Weekend Reading

Ashby Monk

The discovery of oil in Kuwait in 1938, and its subsequent production a decade later, altered that country’s fortunes forever. More to the point, the relationship between the people and the government permanently changed, as the latter no longer relied on taxes from the former to function.

In fact, the new resource rents were so bountiful that a sort of intergenerational savings fund was created in 1953. According to the KIA, this remarkable innovation was the brainchild of the forward thinking ruler at the time, Sheikh Abdullah Al-Salem Al-Sabah, who apparently decided that some resource wealth should be set aside for the long-term welfare of the people of Kuwait. As such, Kuwait is often credited with being the first country (albeit under British rule) to set up a SWF.

I think this is a fascinating story. And, if you agree, you’ll definitely enjoy this new paper by Laura El-Katiri, Bassam Fattouh and Paul Segal entitled “Anatomy of an oil-based welfare state: Rent distribution in Kuwait.” The authors chronicle the rise of the rentier state in Kuwait and offer a broad appreciation for how the discovery of oil literally changed everything. Here’s a blurb:

“Oil has made Kuwait rich. Oil is Kuwait’s largest productive sector by a long way, and oil rents are the foundation of even the non-oil economy. But wealth does not lead automatically to economic and social development. Kuwait’s achievement is that it has, for the most part, used its oil income to provide a high standard of living for full Kuwaiti citizens, while to a much lesser extent also benefiting non-Kuwaitis. Oil wealth has transformed the country within decades from a modest, trade-based desert emirate into a modern city-state. It has also created a relatively egalitarian economy based on an extensive distributive system that provides Kuwaiti citizens with essential services including free healthcare, education and social security. Therefore, the most important fact about Kuwait’s oil wealth is that it has been successfully used to benefit its citizens. This feat has been achieved through a broad distributive welfare state, developed over the decades since oil was discovered.

Nonetheless, Kuwait’s policies of rent distribution have developed in an ad hoc manner into an uncoordinated system with substantial distortions, inefficiencies and institutional deficiencies. These include the long-term use of subsidies to energy and other utilities that lead to inefficient use and misallocation of resources; a highly segmented labour market whose ability to absorb large numbers of young Kuwaitis outside the public sector remains in doubt; and an uncompetitive and deteriorating business environment that stifles private and foreign investment. In our analysis we also note, however, that given Kuwait’s extensive wealth, the structure of the economy and productive relations will necessarily look different from those in most countries. One therefore has to be careful to distinguish between policies and behaviours that are genuinely inefficient or distorting and those – such as low labour force participation – that may be a rational response to unearned wealth.”

The paper offers some fascinating insights into the various channels of rent distribution as well as discussing some of the challenges associated with managing a resource-rich economy. It’s worth a look. Have a nice weekend!

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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