Why the rentier economy fails in economic development? The case of Kuwait

The criteria for assessing the success or failure of development process in Kuwait reside in determining the extent to which the development outcomes are successful in bringing more economic diversification and preparation for the anticipated non-oil future. The dissertation argues that the development process in Kuwait has failed to achieve an adequate degree of diversification of the economy. The inability to reduce dependency on oil and the lack of preparation for the non-oil future can be attributed to the structure and the consequences of the rentier economy in Kuwait, where factors such as rent-seeking and a rentier mentality produce specific institutional settings that discourage the process of economic development. As a result, the rentier structure of the economy not only provides fewer incentives than are needed to create and maintain a sustainable economic growth process, but it also induces a greater tendency toward resource waste and misallocation. Therefore, the source of wealth becomes the source of economic failure. In addition, the dissertation examines the extent to which the rentier nature of the economy affects the political economy of Kuwait. To support these claims, a cointegration test and error correction model is applied to examine the impact of disaggregated government expenditure on the growth rate of the real non-oil economy in Kuwait from 1970 to 2000. The empirical findings indicate weakly that in the long-run the non-oil GDP is positively related to government capital expenditure, but negatively related to government current expenditure. Moreover, the empirical tests from the error correction model did not support the claim of a unidirectional causal relation running from disaggregated government expenditure to the growth of the non-oil GDP. In order to overcome such development obstacles, different policies and recommendations are proposed such as the implementation of a national development plan, national reform strategy, and prioritization of needs.