Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
The Adverse Impact of the Structural Economic
Imbalances in the State of Kuwait
Mohammad Ramadhan1
The State of Kuwait is a small, rich, oil-based economy with an estimated GDP of
183 US$ bill in 2014. The economy depends heavily on oil exports revenues,
which account for 58% of GDP, 95% of exports, and 94% of government income.
The economy is characterized by the dominance of the large public sector in
major economic activities. Such prolonged unwarranted structure has adversely
affected non-oil GDP growth, limited the job opportunities for nationals, and
resulted in severe structural economic imbalances.
The main structural
imbalances of Kuwait’s economy can be summarized as the following:
dominance of the public sector over the private sector; heavy dependence of
national income and aggregate exports on oil; limited share of the private sector
in the GDP; dichotomy in the labor market with high concentrations of national
labor in the public sector (disguised unemployment), while the expatriate labor is
deeply concentrated in the private sector; rigid spending pattern of public budget
and dependency on oil revenues; imbalanced population structure with the
number of expatriates being more than twice the number of nationals. This
paper provides an overview of Kuwaiti economy in terms of economic structure
and indicators. The magnitude of structural imbalances was examined in detail
to assess their negative economic impact. The paper proposed a strategic
framework for an overall economic reform to rectify the persistent structural
imbalances. Within this context, it is important to review recent public policies
and new laws initiated by Kuwait’s government in addressing the structural
imbalances.
Key words: Kuwait, structural imbalances, labor market, public sector, private
sector, strategic framework.
Field of Research: Economics
JEL Codes: E62 and J21
1. Introduction
Kuwait is a small, rich economy with abundance in crude oil that is entirely
owned by the state. Due to unprecedentedly high oil exports and revenues, total
nominal Gross Domestic Product (GDP) grew substantially to US$ 198.03 bn in
2013. Kuwait's oil and non-oil GDP accounted for 55.9% and 44.1% of total
nominal GDP in 2013, respectively. Moreover, oil revenues accounted for
around 96% of exports and 94% of government income. Escalating government
expenditures have resulted in high standards of living and one of the highest per
capita in the world estimated at $48,900 in 2012 (CSB 2013). Kuwait's economy
can be characterized by the dominance of the public sector and heavy
dependence on oil exports both in terms of the generated value added and
1
Dr. Mohammad Ramadhan, Research Scientist at Techno Economic Division, Kuwait Institute
for Scientific Research, Kuwait Email: mrammad@yahoo.com
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
revenues. The government of Kuwait in its efforts to share the oil wealth with
citizens has adopted an extensive welfare-oriented approach toward
development. The development of Kuwait has tremendously depended on public
policies geared toward heavy government spending. Consequently, such public
policies have led to the dependence on the government for the provision of
employment and most social services (Ramadhan et al. 2013).
Such
dependence has created prolonged structural imbalances that include among
others:
 Overwhelming contribution of the public sector to GDP.
 Limited share of the private sector in major economic activities.
 Dependency of government revenues on a single source of income (oil and
other hydrocarbon products).
 Labor market dichotomy, with the national labor force concentrated in the
public sector, and the expatriate labor force work dominating the private
sector.
This paper intends to address the adverse impact of the structural imbalances on
Kuwait’s economy. The paper will proceed in the following structure. Section two
will present the theoretical background on the role of the public sector in economic
growth. Section three will present an overview of the Kuwaiti economy in terms of
economic structure and indicators, and will evaluate the magnitude of structural
imbalances and assess their negative economic impact. Section four will propose
a strategic framework to rectify the persistent structural imbalances and provide
the basis for an overall economic reform. Section five will review recent public
policies and new laws initiated by Kuwait’s government in response to the
structural imbalances. Finally, conclusions and recommendations will be presented
in section six.
2. Review of Literature
The most eminent of Kuwait’s structural imbalances is the role of the large public
sector in redistributing the wealth generated from oil revenues through the
comprehensive welfare system. The main argument to be raised is should the
government reduce the size of the inefficient public sector in economic activities for
a more vibrant role of the private sector? Will the growth and expansion of the
private sector have a positive impact on the economy in terms of long-run output
and employment? There is an extensive theoretical and applied literature
regarding the relationship between the size of the public sector and the rate of
economic growth. Mavrov (2007) showed that economies controlled entirely by
governments (public sector) have witnessed relatively low level of economic
growth. This is due to the fact that most economic decisions are controlled entirely
by governments with the absence of the private sector interest. This argument
presents an important concern regarding the appropriate size of the public sector
that leads to optimal economic growth (Ramadhan et al. 2014).
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
Empirical literature conducted on the public sector’s size and role has two
opposing views. Ram (1989) indicated that economic growth can be stimulated by
large government size. On the other hand, many scholars contradicted this view
and indicated that as the government size increases, in the relative term, it reduces
the growth of per capita income (Barro 1991, Bairam 1990, and Grossman 1990).
Nonetheless, Husnain (2011) pointed out that within these mixed findings, a
consensus emerges that up to a certain level, government activities can stimulate
growth, but beyond this level, the size of government may reduce economic
growth. Husnain attempted to determine the optimal size of government in
Pakistan for the period 1975-2008; his findings showed that government size is
optimized when public expenditures reach 21.5% of GDP. Kuwait more or less
depicts a growth model similar to Barro’s endogenous growth framework that
allows government expenditure to increase economic growth through the provision
of public services that can be used as an input to private sector production (Barro
1990). However, Barro noted that government expenditure crowds out more
productive private investment, and hence, can affect the growth rate negatively in
the long run.
More importantly, Barro (1991) examined the issue of the optimal share of public
sector in the economy by analyzing the public share of 98 countries. He identified a
significant inverse relationship between the share of public sector in GDP and GDP
growth. He concluded that the average share of public sector in these economies
was around 20%. As a proxy, this estimated threshold size is far lower than the
current share of Kuwait’s public sector in GDP (70%). In a nut shell, given the
inefficiency of Kuwait’s public sector, ineffective utilization of resources, and
persistence of the structural imbalances, it is safe to assume that Kuwait’s
economic growth rate would increase if public sector’s size and expenditures were
to be reduced.
3. Major Structural Imbalances
The recent Global Competitiveness Index for the fiscal year 2014-2015 confirmed
that Kuwait dropped to the 40th ranking from the 35th ranking in the fiscal year
2010-2011. Other GCC members (UAE, Qatar, and Saudi Arabia) achieved higher
rankings at 12th, 16th and 24th, respectively. This indicates that Kuwait faces
many problems and challenges that impede its economic development. Most of
the economic problems stem from the imbalanced structure of the economy. The
following subsections will shed light on the nature and magnitude of the major
imbalances and assess their negative economic impact.
3.1 Expenditures on GDP and Dependency on Oil
Kuwait economy is characterized by the dominance of the public sector and heavy
dependence on oil both in terms of the generated value added and revenues.
Table 1 presents expenditure components of Kuwait's GDP over the period 20102013. In 2013, the total nominal GDP was around US$ 198.03 bil with minimum
growth from previous year. Yet, a 57% contribution was registered for the oil
sector compared to 16.9% for non-financial services. Remaining activities’ share
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
was minimal (6.8% for manufacturing industries, 6.5% for financial services, 3% for
wholesale and retail, and 5% for transport storage and transportation).
During the oil boom period (1976-1982), Kuwait enjoyed huge surpluses in its
public budget and balance of payments. Yet, most of the financial surpluses fled
the country in the form of investments in income-producing assets abroad. This
supported the widely held view that Kuwait has a limited absorptive capacity, since
it was unable to utilize these gains internally without adversely affecting its
macroeconomic stability (Ramadhan et al. 2013). However, the fiscal situation had
changed radically following the downturn in oil prices in late 1982, leading to real
budget deficits over the period 1983-1989. The Iraqi invasion in August 1990
reinforced this trend, which resulted in both internal and external deficits.
For the five years prior to the financial crisis of 2008, the economy benefited from
the drastic increase in global demand for oil. The sharp increase in oil revenues
over the period 2004-2008 created huge internal and external surpluses, causing
the economy to grow at a high average rate of 23.1% per annum. Such a high
growth rate indicated the overwhelming dependency of its economy on the
revenues generated from oil. However, the sharp decline in oil revenues in 2009
reduced these surpluses drastically.
Moreover, the current and expected
increases in government spending should limit surpluses to a much lower levels
than those witnessed in the previous boom years. Since the global financial crises
of 2008-2009, the GDP grew by 12.8% per annum over the period 2010-2013. It
should be noted, however, that any noticeable decline in the relative importance of
the oil GDP was mainly due a slump in oil prices and the reduction in export
volume rather than due to a substantial real growth of the non-oil sector.
Expenditures on GDP during this period (Table 1) revealed that the two main
components of aggregate demand, namely government consumption and private
consumption, have increased from the values of US$ 19.76 bn and US$ 33.32 bn
respectively in 2010 to the values of US$ 29.57 and US$ 42.74 bn respectively in
2013. The same trend could be noticed with net exports. However, gross capital
formation component of aggregate demand increased slightly from the value of
US$ 18.49 bn in 2010 to US$ 23.14 bn in 2013. The fact that the public sector is
responsible for the execution of the major part of the investment activities would
indicate that slow spending on investments (capital formation) on the part of the
government would have an obvious indirect impact on the performance and growth
of the private sector. However, investments demand is an important economic
indicator of the economy’s ability to sustain long-term growth. Consequently,
severe fluctuations in aggregate investments in Kuwait over the years could
indicate the vulnerability of the local economy to sustain long-term growth.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
Table 1: Kuwait Gross Domestic Product (GDP) by Expenditure
Indicator
2010
2011
2012
2013
Oil GDP
64.45
97.79
113.79
110.64
Nonoil GDP
66.53
74.75
81.09
87.39
GDP
130.97
172.54
194.89
198.03
Per Capita GDP (Value in
1000$)
36.56
46.67
50.97
49.94
Government Consumption
19.76
22.93
26.22
29.57
Private Consumption
33.32
37.36
41.18
42.74
Gross Fixed Capital Formation
18.49
19.91
21.11
23.14
Net Export
35.01
39.90
45.75
46.67
Total Expenditure on GDP
115.34
154.06
174.08
175.79
Expenditure on GDP
Source: Central Statistical Bureau, Annual Statistical Abstract, 2013. (Values in Bill US$)
3.2 Limited Role of the Private Sector
Structural imbalances have adversely limited the role and contribution of the
private sector in economic activities. This fact has detrimental impact on the
sustainability of long-term economic growth. An analysis of the private sector’s
role in economic activities revealed that the private sector has dominated the
majority of the non-oil activities. However, the contribution of most of these
activities to the GDP and non-oil GDP is minimal, except for the three main
activities of finance, insurance, real estate and business services; transport,
storage and communications; and wholesale and retail trade, hotels, and
restaurants. The combined contribution of these three non-oil activities was
around 30.93% of the total GDP, or alternatively 56.90% of the non-oil GDP.
Furthermore, over the period 1997-2001, the share of the private sector in GDP
and non-oil GDP averaged around 24.5% and 44.1%, respectively. However, due
to the rise in oil prices and the spillover effect of increased government spending
over the period 2001-2013, the share of the private sector in GDP has averaged
around 31.4% (CSB, 2013). The drastic rise in oil prices since 2002 and,
subsequently, the sharp rise in Kuwait oil revenues have accelerated the nominal
GDP growth. However, this unprecedented growth has adversely affected the
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
non-oil sectors of the economy. The oil sector remains dominant in the economy
and has substantial indirect effects on the non-oil sectors. The public spending
funded by oil revenues remains essential to private sector’s various economic
activities.
Table 2. Share of Private Sector in Gross Domestic Product
Indicator
2001
2004
2007
2010
2013*
GDP
36.2
57.6
119.8
131.0
198.0
Oil GDP
15.0
26.6
60.1
64.4
110.6
Nonoil GDP
21.3
31.0
59.7
66.5
87.4
Private Sector (PS)
8.9
18.9
40.0
41.6
62.3
Share of PS in GDP
24.70%
32.90%
33.40%
31.80%
31.45%
Share of PS in Non-oil
GDP
42.08%
61.16%
67.05%
62.61%
71.27%
Source: Central Statistical Bureau, Annual Statistical Abstract, 2005, 2013. (Values in Billion US$)
* The Share of PS in GDP was estimated by calculated the average PS share from 2001 to 2010.
3.3 Rigid Structure of Public Finance
Table 3 presents the main components of public budget for the last five fiscal years
(2009/2010 - 2013/2014). Government spending in fiscal year (FY) 2012/2013
reached a historical high level at US$ 68.3 bn, around 74.1% increase from the FY
2009/2010 budget of US$ 39.2 bn. Government spending in FY 2013/2014 was
slightly lesser from previous year, yet it was at the higher end at US$ 66.45 bn.
Over the five-year period, government expenditure was increasing rapidly at
around 18.5% per annum. The massive rise in spending was forced by the hikes in
salaries, grants, and transfer payments. Total government revenues were
estimated at US$ 113.3 bn, with oil income constituting 93.6% of total revenues.
More importantly, the primary budget surplus peaked at US$ 47.25 bn in
2011/2012, and averaged around US$ 35.83 bn for the period. In fact, the last 13
public budgets have all posted surpluses in public budgets.
Expenditures in Kuwait’s public budget are classified into five chapters
(categories). For FY 2013/2014, the expenditures were as follows: salaries US$
17.71 bn, commodities and services US$ 11.32 bn, transports, machinery and
equipment US$ 0.74 bn, construction, maintenance and public acquisitions US$
5.38 bn, and miscellaneous expenditures and transferable payments US$ 31.31
bn. Expenditures on chapters one and five, i.e., salaries and transfer payments
Proceedings of Annual Paris Business Research Conference
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ISBN: 978-1-922069-82-5
(subsidies for electric and water, health, education) constituted around 74% of total
public spending. Disturbingly, spending on salaries and transfer payments have
almost doubled over that period. In contrast, the high spending on wages and
subsidies overshadows spending on capital investment and developmental
projects. i.e., investments on construction projects and maintenance constituted
only 8% of the total expenditures.
While one can look favorably at the surpluses of Kuwait’s public budget, trade
balance, current account balance, and absence of public debt, the fact that the
budget revenues are heavily dependent on oil income emphasizes its high
sensitivity to fluctuation in oil prices. Hence, sustaining a balanced budget in the
absence of other sources of income (no tax income) requires high oil prices at all
times. The dependency on oil revenues also raises the concern on the future
strains that these expenditures will have on the public budget in the light of
government’s lack of efforts to diversify the economy sources of income. Moreover,
it should be emphasized that expenditures on capital formation has lagged behind
over the years. Within the context of previous underinvestment, it is necessary that
capital spending increases considerably in order to energize the private sector role
in the economy (Hertog 2012). Within the context of the bureaucratic and
inefficient public sector in the state of Kuwait, the government of Kuwait should
energize the role of the private sector in the economy by reducing its role, which
includes privatization of some of these State Owned Enterprises (SOEs).
Proceedings of Annual Paris Business Research Conference
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Table 3. Kuwait’s Public Budgets for (FY 2010/2011 - FY 2013/2014)
FY 2010/11 FY 2011/12 FY 2012/13 FY 2013/14
Expenditures
58.76
60.75
68.33
66.45
Salaries
12.40
14.66
17.10
17.71
Commodities and Services
10.11
9.86
12.88
11.32
Transport, Machinery and Equipment
0.55
0.52
0.56
0.74
Const., Main. and Public Acquisitions
6.11
5.90
5.85
5.38
Miscellaneous Exp & Transfer payments
29.58
29.81
31.94
31.31
Revenue
77.89
108.00
113.27
111.82
Oil Income
72.26
102.05
106.06
102.96
Nonoil Income
5.63
5.95
7.22
8.86
Primary Surplus/ (Deficit)
19.13
47.25
44.95
45.37
Reserve for Future Generations
7.79
10.80
28.32
27.95
Final Surplus/ (Deficit)
11.34
36.45
16.63
17.42
Source: Ministry of Finance, General Accounting Affairs Guidance & System Department, Kuwait,
2011-2012, 2012-2013, 2013-2014. (Values in Billion US$).
3.4
Dichotomy in the Labor Market
The labor market in Kuwait is severely unbalanced; Table 4 explains the dichotomy
in the labor market in 2014. Analysis of labor data revealed the following
astonishing facts:
 Total labor force was estimated at 2.45 million, where private sector represents
80% of total jobs, while the public sector represents only 18% of the total.
 National labor constituted only 17% of total, while expatriates dominated the
labor market with 83%.
 75% of the national labor force is employed in the public sector, while 80% of
the expatriates labor force is employed in the private sector.
 The public sector is dominated by Kuwaitis (71%), while the private sector is
dominated by non-Kuwaitis (95%), with Kuwaitis representing only a low 5% of
total employment in this sector.
Proceedings of Annual Paris Business Research Conference
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 The size of non-Kuwaitis in the public sector (133,886) exceeds the size of
Kuwaitis in the private sector (91,182).
The dichotomy in the labor market structure highlights many adverse
consequences on many aspects of the economy.
Firstly, the excessive
employment of national labor force in public sector leads to disguised
unemployment, i.e., employing Kuwaitis in highly paid unproductive jobs with no
apparent value added. More importantly, expenditures on the increasing number
of highly paid jobs for nationals is putting a real pressure on the public budget, and
in the light of declining oil prices this will lead eventually to a deficit. Secondly, the
private sector share in the economy is limited only to 35%, while total employment
in the private sector is around 1.96 million (80% of total employment). This raises
a fundamental concern that of whether the economy really needs around 2 million
expatriates that contribute minimally to output. This fact indicates that most of the
expatriates are employed in low paid and inefficient jobs with no productivity or
value added. More importantly, the large expatriate’s labor force consumes large
amount of the public subsidized services (electricity, water, health, education,
roads, etc.), which exert enormous pressure on the fragile public budget. Hence,
major labor market reform is well needed to tackle the unbalanced labor market.
Table 4. Labor Force in Kuwait (2014)
Sector
Kuwaitis
% of
Kuwaitis by NonTotal Labor Kuwaitis
Force
% of NonKuwaitis by Total Labor
Total Labor Force
Force
% of
Total
Labor
Force
Public
320,140
71%
133,886
29%
454,026
100%
Private
91,182
5%
1,870,830
95%
1,962,012
100%
Unemployed
11,003
27%
29,557
73%
40,560
100%
Total Labor
Force
422,325
17%
2,034,273
83%
2,456,598
100%
Source: Public Authority for Civil Information, Population and labor force Bulletin, December 2014.
4. Strategic Framework for Economic Reform
Many prominent scholars and research institutions have addressed the importance
of addressing and resolving Kuwait’s structural imbalances. Previous studies
conducted such as KISR/ CMT on the Financial Sector of Kuwait (1988), World
Bank report on Energizing Private Sector in Kuwait (2001); McKenzie report on
Financial & Economic Reform in Kuwait (2007), Blair report on Kuwait’s Vision
2035 (2009), KISR report on Strategy for Private Sector Development in Kuwait
(2012) have emphasized the urgent need for economic and labor reform in Kuwait.
Due to the fact that most of structural imbalances are resulting from the dominance
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
of the public sector in economy, economic reform should focus and be directed
toward the utilization of public sector capabilities, operations, and initiatives to
deliver synergetic solutions to the causes of the inefficient public sector, also, to
create conducive environment that enables the private sector to play a more active
role in economic activities by eliminating problems and obstacle that impedes its
growth. Within the context of supporting public sector initiatives and private sector
operations, economic reform should be centered on the following thrusts:
 Improving the business environment
 Increasing aggregate investments
 Attracting foreign direct investment (FDI)
 Privatization
 Increasing the role of small and medium enterprises (SMEs) in Kuwait.
Formulation and implementation of economic reform in Kuwait entails a
multidimensional approach. The current rates of investments in Kuwait are very
low, consistent with Kuwait’s steady but quite slow non-oil economic growth in the
last two decades. At the same time, the economy generates a gross savings rate
substantially higher than its rate of investment, a situation that results in reserve
accumulation and massive capital outflows. The capital outflows are a mix of
portfolio investment, FDI in various countries, and the accumulation of foreign bank
account holdings. Meanwhile, FDI in Kuwait itself currently stands at a miserably
low level. Turning this situation around presents an enormous challenge for
Kuwait, i.e., keeping in mind the objective of creating a strong private sector that
will employ nationals (entrepreneurs and labor) and gradually reducing
dependence on expatriates. Hence, the proposed strategic economic reform
highlights a range of possible approaches that emphasize the rationale for the
aforementioned strategic thrusts. The envisaged approaches can be summarized
in the following discussion:
First Approach: It is very significant and crucial that Kuwait should be
implementing, as rapidly as it reasonably can, the regulatory and business
environment improvements. Such improvements will create better conditions for
all new businesses starting up in the country, as well as for the existing ones; and
it will also facilitate higher volumes of investment, both by existing firms,
government agencies and publicly owned firms, and incoming investors (FDI).
Second Approach: Investment is important in promoting long-term economic
growth. Steady and strong economic growth can facilitate a bigger role for the
private sector in the economy. However, there is the critical question of how to
raise the volume of investment in Kuwait, whether of domestic origin or funded
through FDI, to achieve the targeted GDP growth rate. In order to meet its
medium- term and longer-term employment objectives, the economy of Kuwait
clearly needs to be growing more rapidly than it has even done over the past two
decades.
Third Approach: Kuwait should also be taking action to adopt and implement
policies and regulatory changes to facilitate and promote FDI. FDI tends to be
accompanied by significant benefits for the domestic economy in terms of
Proceedings of Annual Paris Business Research Conference
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ISBN: 978-1-922069-82-5
management expertise, access to markets and market networks, innovation and
new technology, knowledge of modern business methods, skills development and
training programs. In particular, for a small economy such as that of Kuwait, these
are extremely important benefits. Moreover, the benefits for Kuwait can be
enhanced if FDI projects were to be undertaken in ways that do not result in
‘foreign enclaves’ within the domestic economy. In other words, FDI is most
beneficial when there are strong upstream and downstream linkages with the
domestic economy, where personnel move between domestic firms and the
businesses funded through FDI, and where knowledge transfers and effective
learning are facilitated.
Fourth Approach: Privatization is an important economic/political tool that a
country can implement in order to rectify economic imbalances created by the
dominance of public sector and to speed up economic growth. Privatization entails
the transfer of public entities/projects to private firms. However, there are certain
prerequisites that need to be met for effective implementation of privatization
process. The most significant of these prerequisites is the provision of an
environment that is conducive in promoting effective large-scale private sector
engagement in economic activities.
The enabling environment includes
infrastructure, legislation, regulation, and ease of doing business. Therefore, the
scope of privatization covers ceding of government control of economic entities
and projects to private firms, attracting strategic investors both domestic and
foreign, encouraging private investments, attracting FDI, and promoting and
enabling friendly business environment. Within the context of Kuwait economy, the
drive behind all these factors is to increase the competitiveness and productivity of
the economy.
5. Recent Economic Laws
In response to the negative affect of the persistent structural imbalances on the
performance of Kuwait’s economy, and in the efforts to revert the decline of
Kuwait’s ranking in all global and regional indices, the government has (recently)
passed new laws and initiated a few programs to address and tackle the
challenges presented by these imbalances. The targets of these new laws and
initiatives have been discussed in detail in the major studies conducted by leading
research think tanks. Hence, the new laws and initiatives aimed to overcome the
public sector’s large size and inefficient utilization of resources, and to promote a
vibrant role for the private sector by improving the business environment. The
following sub sections will present the important laws and discuss their objectives.

Law No. 37/2010 Concerning the Regulation of Privatization Programs and
Operations.
The most important step in Kuwait’s privatization initiative was the declaration of
the law 37/2010 for regulating the privatization program and operations.
Subsequently, the Supreme Council for Privatization (SCP) was established in May
2012 by the Amiri Decree 106/2012 for the purpose of executing and implementing
the law. The newly born SCP faces many challenges that include selecting the
Proceedings of Annual Paris Business Research Conference
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ISBN: 978-1-922069-82-5
appropriate method of privatization for each project relative to the operating
conditions and requirements of specific sector, formulating a comprehensive
legislative and organizational framework to support the privatization process, and
protecting the interest and rights of all concerned parties involved in the process
(government, investors, consumers, workers, citizens). The main objectives of
Kuwait's privatization program can be summarized as the following:
 Increase the role of the private sector in economic activities.
 Enhance the competitiveness of the local economy.
 Attract local and foreign direct investments.
 Assist in developing capital markets.
 Build a friendly business environment.
 Provide a fair distribution of national wealth among citizens.
 Protect and rehabilitate national labor.
 Prepare the private sector to absorb a fair share of the national labor force.
 Enhance the overall state public budget.
 Protect the local environment.

Law No. 98/2013 for Establishing the National Fund for the Promotion and
Development of Small and Medium Enterprises.
National Fund for the Promotion and Development of SMEs was established in
April 2013 with a capital of KD 2 billion (about US$ 7 billion). Unlike its
predecessor, the fund will provide access to finance to promising initiatives without
any interference in the management of the financed projects. Generously, the
SMEs fund will provide land, a true scarce resource for investors in Kuwait. It is
also mandated to build and operate incubators in several districts within Kuwait.
Finally, its business processes are subject to reasonable time limits required to
facilitate the infant project’s dealings with government approvals and licenses and
within pre-assigned time limits. The SMEs Fund’s priorities are set in the law: the
first priority goes to projects that maximize the value added, diversify the economy
and create jobs for nationals, followed by stimulating innovations, promoting selfemployment spirit, using locally produced goods, and employing environmentfriendly technologies. A significant feature in the law is its intended plan to make
the SMEs Fund as the central focus of government support to SMEs at the national
level. As such, the Fund is decreed to coordinate, customize, and institute a
sustained model of support for all SMEs, especially startups without the
multiplicities, conflicts, and wasted efforts and resources.

Law No. 116/2013 for Establishing Authority
Investments in Kuwait
for
Promoting Direct
This new law will repeal predecessor Law No. (8) of 2001 regarding the Regulation
of Direct Investment of Foreign Capital in the State of Kuwait. Consequently, the
Kuwait Foreign Investment Bureau (KFIB) will cease to exist. All KFIB assets,
liabilities, obligations and decisions will be transferred to the new authority, which
will be established under the new law as Kuwait Direct Investment Promotion
Authority (KDIPA). The law will come into force six months from the date of
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
issuance. The new law is a an important addition to a host of new economic laws
and regulations that have been recently approved for the purpose of improving the
overall investment climate, fostering competitiveness, encouraging more
engagement in value-added investment opportunities by both local and foreign
investors, and contributing to achieve the country's economic and social
objectives. Under the new law, investment entities can take three distinct forms: a
Kuwaiti company in accordance with the new Decree Law No. (25) of 2012
regarding the Companies Law as amended by Law No. (97) of 2013 with up to
100% foreign equity; or operate as a licensed branch of a foreign company; or
introduced for the first time under the new law to establish a representative office
to exclusively conduct marketing studies without engaging in a commercial activity
or activity of commercial agents. The law adopts the "one-stop shop" approach
overseen by an administrative unit within the authority in coordination with the
relevant government authorities, to complete procedural steps within the timeframe
mandated by the law (www.kfib.com).

Law No. 24/2012 Establishing the Public Authority for Combating
Corruption and Provisions for Financial Disclosure
The Kuwait Anti-Corruption Authority was founded by an Amiri decree to fight and
prevent corruption, and address its causes. Its other tasks include prosecuting
perpetrators; recover funds and proceeds of corruption; promote the principle of
cooperation and join the state and regional and international organizations in the
field of anti-corruption; administrate the principle of transparency and integrity in
economic, financial and administrative transactions, activate the principle of
equality; promote the supervisory role of competent bodies; protect state
institutions and agencies from manipulation, exploitation and the abuse of authority
for personal benefit; prevent mediation and nepotism that revoke a right or realize
a wrong; encourage the role of institutions and organizations of the civil society in
an effective and operative participation in the fight against corruption. The
authority aims to establish the principle of transparency and integrity in financial
and administrative transactions to ensure the realization of good governance of
funds, resources, and state property and their optimal use (Times 4014).
These were the most important laws and initiatives enacted by the government in
response to the main economic challenges. Two more important laws were also
passed in accordance with the aforementioned laws. Law No. 25/2012 for Issuing
New Companies aimed to energize the role of the private companies in economic
activities by addressing some of the issues that hinder their performance and
contribution. Law 10/2007 for Protection of Competition aimed to tackle the
monopolistic and oligopolistic structure prevalent in many economic sectors in
Kuwait. It should be noted, however, that while the initiation of these laws is a
positive step in tackling some of the structural imbalances in private sector
development, the government is very slow in establishing the administrative and
operational structure of these organizations. In most cases, these new entities are
struggling to put forward a competitive organizational structure that can execute
the objectives stated in its mandates.
Proceedings of Annual Paris Business Research Conference
13 - 14 August 2015, Crowne Plaza Hotel Republique, Paris, France
ISBN: 978-1-922069-82-5
6. Conclusions and Recommendations
This paper has examined in detail the main structural imbalances that Kuwait
faces, and assessed its adverse impact on the Kuwaiti economy. The paper has
also provided the framework guidelines for the economic reform needed to tackle
the economic challenges. The government’s recent initiatives to address these
imbalances and challenges were highlighted.
The most imminent of the
challenges facing Kuwait, however, is how to sustain high income levels for future
generations, acknowledging that the present generation is characterized by high
consumption behavior, dependency on state resources (wages and subsidized
services), and low productivity in terms of value added. This entails the
formulation of public policies with clear strategies and objectives for the
transformation of Kuwait’s economy to a productively diversified economy that is
less dependent on oil.
The objective of the transformation process is to expand and diversify the
production base of Kuwait’s economy in order to include more economic activities
in services and manufacturing, led by a prudently regulated private sector. This
will enhance job opportunities for the increasing number of young nationals
entering the labor market. The formulation of the transformation strategy must
emphasize reform actions and measures that can rectify the current imbalances in
the economy and provide a road map to an efficient and rather diversified
economy. The paper proposed strategic economic reforms focusing on possible
strategic thrusts and economic tools. The most important of these tools and
initiatives include privatization, improving business environment, promoting local
and foreign investments, and bolstering SME’s growth. Reform measures may
include among others the following: corporate taxes, imposition of users' fees,
activation of necessary economic laws and initiatives, imposition of fees on
expatriate labor, and, most importantly, active private sector development.
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