Kuwait Faces Several Challenges in Economic Diversification Bid

After relying heavily on hydrocarbon exports to fund its economy and workforce, Kuwait is now at an economic crossroads.

As the demand for oil declines, the Gulf nation must capitalise on new sources of revenue. Diversifying the economy is crucial for the company’s future.

One of the main problems with Kuwait's economic structure is its rigid dual labour market. The public sector is blessed with funds from oil revenue. It can afford to pay Kuwaiti nationals generous salaries with job security.

Unfortunately, the private sector is filled with low-cost labour left to expatriates. This system creates distorted incentives because locals are not interested in the private sector due to wages. Meanwhile, employers want to employ expatriates because they are flexible and more productive.

The government has been pushing Kuwait-focused policies that involve employment quotas, wage subsidies and vocational training, but the private sector still relies heavily on foreign workers.

The public spending on wages is unsustainable. It consumed almost four-fifths of government revenue in the 2024/25 budget. The government must identify how to make the private sector a more appealing, non-oil-dependent economy. Focusing on replacing expatriates will likely not cut it.

If Kuwait does not improve productivity and market competitiveness in national labour, it will face a debilitating fiscal imbalance with oil revenues poised to shrink.

Economic Diversification Demands Political Reform

Diversifying the Kuwaiti economy is not as straightforward as it sounds due to the country’s refusal to adopt a more liberal stance on numerous issues.

Several other Middle Countries are opening new revenue streams to boost their respective economies, but Kuwait runs on a closed oligopolistic model.

A small group of families have marked their territory in the economy, procuring state contracts and a rent-based political economy that stifles innovation and snuffs out the competition.

The business environment in Kuwait bears this same insularity. Kuwait ranked last among Gulf states in the World Bank Ease of Doing Business Index. They were 83rd globally due to this business environment lined with red tape, sketchy regulations and bureaucratic bottlenecks.

If Kuwait wants to diversify its economy, the private sector must attract investment, be productive, and export goods and services without oil-financed behemoths blocking the way.

The government must push reforms that improve regulatory transparency, open the market for accessibility and eliminate cronyism if the country is to stand fearlessly in a post-oil world.

A productive private sector will increase the demand for skilled national labour and reduce reliance on the public sector.

However, this plan will not work if national workers refuse to take up roles occupied by foreign workers. These jobs require long hours, a different work culture and lower pay, so nationals must adapt.

Cultural Constraints and the Gambling Debate

With Kuwait battling diversification in one corner, it must also reconsider the cultural and social norms that influence what kinds of industries are politically viable.

One prominent example is the long-standing resistance to legalised gambling, which has damning economic implications.

While other countries in the region have started to relax their stance, Kuwait has continued to stand against the industry on religious and cultural grounds.

Gambling and other similar entertainment avenues generate economic revenue and tradable services. They attract high-value tourists and massive foreign investment in infrastructure.

Online gambling is an exciting opportunity that Gulf countries should seize, but the conservative posturing from Kuwait will stop them from tapping into this profitable sector.

Several online casino operators welcome Arab players onto their platforms, but they are licensed and regulated by authorities in other jurisdictions.

Creating a legalised gambling framework would allow Kuwait to reroute tax revenue from this sector to its own coffers. The move would create jobs and encourage technological innovation.

Segmenting the Workforce

Many labour reform models have been suggested, but Kuwait's best bet is segmenting the labour market, reserving certain jobs for nationals and others for expatriates.

Kuwait chose the Restricting Dependence on Foreign Labour (RDF) model, which reduces reliance on foreign labour and retains some cost advantages that have sustained the private sector.

The Gulf nation has already taken the necessary steps via its National Labour Support Program. The initiative gives Kuwaitis in the private sector additional monthly wages as supplements.

However, not everyone has signed up, as national skills do not always match private sector demands. There are some negative cultural attitudes towards certain jobs.

Kuwait must complement its segmentation efforts with productivity reforms in the private sector. This involves encouraging businesses to compete with Middle Eastern counterparts on the international scene. They cannot simply rely on government contracts.

It also means investing in technical education, supporting small and medium-scale enterprises (SMEs) and providing incentives to encourage innovation in the private sector.

Implemented properly, the fiscal pressure on Kuwait would reduce due to a decrease in the public sector wage bill and more employment opportunities for nationals.