THE NEW GLOBAL SWING PRODUCER

THE NEW OPEC & THE NEW SWING PRODUCER

OPEC is no more an oil price control cartel or The Global Swing Producer, the new Swing Producer is called "SHALE OIL."

OPEC is today a market leader that has an interest in the long term health and stability of the oil and energy markets and the global economy. It has an interest in maintaining stable long term customer relationships in both crude and downstream products and in keeping its upstream, downstream and distribution network efficiently occupied.

As such, the further OPEC invests in its upstream/downstream, distribution, marketing and logistics network, the more difficult and expensive it is to cut back production. That plus the fact that its core members are some of the world cheapest producers, has made OPEC revise its role from "Oil Markets Price Controller & Protector," to a "club of lead players interested in the long term interest and health of the oil and energy markets."

This not well understood new and evolving role for OPEC coincides with another new development in the oil markets, the entry of "SHALE OIL", explored and developed primarily by small and medium size private ventures and financed by private capital and the financial markets. This oil (primarily produced today in the USA and Canada) is the most expensive source of oil and is totally dependent on maintaining financial viability (price and cash flow), and the willingness of capital markets to finance it. "Shale Oil" requires continuous investment in drilling of new wells to maintain production levels, as wells lose 50% of their capacity in 12 months hence a field where no new drilling is done will be 50% down in 12 months and stop production in 24 months as opposed to conventional wells that lose about 15% of their capacity annually.

This makes this new free market produced oil the "New World Swing Producer." A producer that is sensitive to market developments, it can shut down quiet fast (24 months as opposed to 7 years for conventional well) and is able to ramp up production quiet fast as we have seen in the last few years.

OPEC and the financial markets are still adjusting to this new reality with some players accepting it faster than others. OPEC "Primarily via its GCC" members has begun signaling the markets (primarily to the financial and capital markets) this new reality. OPEC has a new vision to its role and cutting production or protecting prices is not among those and that it's the duty of the most expensive oil to exit when not needed and the market is starting to listen and understand the changing rules of the game.

This clip of Goldman Sachs latest released statement on oil markets, dated 12 January 2015, says it all:

"We forecast that the one-year-ahead WTI swap needs to remain below this $65 a barrel marginal cost, near $55 a barrel for the next year to sideline capital and keep investment low enough to create a physical re-balancing of the market,” the bank said.

Goldman doesn’t expect that Saudi Arabia or other core members of OPEC will cut production, "versus its previous expectation that the group would help balance the oil market" in the second half of 2015, according to the report. 

“This is anchored on "our expectation" that the "slowdown in U.S. shale oil production" in second-half 2015 will be sufficient to clear the market overhang and the threat of capital being quickly redeployed to restart U.S. production growth,” it said.

This Goldman Sachs statement says it all, as capital markets and the small and medium size operators in the Shale Oil sector start to understand the new rules and the risk and rewards associated with those new rules of the game, they will require a premium possibly up to 20% or more at the start of a production ramp up for them to invest and be ready to cut back when market is sufficiently supplied.  

THE DETERIORATING COMPETITIVENESS OF THE KUWAIT ECONOMY AND THE LESSONS LEARNED

Competitiveness of the Kuwait Economy

(Issues and solutions discussed are true for all nations and not specific to Kuwait)

This paper discusses Kuwait's loss of competitiveness, the causes and possible solutions and warns of Kuwait’s' dramatic loss of competitiveness especially when compared to other GCC economies, and suggest THREE STRATEGIC THEMES and a few projects under those themes that would help ignite the required dynamics and momentum that Kuwait needs to regain its regional competitiveness and build the basis for a Kuwait that is much less dependent on oil, and yet able to produce increasing levels of GDP from the same quantum of oil revenues. 

The objective is to build a more competitive, more agile and a more responsive economy, operating in parallel to the current public sector dominated economy which today inefficiently employs 85% of working Kuwaitis. A parallel economy that should provide Kuwait with the tools and skills to cushion the impact of the adjustment process that it must inevitably face in the near to medium term when it can no longer afford to finance its inefficient public sector dominated welfare economy. 

The paper intentionally steers clear of politically controversial issues which will most likely attract the electorate’s resistance, and instead focuses on improving the competitiveness, agility and responsiveness of the Kuwaiti economy. Leaving the issue of dealing with the pervasively generous welfare state for a later date when economic reality sets in and voters are forced to deal with that reality.

I am in favor of keeping the strategy simple, easy and focused in order for it to have a better chance of gaining the understanding and focus of the political leadership and the public. Hence, I will focus on THREE KEY THEMES and a limited number of projects under those themes; projects that can create the largest impact in the shortest possible time frame and help deliver some early successes that will be needed to build the necessary confidence, energy and enthusiasm for government and public to follow on with more aggressive projects under those THREE MAIN THEMES.

 

The Decline of the Kuwait Economy

The continuing decline of the relative importance and weight of the Kuwait economy within the GCC is alarming. When measured in terms of its share of the GCC’s total GDP, Kuwait has dropped from the second largest GCC economy to number THREE after the UAE. The UAE economy today not only occupies the second place that Kuwait once held, but is already more than double the size of Kuwait’s. In the banking sector for example, Kuwait has also dropped to third place from second in terms of total deposits and the UAE banking sector is today "THREE" times bigger than that of Kuwait. If we look at Capital Markets, Kuwait has also dropped to third and soon it will be in fourth place after the UAE and Qatar, "and has lost its regional capital market role to Dubai." (It's worth noting that both nations, the UAE and Kuwait are very close in size and produce about the same level of oil, while Kuwait had at least a 20 years head start on the UAE).

This free fall is primarily due to the deteriorating competitiveness of the Kuwaiti economy in regional terms. Deteriorating competitiveness means lower efficiency, which means we use much more resources (capital and people) to produce the same results as others, or to put it another way, we use the same resources to produce much less output (than our competitors).

This deteriorating efficiency and competitiveness of Kuwait can be attributed directly to three primary factors:

 1.    Limited local, regional and global competition in most sectors.

 2.    Lack of motivation and reward as a result of government ownership.

 3.    And finally a badly structured subsidies system.

Lower Comparative Efficiency

Lower efficiency is a result of lower local, regional and global competition and the lack of motivation and reward. Low levels of competition and lack of motivation and reward in Kuwait can be attributed to the domination of state ownership in the economy. In Kuwait, the state has a greater share of total economic activity than all the other GCC economies, and the impact of this greater government ownership of economic activity is made worse by the fact that leadership in Kuwait is much more distant from the direct management of the economy because of our complex, more competitive political landscape.

In Kuwait the State IS the economy, while in most other nations the state is a client to the economy and an overhead cost to the economy, but NOT the economy.

What can be done to reverse this deteriorating competitiveness and regain lost ground?

Let's start by looking at some examples where a competitive edge was built and an industry gained even when the odds were not in favor of a nation.

Japan's Auto Industry

The Japanese auto industry is a great example of the importance of local competition. In the sixties and seventies, the Japanese Auto industry was fragmented, small, weak and operating in a small market, when compared to the giant American auto Industry. It had more than six manufacturers competing in that small market, while in America three players operated in a much larger economy.

Planning experts at MITI, Japan’s official planning think tank, suggested that the only way the Japanese auto industry could compete with the Americans was for it to consolidate into 2 or 3 large players. The Japanese Government tried hard to encourage that consolidation but failed, very similar to the Kuwait banking industry when the Central Bank of Kuwait tried to encourage consolidation (via mergers) of the Kuwait banking sector (as a solution to improve efficiency and competitiveness) and eventually failed. Fierce competition in Japan (much tougher than in the US auto industry), however spurred the Japanese auto makers to higher levels of efficiency, productivity and competitiveness and a hunger for export markets to the point where the Japanese auto industry overtook the America’s auto industry, so that by 2008, in the midst of the global economic crisis, and just before GM went into receivership, a single year's profit at Toyota was higher than the total market value of GM!

Recent Kuwaiti Examples:

We also have a number of examples in Kuwait where we used (unintentionally) competition to invigorate a sector and drive its competitiveness to levels that allowed it to snatch leadership and initiative from other regional competitors. And of course many painful examples where we lost our leadership position in an industry because we did not allow competition in that sector to develop to the same levels found amongst our regional competitors, and we eventually lost.

 1) Telecommunications:

In the telecommunications sector, the Gulf States outdistanced Kuwait in the privatization of land and mobile communications, but in all instances, they were held under one giant private/public shareholding monopoly. In Kuwait on the other hand, the state sold its majority controlling share in Zain (MTC, Mobile Telecom as it was then) and setup Wataniya Telecom as a competitor. As competition developed, quality of service improved dramatically and the cost of service to the public decreased, at the same time those two companies grew to become two of the three largest Arab telecom players. Their operations have spread to the Gulf, North and Central Africa, and the Levant.

Here is an example where in spite of the late start, and the consuming political environment, the Kuwait's mobile telecom flourished and its two primary companies became regional leaders. This was achieved by exiting government as a controlling owner and player and increasing local competition in the telecom sector beyond that of our regional competitors.

Unfortunately Kuwait was unable to exploit this success and transform itself into a regional telecom hub because that would have required the deregulation of international calling and internet services and placing them in a competitive environment too, rather than under the monopolizing influence of the Ministry of Communications. Hence, Bahrain continued as the regional telecommunication hub.

 Another example:

2) Logistics and storage services:

If you would have asked any expert in the early 1990's where the ideal location for a regional logistic industry to flourish in the GCC would be, they would have said Dubai or elsewhere in the UAE, where there was a flourishing trade centre, an emerging transit hub, and importantly, privately managed ports. But Kuwait privatized the public storage sector allowing competition to thrive in this sector, and today two of the largest regional companies in this sector are Kuwait-based. Here too, Kuwait could not utilize this success to develop itself into a "logistics and storage services hub" because that would have required competitive ports under independent management and competitive customs services.

Now let's look at examples of where others have used more intense local competition to take leadership from Kuwait, even when Kuwait had more than a couple of decades of a head-start.

Banking:

Kuwait was the second largest banking market in the GCC. The UAE however promoted a more open and competitive economy and banking sector wherein a larger number of local and foreign banks competed in a much smaller economy (very much similar to the case of the auto industry in Japan), while in Kuwait the Central Bank was seeking to reduce competition through an attempt to encourage consolidation via mergers, and via Central Bank unified pricing policies for products and services, "seeking to limit and manage price competition", at the same time the Central Bank kept the market closed to regional and global competition. As a result the UAE banking sector was able not only able to edge the Kuwaiti banking sector into third position, but the UAE banking sector is today "at least three times bigger" than that of Kuwait.

3) Last example is the Regional Capital Market Role:

Kuwait had the precedence of establishing the first regional stock exchange and was ahead of other Gulf States by more than 20 years. Until the late nineties the Kuwait Stock Exchange was the second largest in the Gulf and the only regional capital market where any Arab company listed outside its domestic stock market was listed.

Then the UAE decided to set up three exchanges; Abu Dhabi Stock Market, Dubai Financial Market and Dubai International Financial Exchange. Within five years Dubai International Financial Exchange's become the second-largest regional stock exchange and the leading regional financial market, where all the non-Kuwaiti companies listed on the Kuwait Stock Exchange have pulled out and re-listed in Dubai. In addition, a substantial number of Kuwaiti companies have also listed their shares in Dubai. Today, the Kuwait Capital Market has retreated to "third or fourth" place after being the second in the Gulf and the first regional financial market, a role that has since been taken over by Dubai.

Hence our First Theme must be "TO Increase Competition in All Sectors:”

Building more intense local competition by increasing the number of competitors in a sector to levels much higher than all other regional competitors is critical for a strategy of excellence and success. As in the case of the game of football, the nation that owns the most competitive local game will most likely produce the strongest most competitive national team.

"Competition" has the ability to replace comfort and laziness, with the energy and drive of a desire to win, a critical requirement for a wealthy, comfortable and laid back society.

The key lesson for Kuwait or any other nation is that "Local Competition" in all sectors or at least in key economic sectors, should be higher than the level of competition of one's regional and global competitors, if that nation is to maintain or improve its relative wealth.

For competition to flourish, Government-run entities should exit the market in favor of the private sector. Government-run entities in any sector are bad for competition, and, in conjunction with poor competition legislation, stifles or excludes other participants. This is because Government owned players kill margins and profitability to the point where private capital shuns investments in those sectors leading to falling efficiency from lack of competition. Hence limiting government’s participation in running sectors of the economy is a key requirement to encouraging the development of competition.

In fact in most cases, the government’s involvement in a sector leads to monopolistic or quasi monopolistic structure, where government players control over 70% of the market share, and private non-governmental players focus only on smaller segments where government influence is not effective, or where there is little political motivation to be involved. These are usually sectors where service quality, speed of delivery and customer care are important, or areas where government subsidized players are not politically motivated to operate in, such as services to expatriates who do not vote.

Another important reason why the presence of the state is bad for the competitive game is because Government cannot be the judge, the referee and a player. Think of FIFA (the football federation) in the competitive game of football (soccer). No independent team would be interested to play in that series if FIFA (organizer and referee) had a team playing in the in the tournament!

Finally, for effective competition we must fight and prevent monopolies, not only because we need competition to ignite and release the "NEED TO WIN" energy and drive up efficiency, and not only because it is not right to remove the consumers RIGHT OF CHOICE but also because monopolies are bad in many other ways primarily:

• Monopolies encourage political interference in their management and the pricing of their services, even when the monopoly is a privately owned and operated company and despite its ownership being held widely by the public. As an example, take "Mobile Telecom

Company" then "MTC" and today known as "ZAIN". When it was a monopoly, and despite it being a publicly listed company, its CEO was appointed by the government (three Ministry of Telecom Ex-Undersecretaries took that position consecutively after they retired from their public roles), and the pricing of mobile telecom services was negotiated and approved in the National Assembly. Once the government let go of its control of "MTC" and following the introduction of competition in the form of Wataniya Telecom, ("Ooredoo" as it is now called) political intervention stopped, services improved, prices fell and the two went on to become leading regional players.

• A government licensed and approved monopoly obliges government to intervene, subsidize, and support a failing monopoly. As the only service provider, created by the government and thereby forcing customers to use this one single approved provider, government is now obligated to protect the consumer. A clear example is "Kuwait Airways" in comparison to "Wataniya Airlines". Wataniya closed down without receiving any government aid and with little fuss. Kuwait Airways on the other hand, recently needed a government bailout of KD 160 million, and is still losing money, and government is still struggling to find a buyer for it. In the future, I'm sure this will become the fate of the proposed "HEALTH INSURANCE" monopoly coming soon to the Kuwait market.

 

The Second National Theme, should be "Improving Flexibility, Agility and Responsiveness of the Kuwaiti Economy:"

Improving the agility, flexibility and responsiveness of an economy is critical to producing competitive GDP growth, and gaining regional market share. This is because economies must constantly shed and lose old activities that are limiting growth, and gain and seize new opportunities. To do so effectively, they must have the ability to close down old lower value adding industries or industries where they can no longer be a leading player with the least possible resistance, while capturing and gaining new opportunities faster than other competing nations.

This is a continuous process, occurs seamlessly and is rarely driven by a forward vision of what needs to be lost and what an economy should seek to win. As a matter of fact most of the time, politicians, participants and economic strategists will attempt to retain what should be lost as their knowledge is based on historical knowledge and they never see the opportunities that should be gained until very late into the game. Markets do that better by shifting resources and capital from opportunities that are not able to produce a sufficiently viable return and direct those resources to where return and growth seems more promising.

Look at the two opportunities Kuwait took advantage of: "TELECOMS" and "LOGISTICS". No one saw these, no strategist recommended them, no government support or aid was provided yet the right environment was created and market forces were allowed to work freely and they succeeded. However, when we examine the airline industry, Kuwait is struggling to close down or sell "KUWAIT AIRWAYS" although it’s in a totally useless sector and has long lost the game to other regional players, because here all the experts and government bureaucrats are involved.

Examples that demonstrate this constant shift and change are abundant. Look at the automobile industry that was once a key UK and USA industry, then shifted very much to Japan, and today is moving to China and S. Korea. Or the back office and call center services industry - it moved from the USA to Ireland, built the new Irish economy and then moved to India and has since built the new Indian economy. Or the TV technology and manufacturing industry – pioneered in the USA, then moved to Japan, and today is very much in S. Korea. Then there is the PC hardware industry that moved from the USA to Japan and today is very much in China. Similarly, we have the textiles industry which shifted from Europe to Turkey and then to Asia.

No industry is good for a nation forever, and an effective competitive economy must be flexible enough to relinquish the old, yet responsive and opportunistic enough to capture the new faster than others, without the involvement of government experts. Such expert involvement nearly destroyed the Japanese auto industry, and it has destroyed Kuwait's ability to capture in full all the telecom and logistics opportunities. It has also contributed to Kuwait's loss of leadership in the banking and capital markets sectors.

A nation needs to deeply imbed flexibility, agility and competitiveness into all its sectors to enable it to not only take advantage of new opportunities and develop the leading companies in such new sectors, but to also progress from being the “owner” of leading companies in new fields (example Zain and Wataniya in telecoms, and Agility & KGL in logistics) to becoming the "HOME BASE FOR THAT INDUSTRY" or "THE HUB" (which Kuwait has failed to achieve in telecoms and logistics).

Examples of "HOME BASE" or "HUB's:"

• Bahrain is the hub or regional home base of Islamic banking

• Dubai is the regional logistic and capital markets hub

• Detroit is the home base of the US auto industry

• Geneva is the home base of private banking

• New York is the hub for global capital markets

• London is the hub for global banking

In order to develop the agility, flexibility and responsiveness to achieve success and be able to derive further value from those initial successes, Kuwait must not only imbed competition deep into all sectors of its economy, but it also needs the government to shift its expert based allocation of resources, work permits and land allocations etc. to "Market Forces" and highest bidder based allocations. Allocating to the highest bidder allows the forces of supply and demand, rather than government expert bureaucrats to determine the successful owner, as they will only recognize a lost case "decades after markets have seen it" and will only see an opportunity "long after it has gone by."

This is not unique to Kuwaiti experts or Kuwait government bureaucrats, it's the case with all experts globally and is the nature of markets. It's hard to predict opportunities, IBM didn't foresee the PC and then software; Microsoft didn't see or understand the opportunities of internet search engines; Google didn't see social media, and Facebook didn't see the opportunity that Twitter saw in social chatting.

Leaving markets free to take advantage of opportunities and determine its priorities is the most efficient, least expensive and surest way to succeed. The most flexible, agile and responsive economy today in my view is the USA and one can clearly see forces working there.

Examples of where we need to move to market forces in the allocation process in Kuwait are in areas like:

• Work permits for non-Kuwaitis.

• Driving licenses for non-Kuwaitis.

• The allocation of industrial lands.

• Licensing of banks, telecommunications, etc.

• Land allocated for special uses (such as schools / hospitals / banks, etc.)

These licenses or assets should be offered for sale in open auctions and given to the highest bidder and allowed to trade openly. These licenses eventually, if not immediately, will find their way to the most competitive user and produce the highest added value. The state can, however, control prices via controlling supply. If supply is limited politically then price determines the most eligible beneficiary. This is a very important requirement in the attempt to build flexibility and responsiveness into the Kuwaiti economy.

The Third and last "THEME" for Kuwait is THE NEED TO REFORM ITS SUBSIDY MODEL:

By eliminating useless or harmful subsidies and restructuring the way politically required subsidies are granted.

A.   One Harmful Subsidy That Needs To Be Abolished Is The Expatriate Health Insurance Subsidy

The Expat Health Insurance subsidy is absolutely against all economic logic, it maximizes the cost gap between the expat and local labor by further artificially reducing the cost of foreign labor, congesting the already overcrowded public health system and over burdening the public budget.

Health insurance for expatriates must be transferred to the commercial insurance market and private hospital companies for several reasons:

1. It will be a truer reflection of the real cost of expatriate manpower and help reduce the gap with the escalating cost of Kuwaiti manpower.

2. It will encourage the development of a strong and competitive insurance market (an important part of the financial sector).

3. It will encourage the development of the private health services industry, (which may later develop to become an attractive regional health services industry).

4. And finally it will reduce the pressure on public health services and reduce the level of investments in the public health sector.

Experts have been debating such questions as: Can this be done with the current hospital bed capacity in private hospitals? And will the private sector invest in the field of advanced health services? Or what will the impact on inflation by implementing this move? I would say let’s look at a similar Kuwaiti experience, that of the private education sector.

Until 1990, the Kuwait Ministry of Education held tight control over private education by controlling tuitions, curriculum and licenses, and provided free public education to all residents. Private schools were very few in number and the bulk of non-Kuwaiti students went to public schools. The public schooling system was over congested with a severe shortage of classroom seats, so much so that the Ministry of Education was forced to run state schools in morning and evening shifts.

Following the Iraqi invasion and liberation of Kuwait, the Ministry of Education with no prior plan decided not to provide education for children of expatriates, opened the door to private school licenses and removed all previous restrictions. Today, a significant number of state schools became redundant and have been leased to private education companies or have been converted to other public uses. The private education industry has grown to accommodate all non-Kuwaiti students and at least a quarter of the Kuwaiti student population.

Private education has reached university level, and even offers masters-level programs. Not only that, but the top 30% entry exams results for admission to the Faculty of Medicine at Kuwait University are achieved by Kuwaiti graduates of the private education system in Kuwait. The increased cost of private education did not impact the labor cost in Kuwait, nor its competitiveness, nor did it impact the level of inflation.

Expatriate health insurance reform can be introduced in stages starting with government employees, then private sector employees and finally domestic workers. Insurance companies can also be allowed to transfer their clients to state hospitals in the absence of enough beds in the private sector (during the transitional period). For the elderly, or those in Kuwait with health conditions not covered by insurance companies, free government health services can continue to be provided. Visitors must however be required to have health insurance especially with a visit visa request. Eventually, these reforms will allow the health sector to transition to a successful flourishing industry similar to the case of education.

 B.   Restructuring Politically Required Social Subsidies:

Example Electricity, Water and Food Subsidies:

In these sectors, Kuwait needs to shift to monetary subsidies rather than price subsidies. This means paying to households, in cash or via a government account, a sum that is equal to/or slightly more than the cost increase resulting from re-pricing goods and services to their market price. This will stimulate individuals and families to save, and encourage society to develop the correct consumption behavior, invest in efficiency, and reduce the required investment in future production capacity.

The goal here is not to reduce subsidies granted to families, but to encourage families to change and rein in their consumption behavior, invest in the most appropriate lifestyles, and be rewarded for such behavior. At the same time, the state benefits as a result of the reduced need for capital investment in power and water capacity. This approach is supported and urged by the World Bank and is being implemented in countries such as India and others.

Conclusion

Kuwait should adopt Three Main strategic themes for its recovery and growth.

Theme #1: Encourage competition, fight monopolies and exclude the Government as an Economic Player

• The state must exit from ownership of businesses and other economic activity.

• Increase the competitive climate (to be higher than that of other GCC states).

Note: Government employees need not be affected in terms of job availability or security, but should be encouraged to work in the private sector while assuring them the availability of the same job in government should they choose to return.

Theme #2: Move to market forces (supply, demand and price) to determine the beneficiaries of services, licenses or state assets through public auction sales, and allowing those to trade in a secondary market.

Theme #3: Reform the subsidy structure.

• Removing expatriate health insurance subsidies.

• Reforming social and family subsidies by moving to cash subsidies as opposed to the current price based subsidy.

Kuwait’s initial plan should focus on a limited number of projects under those THEMES, projects that can create the largest impact in the shortest time frame and help deliver the early success needed to gain the community’s continued support.

The number of proposed projects should be limited to "five or six major projects", in order for the entire Cabinet to focus on their early success. The five projects I would recommend to be the nucleus of the first strategic plan are:

1.  Advance Kuwait towards becoming a competitive regional financial center by carrying out the following:

 Competition in capital markets must be intensified by:

• Privatizing the current stock exchange as soon as possible and licensing other competing exchanges and other specialized exchanges as early as possible.

• Invite regional and international brokerage firms to open offices in Kuwait and operate in the Kuwait market.

• Increase the number of clearing companies to at least three and encourage competition among them.

• Intensify competition within the banking industry by allowing regional and international banks to open branches and grant them Kuwaiti banking licenses.

• Invite non-Kuwaitis to membership of the Capital Markets Authority and to the board of the Central Bank of Kuwait.

2.  Promoting Kuwait as a competitive trade and logistics HUB:

Again, by the government exiting its ownership and increasing competition via the establishment of port management companies, each managing one of the three ports (Boubyan/Shuaiba/Shuwaikh), and land crossings to Iraq and Saudi Arabia, or setup independent competitive companies to manage those land crossings and permit privately managed cargo centers at the international airport.

3.  In the Telecommunications Sector – In order to reinforce our successes in the telecommunication industry, Kuwait must immediately open its international communication and internet services sector to private companies, and allow open, non-restricted competition, free from government price controls in these areas.

4.    For Improved Efficiency and Agility and Responsiveness

 a.    Kuwait needs to restructure its subsidy policies by:

• Abolishing health insurance subsidies to expatriate workers and transferring the expat insurance business to the private insurance and private health care industries.

• At the same time Kuwait needs to reform its social subsidies structure by changing from price based subsidies to cash subsidies.

b.    Move to "highest bidder" allocation policies to determine beneficiaries of limited permits, licenses or government allocated assets. By placing those through public auctions and granting them to the highest bidder.

KUWAIT’S LOSS OF COMPETITIVENESS & THE POSSIBLE SOLUTIONS

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:

1. 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??

2. 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:

1. 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!

2. 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:

1. Grow the privatize insurance industry (financial services)

2. Develop the private health industry which could lead to “A Regional Health Services Hub.”

3. Reduce the load on Public Health Services and the need to investment in new capacity.

4. 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.

EGYPT - IF YOU’RE WRITING OFF THE BROTHERHOOD PARTY, THINK AGAIN

Let me add a twist to the latest developments in Egypt. My view lately was that the Islamists made a major mistake in taking full responsibility for managing the transitional period after Mubarak, a period that no one can manage successfully and who ever takes responsibility for it will eventually pay the price in the loss of electoral votes in the next elections.

By that time, things would have stabilized enough to allow the economy to stop losing and possibly start to show some improvement and who ever takes power can blame the mess on those that proceeded him.

With this military backed removal of the Brotherhood Party, the Brotherhood Party has been salvaged form a very tough spot they had put themselves in (although I am sure they don’t currently see it this way). Now they can stay in opposition and wait, being the victims of a conspiracy.

The liberals and military will now have to achieve the very difficult task of managing a very difficult transition period with a coalition and the strong Brotherhood Party in the opposition.

In the mean time the brotherhood party has to and will most probably be shuffled and taken over by a younger leadership that is more up to date with the current mood of the younger public. That will position the brotherhood for the next elections or the one after.

The brotherhood party has been spared the responsibility of the tough times, they will be forced to change from within, their competitors now made the big mistake of moving in too early and taking responsibility for this impossible task at the end of which the Egyptian public would be tiered of coalition governments, of old liberal political leadership and of economic hardship , and no one will look again to the Army for help again, everyone will finally realize that the Army really doesn’t have the solution. 

The public would have, by then forgotten the mistakes of the brotherhood party and this will set the stage for their come back, sort of what happened in Turkey with Arbakan, who managed aggressively early and managed with old school style, army removed him, interim governments were coalitions, the youth of the Islamic party split and formed a new party and within 10 years they were in power.

So don't write off the Islamists… 

TURKEY AND TAQSEEM

"Reasons, Possible Solution, and the Unavoidable Eventual Repeat of History"

Here are my thoughts on the latest developments in Turkey, for whatever it’s worth.

The Turkish street protest in my view are primarily caused by a large percentage of the population (primarily large metropole residents) that feel frustrated for losing politically over such a long time (some 12 years), where they see themselves compromising to the needs of the other, no real representation in government and no hope in the foreseeable future of that reversing.

They are not one party, which is the reason they are not sufficiently represented. It's painful and demoralizing to be losing all the time with no hope in sight, it makes for a need to pick on any issue that can sufficiently bring enough opposition consensus to try and get a win, make a stand, regain confidence, faith and self-esteem, which is only normal in such circumstances. 

People need to win sometime, you can't get them to play well if they don't make some small wins between now and then. They also need their space protected, they agree to other spaces choosing their own preferred style but they need their space and their city, they don't want it hijacked from them.

The solution really is to allow the opposition voters to make some wins and get some space, so they can remain a more accommodating and comfortable opposition citizens.

Moral of the story, if you are winning big and want to continue to win for much longer with the least resistance, let the losing minority constituency make some small wins and let them protect their space.

Anyway recent western democratic history shows us that no democratic leader is forever, max 15 to 20 years of successful leadership will bring down any leader in a democratic and competitive political environment (M. Thatcher/Blair). They always come down because they stop listening and believe what made them will keep them, they get too focus on achieving that last big thing.

They all pass to the second person in the party or the second person defeats them to the party leadership and normally that party has one or two terms left.

They would have however left their permanent mark on that nation by then.

MENA REGION: A 2030 SCENARIO

GCC:

By 2030, GCC’s “share” of the total Arab economy (as defined today) would have grown by 25/30% (2-3% GDP Annual Growth difference between GCC & rest of the Arab world for the next 10 years. After that the annual growth gap will shrink (on average would generate 20-30% differential growth). 

MOROCCO:

Morocco, is another new Arab economy that will expand its economic market share of the total regional economy as defined today and will start to command recognition.  (1) Morocco is large, (2) managed a smooth Arab Spring transition, (3) is stabilized by a reasonable monarchy and (4) driven by need.

Growing at 5%-6% (with only 2% inflation and a stable currency) over 10-15 years will mean some 3% to 4% per annum better than the rest of the Arab World and 2% better than the GCC. This over 10-15years would mean 40% growth in its relative importance to the group than what it holds today.

Rising to North African and definitely Magrib prominence, and drawing in central and Western African economies to its increasingly regionally influential economy and market place.

 OMAN:

Another economy to watch is Oman, very much the Moroccan story, on a smaller scale, however with a little help from oil and an increasing role as a major sea hub.  Oman may also develop some economic influence with its traditional links in East Africa.

 TURKEY:

Turkey is the biggest new development, it is the never expected (25 years ago) participant to this region. By 2030 Turkey would most likely be the 10th largest global economy. It will draw in the (1) Caucasus economies (2) a lot of the Black sea region economies, and (3) The Balkan’s to its expanding vibrant and large economy.

It will definitely pull the whole “Levant” into it, where those economies will not be able to resist being part of that sizeable, fast growing economy, driving a lot of benefit’s and efficiencies to themselves by doing so.

This new addition to the region is major and will bring major expansion, efficiency, inter regional synergy and global critical size to this new MENA region economic block.

 ARAB SPRING & GCC:

The GCC having avoided much of the pressures of the early days of the ARAB SPRING, will find it very difficult to avoid that pressure in 10 years time.

Arab Spring Nations now driven by (1) stability, (2) new dynamic’s, (3) competitive politics, (4) increase transparency, (5) cheaper resources , (6) plenty of young manpower, (7) attractive valuations and the new found confidence and liberty would be growing at double the speed of the GCC economies.

The price they paid for change is now behind them and forgotten, the pressure will be very high on the GCC, who by now will have economies that are growing a little slower and the internal pressure mounting on them to introduce further political change.

EMERGENCE OF A NEW ECONOMIC BLOCK: (see map below)

As discussed, a new Economic Block will emerge to replace and overtake MENA. This new Economic Block will be much more “economically” integrated as opposed to just sharing “culture, history and language”.

This new regional economy will need a new name, other than “MENA,” I like to call it the “NEAR ORIENT.”

It will include the Middle East but the new Middle East will now include Turkey (this takes nothing from Turkey being a part of E.U but adds to it), and Turkey will include an economic region that includes parts of the Balkan’s, Caucasus and Black Sea with it.

North Africa but North Africa will include an economic zone that will stretch to include most parts of West, Central and East Africa.

It will include the GCC but that will include in its economic zone Pakistan & Afghanistan and possibly parts of East Africa.

With Turkey increasing weight, it will most likely become the New Political and Economic Hub for the region (which was in Cairo then moved to Riyadh and now preparing to move to Ankara & Istanbul) with sub hubs in GCC, Cairo & Morocco.

This would also happen because the GCC will be internally focused (to some extent) managing the delayed impact of the Arab Spring.

NOW HOW INTEGRATED WOULD THIS REGION BE ECONOMICALLY?

Well we can already see some of this today:

• A single Media infrastructure , MBC, ARABIA, AL JAZEERA, OSN

• One regional youth culture & music (Rotana etc)

• Telecom: regional players (Zain/ Qtel/ Itisilat/ Viva)

• Banking regional Arab Banks, definitely regional Islamic Banks

• Travel hubs : UAE , Qatar , Istanbul

• Regional Real Estate Developers: EMAR & others

• Logistics

 Is TURKEY a part of this?  Yes.        

• Telecom: Turktelecom

• Media: Jazeera

• Islamic Banking and Growing Arab Banks

• Real Estate and others

 In the Arab World:

• Turkish Contractors

• Turkish fashion and Retailers:  BAYMAN , Grocery (BIM is a leading grocery in Morocco today)

• Retail Products: Processed Food, Confectionery

• Tourism

• Istanbul, a key large regional flight hub

• Industrial Goods

• Turkish TV Soap Operas

IRAN:

Iran by now and during most of this period, would most likely be very busy internally managing a transition into a more liberal political system, (possibly leading to the change of “Wilayat Al Faqieh” from the political system) and working on fixing its troubled economy and mending its image in the Arab World (destroyed by its Syria Policy).

HEZBOLLAH:

Damaged by its venture into Syria and weakened further by Iran pulling inward will diminish into a small Lebanese party and Lebanon’s Shia Community will revert to its traditional leadership. Lebanon by then as the rest of the Levant would very much be a part of the new Turkish Economy and sphere of influence.

ISLAMIC BROTHERHOOD PARTY:

The Islamic Brotherhood Party will most likely see its power base trimmed down and the Arab Spring Nations would most likely by this time be lead by a new liberal conservative or conservative liberal (anyway you would like to see it) center parties. Primarily a result of the Brother Hood party making the mistake of:

1. Taking full responsibility of the immediate transition period, a period where no one can succeed.

2. Not paying enough attention to the new virtual youth.

3. The emergence of new liberal conservative or conservative liberal parties.

ISRAEL:

With Turkey’s rise to prominence Israel can not afford not be a friend to Turkey. Its role as a regional tool for USA regional policy will diminish with the diminishing importance of GCC oil to the USA and the pull back of Russia from the region.  By now, Israel would want to live in peace, be an active member of the regional economy, avoid conflict and integrate and dissolve into the region. Israel might even by then start to see value in Israeli Arabs and the adjacent Palestinian State helping it build a gateway to this growing regional economy.

USA/GCC RELATIONS:

By 2030 the USA would be more an outside member of OPEC rather than a client (sort of more like Russia today).

The GCC would not be critical to its energy needs, most likely by then the USA is a net exporter of products. However, being the primary Global Power it will have interest in the GCC for a number of reasons:

1. The GCC will still be important for determining the Global price of oil.

2. The GCC will still be critical to USA Allies and to anyone that wants to challenge USA global supremacy.

So the USA can reward or punish by allowing or making it difficult for others to have access to energy.

As for the GCC it will need to protect its sea routes, its primary distribution channels to its customers and secure its production facilities. There is no one with that capability globally but the USA (and should there be an alternative, its most likely that the GCC would not outsource securing its trade routes to a client, if it has the option, so as not to restrict its marketing and distribution strategies) and hence the same strong relationship but less tense and more comfortable now that the USA is not a customer but a partner.

ARAB SPRING

This far into the Arab Spring, the vision is getting a little clearer and I will venture and attempt to draw a possible future scenario of how things may unfold over the next 5-8 years and the positions of the key stake holders. Of course there is always the wild unseen developments but its still worth the try.

North Africa where the transition of power has been completed, and as was clear to all they are now paying the economic price of this transition in  political turbulence, security and the associated economic deterioration and it is going to take its time. I believe it will need some 5-8 years or two to three presidents, before it starts to settle down and economies start to grow sufficiently again.

I believe the Islamic Brotherhood party has made the major mistake of taking full power and hence the responsibility for this period. This is a period that NO ONE CAN WIN and a wise decision for any party would be to govern through a coalition, and not stand out or better stay in the opposition. Now that the Islamic Brotherhood has made that mistake, there is no going back, they are likely to pay the price in reduced support with voters and see a strong opposition emerging. So if I was to make a bet, the bet is over the next 8 years the President or Prime Minister managing the return to stability and economic growth would be a moderate center right (if right is Islamists and left is liberal in the Arab World Today).

The Islamic party in Turkey took up responsibility when the economy was in its worst and had no where to go but get better. In the Arab Spring nations, it’s the other way round.

These developments suits the conservative GCC, Europe & USA as such they would just let the process take its time, injecting sufficient financial resources to show good will and avoid disaster, try to manage the situation if possible so it does not blow up or spill over, and if successful the end result should be reasonable.

The move from Left (liberal and anti-Islamic old regimes) to Right (conservative Islamic regimes) and eventually gradually gravitating toward the centre is an indication of political maturity of the Arab World.

If this is actually how things do unfold, then this region should regain interesting economic growth, supported by cheap input, available capacity, strong growing pool of young man power, a more transparent and competitive political system and increased confidence and creativity. 

The monarchies in the Arab World (especially the GCC & Jordan) at that point would be more challenged to deliver the same level of freedom and political participation with the same level of economic growth which may be double that of the GCC by then and its at that point that the serious challenges posed by the Arab Spring will hit the conservative GCC, challenge it and vitalize it. At that point, oil revenue increases would have flattened out and economic growth would have slowed down in the GCC. 

As for Syria it is developing as the Afghanistan for Russia, Iran & Hezballah. Syria is developing into the opposite of Iraq. In Iraq the USA and allies were sucked into replacing Saddam and stabilizing the country and finally sort of losing it to Iran. 

Syria is sucking Russia , Iran and allies, it will hurt them financially and militarily, will consume their willingness to initiateother conflicts, will push them to compromise on may other global issues and at the end they will sort of lose to Turkey the GCC and allies. But this is going to be a long and difficult process for the Syrian population, very much like Iraq was tough on the Iraqi people and its going to be much more economically painful to Russia ( for Russia is not the USA) but disastrous to Iran, a country already economically challenged. As for Hezballah, its going to be the killer war, at the end of which Hezballah would be devastated, losing a big part of its grass root support in Lebanon and turned into a smaller political party that does not dominate Shia voters in Lebanon and most likely the current speaker of Parliament, Mr. Ziad Barry will merge as the powerful Representative of the Lebanese Shia community.

THOUGHTS ON CORRUPTION

The level of corruption at public owned enterprises is larger than corruption at private enterprises. Clearly because of the increased sense of ownership by those looking after the privately owned assets and the reduced sense of guilt when those assets are the ownership of “ALL” as opposed to a single owner (your neighbor).

As such corruption in an economy (as a percentage of GDP) will increase with the growth of government ownership of economic activity (growth in public sectors GDP, as a percentage of total national GDP) and will decrease as the public sector ownership of total economic activity decreases.

When the public sector dominates the economic activity of a nation, its ethics and culture will dominate that society eventually (may take 10 or 15 years for full effect, although its immediate effects can be felt within 3 to 5 years) , including those in the private side of that economy. While if Public Sector ownership shrinks to a minority, the ethics, values and culture of the private economy will dominate that society eventually including those employed by the Public Sector.

When we add a participative political system (democracy) to the above formula, we notice that democracy added to a largely privately operated economy adds transparency, improved equality and opportunity. While when added to a largely government owned economy it results in equal right to misuse public assets, be that through theft or corruption, or getting a job in government when no new employment is needed, or not showing up for work, or voting higher salaries with no economic justification etc.

Hence in highly government owned economies, less political participation decreases corruption by limiting corruption to those in power, and in largely privately owned economies political participation decrease corruption.