Economics of the UAE Assessment Group Project Research Paper

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Kuwait Sample

Summary of Kuwait's macroeconomic performance

Kuwait much like most of the developed world has undergone significant change. This change has occurred in both social and economic matters. Aspects that once plagued the nation are now being abated by policies that increase productivity and enhance economic activity. Much work still remains for the nation however, as disparate views often conflict with proper policy. After Kuwait gained independence from the United Kingdom in 1961, the state's oil industry saw unprecedented economic growth. Oil production during the following decades nearly doubled. Oil during these periods, was primarily exported to other developed nations including the United States and Japan. As time passed, Kuwait gained a strong competitive advantage in oil and petroleum-based products. This advantage, ultimately allowed the country to flourish during the 1980's and 90's. However, as will be discussed later in the document, economic concentration of petroleum-based products created a dependency for the entire country, on one commodity. In 1990, Kuwait was invaded and annexed by neighboring Iraq which devastated the overall economy, due in part, to this dependency on oil. The seven-month-long Iraqi occupations came to an end after direct military intervention by United States-led forces (Hunter, 1990). However, the victory did not have its negative aspects. Tourism in particular declined substantially due to the overall stigma attached to the political turmoil surrounding the country. Around 773 Kuwaiti oil wells were set ablaze by the retreating Iraqi army, resulting in a major environmental and economic catastrophe. The entire country suffered as a result with Kuwait's infrastructure badly damaged during the war. This seemingly tragic episode ultimately was one that benefitted the country as it engaged in a dramatic rebuilding campaign. The restructuring of the nation ultimately allowed more individuals to work on construction related jobs. Through the employment of its citizenry, the country could prosper economically as more people were employed. Twelve years later, Kuwait saw another massive foreign military presence as it served as a springboard for the U.S.-led campaign in 2003 to oust Iraqi leader Saddam Hussein. This ultimately led to the leaders death, further liberated the country from foreign control. These events have lead up until the financial crisis of 2008 and the recovery pending in 2013. The country over this period of 1980 to 2013 saw political turmoil, a communist leader fall, oil refineries set ablaze, and its country ravaged by 2 wars. However over this 30-year period Kuwait has reached all time high in regards to the valuation placed on its businesses (Kaveh, 2007). Chart 1 below indicates the overall growth of the businesses of those incorporated in Kuwait.

Chart 1

Kuwait is a constitutional monarchy with a parliamentary system of government. Kuwait City serves as the country's political and economic capital. Kuwait is often described as the most liberal country in the region due primarily to its economic, social, and business practices. The country has the world's fifth largest oil reserves and petroleum products now account for 87% of export revenues and 75% of government income. This aspect, as mentioned earlier, is a detriment to the overall economy due in part to the high concentration of petroleum-based products. Nearly 9 out of every 10 export dollars come from oil-based products. Countries, particularly developed nations, are beginning to adopt alternative energy sources. Electric, more fuel efficient electric vehicles are now being manufactured across the world. Cheaper natural gas is being harvested in the United States to be used in hauling freight. Wind and even ethanol have taken precedence in many countries around the world. Many of these aspects ultimately reduce foreign dependency on oil. As a result, oil price may begin to fall as consumers demand less oil, or countries will begin to use their own sources of oil rather than those of Kuwait and other OPEC nations. Kuwait therefore would need to diversify its product offerings to better acclimate the changing economic conditions prevailing in the market (William, 2000). Tourism in particular needs to rebound as consumers are still skeptical of their safety within the region.

Currently, Kuwait is the eighth richest country in the world on a per capita basis. Kuwait is classified as a high income economy by the World Bank and is designated as a major non-NATO ally of the United States. Kuwait is also one of the wealthiest countries in the world.

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Current GDP per capita reached astonishing peak growth of 439% in the 1970s. This was due in part to high inflation and large demand for petroleum-based products. But this proved unsustainable and as a result, GDP per capital contracted by 58% in the 1980s due in part to political unrest and alternative sources of oil. However rising global oil demand helped register growth of 91% in the 1990s during the height of the stock market frenzy in America and other developed nations. As consumers felt wealthier, they began to spend on more lavish products such as cars. Americans during this time period purchased large cars that relied heavily on petroleum-based products. This trend ultimately fueled the GDP growth of not only Kuwait but other OPEC nations as well.

Major Sectors contributing to GDP

The Gross Domestic Product (GDP) in Kuwait expanded 6.10% in 2012 from the previous year. GDP Annual Growth Rate in Kuwait is reported by the Central Bank of Kuwait. From 1963 until 2012, Kuwait GDP Annual Growth Rate averaged 3.7% reaching an all time high of 34.0% in December of 1993 and a record low of -20.6% in December of 1980. However, Kuwait's growth closely resembles that of the United States. Kuwait holds the world's sixth biggest proven reserves of oil and oil extraction accounts for 40% of GDP. This again in regards to concentration is not a robust number. Oil, as a commodity is heavily dependent on demand. As such, as alternative energy solutions begin to take hold, Kuwait may suffer in a corresponding manner. A bright spot in the overall Kuwait economy is that of service oriented products. The services sector constitutes 30% of the output. Within services the largest segments are: community, social and personal services which account for 11% of GDP; real estate and financial and business services which account for 9% of GDP and wholesale and retail trade and restaurants and hotels which account for 8% of GDP. Of particular interest in regards to GDP, is that of real estate, financial and retail trade. As the country grows and becomes more businesses oriented, financial and retail segments have the potential to prosper. Kuwait is beginning to lose the stigma of being a war-torn country. Instead, economic development in the retail sentiment continues to be promising. Prior to 1980, retail only accounted for .9% of GDP. Current it is 8% which indicates continued growth in globalization. In addition, real estate stands to prosper as the economy both politically and socially, begins to stabilize. Manufacturing contributes for 23% of the wealth and construction and electricity, gas and water distribution for the remaining 7%. Chart 2 below indicates Kuwait's annual growth rate in regards to GDP

Chart 2

Agriculture accounts for 1% of Kuwait's economy and 8% of the gross domestic product. The agricultural sector provides fruit and vegetables for sale in the country's supermarkets. Agriculture is limited by the lack of water and arable land. However, as mentioned above, real estate development continues to grow at a more robust pace. If political instability subsides, agriculture, along with real estates can have a more profound impact on the overall economy. The government has experimented in growing food through hydroponics and carefully managed farms. However, most of the soil which was suitable for farming in south central Kuwait was destroyed when Iraqi troops set fire to oil wells in the area and created vast "oil lakes" (Chilcote, 2003). Fish and shrimp are plentiful in territorial waters, and large scale commercial fishing has been undertaken locally and in the Indian Ocean. The Kuwait Oil Tankers Co. has 35 crude oil and refined product carriers and is the largest tanker company in an OPEC country. Kuwait also is a member of the United Arab Shipping Company. Kuwait is the world's eighth biggest exporter and the tenth largest producer of oil. Shipments of crude and refined oil account for 95% of total exports. Main export partners are: South Korea (18% of total exports), India (15%), Japan (14%), China (10%) and United States (8%). Others include: Saudi Arabia, United Arab Emirates and Pakistan.

Inflation

The inflation rate in Kuwait was recorded at 2.90% in September of 2013. Inflation Rate in Kuwait is reported by the Central Bank of Kuwait. From 1995 until 2013, Kuwait Inflation Rate averaged 3.1% reaching.....

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