Faced with the critical need to get locals into viable private sector jobs, policy-makers are increasingly aware that reform may have to start in the classroom rather than the workplace.
Economic reform and a drive to reinvigorate education may have to run in parallel if Kuwait is to avoid a drift into high youth unemployment with consequent social and political tensions.
A devastating new report (discussed in the box article below) has highlighted gaping inadequacies in the school system that is supposed to prepare young citizens for life in the modern competitive world. Still almost totally reliant on the public sector for their jobs, and a cushioned lifestyle, school-leavers and university graduates will soon have to adjust to the challenge of finding employment in the private sector jobs market as government cuts back on public service recruitment.
Until now the question has been rendered almost academic by the state's continued expansion, offering Kuwaitis a comfortable and secure career-long berth. There is a massive differential in pay and conditions between what Kuwaitis will accept from business employers and what foreign workers will settle for. With rare exceptions such as the booming mobile phones sector, it rarely makes sense for commercial businesses to employ locals, except when they are forced to.
But these labour market fundamentals are changing, as the government seeks to contain public spending, adjust to internationally accepted norms and stimulate the emergence of a more diverse business economy.
Government recruitment is being slowly tightened up, cutting back the chances of job-seekers finding public sector posts. Meanwhile, a crucial reform of pay regulation will begin to nudge Kuwaitis and foreigners into competing for the same private sector job opportunities.
Partly in response to pressure from the International Labour Organisation to impose certain minimum standards, the government is bringing forward a new Labour Law that will require that employees are paid equally.
Kuwaiti citizens will still benefit from substantial state-financed social allowances and will therefore be better off. However, in terms of salary cost to employers, treatment should be the same.
The combined effect of these changes will be to force more Kuwaitis to look for private sector work and to open up jobs for them by reducing the scope for private employers to hire cheaper foreigners.
Attitudes matter
Increasingly aware of the risk that Kuwait could become - in the words of the respected former parliamentarian Abdallah Al-Naibari - "a rentier society", living off the labour of others, the government's strategic economic thinkers are increasingly focused on educational and labour issues rather than purely financial and business concerns.
Fortunately, high oil prices and massive international reserves provide Kuwait with the money, and thus the time, to plan the necessary reforms and phase them in gradually
Privately, senior figures are in full agreement with director of the International Monetary Fund's Middle East department Mohsin Khan, who told GSN in 2004 that oil producers should use their windfall cash to tackle the employment issue rather than fatten their already overflowing reserve coffers.
But the challenge is both economic and cultural. Kuwaiti reformists warn that however cleverly business growth is stimulated, the private sector jobs market will only attract locals if attitudes change and the education system equips them with the right qualifications.
Financially Kuwait could probably afford many more years of oil and investment-funded comfort, without too much pressure on its young men and women to find private sector jobs. But the social consequences would be devastating. That explains why the government of Prime Minister Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah is now allocating $1bn to upgrade schools.
At the same time, however, the government is implementing a wide-ranging set of measures designed to provoke more lively and more diverse business growth and to attract more outside investment. The door has been opened to foreign banks; HSBC is among the new entrants.
Tax reform
A new tax law is planned. This will take time, but as an interim measure the government hopes quickly to push through an amendment to existing legislation which subjects foreign companies to a hefty 55% rate of taxation. This will be cut.
The current law, dating back to 1955, was originally designed mainly to target oil companies, extracting a large chunk of revenue to compensate for the fact that they paid only limited royalties. The oil sector has now been in Kuwaiti hands for decades, but the tax law was never adjusted, which has been a serious deterrent to foreign companies in other sectors that might have considered Kuwait as a potential regional base but then found it was probably cheaper to set up elsewhere.
Reformed foreign direct investment rules, implemented since late 2003, are already more internationally competitive, allowing 100% non-Kuwaiti ownership.
A number of incoming businesses, including international banks, have set up under the new FDI regime. Youssef Al-Ibrahim, economic adviser to Prime Minister Sheikh Sabah, told GSN the government hoped to move to a one-stop-shop approvals system and then launch a promotional campaign to attract investors.
Trade Minister Abdullah Al-Tawil, who used to work in the private sector, plans to set up an independent entity to promote investment and handle applications. This office would have its own chief executive and budget and a fair degree of autonomy.
Sheikh Sabah himself was behind the creation of the new Higher Council for Development and Planning, which is meant to consolidate the economic reform drive.
Developing projects, employment challenges
The government is also pressing ahead with major projects that it hopes will inject fresh dynamism into the wider economy.
Besides the Project Kuwait northern oilfields development - which still awaits parliamentary approval - it is already pressing ahead with the selection of infrastructure contractors for the proposed new port on Bubiyan island, near the border with Iraq. Dredging, site preparation and road construction are the initial priorities.
A consultant is being sought to advise on the development of stock market regulation.
Al-Ibrahim recognises that Kuwait cannot compete as a low cost economy with South Asia, but he sees some complementarity. "We cannot compete with India - even Europe and America can't. But we can integrate with India," he said. For example, design and marketing functions for a business could be based in Kuwait, while production facilities were based in India.
Meanwhile, the government is trying to develop support for local entrepreneurs, especially in technology sectors.
Another priority is to stimulate growth in sectors where Kuwait has obvious advantages, such as downstream oil. This needs the sort of skilled engineers that Kuwait can supply.
Some policy-makers privately argue that the government will have to summon up its political courage, publish a public sector recruitment ceiling each year and announce that once those posts are filled, job-seekers must look in the market.
As one reformer pointed out, the capital cost of training Kuwaitis so they are better equipped to get private sector jobs is far less than the cost of not training them and then paying them career-long salaries in the public service.
But the government believes it must also apply some pressure to the private sector, to encourage the recruitment of more locals, possibly using tax as a prod and raising the obligatory proportion of locals who must be taken on. This currently stands at 37% in banking but only 3% in industry.
Furthermore, employers are warned, the government is gradually removing what it regards as subsidies that make the recruitment of foreigners less costly. Already the state has begun to charge employers the cost of the healthcare service that is available to their employees. Work permit costs could be increased.
© Gulf States Newsletter 2005
