Abstract
This paper aims to examine the absorptive capacity of Kuwait’s economy over the period (1970-2010). The paper will expand on the analytical framework to estimate the absorptive capacity of the Kuwaiti economy developed previously by the main author. The absorptive capacity of the Kuwaiti economy has been increasing steadily over the years. Domestic absorption depicted a slow growth pattern during the period 1970-2000. However, it has accelerated significantly over the last decade rising by almost three fold from $29.1 bil in 2001 to $82.2 bil in 2010. However, the constant positive resource balance and the excess of foreign exchange earnings indicate the limitations of the economy absorptive capacity. The paper highlights the main constraints that limit the ability of the Kuwaiti economy to absorb resources and provide few policy recommendations that should help in increasing the absorptive capacity in long run.
Highlights
The State of Kuwait is characterized as a small rich open economy with abundance in crude oil that is entirely owned by the state
The constant positive resource balance and the excess of foreign exchange earnings indicate the limitations of the economy absorptive capacity
The paper highlights the main constraints that limit the ability of the Kuwaiti economy to absorb resources and provide few policy recommendations that should help in increasing the absorptive capacity in long run
Summary
The State of Kuwait is characterized as a small rich open economy with abundance in crude oil that is entirely owned by the state. The huge oil revenues over the last decade allowed the government to enjoy constant surpluses in the public budget. The constant capital outflow supported the widely held view that Kuwait has a limited absorptive capacity, since it was unable to utilize these surpluses internally in productive investment projects. After the liberation of Iraq in 2003, the private sector has benefited from government spending on developmental projects and the opportunity of increased business activities due to the rebuilding of Iraq This recent growth in economic activities has resulted in unprecedented levels of inflation, mainly due to the lack of absorptive capacity, and the inability to absorb the large amounts of liquidity generated from these surpluses.
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