EN LA MUNICIPALIDAD DISTRITAL DE MIRAFLORES

Countries with large endowments of natural resources, such as oil and gas, often perform worse in terms of economic development and good governance than countries with fewer resources as has been seen in the discussion on the Dutch Disease256. Paradoxically, despite the prospects of wealth and opportunity that accompany the discovery and extraction of oil and other natural resources, such endowments all too often impede rather than further balanced and sustainable

255

Ross, M. (2001), Does Oil Hinder Democracy? World Politics 53:(3), pp.325-361.

256

90 growth257. On the one hand, the lack of natural resources has not proven to be a fatal barrier to economic success for the star performers of the developing world - the Asian Tigers (Hong Kong, Korea, Singapore, and Taiwan). All achieved booming export industries based on manufactured goods and rapid economic growth without large natural resource reserves, while many natural resource-rich countries have struggled to generate self-sustaining growth. Thus, resource-rich countries grew less rapidly than resource-poor countries during the last quarter of the twentieth century and alongside these growth failures are strong associations between resource wealth and the likelihood of weak democratic development, corruption, and civil war258. There is also a high degree of variation in well-being across resource-rich countries. The United Nation’s Human Development Index illustrates this by measuring income, health, and education across countries worldwide. Thus Norway, a major oil producer, ranks at the very top of the index, yet Equatorial Guinea, Gabon, the Republic of Congo, Yemen, Nigeria, Angola and Chad, all oil-producing countries, fall at the other extreme259. To understand the natural resource paradox there is a need for a sense of what makes natural resource wealth different from other types of wealth. As has been mentioned above260 natural resources of wealth - unlike other sources of wealth - do not need to be produced, they simply need to be extracted (even if there is often nothing simple about the extraction process). Since it is not a result of a production process, the generation of natural resource wealth can occur quite independently

257

Auty, R. (1993), Sustaining Development in Mineral Economies: The Resource Curse Thesis, London: Routledge, pp.154-160.

258

Ross (note 255 supra) and Humpheys, M. (2005), atural Resources, Conflict and Conflict Resolution, Journal of Conflict Resolution, 49: pp. 508-37.

259

Human Development Report 2005, http://hdr.undp.org/reports/global/2005 [visited 2/10/2009].

260

91 of other economic processes that take place in a country; it is, in a number of ways “enclaved”261. A government can often access natural resource wealth regardless of whether it commands the co-operation of its citizens or effectively controls institutions of state, through the government can - and in the case of Kuwait does – give a false perception of oil revenues and the state’s budget. In April 2010, oil revenues in Kuwait appeared larger than estimated, the reason behind this is that the Kuwaiti budget is calculated according to the next year’s oil revenue, and since there is no way to accurately estimate such a fluctuating resource each year there appears to be a surplus in the revenues. The Kuwaiti Ministry of Finance calculates its budget at a very modest price. In the Financial Year 2010-2011, the budget was calculated according to a price $37.8 per barrel, and a daily production of 2.2 million barrels a day. However, prices of oil in this year reached $80.8 per barrel at a production rate of 2.45 million bpd in the first quarter of the financial year. Hence actual income reached KD 16.8 billion262, higher by 8.2 billion than the budget estimated; only 1 billion of the revenue came from non-oil resources. The total budget for 2010-2011 would reach KD 17.9 billion, and this when compared to the estimated expenditure of the state KD 16.162 should mean a surplus of KD 1.7 billion for the entire fiscal year263.

The fact that extraction of rent is undertaken quite separately from the political process means that rulers do not need their people’s consent or participation in the process of extracting that wealth. This also results in a false political stability

261

Natural resource extraction is referred to by social scientists as ‘Enclaved’, Hirschman 1958; Seers 1964.

262

No Easy Solution for the Social Service Deficit: Time Adds to the Costs, Al Qabas Daily News Paper, 19/5/2007, http://www.kw/final/newspaperwebsite/ [visited 2/9/2007].

263

Al Shall Economic Report, vol. 6., issue 44, November 4th 2010,

http://www.alshall.com/admin/downloads/20101111041453-2-eng-report-44-10%20e.pdf. [visited16/11/2010].

92 produced by the rentier economy’s effect on social structure264. Because these states do not tax their citizens, they do not have to worry about taxpayer-based groups pressuring them for accountability, demanding to know how their tax dollars are spent, or demanding something in return for their contribution to the state. If there are groups with complaints, the large revenues allow the rentier state to buy their compliance, to co-opt them265.

Applying the above i.e. the description and requirements of a rentier state, the drawbacks of rentierism – to Kuwait, it is evident that rentierism does exists in Kuwait266. Oil revenues in Kuwait have historically come from foreign oil companies. The industry itself creates few local upstream and downstream linkages. It normally employs few local workers, as it is a very capital intensive industry, and it is almost an economic enclave. In a rentier economy, revenues go directly to the state. A rentier economy is distinguished from most economies highly dependent on foreign trade, because the income from foreign trade goes to the private owners of the commodity-producing properties and not directly to the state. This was the case in Kuwait before oil. As seen above267, the Shaikhs collected taxes on the pearling and trading boats owned by the merchants. Oil revenues, however, go directly to the state. The fact that oil revenues go directly to the state is important because it means that money is centralized in the state. Individuals can become rich only through their relationship to the state, or with

264

Ross, Michael L., (2004), What do we Know about atural Resources and Civil War?, Journal of Peace Research, 41(3): pp. 337-356.

265

See pp. 84-85.

266

Beblawi and Luciani (note 212 supra).

267

93 the state elite268. Finally, in a rentier economy rents are large. Unless rents are the only important revenues in the economy, they will not dominate the economy. As has been mentioned above269, Kuwait is highly dependent on oil; sales of oil account for 95% of the state’s revenues270. The most important administrative functions of most states, rich and poor alike, is to extract revenues, that is, to draw taxes from the population. Because rentier states do not rely on taxes from the local population for income, they do not have to carry out this extractive function. Instead of extracting revenues, they distribute them. In Kuwait, pre-existing traditions - patterns of paternalism and group solidarity271- already predisposed Kuwait to distribute revenues.272 This function has become institutionalized, and revenues are now distributed by the state through direct transfer, social services, and state jobs. One result of this distributive function is that the institutions of rentier states differ from most other states. In Kuwait, as will be seen273, there is only an embryonic tax system and consequentially, a small non-independent tax department within the Ministry of Finance. On the other hand, it has extensive distributive institutions representing the state such as the Ministry of Health, Social Affairs, and Education. It also has a large Oil Ministry to ensure that its capacity to distribute will continue. Kuwait, however, despite its excellent distributive capacity, has virtually no redistributive capacity. It can give to the poor, but it cannot take from the rich. The lack of an extractive, hence

268

Beblawi and Luciani (note 212 supra).

269

See p. 79.

270

KAMCO Research, (2011), Kuwait, Economic Outlook, p.6

http://www.menafn.com/updates/research_center/Kuwait/Economic/kamco170211ee.pdf [visited 14/6/2011].

271

See chapter 2 of this thesis on more about the Islamic Almsgiving of ‘Zakat’ practiced in Kuwait p.7-9.

272

Auty (note 257 supra).

273

94 redistributive, capacity means that the state has fewer policy tools, fewer fiscal options, and less flexibility should it need it. All the above cover the first and second requirements which Beblawi argued274 satisfy the definition of a rentier state i.e. a state economy where rents predominates, and where the origin of these rents are from a foreign source. The third consequence of a rentier economy, which Beblawi points out, is that the rents – on which a rentier state predominately depends radically change the relationship between state and society, primarily by creating new social classes. In Kuwait, oil weakened the old classes who had previously prevailed, such as the merchants, because the state no longer depended on them for money, and Kuwaitis no longer depended on the merchants for employment. However if oil ‘destroys’ certain social groups, it also creates new ones. These were the bureaucrats and middlemen-contractors, groups defined by their dependence on the state for their creation and sustenance275. The third and the fourth requirements which constitute Beblawi’s rentier state276 provide that in a rentier state only a few are involved in the generation of the rent, while the majority are beneficiaries of its distribution277. And finally, the government of a rentier state is the principal receiver of the rents. In this context, Kuwait has the oil company, KOC, which is run by a limited number of employees and executives, while the rest of the state’s service providing institutions spend the revenue it generates. Oil revenues in Kuwait have allowed the Kuwaiti government to spend not only on essential services such as health,

274

See p. 88.

275

Smith, B. (2004), Oil Wealth and Regime Survival in the Developing World, 1960-1999, American Journal of Political Science, 48 (2): pp. 232-246.

276

See p. 88.

277

Stauffer, T. (1987), Income Measurement in Arab States, in Beblawi H. and Luciani (note 212 supra).

95 education, housing, and social insurance, but also on water provision, benefits, social allowances and loans278. The state pays premium wages, and collects minimal rents on its properties. It sells goods, especially food, below cost, and charges only a fraction of the market price for energy. Bus and aeroplane fares are subsidised279. The state covers medical expenses and student fees, and assists almost every commercial or agricultural venture with inexpensive land and interest-free loans280. Finally, the rent yielding company in Kuwait, KOC, is state owned and thus its revenues go straight to the state281.

3.6 The Crucial need for Kuwait to Move away from Dependency on Oil