Persian Gulf States - Kuwait Diversification

Diversification

Industrial development in Kuwait has always faced formidable obstacles. Kuwait, so rich in oil, is poor in most other resources, which limits the manufacturing industries that can be established. No metallic minerals and few suitable nonmetallic minerals are locally available. Most raw materials for the early industries--for example, cement--had to be imported. The limited supply of fresh water is another constraint. In a country without streams and with few underground sources, water is crucial to industrial development. The pre-oil system, where local sailing boats carried water from Iraq to Kuwait, could not meet manufacturing needs. The small size of the domestic market restricts production for local consumption to small-scale operations. The open economy, which was maintained before and after the discovery of oil, provided little protection from foreign competition. The small Kuwaiti labor force, possessing limited skills, is another constraint. After the discovery of oil, labor costs escalated, and in a few years wages in Kuwait were higher than those in almost any other area of the Middle East, further hindering industrial development. Also, the commercial tradition in the country predisposes most entrepreneurs to invest in trade rather than manufacturing. As a result of these obstacles, industry, excluding oil-related industry, expanded very slowly.

The discovery of oil created a demand for new industries, initially satisfied by the oil company itself. Oil operations particularly needed water, electricity, and refined petroleum products, and these were the first modern industries created in the state. The government took over production of water and electricity, expanding the systems and subsidizing their use. Air conditioning provided the largest demand, with peak summer loads more than five times minimum winter loads, creating substantial idle capacity for about six months of the year. The need for larger and more regular supplies of water, no matter how costly, compelled KOC to install the first desalination plant. In 1953 the government installed the first unit, which had a capacity of 3.8 million liters per day. Subsequently, the government claimed that it had developed the most advanced continuously operating desalination facilities in the world.

Although oil spurred the first industries in Kuwait, after the initial push, oil did not generate much in the way of new industries locally. As a result of the many obstacles that industry faced and in light of the massive oil revenues, the government began to play a major role in all industrial development. The government undertook some efforts at diversification in the 1950s, but the first major push for industrialization occurred with the establishment of the Ash Shuaybah Industrial Zone in 1964. The zone comprised electricity and water distillation plants, expanded port facilities, metalworks, and plants manufacturing chlorine, asphalt, cement, pilings, and prefabricated housing. The government provided such necessary facilities as roads, gas, electricity, water, sewerage, port facilities, communications, and rented or leased industrial sites at nominal rates. Most of the larger industrial facilities were located in the zone. Other small manufacturing establishments were located in the populated parts of the country.

The government provided a range of incentives to private manufacturers who were predominantly local--51 percent Kuwaiti ownership was required of all businesses. In addition to infrastructural support, financial aid included equity capital and loans. In 1974 the government created the Investment Bank of Kuwait to provide medium- and long-term industrial financing at low interest rates. The government also gave local industry preference in government purchases, protection from imports in some cases, and exemption from customs duties and taxes. In the 1970s, the government's Industrial Development Committee and the Industrial Bank of Kuwait established a number of incentives for private-sector participation, such as technical aid and preferential guaranteed markets in state industry. Nonetheless, industry in Kuwait never enjoyed the same level of state support that it did in other gulf states. The government, having made a conscious decision to invest its revenues overseas and locally in such human resources as education and health care, gave only minimal support, by the standards of other oil-producing countries, to non-oil manufacturing.

More about the Economy of Kuwait.

Arab states of the Persian Gulf - Wikipedia
The Gulf Economies' Coming Collapse | Foreign Affairs
The Political Economy of the Persian Gulf | Hurst Publishers
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Persian Gulf states : country studies | Library of Congress