided by the state to the private sector such as Tax exemption, the provision of industrial land, subsidy of electricity and water, fuel prices, support the national labor force and government financing.
5.1.1 National labor force support
Kuwait government has established Restructuring Program for the national labor in 1997. The Restructuring Program support and encourage national labor to work in the private sector through media campaign to change the perception about working in private sector. The program paid financial benefits for workers in private sector, including social allowances and children as well as cost of living and instead look for work and any other financial gains enjoyed by the public employee. The program is also contributing to carry the cost of training courses that aim to develop the capabilities of those at the head their citizens working in the private sector companies.
In the private sector aspect, a State of Kuwait considers a rentier state because it enhances the private sectors by providing financial supports for Kuwaiti people who work in the private sector within Program of Restructuring of the Workforce and these supports come from the oil revenues. In the beginning of 2012, the government decided to raise the financial supports as a support the high cost of living, the following table shows the increases that will be happened on the Kuwaiti salaries who work in the private sector: The Monthly Increase on the Financial Support | Series | Academic Qualifications | Proposed Increase (KD) | 1 | Bachelor (Medicine-Pharmacy-Engineering) | 330 | 2 | Bachelor (Business Administration Majors) | 280 | 3 | Bachelor (Other Majors) | 230 | 4 | PhD degree | 75 | 5 | Master degree | 75 | 6 | Diploma - High school with two years training or more | 190 | 7 | High School or Diploma after Intermediate | 140 | 8 | Intermediate | 100 | 9 | Without qualification | 50 |

5.1.2 Tax Exemption
The tax exemption one of the most important in the study any new project, so we find a lot of feasibility studies reject the projects because of the cost of high tax. In many countries that apply law of tax, they exempt tax for charitable organizations and small businesses unlike state of Kuwait. In Kuwait, There is not tax imposed on profits of projects whether non-profit organizations or profit organization. Thus, the state of Kuwait loses part of income while most countries depend on tax income to foster their budget. On the other hand, there are many advantages of tax exemption, are as follows: * Encouragement of investment projects in state of Kuwait. * To reduce the additional costs imposed on the project. * Encourage the owners of small businesses and entrepreneurs.

5.1.3 The Provision of Industrial land
The State of Kuwait offers industrial land to who has an industrial project by Public Authority for Industry. Public Authority for Industry provides industrialists lands low fees paid annually. These lands valued millions of Kuwaiti Dinar but the government gives the land to encourage industry sector in Kuwait where the rental value of per square meter 200 fils annual. Any industrial projects in Kuwait are exempted from custom fees especially in the import of machinery and equipment. The Public Authority for Industry distributed to the private sector about 1094 lands in Shuwakh area, Sabhan,Alrai, Abdulla Port, Shueaba area and Um Qarah. The objectives of The Public Authority for Industry are as follows: * Encourage and protect domestic industries. * Diversity sources of national income. * Support , encourage and develop industrial craft
5.1.4 Subsidy of electricity and water
State of Kuwait provides electricity and water for private sector projects at low price.
Electricity Prices: * 2 Fils per Kilowatt for the existing projects in Sabhan, Um Qara,Alrai and Shuwakh area. * 1 Fils per Kilowatt for the existing projects in Shueaba and Abdulla Port.
Water Prices: * 250 Fils per liter for the existing projects in Shueaba and Abdulla Port. * 800 Fils per liter for all others industrial areas.
5.1.5 Support fuel prices
State of Kuwait support fuel prices for private sector projects at low price, fuel prices as follow: * Gasoline :60 Fils per liter * Oils :350 Fils per liter * Kerosene:55 Fils per liter * Diesel:65 Fils per liter

5.1.6 The Governmental Financing
Kuwait government has established Industrial Bank of Kuwait in the December 1973 by the ministry of finance. Industrial Bank of Kuwait aims to support private sector through providing concessional financing and banking services to encourage private sector in industrial sector. Industrial Bank of Kuwait offers industrial loan, commercial finance, Islamic financing and agricultural finance at low interest rate about 2% annual. It has financed 907 projects since 1974 until 2011 for a cost of 930,000,000 million KD There are several factories that take benefit from the government, such as:
The Kuwait Danish Company (KDD)
Website: www.kddc.com
Product: Dairy products-Food products
Start date:1966
Total finance: 5,575,547 KD
Insulating Material Plants Co.
Website: www.isofoam.com
Products: Isolation Materials
Start date: 1974
Total Finance: 1,000,000
Al-Ahlia Plastic Co.
Website: www.babtain.com
Products: Plastic derivatives
Start date: 1975
Total Finance: 1,251,000

6. Recommendations for Public sector
There are many approaches to mitigate the rentier effect in Kuwait and it should happen to find other sources to diversify its income sources and decrease its dependence on oil. As a rich country, Kuwait can changes its agriculture soils for better like the farms in Al Wafra and Al Abdaly, and it can be another income source for the country by increasing the agriculture production and exporting to other countries.
In addition, Kuwait should privatize many places which the companies can share it with the government. For example, when Kuwaiti government privatizes the sport clubs and have shares with companies who will own it, it will reduce some expenses on the government and the majors will cast on the company. It is the same case with Kuwait Airways, because of many losses that the company is facing it, the Kuwaiti government wants to privatize Kuwait Airways to reduce these losses and to maintain the financial position and operation performance of it by letting private company manage it.
So, privatization is the answer for Kuwait where it will lower the expenses and increase income to the Kuwaiti government which it can be another source of income for Kuwait. In addition, privatization of government agencies is to support the private sector and increase income without facing large expenditures for Kuwaiti government.
Finally, the state should recognize the private as a partner in developing the country as before. They have created the stated backbones and provided the tools to engage in the oil industry. Therefore, their importance cannot be ignored anymore.

7. Recommendations for Private sector
Reinter states have all the cards to start business on international in giving services to other countries. For example, Kuwait has Zain telecommunications Company. A company that has a large market shares in the African and the Middle East regions. The state should emphasize its efforts to increased their share of global market and enter new realm for greater opportunity by serving communication mains. Also, the cost of these kinds of company conducted almost from fixed cost and the variable are customer’s service.
Buying out other businesses is also a good idea to start grow and enter new markets. Agility logistics, a company owned by Al-Sultan group. Have been enjoying successful years. Ever since appointed as a contractor for the US troops and provides logistic services. Also, the company went on buying other companies from different countries and in order to become major logistic provider with cost effective and yet efficient in delivering time.
On another level, Building new schools and universities in Kuwait will boost domestic economy in many ways. Because, foreign students will need a place to accommodate and other life necessities for more than 3 years. This will result new areas to be built with new shops and services to be provided. And finally, a new external income for the whole state. Also, it will help Kuwait income to decrease leaking its funds out of the state.
In a nutshell, Kuwait cannot compete on manufacturing, due to lack of material and the important expertise. On the other hand. Kuwait can be seen as service provider.

8. Recommendations for Society

The problems that were mentioned were solved partially. Thumb machine were inserted to control the attendance. But that did not solve the absence nor the signing in and out at the beginning and the end of the working hours. Neither misuse of state facilities.
Schools as well homes should embrace the ideology of work and honesty to children. This problem can be seen as an ethical. The government should do a long term media campaign to fight the ethical dilemma and show.
Another suggested solution to solve the behavior of retierism is to educate people. Even more, incentive should be granted to encourage people to take technical and scientific degrees. The problem is that, there’s only one facility that is specialized in scientific matters, Kuwait University. Also, the process of getting high education is damage and stained with bureaucracy and lack of facilities to accept more students. A solution would be giving new licenses to build new universities an schools, even provide the necessary facilities from lands to loans.
The more educated society, the more desirable environment to live in.

9. Conclusion
Being a rentier state has its own disadvantages, from being rich yet undeveloped, to being under the mercy of fluctuating value of oil. Never the less, It is not too late to fix these dilemmas, and most importantly, it should be seen a great opportunity to conduct business on a global level and providing services to our new partners by emphasizing the idea of going international.

References 1- Hazem Beblawi, Giacomo Luciani, , The Rentier State, Routledge, 1987 2- Amer Al-Tameemi, Arab-api, Kuwait: role of private sector and the chanllenges of rentier economies. 3- Ministry of finance 4- Statistics by CSC published by alWtana 5- Economy watch 6- Alqabas 7- Khouja and Sadler 1984: 39; Ismael 1993: 135; authors’ own calculations 8- MGRP 9- Industrial directory of Kuwait 2010-2011, Public Authority for Industry 10- Industrial bank of Kuwait , Annual report 2011

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[ 1 ]. Hazem Beblawi, Giacomo Luciani, , The Rentier State, Routledge, 1987
[ 2 ]. Ministry of finance
[ 3 ]. Statistics by CSC published by alWtana
[ 4 ]. http://www.economywatch.com/economic-statistics/country/Kuwait/
[ 5 ]. http://www.alqabas.com.kw/node/80743
[ 6 ]. Khouja and Sadler 1984: 39; Ismael 1993: 135; authors’ own calculations
[ 7 ]. * http://www.mgrp.org.kw
[ 8 ]. -9 Industrial directory of Kuwait 2010-2011, Public Authority for Industry
[ 10 ]. * Industrial directory of Kuwait 2010-2011, Public Authority for Industry
[ 11 ]. * Industrial bank of Kuwait , Annual report 2011