COUNTRY COMPARISONS 

 


Comparison of the
Economies
and Cultures
of Kuwait
and Lebanon



by Sarah Campion

May, 2002
 

 

 

The Middle East is a region rich from the natural resources of petroleum found under the desert land and a region notorious for conflict.  Countries in this area can be alike in many cultural and superficial aspects, but the possession of a natural resource or the bad luck of a country war can have a dramatic effect in differentiating countries.  Lebanon and Kuwait are two Middle Eastern countries similar in size, people and culture, but greatly different in economies.  The Mediterranean Sea on the West, Syrian on the North and Israel on the West and South border Lebanon.  Lebanon is the smallest Middle Eastern country, with land area of about ten thousand square kilometers.  The majority of the three and a half million population is Arab and speaks Arabic as the official language while English and French are also widely spoken.  Lebanon is about seventy percent Muslim and thirty percent Christian.  The government is a republic led by President Emile La HUD and Prime Minister Salim al-HUSS.  Kuwait, separated from Lebanon by the countries Syria and Iraq, is next to the Persian Gulf on the West and between Iraq and Saudi Arabia.  It is relatively lager than Lebanon with a land area of about seventeen thousand square kilometers.  The population of two million is made up of eighty percent Kuwaitis and other Arabs and Arabic is also their official language while English is widely spoken.  Eighty-five percent of Kuwaitis are Muslim.  Kuwait’s government is a nominal constitutional monarchy type and the executive branch is led by the chief of state Amir JABIR al-Ahmad al-Jabir Al Sabah and Prime Minister SALIM al-Sabah al-Salim Al Sabah. 

Lebanon is most widely known for its recent 15 year civil war.  Before the war, Lebanon was profiting from its growing population, which was strongly educated and providing a dynamic, well trained labor force.  The civil war of 1975-1990 negatively affected Lebanon causing many of the skilled workers to move out of the country, resulting in political instability, causing inflation that destroyed much of the middle class and causing national debt to rise. 

 

Kuwait was established in 1670 and up until oil was discovered at the outbreak of the Second World War, Kuwait’s economy depended on fishing, pearl diving and sea faring.  Kuwait’s location relative to the major trade routes gave it a major benefit with the major powers of the world.  Since the beginning oil the oil drilling in the 1930’s until the 1970’s, there was no control over the oil companies.  The companies profited greatly from the new discovery, but they were over producing and thought to be rapidly depleting the natural reserve.  With the implementation of the first free parliament, the government began to create restrictions of the oil companies and control the production and the profits. 

Lebanon, with the exception of its civil war, is a small, relatively globally insignificant country that has for the most part kept to itself.Before the dangers of Beirut erupted and discouraged foreign visitors, Lebanon prided itself on the tourism it attracted.  One of the major national identities of the country of Lebanon is its variety of beautiful geographical attractions in the small area.  Lebanon has snow covered mountains for skiing, the Mediterranean Sea for swimming, desert land, and forests.  The Lebanese boast that in their country you can go skiing in the morning and in the same day, drive an hour to go swimming in the afternoon.
  This beautiful landscape has brought the country prosperity from their tourism sector. 

 

 

Many Kuwaitis pride themselves in the services provided by their country.  Kuwait has used its wealth from the oil revenues to benefit the citizens.  Kuwaitis enjoy the advantages of free education, free health care, and free social welfare.  These systems have made the culture of Kuwait more flourishing.  Kuwait does not suffer from the problems of impoverished citizens that many other rich countries suffer from.  All citizens can have the option to improve their well-being from health care and to improve their minds through education.  The citizens benefit in many ways from these programs that the government provides them.  Another aspect of these programs is the Fund for Future Generations.  This fund is provided by the government to save a portion of the oil revenues for the future generations.  Kuwaitis are proud that their country has implemented a system so that Kuwait will continue to prosper even if there is a slow down in the oil economy.  This aspect of the government and country makes Kuwait unique compared to many other countries. 

 

Before the war, the Lebanese economy was profiting from the well skilled Lebanese work force and the cheap semi skilled Palestinian workers.  As a result of this, there was a relatively high capital to labor ratio.  The Lebanese economy was a confessional economy that developed as a result of the interest of Maronite bureaucrats and Sunni trading families.  The few most powerful Sunni families greatly influenced the economy by setting up a stable source of public finance, which at that time the funding came from custom duties on foreign imports.  A result of this influence was a government with efficient social infrastructure and free trade policies.  The war changed the economy of Lebanon drastically.  It severely damaged the infrastructure of the country transportation services such as, water and electricity, sewage pipes, power plants, petroleum refineries, and irrigation systems. It also uprooted a large proportion of the rural population and led to overcrowding in the cities and the emigration of a large number of skilled professionals.  As a result, Lebanon suffered a brain drain because of the emigration of highly skilled workers to more stable countries.  Now that the war has ended, the restructuring process of the economy is very extensive to reduce the nation deficits, rebuild the infrastructure and to bring stability back to the country.  During its rule from 1992 until 1998, the government of Prime Minister Rafik Hariri worked to rebuild the country and the economy.  The gross domestic product (GDP) grew 80 percent from 1990 to 1996 and the per capita income has rose from less than 1,000 dollars in 1990 to an estimated 3,000 dollars.  The major sectors of the Lebanese economy are the banking and services sectors, which represent about 70% of the country's gross national product.  Since Lebanon’s sectors do not play a major role in international economics, Lebanon’s place among the world economics will remain insignificant.  As mentioned, Lebanon’s economy is struggling, while improving from the damage of the war, but there is still major worked needed to be done to decrease the deficits, the national debt, the unemployment rates and to maintain monetary and currency stability. 

 

The Kuwait economy is small and open and dominated by its oil industry.  Kuwait posses about ten percent of the world’s crude oil supply.  This discovery has changed the economy drastically.  The citizens of Kuwait benefit from a well developed infrastructure, comprehensive health care systems and free education.  In addition, in 1976 the government created the Reserve Fund for Future Generations which ten percent of the government revenue is set aside annually so that the future generations are ensured to benefit from this prosperity.  The government plays a dominant role in the country’s economy.  Kuwait’s economic system is based on a social welfare state, so government regulations are needed to restrict participation and competition in a number of sectors and control the roles of foreign capital[1].  The government is the largest employer of Kuwaiti citizens, employing 92% of nationals.  Kuwait also suffered from a war, however to a much lesser extent than Lebanon.  The Gulf War of 1990-1991 resulted in infrastructure damage that has caused the government to draw upon its reserves for rebuilding.  Another disadvantage to the Kuwaiti economy is that in the last decade there has been an unexpected decline in oil prices that have reduced the government revenues and constrained the government’s spending.  Since Kuwait is almost entirely dependant on one sector of its economy, fluctuations in the demand for this product have a direct effect on the developmental plans for the country.

One of the major aspects of the Lebanese economy is its banking and financial sector.  The Lebanese economy is also a typical open economy with a large banking sector equivalent to more than 2.5 times its economic sector and providing an important support to aggregate demand.  Before the civil war, Lebanon was the unrivalled financial center in the Middle East. Lebanon's free exchange system, strict secrecy laws, and strong currency all served to attract regional and international financial institutions and customers.  During the early years of the war, the banking system was boosted by an influx of funds for the various militias. As the war continued, banks survived by expanding overseas and by holding a larger portion of their balance sheets in US dollars.

 

            The civil war negatively affected the Lebanese banking industry.  The banks survived the war in a state of undercapitalization, limited funding, poor asset quality and severe under performance.  The country’s budget has been in deficit over the past year as the government continues to pay its numerous employees and to supply goods, despite its inability to collect sufficient revenues.  To hurt the banks even more, the borrowing from the banking sector has financed this deficit.           

 The Lebanese banks have made an excellent recovery since the civil war ended in 1990.  Relative to the size of the economy, the Lebanese banking sector is still among the largest in the world. Lebanese banks have total assets approaching $45 billion and deposits of about $37 billion, compared to an estimated gross domestic product last year of $16 billion-$17 billion[2].  Since 1992, the Central Bank of Lebanon has implemented a tough monetary policy to control the inflation and to stabilize the Lebanese Pound.  Despite the recovery, Beirut no longer can claim its former status as the financial capital of the Middle East but the banking sector is once again efficient and increasingly dynamic.

The major strengths of the banking sector include an open market system, high quality human resources, diaspora resources, low tax rates, strong Central Bank supervision, free capital flows, and Lebanese entrepreneurship[3].  These strengths were dominate before the war and have been rapidly returning since.  However, the Lebanese economy remains grossly overbanked (83 banks) and most banks are characterized by limited funding and profitability. A group of larger banks is coming about, monopolizing and taking over the business from their smaller peers.  One of the main challenges that Lebanese banks have to improve is to modernize their industries.  The banks still rely on techniques and strategies from two decades ago.  Therefore, they should develop new lending techniques and choose specific venues, which would accentuate their specific approach to banking. Lebanese banks also need to diversify their sources of funding and contribute significantly in the creation and development of a domestic capital market[4].

 

            The oil sector in Kuwait is very profitable due to the world’s high demand.  The Kuwait Petroleum Company (KPC) is the seventh largest oil company in the world.  In the beginning, Kuwait was one of the richest countries because it increased its production at a rate faster than average than other oil exporting countries. Today, oil accounts for over 50% of total output and 95% of export income. 10% of total oil income is placed in a special reserve fund set up by the government for the day when oil reserves are exhausted.

The economy has recovered from the Gulf War when the Iraqi troops occupied Kuwait.  The war was estimated to have cost Kuwait $170 billion, and the extent of the reconstruction is illustrated by the fact that Kuwait needed to liquidate a large amount of its overseas investment portfolio. These accounts, which are controlled by the Kuwait Investment Office, are used both to support the country's running costs (free education and social services) and to add to the reserve fund: the Fund for Future Generations.

KPC is implementing plans to raise crude production capacity in Kuwait to 3.5 million b/d.  It has been estimated that Kuwait can continue to produce at current levels for at least 200 more years.  This increase in capacity would greatly increase the country’s revenues.  

 

            One of the major problems with Kuwait’s oil sector is that the underlying economic base for the entire country.  Since the beginning of the first commercial oil export in Kuwait in 1946 until the end of 1965, the oil sector in Kuwait’s non-oil economy has been flat since a reconstruction boom, which followed the country’s liberation after the Gulf War[5].  However, now the KPC is implement new strategies to increase the productivity of the non-oil sectors in the economy.  This will give Kuwait more economic stability.  Another problem is that there is a high percentage of non-national workers in the labor force.  This poses a problem because of the threat of political and social problems arising from a lack of unity and similar interests. 

 Lebanon and Kuwait are similar in the aspects that they are both small Middle Eastern countries with small populations.  Both countries have similar cultures as well.  The majority of the population in each country is Muslim and speaks Arabic.  However, these countries differ greatly in their economies.  Kuwait prospers greatly from their extensive oil reserves, which makes up ten percent of the world’s oil reserves.  The discovery of oil has turned the economy around and improved the infrastructure and social programs.  The dominance of this sector does provide potential problems for the country.  Since the majority of the government’s revenue relies on the oil market, any fluctuations in price can have a major impact on the money earned by the country.  The KPC is working to overcome this problem by increasing their non-oil sectors.  Lebanon does not have this advantage of a natural resource.  Their economy is based mainly on the banking and financial sector.  However, with the civil war that Lebanon endured for close to two decades, the economy has suffered greatly.  The country has been rebuilding the economy, the infrastructure and many other aspects since the war was declared over.  Even though Lebanon will never be as prosperous as Kuwait for as long as Kuwait produces oil, they will return to their prosperity of a major banking country of the Middle East. 

 

 

Works Cited

Al-Saban, Dr. Y. S. F.  The Oil Economy of Kuwait.  London:  Kegan Paul International, 1980.

Al Mallakh, Ragaei.  The Absorptive Capacity of Kuwait.  Lexington: Lexington Books, 1981.  

War, institutions, and social change in the Middle East.  Edited by Steven Heydemann.  Berkeley: University of California Press, c2000.

The Competitiveness of the Lebanese Banking Sector,
Mr. Nicolas Photiades
Lebanon and EURO-Mediterranean Partnership Conference - July 1 - 2, 1996.  Paper Abstracts

 

 

Footnotes

[1] War, institutions, and social change in the Middle East.  Edited by Steven Heydemann.  Berkeley: University of California Press, c2000


[2] Lebanon's banking sector cautiously optimistic new year will bring new opportunities.”  by Richard Eames
Daily Star business editor, April 22nd 2002


[3] US Department of Commerce.  http://www.buyusa.gov/lebanon/en/index.php?page=37

[4] The Competitiveness of the Lebanese Banking Sector,
Mr. Nicolas Photiades
Lebanon and EURO-Mediterranean Partnership Conference - July 1 - 2, 1996 Paper Abstracts


[5]  Al-Saban, Dr. Y. S. F.  The Oil Economy of Kuwait. London: Kegan Paul International, 1980.

 

 

 

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