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Economics

Through its collaborations with multiple renowned knowledge and expertise centers around the world, KFAS has supported various research project on macroeconomics and economic reform in Kuwait.

Reforming Wealth Distribution in Kuwait: Estimating Costs and Impacts

Principal Investigator: Dr. Steffen Hertog from the London School of Economics

Like other Gulf Cooperation Council countries, Kuwait shares its wealth generously with its population. Yet the way in which it does so is inefficient, inequitable and economically distortive. This is true both for the country’s conventional social safety mechanisms and for two large-scale ‘quasi-welfare’ policies: the provision of cheap or free energy and large-scale public sector employment for citizens. Current wealth sharing policies are fiscally unsustainable given current demographic trends, disproportionately benefit richer households and deeply distort markets for energy and labour. Against this background, this paper analyses a number of alternative mechanisms of social safety and wealth sharing that could be less distortionary and more conducive to private job generation for nationals. It focuses in particular on the idea of a ‘resource dividend’: an unconditional cash grant for adult nationals that could be provided in lieu of other, more unequal, discretionary and distortive forms of subsidies and rent sharing. While the case for a resource dividend has been made in previous research, this paper goes beyond conceptual discussion and illustrates in detail how such a dividend could be financed, what its distributional consequences would be and how it should be combined with other welfare policies to minimise distortions and maximise political feasibility. The paper develops concrete scenarios illustrating how different types of households and businesses would be impacted and discusses the administrative arrangements likely to be required by resource dividend and social safety reform.

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Quantifying Dutch disease effects and asymmetry in economic responses to oil price volatility in Kuwait

Principal Investigator: Dr. Manal Shehabi, from the Oxford Institute for Energy Studies

The motivation for this study is to fill existing gaps in the understanding of the economic impacts of oil price volatility on Gulf Cooperation Council (GCC) economies and to assist in the management of recent oil price shocks following the COVID-19 pandemic. To that end, this paper employs an economy-wide general equilibrium model that embodies Kuwait’s economic structure and accounts for its political and economic constraints to quantify asymmetric responses of terms of trade shocks in Kuwait. It highlights impacts on non-energy sectors and ‘second-best effects’ to draw potentially-applicable lessons for the GCC. The results show that, consistent with expectations in the literature, there is potentially an asymmetric response between equi-proportional terms of trade shocks; yet in the current economic policy environment, this asymmetry is either non-existent for some economic variables or very limited and is significantly smaller than the asymmetry shown to exist in other resource-dependent and specialized economies. The potential asymmetry is mitigated by idiosyncratic adjustment mechanisms, namely the sovereign wealth funds (SWFs) and expatriate labour movement, especially when oligopolies are regulated. Contrary to theory expectations, the results also show there is a weak and limited (reverse) Dutch disease dynamic: specifically, there is a strong resource movement effect of the Dutch disease in Kuwait but an almost non-existent de-industrialization effect.

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