If you wish to buy a television set, and your country doesn’t manufacture TV’s, you need to first find the currency of the manufacturing country. The TV manufacturer wants to be paid in his currency with which he incurred his production costs, and his profit will be spent on his living expenses. The only way you can get his currency is if you have something his country needs and buys from you, thus exchanging its currency with yours. This will allow your bank to accumulate the foreign currency to pay for your TV. Of course, this a simplified view without many details.
The Single Revenue Source Predicament
The Gulf oil states share with dozens of third world countries the predicament of being single revenue source economies. They produce one single product such as oil, minerals, or specialized agriculture produce such as coffee. Hence, they remain at the mercy of any misfortune that may strike their production or its prices. There are piles of academic economic studies and World Bank and IMF reports that address this problem, and illustrate how it can wreck economies and impoverish countries.
The Gulf states have spent over half a century exporting oil, and in return imported all they needed to build and develop themselves. And, with the sporadic, but continuously rising oil prices since 1973, their exports greatly exceeded their imports, which increased spending on not only on what was necessary for development, but also on luxuries and extravaganzas. But it also allowed them to accumulate huge financial surpluses, that were allocated as reserves to be invested in the hope of developing an alternative source of revenue – or as a stash for a rainy day… or whatever misfortune fate may serve.
The Gulf Predicament
The main problem (We shall henceforth refer primarily to Kuwait) was, that those states were distracted from, or unwittingly postponed, the necessary task of creating and developing the productive capabilities of their societies, which increased their dependence on their single source of revenue. This was further exacerbated with rapid growth of public expenditures, in parallel with the rise of oil revenues.
Then, misfortune struck and they discovered that their financial strength was a paper tiger, and panic ensued. With the, crash of oil prices in 2014, their dreams of continuous budget surpluses and ever-growing reserves vanished. They began to frantically search for a way out… before the ship sank! However, the problem seems too big, for after three years since the beginning of the crisis, there are is no concrete vision or plan on the table – it seems confusion and panic have seeped into the solution process.
The Present Proposed Solutions
Most of the solutions proposed or discussed are more accounting and bookkeeping in nature, rather than economics. They feel like a knee-jerk reflex, instead of a sober well studied strategy with clear goals and realistic time frames. Spot reactions tend to be short term and rarely deliver good or lasting results. As such, the governments’ first step was to jump on the simplest option; ‘Increase Revenues and Reduce Costs’, without defining which expenses and which revenues, without careful consideration of the potential impact on the economy and society and without assessing its ability to realize long term goals. Naturally, the public was far from joyous, and angrily rejected these proposals, especially in Kuwait, where the final decision is in the hands of parliament.
Have the Governments forgotten that the vast bulk of revenues are from oil, and that most expenses are spent on salaries and public projects, which represent the main sources of livelihood for everyone in the country? Abruptly, imposing taxes, privatization of public services, raising rates and ending ‘living expenses’ subsidies are not economic solutions, but bookkeeping stop-gap actions, that may do more harm than benefit. Their potential harm could affect the overall population and economy, and stifle any chance of real economic growth. Benefits, if any, are likely to be short-term and primarily a cosmetic window dressing for the books and the budget!
Reasons for this negative assessment
1) A value added tax (VAT) is not a fair tax. Its applies equally on all and, thus, confiscates a greater portion of the fixed income of medium and lower social groups. And despite marketing it as being only 5%, all VAT taxes were initially marketed as 3% or 5%, but soon rose, in some cases to 30% !
2) All taxes raise costs and are inflationary on consumer prices. They will make life more difficult for fixed income earners, especially after withdrawing the living expenses subsidies and raising government rates. This is particularly negative because most people are wage earners on fixed salaries, and need time to adjust and transform into an enterprising productive society. But, more importantly, taxes do not encourage a laggard economy to grow, especially a new or just emerging economy.
3) These solutions will contract the economy, rather than grow or rejuvenate it. They are not likely to create a booming private sector that can absorb the surplus civil service cadres, which the government is betting heavily on.
4) The crown jewel of the proposals, is the intention to privatize public services and entities by selling them off to local and foreign investors, despite many international studies, that warn how this can lead to higher prices, greater burdens on the populace and not necessarily deliver the anticipated results.
It may be wiser to stop now, take a deep breath and reassess what is about to done. What is needed is a realistic plan to transform the present economy, from its paternalistic welfare nature, to a productive one. And by productive, we mean:
1) An economy that produces products and services for export and earns foreign currencies.
2) An economy that produces products and services that replace some of the huge volume of imports, and reduces excessive foreign currency spending.
3) Reduce the present high level of imports, via stiff custom duties, especially on non-essential products. This would have the added benefit of increasing government revenues.
4) A concerted effort to retrain the civil service cadres and provide them with new skills that would allow them to work outside the public sector.
5) Delay imposition of taxes, raising rates and eliminating subsidies, until the non-oil part of the economy begins to grow in a self-sustaining manner.
6) Think of “commercialization” of part of the public sector rather than straight privatization. This may include PPP projects that require local private sector funding participation.
For those who believe in magic and quick fixes, there is a downside. These alternative solutions need lots of funding as well as time. They will require five to ten years (or more), before results begin to appear – and only if it they are implemented in a serious and committed manner. Unfortunately, there is no quick and easy way to eliminate a deficit permanently. It is likely to persist for some time, hopefully in a controlled manner. However, this may be far better than implementing a bookkeeping solution, that will bring misery to the people, not necessarily eliminate the deficit and, in the process, create a huge public debt that erodes the reserves; the country’s last bullet!
Despite the above comments, there is a role for the accounting approach. It can contribute by shrinking many unnecessary expenses such as military equipment, extravagant projects, and those without any clear economic feasibility. On the revenues side, it can work to improve the investments returns of the reserve fund.
No one has a monopoly on solutions, nor are any results guaranteed. Nevertheless, the starting point for all good solutions is a clear vision, realistic objectives, realizable time frames, and above all, the ability to tolerate and listen to constructive criticism and opinions.