Kuwait Times
Wednesday, July 5, 2020
Since the outbreak of the COVID-19 pandemic, it is obvious to those keeping up with economic developments in Kuwait that there is a clear dilemma in the decision-making process. This is with regard to two specific key issues, namely the growing budget deficit and the consequent concern for the sustainability of the economy, and the private sector’s position and role in this context. Regardless which of these two issues we begin with, the immediate thought that comes to mind is the state’s economic model. A model which is regarded by the majority as a rentier model that has made it difficult to integrate new ideas and concepts, since they may be construed as favoritism towards specific segments of society. This, in turn, has built up our appetite to
explore the current and prevailing economic discourse and ideologies such as the fair distribution of benefits, the right of some segments to potential governmental support as opposed to others, and more
importantly, the dire absence of key concepts to date, specifically the productivity of our economy.
In the past three months, I have realized the multitude of reports concerning the status of the economy that remain pending. Among them is a report issued by The Conference Board (TCB) on priority sectors in terms of productivity. According to the report, labor productivity declined by 2 pa on average from 2000 to 2018. In most other regions of the world, labor productivity growth has been the major source of output growth for decades. Negative productivity
means that the potential of the GCC is not realized. If productivity growth had remained flat, economic growth in the region would have been faster than the average for emerging and developing economies. A recovery to positive productivity could accelerate economic growth in the region beyond that of major emerging economies in the next decade.
A careful reading of this report and developing well-thought-out solutions can ensure a quantum leap for our rentier economy. The report underscores the urgency for GCC countries to come together and reach a consensus on which are the productivity sectors such as financial services, telecommunications services, and alternative energy,
in order to move beyond this current sustainability predicament.
Here is an important thought: what if we introduced the word “productivity” as a fundamental concept that can drive significant change for a new economy? How about swapping a rentier economy
that is laden with employment in the government sector, regardless of this sector’s productivity level, for an economy that believes in strong modern governance with its sights set on the productivity of a private sector, which operates according to the highest standards of transparency?
In short, what if we trigger a productive economic discourse, rather than the worn-out rentier one?
Today, all that we fear in the sustainability of our model has swiftly surfaced due to the COVID-19 pandemic, as it has also brought to light, now more than ever, the contrast between the strength of our financial model on one hand, and the weakness of our economic model on the other. The Kuwaiti economic model is a democratic institutional one based on the diversity and free speech, which makes it distinct, but on the other hand, it is one based on a rentier system that relies heavily on oil as the only source of national income. It also suffers from a significant weakness in its overall structure in terms of productivity, which in turn, leads to a weakness in the sustainability of the economy’s constituents. This contrast between weaknesses and strengths of models, and between what is financial and what is economic, has clearly created confusion in the economic decision-making process. For instance, when considering the measures taken by the government in
response to the pandemic, we can see that the lack of a solid decision has stalled a number of pleas from businesses of all sizes that required the provision of liquidity to avoid detrimental actions, such as reducing salaries or laying off employees in large numbers, which may create a case of recession that is difficult to overcome. All of this comes at a time
when the state is experiencing a major budget deficit in one of its most vital components; the expansion of public sector employment, and consequently, there is an urgent need for a unified decision with regards to creating more jobs in the private sector as a top economic priority.
Uncertainty
This contradiction created evident uncertainty with regards to the private sector’s positioning in all of this.
That said, is there a clear government policy put in place that considers the private sector as a strong alternative for employment for the coming years, in response to the government’s budget deficit and salaries component? And if so, will this create in turn, greater opportunities for the private sector, to grow and create jobs for a skilled workforce, while keeping up and competing with global labor markets?
Allowing for a confusing discourse to prevail and impact decision-makers is unwarranted; especially when we see that an environment of purposeless criticism has led to a state of paralysis in decision-making, whether in the government or the private sector.
On the other hand, a coherent public opinion with long-term goals to build a productive, superior, and sustainable economy, away from skepticism in the private sector, is still non-existent. In fact, the recent discourse has taken a turn, reflecting a sentiment of hostility towards expatriates, regardless of caliber and skill, which in turn, has amplified the challenge faced by the nation in attracting talent from the global
and regional labor markets. It has also become a substitute discourse that lacks any room for development or change. Unfortunately, it fails to address matters of employment in terms of deploying a more modern
approach when it comes to managing skills and talent or enhancing productivity. It has even impacted Kuwait’s relationship with other countries negatively.
As the New Kuwait 2035 vision testifies, the government’s interest in the private sector is evident, but lacks enforcement and is tainted by hesitation. This is illustrated, for example, through the current model put in place to support private-sector employees, which is based on government support through the Manpower Support Fund, i.e. private companies with semi-governmental salaries. This model specifically
defies the overall positioning of the private sector and its employees. That said, there is an urgent need for an in-depth understanding of the private sector, its strengths and weaknesses, and more importantly, a
strong belief in its capabilities to manage financial resources and other resources effectively and productively. However, when referring to the private sector, there are many generalizations and risks that can only be taken on by a conscious government that is capable of managing the wild horse that the private sector can be; the risk of procurement, governance, and ensuring full alignment of both private and public interests are examples of areas that ought to be addressed therein. This level of awareness already exists to a reasonable degree as we had witnessed when the financial sector was successfully reorganized and was further demonstrated with the formation of the Capital Markets Authority. It was proven even more successful and showed great confidence with the privatization of the stock exchange, Boursa
Kuwait.
Rentier model
The prevailing rentier model and low productivity mindset are distorted concepts of citizenship that grant rights with no commitments in return, and these constitute a dysfunctional landscape. That said, new economic discourses must be based on the capabilities of building trust, by creating a solid reform plan that is rolled out among institutions to eliminate corruption, and in turn, lead to institutional excellence. Also, it is important that creativity is empowered within a framework of social
responsibility for institutions, in order to transcend its narrow role to an active national role, and encourage the seeking of the necessary assistance from specialized authorities by focusing on the qualifications, merit, and the components of trust. Ultimately, implementing a
movement of institutional excellence and a true institutional reform to confront corruption in all its forms is the need of the hour.
To that effect, we support the complete transformation of the economic discourse, as many others do, where the first statement should focus on facing economic challenges for what’s to come post COVID-19. It must be one that puts an end to the current rentier discourse that stands for quantity rather than quality, diminishes any sense of competition and confuses decision-makers. Undoubtedly, Kuwait is in want of a discourse that urges a true economic reform with clear objectives aimed at building a sustainable and productive economy.
Note: Manaf Abdulaziz Al-Hajeri is Chief Executive
Officer at Kuwait Financial Centre (Markaz)
WASHINGTON, DC – With the COVID-19 catastrophe having laid bare the vulnerabilities inherent in a hyper-connected, just-in-time global economy, a retreat from globalization increasingly seems inevitable. To some extent, this may be desirable. But achieving positive outcomes will depend on deep, inclusive, and effective multilateralism.
One of the most powerful drivers of support for deglobalization is the vulnerability of production models that rely on long and complex global supply chains, which have sacrificed robustness and resilience at the altar of short-term efficiency and cost reduction. With many companies and industries dependent on faraway suppliers – and lacking any alternatives – no part of such value chains can function unless all parts do. And as the COVID-19 crisis has shown, one never knows when parts will stop functioning.
This is especially true with regard to China, a global supply-chain hub. The country is central to the manufacture of a wide range of common consumer products, including mobile phones, computers, and household goods. Moreover, it is the world’s largest supplier of active pharmaceutical ingredients, so a crisis affecting production there can disrupt medical supplies worldwide.
It should not be surprising, then, that China’s COVID-19 lockdown immediately affected global production. Fortunately, China seems to have brought the coronavirus under control, and economic activity in the country is returning to normal, so the disruption has been limited. But there is no guarantee that the next disruption will not be more severe or last longer.
Such a disruption could come in the form of another public-health crisis or a natural disaster. But it may also be a political decision – what the political scientists Henry Farrell and Abraham L. Newman call “weaponized interdependence.”
This was a source of apprehension even before the pandemic, when the United States cited national security concerns to block Chinese telecommunications giant Huawei from its markets and restrict its access to US technologies and suppliers. Many governments are also intensifying scrutiny of foreign investments, lowering the thresholds beyond which restrictions are triggered, increasing the number of sectors deemed strategic, and working to repatriate production in these areas.
Many climate activists also call for more local production. Global shipping emitted 796 million tons of carbon dioxide in 2012, accounting for about 2.2% of total anthropogenic CO2 emissions for that year, according to the International Maritime Organization. Reducing the distances over which goods are transported would advance the world’s emissions-reduction goals. But at what cost?
Efforts to prevent “carbon leakage” – when companies shift production away from countries that have implemented strong emissions-reduction measures (such as carbon prices, cap-and-trade mechanisms, or strict regulations) – would also imply some deglobalization. Already, some advocate carbon border taxes to discourage this phenomenon – an approach that would strengthen the incentive for local production.
All of this suggests that some degree of deglobalization, with an emphasis on robustness and sustainability, may be both inevitable and desirable. But this process carries serious risks, from skyrocketing production costs to geopolitical conflict.
To be sure, some increase in production costs will be unavoidable, as countries try to diversify their supply chains and build more redundancy into them. And it may not be too difficult for very large economies to cover the costs of diversifying their production. But small and medium-size economies would find the costs prohibitive. Countries attempting to stockpile supplies of vital goods would also run into cost constraints.
Climate concerns and carbon border taxes could compound the problem, by spurring cycles of retaliation and intensifying strain on international trade. Likewise, reducing trade and foreign investment in the name of national security may actually increase political tensions and, by spurring a cycle of reprisals, place economies on a downward spiral.
The emergence of two large and diversified blocs centered around the US and China could reduce some of the economic costs of deglobalization. But it would also undermine the agency of most countries (which would be forced to choose a side), further politicize the global economy, and erode the legitimacy of the international order. Moreover, by entrenching a volatile long-term rivalry, it would pose a grave threat to peace. The addition of a third bloc, comprising the European Union and other cooperation-oriented economies, would not do much to offset these disadvantages.
A better approach would be based on effective forms of multilateral and global cooperation. To ensure adequate pandemic preparedness, for example, the world should develop a more ambitious shared early-warning system and agree to stockpile medical equipment in regional centers, overseen by the World Health Organization, with established cost-sharing policies and flexible deployment plans. Similarly, protocols and financing for rapid vaccine development and production capacity should be agreed (and continually updated). This would place the world on a stronger footing to manage a large-scale disease outbreak than an every-country-for-itself approach.