High prices of land/real estate Essay
Kuwait has generally high prices of land and real estate compared to GCC countries and other countries worldwide. This is because of the shortage of supply of land due to government monopoly of most land in Kuwait. It is estimated that more than 90% of Kuwaiti land is owned by the Kuwaiti government, particularly the Ministry of Energy, and that only 7% is currently used by the public (1).
In Kuwait, the average salary is KD 1,200 per month, and loans cannot exceed 50% of the person’s salary as set by the Central Bank of Kuwait. Hence, the maximum amount that could be borrowed by an average-salary person is KD70,000, plus the KD 70,000 interest-free loan from the government to Kuwaiti citizens only, totalling KD 140,000. Nowadays, the minimum price for a plot of land in a residential area is KD 150,000; hence, prices are out of reach for most people.
Why is this a problem?
This overpricing in land and real estate constitutes a major problem in Kuwaiti economy in terms of GDP. Since most people won’t be able to buy a house, they would either borrow money to buy a house or rent. Also, expatriates who are not allowed to own land are forced into the rental market, which pushes rental prices upwards. When people borrow money, they spend most of their income on paying back the loan, meaning less consumer expenditures and less investment, yielding a decrease in GDP. At the same time, local and foreign investors will not be encouraged to invest locally under such circumstances; this will ultimately lead to a big outward shift of investments and capital outflow from Kuwait to neighbouring and foreign countries. In both cases, C and I components will decrease, and hence GDP decreases also.
Another important implication of the high prices of land and real estate is inflation. This is because of the high rent prices which pushes suppliers of goods and services to raise prices in order to cover the costs and make profit. Hence, there will be a general increase in the level of prices.
Since most land is owned by the government – oil sector – and kept undeveloped under the hypothesis that it might hold potential oil fields, the government needs to organize with the Ministry of Energy to conduct proper studies in order to free some of the land and make it available for trading, housing projects, and investment.
Another effective solution is to invest in developing infrastructures of new cities, such as the one in Sabiya and the bridge linking Kuwait City to it. This will increase the supply of land for housing and investment by the private sector and would push prices down.
In addition, the government should give the private sector the opportunity to take part in mega public residential projects to lure their investments back to Kuwait, thus increasing the I component of the GDP and providing houses for individuals at reasonable prices. This would increase the portion of their savings for consumption and investments, and hence increasing GDP.
2. Disguised unemployment
Around 10,000 fresh Kuwaiti graduates enter the workforce each year, and 85% of those are employed in the government sector (2). Since the government is obliged to employ every Kuwaiti as stated in its constitution (3), and because of the high newly employed traffic induced every two months into the government sector through the Civil Services Commission, there is overstaffing in the government sector, especially with the introduction of new technologies which makes it possible to do the work with less employees. Disguised unemployment rate was estimated to be 30% of all government employees in 2008 (2).
Why is this a problem?
Overstaffing or disguised unemployment can have many implications on the Kuwaiti economy. The overstaffing of employees creates bureaucracy and reduces output efficiency, meaning that there is a slow-down in needed business activities and that basic business start-ups such as obtaining business permits and licenses may take very long. This discourages the private sector – both local and foreign – to invest in Kuwait, and dismiss these potential investors to other countries that have “healthy business environments”. Hence, disguised unemployment and bureaucracy result in a decrease in GDP.
The government needs to give the private sector a greater role by helping it to be established and to expand. This can be achieved by revising the current laws and regulations that may be viewed as obstacles to the private sector and by providing funding to mega projects, hence creating more job opportunities and diminishing disguised unemployment and bureaucracy.
Moreover, the government should give more incentives to individuals to venture into their own small/medium business enterprises, by means of providing low interest rate loans, professional business consultation, providing marketing opportunities to attract potential customers by having open business fairs, putting in perspective the small business owner when laying down any trading law and regulation, designating suitable buildings/zones to allocate their business, etc. This will decrease the load on the government and create diverse and multiple sources of expenditure and income, thus revive the economy.
(3) Article 41; Kuwait Constitution.
3. Bureaucracy and poor government regulations
The heavy bureaucracy and poor government regulations regarding starting a business or expanding on current investments have led both local and foreign investors to take their businesses abroad, especially to Gulf countries where laws and regulations are more appealing (5). Nowadays, starting a business and getting the proper paperwork done – such as business permits and licenses – may take months due to the slow pace of bureaucracy and the hierarchy of offices.
Why is this a problem?
Foreign investment plays a very important role in the process of economic development, especially in a country like Kuwait, where there are few other sources of income other than petroleum production and petrochemical industries. The slow pace of bureaucracy and the poor government regulations create obstacles for both local and foreign investors. Hence, these potential investors and their capital will be encouraged to invest abroad, decreasing the I component and, subsequently, decreasing the real GDP. Also, although the GNP increases when Kuwaiti investors invest abroad, the GDP keeps decreasing and unemployment increases, while these Kuwaiti investments provide foreigners with jobs and the government takes more burden by employing Kuwaitis and making the problem of disguised unemployment worse.
To fight the problems of bureaucracy and poor government regulations, these laws and regulations need to be revised to create a “pro-business” environment in Kuwait. The government should set up new laws and regulations to make Kuwait a leading financial and investment center, and should focus on drawing foreign investments and maintaining current local investors in the country. A good start can be by giving foreign investors the right to establish a local company where the share of foreigners may reach 100% of its capital. Moreover, the government should take the initiative to reduce taxes on the foreign investments and to allocate land and real estate necessary for the purpose of investment. Regarding the bureaucracy problem which slows down every business activity, the government should continue with its project concerning the “electronic government” in order the make procedures faster and easier. These structural business reforms will encourage investments and employment in the Kuwaiti economy and will increase the GDP.