Move aims at reviving weak private sector

KUWAIT CITY, March 21: Kuwait, which relies heavily on public sector wages and energy subsidies, must make radical changes like the provision of unconditional cash grants to sectors of society if it intends to revive its weak private sector, reports Al-Rai daily quoting an article published by The Banker Magazine recently. The article said the comprehensive basic income initiatives, which are intended to provide governments with regular and unconditional cash grants to segments of society, have reverberated frequently in recent years in countries such as Kenya, Brazil, Iran and Finland; while interest in these plans is now increasing in the Arab Gulf region.

The article pointed out that at first glance, the idea of unconditional cash grants may seem strange in the context of oil-rich countries such as Kuwait; but the promotion of comprehensive income initiatives has started to increase as a tool for improving the unequal and ineffective distribution of the revenues of oil states among Gulf citizens, with the positive consequences of that for the macro economy, the private sector and the environment. A professor of international development at Georgetown University and former chief economist at the World Bank Shanta Devarajan commented on this, stating that the Kuwaiti oil revenues are distributed to Kuwaitis in two ways, which are completely ineffective

Hinder
Devarajan revealed “the first method is through high-paying jobs in the public sector, which are very huge and not productive jobs that hinder the growth of the private sector; while the second is through fuel subsidy, which is ineffective as it creates incentives for excessive fuel and electricity consumption.” The article added that public sector wages and energy and utility subsidies represent about 70 percent of annual government spending in Kuwait, while the exorbitant salaries paid to government sector employees are a strong disincentive factor for Kuwaitis to work in the private sector, which is dominated by expatriates from the South and East Asia to a large extent. While the number of Kuwaitis working in the public sector increased by 4.5 percent annually from 2014 to 2019, the number of workers in the private sector declined by 0.3 percent annually during the same period. Although Kuwait’s large oil wealth and its relatively small population indicate that financial reform is less urgent than Saudi Arabia, Oman and Bahrain; its changing global oil consumption patterns have made financial reform more urgent.

Even if the International Monetary Fund (IMF) and other international development agencies have called for cutting subsidies and public sector salaries for decades, there has been minimal progress due to ongoing confrontations between the government and concerns about the impact of these reforms on Kuwaiti citizens. Given the enormous size of the wage gap between Kuwaitis and expatriates, reducing these differences is risky. During its consultations with Kuwait in March 2020, the IMF urged the government to phase out subsidies in favor of targeted compensation schemes. Meanwhile, Associate Professor of Comparative Politics at the London School of Economics Steffen Hertog said: “The idea of merely transforming Kuwait into a free market economy cannot be politically or morally defensible in which citizens do not have any special support while they are pushed to compete with low-cost labor from the South of the Globe and other places.” “Instead, a balance must be struck that enables citizens to become more competitive in the labor market while receiving an income that enables them to enjoy a kind of middle-class life,” he added.

Excluded
“The Gulf region has so far been excluded from discussions of universal basic income, although in many ways it is an ideal environment to experiment with such policies,” he asserted. “On one hand, they have enough money to implement universal basic income in a reasonably generous way, but on the other hand, the financial trends are so dangerous that they really need to do something about financial sustainability,” he explained. Hertog’s modeling suggests that removing subsidies on domestic energy consumption can generate a monthly cash grant of $200 for every Kuwaiti adult employed in the public sector, $700 for those outside the public sector and $230 for every child.

He believes that separating government employment from wealth sharing would give citizens stronger incentives to search for skills related to the private sector, noting that ensuring basic income gives citizens autonomy in bearing the risks of entrepreneurship and making the most of their talents. He thinks the idea of ‘universal basic income’ should be explained very carefully, so that the benefit of income is spread to all Kuwaiti families. “This must be explained clearly, however, comprehensive basic income is an alternative to subsidizing energy and employment in the public sector. It must be established constitutionally, so that there is no temptation to engage in the new patronage policies beyond that,” he concluded.