Let’s Mix It Up

How to diversify?

Giant petrochemical industries along with SMEs are Kuwait's best bet for ushering in an era of economic diversification.

In 1938 Kuwait’s first drilling well reached oil in the Burgan field, and by 1946 the shipment of crude oil was inaugurated, which—as the world knows—changed everything for Kuwaitis. Kuwait, however, like its oil exporting neighbors, has had a complicated relationship with its hydrocarbon wealth.

While oil revenues kickstarted Kuwait’s modern economy in the second half of the 20th century and gave the nation enviable living standards, one of the highest per capita incomes in the world, and good infrastructure, they dampened the organic growth of sectors such as industry and manufacturing.
It is estimated that 40-60% of GDP growth in Kuwait and almost all economic growth is driven by oil revenues; however, the golden age of petroleum industry is coming to an end, and it is quite probable that there will be no other oil boom in the world ever. Kuwait must adapt to this new reality and diversify away from a single-sector economy which has been in place since the petroleum industry’s nationalization in 1975.

The experience of Norway, for instance, shows that it is possible to have a diversified economy as well as an oil and gas industry. The recent fluctuation in the price of crude oil has been yet another warning that traditional oil-based economies should look for alternative sources of revenue.
Kuwaiti businesses, however, have had mixed feelings about the country’s transition to a post-oil economy. Although the country’s private sector is keen to play a more central role, it is reluctant to shoulder the government’s current burden, especially in areas such as job creation. At the same time, sudden changes in Kuwait’s business ecosystem can render the existing business models used by the private sector out of place.
Diversification, however, will not happen overnight. Almost all of Kuwait’s neighbors have been trying to get over their oil-dependence for years, but with limited success. The shift is, in part, slowed down by obstacles pertaining to regulations and national policies.

Fortunately, the New Kuwait development plan, launched in January 2017, has addressed such issues; the plan strives to, among other things, reduce the country’s dependence on expat workers, capitalize on the nation’s strengths for wealth-generation, and direct more foreign and domestic investment toward Kuwaiti industries.

If all goes according to plan, by 2035 Kuwait’s overall state revenue will jump to approximately USD165 billion from the current figure of USD44 billion. This leap will be, in part, aided by the expansion of the industry sector.
One readymade area for industrial expansion is petrochemicals, given that Kuwait is already a manufacturer of petrochemicals and fertilizers. Focusing on the petrochemical industry is an ideal transitional move, because while it is a legitimate industry with notable added value, it requires affordable crude oil as its main input—of which Kuwait has a lot.
Other forms of manufacturing should not be taken lightly. The manufacturing sector currently accounts for under 6% of Kuwait’s GDP. The New Kuwait plan is expected to stimulate the manufacturing of construction materials required for the country’s ambitious infrastructure expansion program.

What is more, a number of major PPPs are about to be announced soon, according to the Kuwait Authority for Partnership Projects (KAPP). These energy and infrastructure projects are also expected to strengthen the value chain in the industry sector.
The industry sector is by no means limited to major initiatives. Indeed, one of the weaknesses of Kuwait’s industry is the downplayed role of SME. According to the World Bank, Kuwait has a large number of SMEs in non-financial areas, including industry, which have not reached their full potential in the context of the country’s economy, while SMEs account for 40-50% of GDP in both high-income and emerging economies.

Industrial SMEs, as one of the most influential agents of change in emerging economies, representy an opportunity. Fortunately, in 2013 Kuwait launched a national fund for the development of SMEs with a capital of USD7 billion, which is the first entity of its kind in the Gulf and has been empowering the country’s SMEs ever since.

Moving away from oil is best achieved by targeted diversification, because as Warren Buffett once observed, “Wide diversification is only required when investors do not understand what they are doing.” And, the industry sector seems to be just the right target for Kuwait’s economic diversification agenda.