Kuwaiti Consumption in the Presence of Dramatic Economic Events: 1973-2003

Abstract

The Kuwaiti consumption function is examined for the 1973-2003 time period. The dramatic events included: the Arab oil embargo of 1973, Kuwait's nationalization of oil facilities in 1976, the oil price shock in 1978, the Iranian Revolution in 1979, the Iran/Iraq war, Kuwait's unofficial stock market Al Manakh crash, increases in crude oil supply by non-OPEC producers by ten million barrels per day, the collapse of world crude oil prices in 1986, and the 1990 Iraq invasion. This paper examines three decades in which Kuwait experiences a variety of uncommonly dramatic economic and sociological events. The question we are addressing econometrically is: "Is consistency in Kuwaiti consumption maintained even in the presence of extreme economic conditions?"We found that Kuwaiti consumption is consistent with the Permanent Income Hypothesis. That is the marginal propensity to consume (MPC) approaches the average propensity to consume (APC) and the intercept is not significantly different from zero. Moreover, this result of a relatively small MPC of 0.30 is consistent with the contentions of Keynes and Kurihara that wealthy high income economies have relatively small values for MPC and APC.