Countries of the World/COUNTRYS.BIN/dp/0210/02105.txt

Text File | 1991-06-25 | 35KB | 546 lines

$Unique_ID{COW02105}
$Pretitle{385B}
$Title{Kuwait
Chapter 1B.   The Economy}
$Subtitle{}
$Author{Darrel R. Eglin, Donald M. Seekins}
$Affiliation{HQ, Department of the Army}
$Subject{oil
kuwait
government
production
revenues
percent
gas
officials
crude
kuwait's}
$Date{1984}
$Log{Kuwaiti Crafts*0210501.scf
Figure 6.*0210503.scf
}
Country:     Kuwait
Book:        Persian Gulf States, An Area Study: Kuwait
Author:      Darrel R. Eglin, Donald M. Seekins
Affiliation: HQ, Department of the Army
Date:        1984

Chapter 1B.   The Economy

[See Kuwaiti Crafts: Courtesy Embassy of Kuwait, Washington DC]

     After their migration to Kuwait Bay in the early 1700s, Kuwaitis were
forced by the scant rainfall and limited water for irrigation of crops to
look seaward for economic development. Boatbuilding flourished, and Kuwaiti
craft became known throughout coastal Arabia for their quality. These craft
with Kuwaiti sailors plied the waters of the Gulf, the Arabian Sea, and
the Indian Ocean. Pearling was also a large-scale activity until the rise
of the cultured pearl industry in Japan in the 1920s. The good harbor in
Kuwait Bay and other maritime activity led to the development of a vigorous
merchant class in Kuwait City. During the eighteenth and nineteenth centuries,
the city rivaled Basrah in Iraq as an entrepot for the trade between India and
parts of the Middle East. The legacy of seafaring and trade gave the Kuwaiti
people an aptitude for commerce and a propensity to look abroad that continued
into the 1980s.

     Although maritime activities provided employment in early Kuwait,
incomes were low and life harsh except for a few merchant families who became
wealthy. Even the ruling family had a very limited income. In the mid-1930s
the entire budget for the palace and all of the royal family was the
equivalent of about US $7,500 a year and was contributed directly or
indirectly by the merchant families. In FY 1939 the average per capita income
in the country was estimated at the equivalent of about US $35 a year, and
total public revenue, two-thirds of which came from import duties, amounted
to US $290,000. Some observers attributed the resourcefulness and independent
spirit of the Kuwaiti people to their struggle for survival under adverse
conditions.

     Conditions began to change after oil was found in 1938. Oil field
activities created jobs at much higher pay than many traditional pursuits,
attracting Kuwaitis from labor-intensive, low-income sectors of the economy
and workers from other countries. World War II held up development of the
fields. Commercial production of crude oil began in 1946, ushering in a
construction boom. More workers were attracted from abroad, and by the 1950s
foreigners outnumbered Kuwaitis in the work force. By 1948 oil revenues had
reached about US $6 million, sufficient for the government to begin public
projects to improve living conditions. In 1949 construction began on a public
hospital, a government building, schools, and roads.

     The government was not prepared for the changes that occurred; there was
little government when oil was discovered, and little was needed. Initial
public projects were started with minimal basic planning and often from
simple sketches. Public administration developed in response to the increasing
flow of oil revenues. But one basic change occured with the first oil company
payment: the oil revenues were paid to the amir, concentrating in his hands
and, subsequently, those of other government officials, the distribution of
funds. The position of the amir was enhanced relative to other segments of the
society, and he was freed of dependence on financial support or taxes from the
rest of the community.

     Oil revenues continued to mount. By the 1960s Kuwait had become the
richest country in the world (wealth being measured in terms of national
income per capita). The rapid escalation of crude oil prices and revenues per
barrel greatly increased the government's income in the 1970s and early
1980s. Oil revenues jumped from US $1.8 billion in FY 1974 to US $8.3 billion
in FY 1975. By FY 1980 government income from oil reached nearly US $21.7
billion, and in 1981 gross domestic product (GDP) amounted to US $24.3
billion. GDP on a per capita basis was about US $16,500, making the average
Kuwaiti the world's wealthiest-except, perhaps, for the citizens of Qatar.

     The flow of oil revenues created a problem unusual to most governments
in the world-what to do with all the money. By the early 1980s Kuwait had an
extensive welfare program, exceeded perhaps by no other country. Citizens
received free medical services from modern facilities, free education through
the university level, and subsidized food, housing, utilities, and
transportation, for example. Noncitizens, however, benefited much less, and
many resented their disadvantaged position despite having worked many years
in the country. In the 1970s the government invested heavily in a gas-
gathering system and downstream (see Glossary) facilities for refining,
petrochemicals, and petroleum marketing. Even with the various expenditures a
substantial surplus of funds accumulated over the years, which the government
invested in overseas assets.

     By the early 1980s Kuwait's economy was far different from that of 40
years earlier. In 1981 the oil industry (including refining) dominated the
economy, contributing 63 percent of GDP (see table 5, Appendix A). The other
major activity was public administration and social service, which accounted
for about 10 percent of GDP. Trade contributed 7 percent of GDP and financial
services a similar percentage. Industrial activity and construction each
amounted to 4 percent of GDP. The remaining sectors made minor contributions
to value added-particularly farming and fishing, which accounted for 0.3
percent of GDP. Apart from the oil industry but because of oil revenues, the
economy was predominantly service oriented. The distribution of oil revenues
among the population accounted for part of the services and also stimulated
distribution and sale of imported goods and financial transactions, including
real estate and stock market speculation (see Finance, this ch.). The
traditional commercial orientation of the more prosperous Kuwaitis persisted
in the 1980s, causing interest and investment in industry or agriculture to
be the choice of relatively few.

     Once exports of oil began in the late 1940s, economic development
became nearly continuous. Until 1972 much of the expansion resulted from
increasing crude oil production, but oil production peaked in that year.
For the rest of the 1970s, oil production was substantially lower, but
higher revenues per barrel financed continued economic growth (see table 6,
Appendix A). In late 1980 a surplus of oil relative to demand began to emerge
on world markets, and this persisted in 1984. More important, oil revenues
declined from US $21.7 billion in FY 1980 to US $9.7 billion in FY 1982.
Although data were unavailable, economists expected that oil revenues
remained low or declined a little in FY 1983.

     Economic activity slowed after 1980. GDP fell 9 percent in 1981 and
probably further in 1982 and 1983. A crash of the unofficial stock market
in mid-1982 contributed to the diminished economic activity (see Finance,
this ch.). Although budget revenues dropped sharply during the recession of
the early 1980s, officials largely sustained government spending by drawing
on investment income from assets abroad (see Role of Government, this ch.).
By maintaining government expenditures the economy was spared the worst
effects of the recession. By 1984, however, some mild austerity measures
had been introduced to limit the growth of expenditures. Although many
economists considered the economy sound and stable because of the country's
foreign assets, observers wondered about the population's reaction if further
austerity measures were required by continuing low demand for Kuwait's
oil in world markets for