Kuwait’s loss of competitiveness (as compared to the rest of the G.C.C) is expanding at a very alarming rate. The country has managed to drop from the second largest G.C.C. economy to third in 15 years. Today the UAE (which in 70’s & 80’s received economic aid from Kuwait, and currently produces just about the same level of daily oil production as Kuwait) has not only displaced Kuwait as the second largest G.C.C. economy but is twice a big in terms of total GDP.
If this deterioration of competitiveness continues, and all signs indicate it will , the UAE will in 10 or so years be three times bigger an economy than Kuwait and Oman will be competing for third position with Kuwait.
The primary cause of this loss of competitiveness is the intoxicating effect of naturally endowed wealth mixed with a competitive participatory political system (democracy) that has produced a crippling government owned and controlled economy, and hence has removed all the incentives needed to encourage competition. It has closed down all market opportunities and left one market open the “Steal from Government Market,” where those willing to compete for wealth can compete.
We have become so intoxicated with the effects of this government owned economy that we today think and operate just like the Soviet Bloc did before or immediate after the collapse of the Soviet Union or similar to the United Kingdom a few years before Margret Thatcher took office. Our ability to understand our goals and develop the right tools to achieve them is not only distorted, it is most of time the exact opposite of normal economic wisdom.
Very basic examples are:
In Kuwait we ask “What can the private sector do to help in economic development?“ In most nations the question would be what can the state or government do to help economic development. We seem to not realize that governments are clients to markets and economies as they consume goods and services and a tax and an overhead to an economy, but they are never the economy.
In Kuwait we understand the constitutional statement that the “Government or the state is responsible to create employment opportunities” to mean the creation of government jobs, while no other government understood it this way.
The next serious problem for Kuwait, IS HOW WE GO ABOUT ACHIEVING OUR GOALS & STRATEGIES. For example:
We agreed to provide subsidies to citizens however, we created a major bureaucracy to deliver it, and delivered it via subsidized pricing, with all the waste resulting from low pricing. Then we create a large bureaucracy to manage and control waste, lose and theft??
Even when we do reach a consensus that privately managed and delivered solutions are better than government managed solutions and that this does help separate the politics form the economy, we structure it via a private sector monopoly! We don’t seem to understand that private sector efficiency is achieved via competition and only via competition, and that the more severe the competition the more efficient the solutions.
The other problem of monopolies is that they do not prevent political intervention. A good example is mobile phone services in Kuwait (in the early days when there was only one private sector monopolistic operator in Kuwait.) government and parliament managed pricing and policies for our mobile services.
Then even when we do manage to agree to allow two or more players, we spoil it with either keeping a subsidized government player in the game (with no independent regulatory body) or we design the game so it’s non-competitive, examples:
Airlines: We de-regulate the industry and adopt open skies policies. We licensed two independent airlines, but kept Kuwait Airways as a subsidized government owned player. We also restrict those licenses so that the one to Jazeera (was restricted to low fare airline service) and the other to Wataniya (was restricted to only regular full fare airline service). Jazeera manages to survive by swinging under the arms of Kuwait Airways, the big heavy player, but Wataniya competing head to head could not survive the pricing war against Kuwait Airways. Eventually Wataniya closed down after a KD 10 mio loss, while Kuwait Airways continues after a KD 170mio Government bailout. During that period, the government continued to give all its ticketing business to Kuwait Airways and non to the other national operators!
The other example is the privatization of retail gas stations. KNPC decided that managing the retail distribution network is a burden, makes no money and hence the best thing is to sell it. Like a professional bureaucracy not used to competition what do they do? They split the network into TWO companies, where NO two gas stations are directly competing in the same location! They also controlled retail gas prices! What is worse, they then float the two companies in the stock market and allow one investor to take control of both???
Having said all that about the mess in Kuwait, is there any way that Kuwait can reverse this trend before it economically hit’s the wall?
I must say that judging from the experiences of other nations, most likely NO! It is usually extremely difficult for politicians and the public to wake up from this intoxication before they can no longer afford it.
For sure, attempting to stop the welfare state, or shrink it, or reducing subsidies or government created jobs, is a political land mine, as long as there is still money in the bank.
SO, WHAT CAN BE DONE THAT IS SOCIALLY AND POLITICALLY ACCEPTABLE AND CAN HELP STOP THIS LOSS OF COMPETITIVENESS AND REVERSE IT, WHILE WE STILL HAVE NOT HIT THE WALL?
I believe there are possibly a few ways we can go about executing a strategy that can help us navigate this political landscape and deliver results. We need to search for successes and failures in our recent history. Clearly it is easy to find failures and I have described a few and will describe more but I will point to a few successes and try to summarize the lessons learned.
Two very interesting success stories that we were not able to build further on them because they were not intentional and our bureaucracy was and still is very crippling.
1) The Mobile Telecom Business:
All other GCC nations privatized the telecom services industry both ground and mobile years before Kuwait. We finally managed to privatize the mobile services business by government selling a key part of its controlling stack in ZAIN (previously MTC) and followed that up by licensing one more private sector operator “WATANIYA.” In a matter of 10 year, two of the three leading regional Telecom Companies were Kuwaiti, the third being ORASCOM of Egypt. Service in Kuwait improved and cost of service dropped and parliament stopped interfering in this business.
So how come we succeeded so well and so fast against giant private regional telecoms like Etisalat, Qtel, Batelco etc. Well because we created more competition in Kuwait while the others kept their game monopolized by large private sector monopolies.
We, however were not able to take this success and use it to create a “Regional Telecom Hub” because the rest of the telecom sector was managed by the Ministry of Telecommunication. Hence Bahrain continued to be the preferred “Telecom Hub” for independent GCC players.
2) Logistics :
We privatized the pubic warehousing sector at about the same time that we privatized Mobile Telecom and within 10 years two of the three largest regional logistics operators were Kuwaiti (Agility & KGL), the third being ARAMEX from Jordan.
Why, well for the same reasons, we privatized had no government operator competing , allowed plenty of competition and with the USA & Allies invasion of Iraq, the industry took the opportunity and built on it.
But we were not able to take advantage of this success to build a “Regional Logistics Hub” because that need the rest of the economy, Ports and Customs services to work well.
Those were, two successful examples of where we pulled the government out of a sector, allowed competition to develop freely beyond the level of competition that existed in neighbouring economies and that allowed us to steal the lead even when as in Telecom, we were the last to privatize and in logistics in spite of the fact that Dubai was the regional logistic hub.
We achieved those successes while Kuwait was still a big fat bureaucracy of a state, with a killer political game and with no vision or strategy, except an effort to save cost and generate cash for those were the years just after the liberation of Kuwait. In Kuwait, for any strategy in any sector to succeed we need to design it in such a way that the sector is much more competitive than the same sector in the other regional economies, this is because:
We are playing a catch up game so we need to run faster and be more agile.
We have a much heavier bureaucracy and our political leadership is much more separated from the actual business enterprises than the rest of the GCC. Hence, we need our players to have much more athletic stamina to have a chance of achieving regional leadership, equal is not enough.
Now examples of where Kuwait has underperformed, some I have described earlier but two very useful examples are Capital Market and Banking.
Kuwait up to the Iraqi invasion was the second largest banking centre and the second largest capital market. It was the only regional capital market (meaning the market that had the largest number of non-local companies listed on it). We managed to lose both leads as a result of our economy slipping from second largest to third, and our strategy of limiting competition in our banking sector and maintaining a government monopoly in the capital market.
While our capital market was the only regional capital market that had KD bonds listed and traded on it as far back as the early 80’s with foreign sovereign states and corporates issuing KD denominated bonds that were traded on our national exchange, and while Kuwait was the only market where any Arab Company listed outside its domestic market had chosen to be listed. Within three years from the date UAE created three stock markets, Abu Dhabi, Dubai and Dubai International Financial Centre, there was no non Kuwaiti stock listed in Kuwait, and today there are more Kuwaiti Companies listed in Dubai than there were non-Kuwaiti companies listed in Kuwait.
Dubai is currently the second largest capital market in the region and is on the Emerging Markets list. Kuwait is down to fourth after Saudi Dubai and Abu Dhabi and most likely soon fifth behind Doha.
Our financial services sector importance is dropping with the drop of our economic importance and is much less sophisticated today than the same sector in the other leading regional economies, for we have kept it protected while all others allowed foreign and regional competitors to participate and hence stimulate competition and improve efficiency.
We are truly far from a “Regional Financial Centre” and are getting further away every day.
To reverse this we need to increase competition in our banking sector by inviting regional and international players, we also need to privatize the Kuwait Stock Exchange and create at least one more competing stock exchange.
We also need to do the same to the Clearing Industry and invite foreign brokerage and investment banking firms, and regional and international personalities and experts into our different Regulatory Boards.
It is very clear we succeeded when we created a stronger competitive game inside Kuwait and we lost when we didn’t.
Hence, a key tactical implementation strategy for Kuwait must be:
To design for a level of internal competition that is much higher than that of our key regional competitors and to make sure that Government is not a player, the game should be regulated by independent Non-Governmental Regulators if possible and Government must treat all players equally. Regulator’s must not allow Government players (if we must have them) to use price dumping tactics to destroy their competitors.
This is important as all current governmental strategies are designed with either a single government owned provider or a private sector monopoly. This is especially important when implemented on the management of sea/air and land ports as part of the national strategy trying to help develop the country as a logistic Hub. To break from the bureaucracy, drive efficiency and competitive energy we need to design three sea ports competing with each other (Shuwikah/Shuaiba/ Boubyan). We also must make sure we have competition in land gateways to Saudi and Iraq and air terminals. If not then it will not work in Kuwait, or more importantly it will not allow us to achieve regional success. The same is true for our financial services, insurance, capital market and private health services strategies.
Another key area that must be addressed is reforming the subsidies’ structures:
Kuwait must eliminate unneeded subsidies and restructure the way we deliver politically required subsidies.
One subsidy that must be eliminated immediately is the foreign labour health insurance subsidy. An example of reverse logic policies. We subsidize foreign work force, increase Government Kuwaiti employee salaries out of range and then complain that the gap is big and the private sector does not employ Kuwaitis???
We must move health insurance for all work permits, and visitors to the private health insurance industry. This should achieve the following:
Grow the privatize insurance industry (financial services)
Develop the private health industry which could lead to “A Regional Health Services Hub.”
Reduce the load on Public Health Services and the need to investment in new capacity.
Reflect the true cost of foreign labour.
We have a very interesting example in education. After 1990 (liberation of Kuwait) the government stopped providing free education to non-Kuwaitis. As a result, the Private education service industry developed very fast to fill in the gap. Government ended up in closing a number of unneeded public schools and today all non-Kuwaitis and about 25% of Kuwaiti’s study at private schools. A number of private universities developed, the Government sponsors high grade Kuwaiti students studying at Private Universities and today the Kuwait Medical College acceptance test show that the top 25% of Kuwaiti students applying for admission at the Kuwait University Medical College are all private schools educated Kuwaiti’s! While prior to 1990, we had such a shortage of public schools that public schools operated in two shifts (morning and evening), none of that exists today.
Today not only has the private education industry developed to accommodate about 60% of the population of students but we have a large number of high quality private universities and most are accredited by leading universities globally. The same should happen in the private health and insurance businesses, in logistics and port and transit and logistic private hub management sectors.
As for the subsidies we must keep, we need to move those from price subsidies that encourage waste, misuse and theft to cash subsidies were prices are allowed to reflect reality and consumers are encouraged to rationalize their use, incentivized by their ability to benefit financially as a result of their savings. This is very important in areas such as subsidized electricity and water services and fuel.
Moving to cash subsidies will produce no less than a 30% saving in consumption, encourage investment in efficiency and alternative energy, reduce the needed capital investment in infra-structure, power and water generation and allow a free market in those commodities to develop.
In Kuwait, it’s not enough to agree on what we need to do, we have to agree on what is the best and most effective way to do it.