In the Global Competitiveness Index (GCI) 2018, prepared jointly by the International Finance Corporation, the World Bank and the World Economic Forum, Kuwait ranked 52nd globally. The country also stood second lowest among the Gulf Cooperation Council (GCC) states in terms of competitiveness and fared poorly on macroeconomic environment and labor efficiency fronts. Ultimately, factors such as competitiveness, innovation, financial market development and labor market efficiencies are critical to determining a nation’s productivity and the prosperity of its citizens.
The latest GCI ranked 137 countries on their competitiveness based on various metrics, including education, health, infrastructure, innovation, institutions, labor market efficiency and macroeconomic environment. Among GCC states, Oman at 62nd position globally stood at the bottom of this year’s rankings, nevertheless, the country also made the greatest improvements in the decade since 2007, in contrast, Kuwait dropped the most in competitiveness during the same timeframe. The UAE with a global rank of 17 topped the regional list in 2018, while Qatar occupied the 25th, Saudi Arabia the 30th and Bahrain the 44th position on the global competitiveness index.
Despite its long tradition of commerce and enterprise, the state-led economic model that Kuwait adopted following its independence has left the economy overly dependent on hydrocarbon revenues and government largesse to foster growth and development. This is clearly unsustainable.
In 1961, flush with accumulating oil revenues, the newly independent Kuwait could afford to implement a cradle-to-grave welfare system that provided public sector employment, profligate subsidies and social protection for citizens. This social contract between people and the government continued unabated for over four decades.
But recent volatility in oil prices — from over $110 per barrel in June 2014 to less than $36 per barrel in February 2016 — which led to a precipitous fall in oil revenues and consecutive annual budget deficits, have raised serious concerns on the continued viability of a state-led economic model.
The initial response from the government to the fall in revenues was to rein-in spending and implement austerity measures such as cutting subsidies, increasing utility prices and raising fees for many public services. But this undermined the largesse that citizens had grown accustomed to — and felt they were entitled to — stoking resentment and misgivings against the government. Public rancor and parliament uproar forced the authorities to backtrack on reform measures, and to placate citizens by limiting subsidy cuts and price increases only to the expatriate population.
However, there is growing realization that providing the prodigal social welfare services that citizens feel entitled to, and finding public sector jobs for the thousands of young nationals who enter the labor pool each year is increasingly becoming untenable. The state-led model that relies on depletable hydrocarbon reserves, and fluctuating oil revenues, to meet the growing needs of an increasing population is being strained and is clearly unsustainable in the long run. Persistently pursuing diversification strategies, implementing across the board economic reforms, supporting the development of an effective private sector, and enhancing competitiveness and improving labor efficiency are no longer an option, they have become unavoidable.
In a separate, region-specific Arab Competitiveness report, the World Economic Forum noted that in order to face the challenges posed by unstable oil prices and an economy overly reliant on hydrocarbon revenues, “Kuwait will have to increase its innovation capacity by investing in higher education and training, as well as by fostering a more inclusive and efficient labor market that allows it to make the best use of its human capital.
“Unfortunately, across most of these dimensions Kuwait has not improved significantly over the past decade, and in many cases the situation has worsened. In particular, the country’s labor market efficiency dropped by more than one full point, making it one of the areas where it lags the most with respect to advanced economies, together with innovation, higher education and training, and technological readiness.”
The report added: “Fluctuations in commodity prices have increased the urgency of reform, highlighting once more the limitations of a model centered on the use of public administration and state-owned enterprises to create secure jobs, generous subsidies to energy-intensive sectors and a marginal role for private initiative.
As rapid technological advances transform the global economy, the crucial role that human capital has in the development of economies and societies cannot be over emphasized. The competitiveness report should be a wake-up call for authorities to urgently implement educational reforms and training to enhance human capital in Kuwait, and improve the efficiency and efficacy of the country’s labor market. By developing the requisite cognitive and non-cognitive skills, especially advanced socio-behavioral skills, and by enhancing other human capital components, the labor pool can be made more productive, innovative and resilient to market changes.
A major upside to a diminished state-led economic model is that it could foster enthusiasm for work, encourage innovation and revive latent entrepreneurial skills of the people, and hopefully wean them from their dependence on government to ensure the quality of their life. Unraveling of the decades-long social contract that pampered and cocooned them from harsh economic realities could be a blessing if it creates a new awakening among citizens. Having to compete for jobs, and work efficiently in order to ensure a roof, food, education and healthcare for their families — aspects of life that most people in other countries are familiar with — could be novel experience worth pursuing for citizens in Kuwait.