2009 Index of Economic Freedom

Quick Facts

Population:

• 2.6 million

GDP (PPP):

• $121.2 billion
• 6.3% growth
• 9.6% 5-year compound annual growth
• $43551 per capita

Unemployment:

• 2.2%

Inflation (CPI):

• 5.0%

FDI Inflow:

• $109.6 billion

Kuwait's economic freedom score is 65.6, making its economy the 50th freest in the 2009 Index. Its score is 2.5 points lower than last year, mainly because of an increase in government size, but also because of weak property rights and freedom from corruption. Kuwait is ranked 5th out of 17 countries in the Middle East/North Africa region, and its overall score is well above the world average.

Kuwait performs relatively well in many of the 10 components of economic freedom and is significantly higher than the world average in fiscal freedom and labor freedom. There is no income tax, but corporate tax rates on foreign businesses can be high. Kuwait is a major energy producer, and high oil revenues have delayed privatization efforts that were part of Kuwait's strategic plan to diversify the economy. The labor market is flexible. Kuwait's scores for investment and financial freedom are about the world average.

Kuwait scores slightly below the world average in terms of government size and monetary freedom.

Background Back to the top

Kuwait, an Arab constitutional monarchy, gained its independence from Britain in 1961. Occupied in 1990 by Iraq, it was liberated by a U.S.-led coalition in 1991. With an estimated 104 billion barrels of oil reserves, Kuwait controls roughly 10 percent of the world's oil supply. Oil accounts for nearly 50 percent of GDP and 95 percent of export revenues. The Al-Sabah dynasty has used state-owned oil revenues to build a modern infrastructure and cradle-to-grave welfare system for Kuwait's small population. Former Prime Minister Sabah al-Ahmad al-Jabr al-Sabah, chosen as Amir in January 2006, remains committed to cautious economic reforms but faces opposition from Islamic fundamentalists and populist members of parliament.

Business Freedom 67.4 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected under Kuwait's regulatory environment. Starting a business takes an average of 35 days, compared to the world average of 38 days. Obtaining a business license takes slightly more than the world average of 18 procedures, and closing a business is time-consuming and burdensome.

Trade Freedom 81.0 Back to the top

Kuwait's weighted average tariff rate was 4.5 percent in 2006. Prohibitive tariffs, import restrictions, services market access barriers, import licensing requirements, restrictive and burdensome regulations and standards, non-transparent customs implementation, and weak enforcement of intellectual property rights add to the cost of trade. Ten points were deducted from Kuwait's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 99.9 Back to the top

Kuwait does not tax individual income or domestic business income. Foreign-owned firms and joint ventures are the only businesses that are subject to corporate income tax, which can be as high as 55 percent. In the most recent year, overall tax revenue (mainly from duties on international trade and transactions) was 1.5 percent of GDP.

Government Size 63.7 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 34.8 percent of GDP, and revenue growth was outpaced by expenditure growth. Authorities increased salaries across the board to counter the effects of inflation.

Monetary Freedom71.7 Back to the top

Inflation is moderate, averaging 4.4 percent between 2005 and 2007. The government provides numerous subsidies and controls prices through state-owned utilities and enterprises, including telecommunications, ports, and transportation. Fifteen points were deducted from Kuwait's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Kuwait is open to some types of foreign investment, but restrictions are significant. Licenses from the Ministry of Commerce and Industry are required for the establishment of all new companies, and government authorization is required for any incentives offered by the Foreign Investment Law. Foreign investment in the upstream petroleum and downstream gas and petroleum sectors remains restricted. Bureaucracy is often inefficient and non-transparent, and it can be biased in favor of domestic interests. Residents and non-residents may hold foreign exchange accounts, and there are no restrictions or controls on payments, transactions, transfers, or repatriation of profits. Non–Gulf Cooperation Council citizens may not own land.

Financial Freedom50.0 Back to the top

Kuwait's financial system is relatively well developed and offers a full range of financial services for commercial transactions. Nine commercial banks, including three based on Islamic banking principles, are in operation with over 140 branches in Kuwait. The government retains stakes in a number of these banks but intends to privatize them. Credit is generally allocated on market terms. In recent years, the Kuwaiti central bank has improved its banking supervision, ensuring fairer and more efficient credit distribution. As a result of an amendment to the banking law in 2004, foreign banks are allowed to establish operations in Kuwait but are confined to a single branch. Since the beginning of 2008, several foreign banks, particularly from Gulf Cooperation Council member countries, have gained permission to enter the Kuwaiti banking sector, and there are now 10 foreign banks (four international and six regional).

Property Rights50.0 Back to the top

The constitution provides for an independent judiciary, but the Amir appoints all judges. The majority of judges are non-citizens, and renewal of their appointments is subject to government approval. Foreign residents involved in legal disputes with citizens frequently claim that the courts favor Kuwaitis. Trials are lengthy. In 2006, the government formed an intellectual property rights committee and announced plans for an IPR court.

Freedom From Corruption43.0 Back to the top

Corruption is perceived as significant. Kuwait ranks 60th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The executive, legislative, and (to a lesser extent) judicial branches are widely perceived as subject to corruption.

Labor Freedom79.3 Back to the top

Kuwait's flexible labor regulations facilitate employment and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be costly. There is no private-sector minimum wage. Restrictions on the number of work hours can be rigid.