Mohamed Ihsan Ajwad Johannes Koettl TOWARDS A NATIONAL Ismail Radwan Thomas Farole Javier Sanchez-Reaza JOBS STRATEGY Carole Chartouni Jumana Jamal Subhi Alaref Nayib Rivera IN KUWAIT Venkatesh Sundararaman Zeina Afif Gharam Alkastalani Dexter Photo by Ahmad Mohammed on Unsplash TOWARDS Mohamed Ihsan Ajwad Johannes Koettl A NATIONAL Ismail Radwan Thomas Farole Javier Sanchez-Reaza JOBS STRATEGY Carole Chartouni Jumana Jamal Subhi Alaref Nayib Rivera IN KUWAIT Venkatesh Sundararaman Zeina Afif Gharam Alkastalani Dexter © 2021 Government of Kuwait General Secretariat of the Supreme Council for Planning and Development Government office in Kuwait City, Kuwait Phone: +965 1841 212 This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions Attribution — Ajwad, Mohamed Ihsan, Johannes Koettl, Ismail Radwan, Thomas Farole, Javier Sanchez-Reaza, Carole Chartouni, Jumana Jamal Subhi Alaref, Nayib Rivera, Venkatesh Sundararaman, Zeina Afif, and Gharam Alkastalani Dexter. 2021. “Towards a National Jobs Strategy in Kuwait.” World Bank. Washington, DC. The material in this work is subject to copyright. All queries on rights and licenses, including subsidiary rights, should be addressed to: General Secretariat of the Supreme Council for Planning and Development Government office in Kuwait City, Kuwait Phone: +965 1841 212 Acknowledgments This report is one of the main deliverables outlined Development Specialist), Dana Kablawi (Consultant), in the legal arrangement of September 10, 2019 Sultan Khair (Consultant), Gael Moraes (Consultant), between the Kuwait General Secretariat of the Tasmia Rahman (Economist), Gonzalo Antonio Supreme Council for Planning and Development (GS- Pons (Extended Term Consultant), Mariana Viollaz SCPD) and the World Bank. The World Bank Team (Consultant) and Ramy Zeid (Consultant). William was led by Mohamed Ihsan Ajwad (Task Team Leader Shaw (Consultant) and Lisa Stewart (Consultant) and Senior Economist), Johannes Koettl (Co-Task edited the report, Eduardo Salgado (Consultant) Team Leader and Senior Economist), and Zeina Afif prepared the report for distribution, and Fatiha (Co-Task Team Leader and Senior Social Scientist). Amar (Operations Analyst) provided operational Ekaterina Pankratova (Senior Program Coordinator support. Design and data visualization for this for the GCC Social Protection and Jobs Engagement) report were performed by Two four eigth Studio coordinated the work program. (www.twofoureight.net). The core pillars of the strategy were led by: The report benefited from the strategic guidance > Public Sector: Ismail Radwan (Program Leader) of Issam Abousleiman (Country Director, Gulf Cooperation Council Countries), Ghassan Al Khoja > Private Sector: Thomas Farole (Lead Economist), (Kuwait Resident Representative), Anush Bezhanyan Javier Sanchez-Reaza (Senior Economist), Carole (Practice Manager, Middle East and North Africa Chartouni (Labor Economist) Social Protection and Jobs) and Sameh El Saharty > Social Protection: Jumana Alaref (Social Protec- (Program Leader for Human Development in the GCC). tion Economist) Dino Leonardo Merotto (Lead Economist) and Michael > Human Capital: Nayib Rivera (Social Protection Geiger (Senior Economist) were peer reviewers. Economist), Venkatesh Sundararaman (Lead The World Bank team is very grateful to H.E. Dr. Economist) Khaled Mahdi, Kuwait Secretary-General of GS- The cross-cutting themes were led by: SCPD, for his strategic guidance and directions. In > Behavioural Economics: Zeina Afif (Senior Social addition, Mr. Ahmad Al-Janahi, Dr. Faleh AlRashidi, Scientist) Ms. Hawra Bahman, Mr. Abdullah Al Ameer, and > Women, Business, and the Law: Gharam Dexter other representatives from Kuwait GS-SCPD provided (Private Sector Specialist) valuable inputs during the technical and policy advisory discussions. The core team members included: Maryam Abdullah (Operations Officer), Souad Adnane (Consultant), The World Bank team also thanks representatives of Aalaa Alshaheen (Consultant), Alia Aghajanian the Kuwait Ministry of Education, Ministry of Health, (Consultant), Mohd Rami Abdelqader (Program Ministry of Higher Education, Ministry of Social Assistant), Saud Alrakhayes (Consultant), Dana Affairs and Labor, Central Statistical Bureau, Public Jasmine Alrayess (Consultant), Mehtabul Azam Authority for Manpower, Civil Service Commission, (Consultant), Simon Bilo (Consultant), Mohamad Public Authority for Applied Education and Training, Chatila (Extended Term Consultant), Abigail Dalton National Fund for Small and Medium Enterprise (Operations Officer), Laura De Castro Zoratto Development (the “SME Fund”), and Kuwait (Senior Economist), Iva Hamel (Senior Private Sector University for their time, information, and insights. 5 Abbreviations and Acronyms BQA Education and Training Authority PAAET Public Authority for Applied Education CSC Civil Service Commission and Training ECD Early Childhood Development PAM Public Authority for Manpower EIA Energy Information Agency PIC Petroleum Industries Company EU European Union PISA Programme for International Student Assessment FDI Foreign Direct Investment SDGs Sustainable Development Goals FGF Future Generations Fund SEZ Special Economic Zone FLFP Female Labor Force Participation SME Small and Medium Enterprises GCC Gulf Cooperation Council SOE State-owned Enterprise GDP Gross Domestic Product STEM Science, Technology, Engineering and GDPPC GDP per Capita Mathematics GFCF Gross Fixed Capital Formation TFP Total Factor Productivity GVA Gross Value Added TIMSS Trends in Mathematics and Science IAP Individual Action Plan Study ICT Information and Communications TVET Technical and Vocational Education Technology and Training ILO International Labor Organization UAE United Arab Emirates IMF International Monetary Fund UK United Kingdom KWD Kuwaiti Dinar UNCTAD United Nations Conference on Trade KSA Kingdom of Saudi Arabia and Development LFS Labor Force Survey UNESCO United Nations Educational, Scientific LMIS Labor Market Information System and Cultural Organization MENA Middle East and North Africa US United States MoH Ministry of Health VA Value Added MOSA Ministry of Social Affairs WB World Bank NEET Not in Employment, Education or WDI World Development Indicators Training WEF World Economic Forum NQF National Quality Framework WGI Worldwide Governance Indicators OECD Organization for Economic WITS World Bank Integrated Trade Solutions Co-operation and Development 6 7 Table of Contents PART 1 | DIAGNOSTIC 12 1 | INTRODUCTION 57 3 | PRIVATE SECTOR 13 Introduction 58 Introduction 15 A jobs strategy is urgently needed 59 Kuwaiti workers are underrepresented 19 The labor market is unique in many sectors 21 The public sector is large and generous 72 Entrepreneurship is lagging 25 The population is growing rapidly 77 The business environment is weak 26 Oil dependence persists 84 Kuwaitization has worked but its limits are becoming apparent 27 Productivity is falling 92 References 30 2 | PUBLIC SECTOR 93 4 | SOCIAL PROTECTION 31 Introduction 94 Introduction 32 The public sector wage bill is large 97 Labor market programs and transfers 36 Kuwaitis prefer public sector jobs are small relative to other programs 39 The Kuwaiti public sector is unique 113 Social insurance transfers are 44 Educational attainment in the public disincentives to work sector is low but improving 116 Social safety net transfers 48 High dependence on foreign workers 120 Energy and water subsidies are for education and health jobs the bulk of social expenditures 52 Women are paid less than 121 References men in the public sector 54 Salaries of new hires varies 122 5 | HUMAN CAPITAL 56 References 123 Introduction 124 Education spending is high 125 Educational outcomes and quality of education 138 Maximizing human capital 151 References 153 Annex 8 PART 2 | STRATEGY 162 1 | POLICY RECOMMENDATIONS 163 Introduction 165 Public Sector 172 Private Sector 177 Social Protection 183 Human Capital 188 The Jobs Strategy recommendations 9 Photo by Arlo Magicman on Shutterstock PART 1 DIAGNOSTIC 1. DIAGNOSTIC INTRODUCTION PART 1 13 Introduction 15 A jobs strategy is urgently needed 19 The labor market is unique 21 The public sector is large and generous 25 The population is growing rapidly 26 Oil dependence persists 27 Productivity is falling 12 PART 1 | DIAGNOSTIC | 1. INTRODUCTION Introduction This report is one of the main deliverables outlined in the legal arrangement of September 10, 2019 between the General Secretariat of the Supreme Council for Planning and Development (GS-SCPD) in Kuwait and the World Bank. A separate overview report is also available. The social contract in Kuwait is at risk. Kuwaiti citizens are used to the state providing public sector jobs, free education, free healthcare, and subsidized fuel to all citizens. These benefits have been bought and paid for using Kuwait’s oil revenues, however, the sustainability of the social contract has been questioned by three mutually reinforcing challenges. First, oil demand is projected to steadily decline the next few decades. This decline is partly the result of changing consumer preferences away from carbon-based fuel sources, and partly the result of increasingly cost-effective alternative energy sources becoming available. Second, with mounting fiscal deficits, the size of the wage bill for the government is a growing concern. Third, the needs in the labor market will continue to grow as Kuwait’s population is young and growing. Central to these structural challenges are challenges to Kuwait’s labor market. A growing number of young Kuwaitis are entering the labor market with high expectations of well- paid, secure, public sector jobs. In the private sector, employers are dependent on low-cost and largely unskilled foreign workers. The 2019 COVID-19 global pandemic, which has led to an oil price crisis and a global economic slowdown, has intensified the debate surrounding jobs challenges in Kuwait. These jobs challenges need to be addressed to ensure the sustainability of the economic growth model and avoid major social disruption. The government has asked The World Bank for assistance to formulate a National Jobs Strategy to help confront these challenges, based on evidence and best practices. Reforms are recommended in four areas, or pillars: (i) make the public sector more sustainable, (ii) improve human capital, (iii) support private sector growth, and (iv) build a social protection system (Figure 1). In addition, the jobs strategy covers two cross-cutting themes: behavioral economics, and monitoring and evaluation, also embedded in the four pillars. This introduction briefly explains the critical challenges facing Kuwait that require substantial changes in policy. The subsequent sections analyze the major issues of these four topics, with recommendations for policy change to improve sustainability and enhance incomes. 13 PART 1 | DIAGNOSTIC | 1. INTRODUCTION FIGURE 1 The four pillars of the Jobs Strategy Jobs Strategy 1 2 3 4 Public Sector Private Sector Social Protection Human Capital Behavioral Economics Monitoring and Evaluation 14 PART 1 | DIAGNOSTIC | 1. INTRODUCTION A jobs strategy is urgently needed A jobs strategy is urgently needed because the social contract in Kuwait is at risk. For decades citizens have been accustomed to the state providing public sector jobs, free education, free healthcare, and subsidized fuel to all citizens. These generous benefits have been paid for using Kuwait’s oil revenues. However, Kuwait has been unable to adjust to lower fiscal revenues since the oil price crash of 2014 (Figure 2). Each year since 2014, the Kuwaiti government has spent more than it has received in revenues. The COVID-19 pandemic and the associated plunge in oil prices in March 2020 has exacerbated the situation further. The Ministry of Finance forecasts government deficits of KWD 14 billion in 2020/21 and KWD 12 billion in 2021/22. Deficits have been recorded around the world during the COVID-19 outbreak, but in Kuwait there is significant concern as the cause of the deficits is structural, and a comprehensive long- term solution is needed to bring expenditures back in line with revenues. FIGURE 2 Government Fiscal Balance (KWD Billions) Kuwait has recorded a deficit since 2014/15 10 5 5 0 -1.3 -2.7 -5 -3.9 -4.8 -6 -5.8 -10 -12 -15 -14 2013 / 14 2014 / 15 2015 / 16 2016 / 17 2017 / 18 2018 / 19 2019 / 20 2020 / 21* 2021 / 22* Source: Ministry of Finance 15 PART 1 | DIAGNOSTIC | 1. INTRODUCTION Three main structural factors complicate efforts to control the fiscal concerns: > Kuwait’s government expenditures are largely allocated to salaries: almost 72 percent of government expenditures go to salaries and subsidies.1 Kuwait’s public sector wage bill has risen sharply in the last two decades from KWD 1.8 billion in 2005 to KWD 7.7 billion in 2019 (Figure 3). This 4.3-fold increase in the public sector wage bill far outpaced the 1.5-fold increase in government revenues in the same period. The high wage bill finances more than 80 percent of Kuwaiti public sector employees. It also represents a drag on growth as it crowds out spending on more productive items, like infrastructure. > Public sector employees are better paid than private sector employees, its generous salaries and benefits are very attractive. Kuwaiti job seekers actively search for public sector jobs as do a significant number of private sector employees. In the next 5 years, approximately 100,000 Kuwaitis are expected to enter the job market (26 percent of current Kuwaiti public sector employees). The government cannot afford to continue absorbing so many workers into the public sector and will need to focus on stimulating the private sector and reducing public sector benefits to make the private sector a viable alternative. FIGURE 3 Public Sector Wage Bill (LHS) and Revenues (RHS) 2005-2019 KWD billion, nominal Wage Bill Revenues (right axis) 7.7 40 8 7 6 30 25.0 Public Sector Wage Bill 5 Revenues 4 16.9 20 3 2 10 1 1.8 0 0 2005 2009 2013 2017 2019 Source: Ministry of Finance > Diversification from oil remains an elusive goal for Kuwait. About 83 percent of government revenues come from oil, and expectations are that oil prices will remain low or even trend down in the next few decades, putting further pressure on government fiscal balances. Kuwait is one of the most hydrocarbon dependent countries in the world, even relative to other GCC countries. In 2018, hydrocarbons accounted for about 43 percent of GDP (90 percent of exports) in Kuwait, while in Saudi Arabia and Oman hydrocarbons accounted for 29 percent of GDP, in Qatar this number was 21 percent of GDP. This dependance on oil revenues meant that government revenues were subject to 1 Ministry of Finance. https://www.mof.gov.kw/MofBudget/PDF/Budget22-21eng.pdf. 16 PART 1 | DIAGNOSTIC | 1. INTRODUCTION the same boom and bust cycles seen in most undiversified economies around the world. But, the problem is more pressing for Kuwait given World Bank forecasts indicating that crude oil prices are likely to be below US$ 60 per barrel – the fiscal breakeven oil price for Kuwait – over the next decade (Figure 4).2 Under this scenario, and if oil extraction technology remains the same, Kuwait is expected to record deficits for a decade. FIGURE 4 Kuwait's dependency on oil, compared to GCC countries 4.1 | Percent (%) of GDP Kuwait Bahrain Oman KSA Qatar UAE 43.1 38.2 29.5 29.2 21.3 17.4 4.3 1995 2018 4.2 | Fiscal breakeven oil price, Kuwait USD per Barrel, 2020-21 Estimates 65 61.1 60.3 60 53.6 52.6 55 50 45.7 45 40 2017 2018 2019 2020* 2021* Source: World Bank World Development Indicators, 2021; and IMF, n.d. As the effect of the pandemic began to be felt and Kuwait’s additional emergency spending depleted the government’s main fiscal liquidity buffer, the General Reserve Fund (GRF), calls to improve fiscal sustainability have become more forceful. The March 2020 IMF Article IV report concluded that “without a course correction, fiscal and financing challenges will intensify.”3 In September 2020, in response to the government’s “increased liquidity risks” 2 https://www.worldbank.org/commodities. 3 IMF. 2020. “Kuwait: 2020 Article IV Consultation – Press Release; Staff Report; and Staff Supplement” IMF Country Report No. 20/89, Washington, DC. 17 PART 1 | DIAGNOSTIC | 1. INTRODUCTION Moody’s downgraded Kuwait’s sovereign credit rating. Similarly, in July 2020, S&P Global Ratings revised Kuwait’s outlook from stable to negative, pointing to risks posed by the depletion of the GRF. A move that was followed by Fitch Ratings in February 2021. “Kuwait has yet to put in place a long-term, sustainable funding policy,” S&P Global Ratings noted. More alarming is the concern raised in the S&P Research Update of January 2021: “broader reform momentum remains slow and complicated by the confrontational relationship between the government and parliament.” The alarms bells are not only being rung by outsiders, but by insiders as well. In November 2020, 29 Kuwaiti scholars specialized in economics and business published a document that began with the declaration: “The current state of the Kuwaiti economy is unsustainable.”4 Shortly thereafter the Kuwaiti private sector published a similar analysis through the chamber of commerce. While fiscal sustainability issues continue to mount, Kuwait needs to consider the reforms presented in this study as an important component of its effort to achieve fiscal sustainability. 4 “BEFORE IT’S TOO LATE: A Vision to Reform the Kuwaiti Economy.” Kuwaitimpakt.com. 18 PART 1 | DIAGNOSTIC | 1. INTRODUCTION The labor market is unique About 90 percent of the workforce in Kuwait are citizens of other countries and living in Kuwait on temporary visas. The private sector accounts for almost 80 percent of all employment, and 88 percent of private sector workers are non-Kuwaitis (Figure 5). By contrast, almost all Kuwaiti workers are in the public sector; less than 10 percent of Kuwaitis have private sector jobs. The private sector is dominated by non-Kuwaitis FIGURE 5 Total employment by sector Percent (%) Public Sector State Owned Enterprise Private Sector 9.6% 10.4% 8.3% 2.5% 7.4% 10.3% 79.6% 88.3% 89.3% 83.0% 79.3% 3.5% 3.0% 16.9% 8.7% Total Kuwaitis Non-Kuwaitis Kuwaiti Males Kuwaiti Females Source: Kuwait Labor Force Survey (LFS) 2017; and Penn World Tables 9.0 19 PART 1 | DIAGNOSTIC | 1. INTRODUCTION Labor force participation by Kuwaitis is only about 40 percent (Figure 6) and is particularly low among Kuwaiti women. A significant share of youth, especially women, are not in employment, education, or training (NEET). Unemployment is significantly higher for women than for men and it is also relatively high among young adults underlining the importance of experience for securing employment. Efforts to improve the labor market status of women and youth are important to improving equity and increasing the efficiency of the economy. Labor force participation among Kuwaitis is low FIGURE 6 Labor force participation by nationality and gender Labor Force Participation Rate (%) (right axis) 3,000,000 100% 2,549,734 2,500,000 82.2% 80% 2,281,189 73.8% No. of Individuals in Labor Force Labor Force Participation Rate (%) 2,000,000 60% 1,500,000 39.6% 40% 1,000,000 20% 500,000 268,546 - 0% Total Males Females Total Males Females Total Males Females Total Kuwaiti Non-Kuwaiti Source: Kuwait LFS 2017 20 PART 1 | DIAGNOSTIC | 1. INTRODUCTION The public sector is large and generous Kuwait’s constitution mentions the right of every Kuwaiti to work.5 This has often led Kuwaitis to hold out for public sector work because wage levels and non-wage benefits in the public sector tend to exceed those in the private sector. To increase Kuwaiti participation in the private sector, the Dam Al-Amala program was initiated in 2001 to provide an in- work benefit that would bring private sector wages closer to public sector wages, and thus encourage Kuwaitis to seek private sector employment. The Dam Al-Amala program reduces the public sector wage premium (not correcting for worker characteristics) from 70.4 percent in favor of the public sector to 12.8 percent in favor of the private sector. Average public sector wages are 6.8 percent lower than private sector wages if the data are adjusted for workers’ characteristics that affect productivity, including education, age as a proxy for work experience, marital status, gender, and governorate ( Figure 7 ). 6 There are also several non-wage benefits to working in the public sector: public sector employment tends to have lower average working hours (approximately 35 hours per week compared to almost 50 hours in the private sector); more lenient working conditions; and higher job security. In addition, social norms tend to reinforce the bias towards public sector employment (see section on public sector, below). For Kuwaitis, working in the private sector is uncommon, and is often viewed as an odd and (more importantly) risky decision. The response to the COVID-19 pandemic also reinforced the stability of the public sector: workers were paid the full wage in most cases, while private sector workers had to absorb some of the impact of curfews, lockdowns, and the reduced demand for services. Dam Al-Amala reduces wage differences between public and private sector employment 5 The Constitution states that every “Kuwaiti has the right to work and to choose the type of his work. Work is a duty of every citizen necessitated by personal dignity and public good. The State shall endeavour to make it available to citizens and to make its terms equitable.” 6 The section on social protection provides an in-depth analysis of the impact of the Dam Al-Amala program on wages. 21 PART 1 | DIAGNOSTIC | 1. INTRODUCTION FIGURE 7 Difference in monthly wages between public and private sectors due to Dam Al-Amala - Without Dam Al-Amala With Dam Al-Amala Percent (%) Percent (%) 0.0 100 82.3 -10.0 -6.8 80 70.4 -12.8 -20.0 60 -30.0 40 -40.0 20 -50 0 0 Raw Wage Gap Wage Gap after Accounting Raw Wage Gap Wage Gap after for Worker Characteristics Accounting for Worker (i.e. Wage Premium) Characteristics (i.e. Wage Premium) Source: Kuwait LFS 2017 Note: ‘Wage gap’ refers to the difference between wages in the public and private sectors. Controls account for worker characteristics, such as education, age (as a proxy for work experience), marital status, gender and governorate. The coefficient on the wage difference after controlling for workers characteristics is significant at the 5% level with a standard error of 0.017 The impact on public finances The public sector is the employer of choice for comfortable, secure, and well-paid employment for most Kuwaitis and this is a significant drain on public finances, particularly given substantial salary hikes and increased recruitment in the last decade. The wage bill makes up a third of public expenditures and 17 percent of GDP these are the highest ratios in the GCC and well above OECD averages of 24 percent of expenditures and 10 percent of GDP respectively, see Figure 8. The fiscal deficit (excluding investment income, and after transfers to the Future Generations Fund) ballooned to 17.5 percent of GDP in FY15/16 (the fiscal year ending March 31, 2016) with the sharp fall in international oil prices in 2014 (Figure 9). The subsequent rise in the price of oil reduced the deficit, however, budget deficit financing reduced the General Reserve Fund by 60 percent from FY14/15 to FY18/19. The IMF forecast of financing needs for the next five years (completed in 2018, well before the current COVID-19 induced crisis) greatly exceeds the resources of the Fund. The public sector wage bill is much higher in Kuwait than in many high-income countries 22 PART 1 | DIAGNOSTIC | 1. INTRODUCTION FIGURE 8 Wage bill, 2016 Kuwait 34 17, 33 GCC Wage Bill (% of Total Expenditure) 30 Estonia US 26 Chile Oil Exporters OECD Finland Luxembourg 22 Romania 18 5 7 9 11 13 15 17 19 Wage Bill (% of GDP) Source: World Bank World Development and Bureaucracy Indicators 2018; and Fitch Solutions 2019 The government deficit is high and is expected to remain high FIGURE 9 Kuwait government balance Percent (%) of GDP 30 Balance excluding investment income and after transfers to FGF Balance excluding investment income 20 12.2 10.2 10 0 -4.6 -10 -7.3 -12.3 -12.7 -12.3 -17.5 -17.1 -20 FY2012/13 FY2013/14 FY2014/15 FY2015/16 FY2016/17 FY2017/18 FY2018/19 2019/20 2020/21 Source: IMF 2019 23 PART 1 | DIAGNOSTIC | 1. INTRODUCTION The oil price collapse in early 2020, which was significantly, but not singularly, caused by the COVID-19 global pandemic, has greatly exacerbated the government’s financing difficulties. The oil price that is consistent with budget balance in Kuwait is estimated at about $60 per barrel (Figure 10). The price of Brent crude, a commonly used benchmark for the oil market, was below $60 for most of 2020. In the absence of a rapid and sustained recovery in oil prices, Kuwait can anticipate large fiscal deficits for the foreseeable future. The government has substantial financial assets, but there is a limit to how long the current level of expenditures can be maintained without serious financial repercussions. FIGURE 10 Fiscal breakeven oil price, Kuwait USD per Barrel, 2020-21 Estimates 65 61.1 60.3 60 55 53.6 52.6 50 45.7 45 40 2017 2018 2019 2020* 2021* Source: IMF 2019 24 PART 1 | DIAGNOSTIC | 1. INTRODUCTION The population is growing rapidly Financing employment in the large and generous public sector is set to become more difficult. Kuwait has a young population, with 21.4 percent below the age of 14. This implies a sharp rise in the working age population over the next few decades. The Kuwaiti labor force will increase by at least 50 percent in the next ten years, and Kuwait will need to create almost 20,000 new jobs per year to absorb these new workers (Figure 11). Additional young workers can raise output and economic welfare, but only with access to productive employment. A rapidly growing supply of job seekers who expect to get public sector jobs are coming up against fiscal pressures that will limit public sector employment; combined with slow growth constraints in private sector employment, this is a recipe for high rates of unemployment and social tension. The World Values Survey provides some insight into the growing pressures for greater government support for livelihoods: 36 percent of Kuwaiti respondents completely agreed with the statement that the “government should take more responsibility to ensure that everyone is provided for,” the tenth-highest level of the 60 countries with data for that question.7 By contrast, only 8.5 percent of US residents, 19 percent of Qatar residents, and 26 percent of Lebanese residents completely agreed with that statement. The supply of new workers will rise sharply over the next decade FIGURE 11 Estimated number of Kuwaiti nationals in the labor market over the next 10 years 800 600 Retirees 74,268 New Additions 264,069 New Jobs 189,801 Thousands 400 Private 73,634 200 Public 310,964 0 Kuwaiti nationals Kuwaiti nationals in labor market in labor market in 2020 in 2030 Source: Data from labor market information system (LMIS) and World Bank calculations Note: Analysis assumed that everyone who reaches retirement age will retire, and that the government will continue to aim for a low (2%) unemployment rate, and that the labor force participation rate remains the same 7 Data are from the World Values Survey database, accessed on May 5, 2020. http://www.worldvaluessurvey.org/WVSOnline.jsp. 25 PART 1 | DIAGNOSTIC | 1. INTRODUCTION Oil dependence persists Natural resource rents make up about 40 percent of GDP, significantly higher than other GCC countries (Figure 12). The economy is therefore highly vulnerable to changes in policies and economic trends that could reduce demand for oil, for example anything related to climate change. Even if the recent collapse in the oil price, driven by offal in demand as a result of the COVID-19 global pandemic, is partially reversed, dependence on oil will continue to expose Kuwait to future demand shocks. Moreover, the longer-term prospect for oil prices is uncertain, particularly given the pressure to shift to renewables to limit climate change. Thus, there is considerable pressure for Kuwait to diversify its economy. Kuwait is one of the most oil-dependent economies in the world FIGURE 12 Natural resource rents for GCC countries Percent (%) of GDP Kuwait Bahrain Oman KSA Qatar UAE 43.1 38.2 29.5 29.2 21.3 17.4 4.3 1995 2018 Source: World Development Indicators Note: Natural resource rents measure the difference between the value of natural resource production (including oil, gas, and minerals) at world prices and total costs of production, as per the methodology described in “The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium” (World Bank, 2011) 26 PART 1 | DIAGNOSTIC | 1. INTRODUCTION Productivity is falling Limiting public sector employment to achieve a sustainable fiscal position, absorbing the growing population of new entrants into the labor force, and diversifying the economy can only be achieved by increasing employment and productivity in the private sector. The key goal of the National Jobs Strategy is therefore to increase the supply of highly productive private sector jobs, to attract more Kuwaitis into the private sector and raise incomes. The bulk of private sector resources in Kuwait, however, are currently channeled into low- productivity, slow growing activities. This is partly because Kuwaitis’ high reservation wages from public sector employment, coupled with the massive availability of low-paid foreign workers, has distorted firms’ production decisions, resulting in a private sector dominated by low-productivity activities. Moreover, poor educational quality and limited lifelong training opportunities have constrained the productivity of Kuwaitis. According to the World Bank’s Human Capital Index, children born in Kuwait today will reach only 58 percent of their productive potential as adults. The difficult challenges involved in accelerating private sector growth, and the urgency of policy reforms to boost productivity, are underlined by the overall decline of 20 percentage points in the average output per worker over the past 20 years (Figure 13), a more pronounced decline than in other GCC countries. Total Factor Productivity (TFP) has been steadily falling for a decade.8 Productivity has fallen FIGURE 13 Labor productivity and TFP in Kuwait 1.8 TFP Index, 2011 (Right Axis) 180,000 GDP per Worker (USD) 1.8 160,000 1.6 (USD, constant PPP 2011) 140,000 Labor Productivity 1.4 TFP Index, 2011 120,000 1.2 100,000 99,697 0.9 1.0 80,000 0.8 79,605 60,000 0.6 2000 2017 Source: Penn World Tables 9.0 8 Total Factor Productivity (TFP) is defined as the efficiency with which firms turn inputs into outputs. It compares changes in output over time to changes in the mix of inputs, including labor, new technology, capital investment and workforce skills. 27 PART 1 | DIAGNOSTIC | 1. INTRODUCTION Since 2010, growth has relied on population growth to offset negative productivity contributions. Between 2010 and 2017, instead of fueling economic growth with productivity gains, Kuwait’s economic performance was dragged down by declining productivity ( Figure 13). Over the entire period, the country’s value added in per capita terms declined at an average annual rate of 2.5 percent. And although demographic factors and the labor force positively influenced growth, these were also negative between 2015 and 2017 (last available data); other than the employment rate, all elements in the growth decomposition analysis were negative. Those two years may also hint at the possibility that unless productivity gains are realized, job creation will not be enough to generate growth. Kuwait’s growth trajectory is at odds with comparator countries that include high-income and oil-producers (Figure 14). While productivity is the main engine of growth in the latter, Kuwait’s growth suffers from waning productivity. FIGURE 14 Growth decomposition in per capita value-added terms, 2010-17 Productivity Employment Rate Participation Rate Demographic Change United States 2000-2017 2010-2017 Total = 1.0% Total = -2.5% Singapore 2000-2018 Total = 3.1% United Arab Emirates 2010-2017 Total = 2.7% 2015-2017 Total = -2.3% Norway 2000-2018 Total = 0.7% Malaysia 2000-2018 Total = 3.1% 2010-2015 Total = -2.6% Kuwait 2010-2017 Total = -1.9% -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 Percent (%) yearly contribution to growth Annual change (percentage points) Source: World Bank, 2021. JobStructures Tool Achieving greater private sector employment among Kuwaitis and raising productivity would require a series of complementary reforms in several areas: > Impose constraints on public sector employment coupled with reforms to improve government efficiency; > Improve the business environment to boost firms’ demand for workers and to remove barriers that limit firms’ productivity growth; 28 PART 1 | DIAGNOSTIC | 1. INTRODUCTION > Improve social assistance and pension programs to increase incentives to work, and to focus social assistance and support for job search on those most vulnerable to unemployment; and > Reform the education and training sector to focus on outcomes and ensure that investments are productively used to provide the highly productive workers needed by a more dynamic private sector. These four goals correspond to the four pillars of the labor market strategy; the reforms need to be implemented together to be fully effective. For example, the contribution of improvements in the business environment to private sector growth will be limited if Kuwaitis are not encouraged to accept private sector employment, or if firm growth is constrained by a shortage of high-skilled workers. Likewise, efforts to improve incentives for work will be futile if there are insufficient jobs if the private sector remains dominated by low-productivity, slowly growing firms. For ease of exposition the labor market strategy is divided into four areas, however, concurrent progress in all four pillars is essential to success. Behavioral science is a cross-cutting element of this jobs strategy because labor market decisions are not only influenced by structural, economic, and policy aspects, but also by behavioral factors. Understanding beliefs, mental models, aspirations, and the behavior of key stakeholders in the labor market will help identify bottlenecks and opportunities for reform. 29 2. DIAGNOSTIC PUBLIC SECTOR PART 1 31 Introduction 32 The public sector wage bill is large 36 Kuwaitis prefer public sector jobs 39 The Kuwaiti public sector is unique 44 Educational attainment in the public sector is low but improving 48 High dependence on foreign workers for education and health jobs 52 Women are paid less than men in the public sector 54 Salaries of new hires varies 56 References 30 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Introduction Public sector reform is urgently needed to ensure the sustainability of government finances, support economic growth, and maintain social peace. The large increase in public sector employment over the past two decades, coupled with increases in public sector salaries, has greatly inflated the wage bill, while revenues remained tied to a volatile oil market in which prices have been decreasing steadily since 2014. Kuwait’s young working-age population is growing rapidly and the continued practice of hiring most new Kuwaiti labor market entrants into the public sector has resulted in large and continuous fiscal deficits since 2015. Thus, future employment demand, and the ability of young Kuwaitis to find fulfilling work with adequate remuneration, depends on rapid growth in good private sector jobs. In addition to efforts to rein in the growth in public sector employment, improvements in public sector efficiency and equity are also needed to strengthen the provision of public services. This section of the Jobs Strategy reviews the increase in the public sector wage bill over the past few years, it analyzes Kuwaitis’ strong preferences for work in the public sector over the private sector and provides an overview of public sector employment. It then considers key issues facing the public sector, including education levels in the civil service; the declining but still significant reliance on foreign workers; gender inequality; and the large disparity in salaries for new hires. 31 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR The public sector wage bill is large > The state guarantee of employment has been met through providing public sector jobs. The resulting sharp expansion of public sector employment has boosted the public sector wage bill as a share of public expenditures and GDP that are far above levels in most high- income countries. The government guarantees employment for all Kuwaitis. The right of every Kuwaiti to work is mentioned in Articles 26 and 41 of the Constitution and in various Emiri decrees.9 The Constitution also commits the state to provide generous allowances for housing, health care and education as well as social security, pensions, and disability benefits. This system of guaranteed employment in the public sector along with generous social welfare benefits has provided strong support for Kuwaitis since independence in 1961. The Kuwaiti constitution’s employment guarantee has resulted in a significant influx of Kuwaitis to the public sector over time. In 1981, there were just 46,443 Kuwaitis in the civil service, significantly outnumbered by the 91,671 non-Kuwaiti staff. Since then, the number of Kuwaitis in the public sector has risen steadily while the number of non-Kuwaitis has been volatile; the number of non-Kuwaitis in the public sector fell to just 25,395 in 1991 following the invasion of Kuwait and then gradually rose again to the current level of 126,125, compared with 346,384 Kuwaitis.10 The total number of civil servants has doubled in the last decade; the average number of new hires from 2017 to 2019 was more than 50 percent greater than the average number of new hires from 2010 to 2012 (public sector salaries were raised significantly in 2012). More than one-third of current civil service employees has been recruited in the last 5 years, with about 26,000 recruited in 2017 alone (Figure 1). However, the number of non-Kuwaitis has grown at a slower pace, and their share of the total has fallen as Kuwaiti nationals are increasingly filling their roles. 9 Article 26 [Public Office] (1) Public office is a national service entrusted to those who hold it. Public officials, in the exercise of their duties, shall aim at the public interest. Article 41 [Right and Duty to Work] (1) Every Kuwaiti has the right to work and to choose the type of his work. (2) Work is a duty of every citizen necessitated by personal dignity and public good. The State shall endeavor to make it available to citizens and to make its terms equitable. 10 Kuwait Civil Service Commission and Public Authority for Civil Information, 2019. 32 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR One-third of the Kuwaiti civil service has been recruited in the last 5 years FIGURE 1 Recruitment into the civil service, 2010-2019 No. of Individuals, Thousands 26 22 21 20 19 16 16 16 15 13 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Kuwait Civil Service Commission 2019 About 90 percent of employed Kuwaitis work in the public sector.11 As a result of high levels of employment and generous wages and benefits, the size of the public sector and the public sector wage bill in Kuwait greatly exceeds levels in other GCC countries, both in terms of GDP and public spending. (see Figure 2). 11 This assumes that state enterprise employees are considered part of the public sector, see Table 2. 33 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Kuwait is an outlier in terms of the size of the wage bill both as a share of GDP and total expenditure FIGURE 2 Wage bill, 2016 Kuwait 34 17, 33 GCC Wage Bill (% of Total Expenditure) 30 Estonia US 26 Chile Oil Exporters OECD Finland Luxembourg 22 Romania 18 5 7 9 11 13 15 17 19 Wage Bill (% of GDP) Source: World Bank World Development and Bureaucracy Indicators 2018; and Fitch Solutions 2019 The growth in the wage bill has outstripped that of revenues. The wage bill almost quadrupled over the past ten years and has risen by over 30 percent in the past two years despite low and stable inflation (Figure 3). By contrast, revenues over the past ten years have followed trends in the oil price. Even during the period of low oil prices that followed the oil price shock of 2014, the wage bill continued to grow, although the rate of growth remained somewhat tempered through 2016. Wage levels in the public sector are considerably lower for non-Kuwaitis than for Kuwaitis. On average, Kuwaitis are paid twice the rate that non-Kuwaitis receive, so despite making up 27 percent of the Kuwaiti civil service, non-Kuwaitis receive only 13.4 percent of the total wage bill. This points to the need to consider the fiscal implications of continuing with replacing non-Kuwaitis with Kuwaitis in the public sector. 34 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR The wage bill has grown while revenues have not FIGURE 3 Public Sector Wage Bill (LHS) and Revenues (RHS) 2005-2019 KWD billion, nominal Wage Bill Revenues (right axis) 7.7 40 8 7 6 30 25.0 Public Sector Wage Bill 5 Revenues 4 16.9 20 3 2 10 1 1.8 0 0 2005 2009 2013 2017 2019 Source: Kuwait Ministry of Finance General Budget, Various Years 35 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Kuwaitis prefer public sector jobs > Kuwaitis tend to prefer public to private employment due to higher wages for most groups, shorter working hours and job security. Employment in the public sector is preferred over the private sector for three main reasons: > Higher pay and benefits for some groups; > More attractive working conditions; and > Behavioral reasons and cultural expectations. Compensation for public sector employees significantly exceeds those in the private sector. When earnings include Dam Al-Amala, public sector employment is particularly attractive for low-skilled workers and new entrants to the labor market. Non-monetary benefits also make public sector employment more attractive: workers can retire five years earlier than the national retirement age12 and they have a generous 3-month maternity leave, while the private sector usually gives just 1 month. Working conditions in general are quite appealing, and job security is one of the most important factors driving the preference for public sector jobs,13 especially for Kuwaiti youth enrolled in higher education (see Box 3). Kuwaiti civil servants are required to work 35 hours a week,14 less than in the private sector, and also less than in most high-income countries (Figure 4): they work around 383 hours less per year than those in the United States and 232 fewer hours than in Abu Dhabi. Furthermore, overstaffing in many ministries and agencies means that duties for most civil servants are reportedly not onerous or time-consuming. Coupled with opportunities for automatic career advancement and overall job security, the public sector is a highly attractive option for many Kuwaitis. 12 Current retirement age is 55 for men and 50 for women, which is already young by global comparisons. Early retirement is possible in the public sector if they accept a 2 percent reduction to their pension a year up to 5 years. 13 Findings from a survey of approximately 4,100 public sector employees, by the World Bank and GS-SCPD. 14 While these are the official hours, they are seldom enforced. 36 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Kuwaiti public sector employees have shorter working hours than civil servants in other high-income countries FIGURE 4 Formal hours worked in the public sector Weekly Gross Annual Public Total Leave Total Hours Hours Annual Hours Leave Holidays Hours Worked Hungary 40 2,080 20 8 224 1,856.0 US 40.1 2,087 20 10 240.8 1,846.2 Spain 38.4 1,996.8 22 14 276.5 1,720.3 Abu Dhabi 37.5 1,950 24 10 255 1,695.0 UK 37.3 1,939.6 25 8 244.7 1,694.9 Sweden 37.1 1,929.2 25 11 267.1 1,662.1 Germany 37.7 1,960.4 30 10.5 305.4 1,655.0 France 35.6 1,851.2 25 11 256.3 1,594.9 Kuwait 35 1,820 39 12 357 1,463 KSA 35 1,820 35 17 364 1,456.0 Qatar 35 1,820 33 23 392 1,428.0 Source: World Bank staff calculations Absenteeism is a real challenge in the public sector in Kuwait. To better regulate attendance, public servants need to sign in and out every day, and staff members that are absent for more than 15 days without authorized leave are fined or excluded from performance bonuses. Although this might have encouraged more staff to report for work regularly, no data exists on the impact on productivity or service delivery. 37 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Behavioral viewpoints may also limit Kuwaitis’ desire to work in the private sector, in four respects.15 First, in the absence of accessible, reliable labor market information, employers and job seekers often believe the stereotypes about private sector workers, that they are driven, have good networking skills and high levels of expertise, and that they are highly proactive, this outlook could discourage job seekers from entering the private sector; employers also tend to believe stereotypes about the reliability, productivity, experience and skills among Kuwaiti and non-Kuwaiti job seekers. Interviews with private sector employers confirm this perception, which translates into a preference for hiring non-Kuwaiti workers (see Box 1). Second, the lack of familiarity with the private sector, and lack of contact with private sector workers can make it difficult for some people to see themselves in particular roles, thus limiting their options when thinking about their careers. Third, high positions in the civil service and state enterprises are considered to be prestigious jobs, many Kuwaitis prefer not to deviate from the norm, furthermore, parents with traditional beliefs often consider some private sector jobs as unsuitable for women. The fourth issue is common attitudes that reinforce preferences for public sector employment as many Kuwaitis choose jobs that offer comfort, stability, and convenience - all aspects associated with public sector jobs, rather than the challenge and excitement that is more typical of the private sector. There is a tendency to consider private sector jobs as temporary, to gain experience or to try something more interesting. Finally, many Kuwaitis see government benefits and safety nets, including public sector employment, as a right (their “share of the oil wealth”). 15 This analysis is based on interviews with staff of key government agencies and institutions (e.g., PAM, PAAET), limited focus groups and interviews with current and former government employees and employers from the private sector, and behavioral science theory. 38 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR The Kuwaiti public sector is unique > The largest ministries are health and education, as all medical professionals and teachers are viewed as core civil servants. > Women make up most civil servants and tend to have higher educational qualifications than men. > Most new hires are in their mid-twenties. > Wait times for civil service jobs tend to be long. > Despite high levels of staffing, public sector effectiveness is low. In 2019, the Kuwaiti public sector employed 346,384 Kuwaitis and 126,165 non-Kuwaitis16 in all central ministries, public authorities, and agencies, as well as public enterprises, the military and security forces (Table 1). This analysis focuses on the central ministries and authorities, which make up the bulk of the public sector. Public enterprises follow different pay-scales, are managed according to different criteria, and remain a small part of total employment in the public sector; the armed forces are outside the scope of the current study and outside the remit of the World Bank.17 One reason for the large public sector is that medical professionals and teachers are considered core civil servants, unlike many other countries. The Education Ministry, the largest, employs a third of all civil servants and 31 percent of Kuwaiti civil servants; the Health Ministry is the second largest (Figure 5). These ministries are among the most important in terms of service delivery. TABLE 1 Breakdown of the Kuwaiti public sector Kuwaiti Non-Kuwaiti Total Public Sector 346,384 126,165 472,549 Central ministries and authorities 270,322 71,200 341,522 Public enterprises 16,222 13,691 29,913 Armed forces 59,840 41,274 101,114 Source: Civil Service Commission and Public Authority for Civil Information 2019 16 Kuwait Civil Service Commission and Public Authority for Civil Information, 2019. 17 Some publicly available data on the public enterprises and the armed forces are used, where appropriate. 39 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR The Education Ministry is the largest employer of Kuwaitis FIGURE 5 Kuwaiti nationals employed in ministries by gender, 2019 Thousands of Kuwaitis 90 13.1 Male 80 Female 70 60 50 73.3 40 30 7.9 20 10 18.3 0 Education Health Electricity and Water Interior Awqaf and Islamic Affairs Public Works Justice Information Social Affairs Transportation Kuwait Municipality Fire Department PAAET Customs Council of Ministers Civil Aviation Finance Commerce and Industry Defense PAM Disabilities Agriculture and Fisheries Foreign Affairs Civil Service Commission State Audit Bureau Culture, Arts and Letters Amiri Diwan Source: Kuwait Civil Service Commission 2019 Note: Only bodies with more than 1,000 employees shown here The central ministries are predominantly staffed by women (62 percent, see Figure 6), in part because many Kuwaiti men opt to join the military or public enterprises (dominated by the oil sector).18 In addition, the average educational attainment among women is higher than that of men, increasing their attractiveness as civil service hires. Most non-Kuwaitis in the civil service are also women, a result of the large number of non-Kuwaiti nurses and teachers, however, women remain under-represented at all technical and political levels. The traditional values that underpin the Kuwaiti civil service can also be seen in the lack of facilities to meet the needs of young female staff, like on-site childcare or other facilities as is common in OECD countries. 18 The sector includes companies such as Kuwait Oil Company, Kuwait Petroleum Company, National Petroleum Company, Petroleum Industries Company (PIC) and Kuwait Oil Tanker Company. 40 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Females outnumber males in the central ministries FIGURE 6 Kuwaiti central ministries employees by gender Kuwaiti Males 102,149 Kuwaiti Females 168,173 Source: Kuwait Civil Service Commission 2019; and Kuwait Labor Market Information System 2019 Note: Figures for public sector employment include central ministries and public authorities, but exclude the military, security, and other armed forces Many new hires are relatively young, and the bulk of the 20,845 new public sector employees in fiscal year 2019 were aged 24 to 28. The number of new entrants between 30 and 40 years old was much smaller, and only nine percent were mid-career professionals above the age of 40. The average age of new recruits was 28 and the mode was 26. Entry to the civil service is restricted to those 25 years or older, unless the staff member is married; most new civil servants between the ages of 26-28 are also likely to be new entrants to the labor market in general, many of them have a bachelor’s degree and most likely completed their studies by around age 22,19 younger workers, men and women, are more common than older workers in the civil service (Figure 7). Centralized recruitment under the Civil Service Commission (CSC) matches applicant profiles to ministry and public agency demand for new recruits. 7,000 Kuwaitis are currently registered with the CSC for public sector jobs, around 5,000 of whom have waited more than a year for a position. CSC officials report that most ministries are fully staffed and can meet their service delivery requirements with current staffing levels, however, the demand for public sector jobs (see above) means that there is tremendous political pressure 19 What young Kuwaitis do before joining the civil service is a question for future research in the next phase of this work. 41 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR on ministries to maintain high levels of public employment. Exceptions are health and education sectors, where there are not enough Kuwaiti teachers, doctors, nurses, and auxiliary health personnel to meet the country’s needs. Appropriately qualified, Kuwaiti applicants are generally employed immediately. Kuwait’s civil servants are young FIGURE 7 Kuwaiti central ministries employees by age and gender 50,000 Male Female 40,000 30,000 20,000 10,000 0 20 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60+ Source: Kuwait Civil Service Commission 2019; and Kuwait Labor Market Information System 2019 Note: Figures for public sector employment include central ministries and public authorities, but exclude the military, security, and other armed forces Despite high levels of public spending, and the large size of the civil service, effectiveness is low and the ease of doing business is poor (Figure 8). While there are many reasons for low government effectiveness, one factor is that civil servants do not have clarity on their own career goals, or the goals of the institution. This is particularly relevant for younger Kuwaitis: in the WB/GS-SCPD survey with public sector employees, 50 percent of employees under 35 felt their department did not have clear goals, compared to 41 percent of those older than 35. Younger Kuwaiti public employees also reported lower job satisfaction than older employees. 42 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Government Effectiveness and the ease of Doing Business are low FIGURE 8 Score on Government Effectiveness Index 2018 and Ease of Doing Business 2020 Government Effectiveness, 2018 Ease of Doing Business, 2020 Singapore 100.0 New Zealand 86.8 Finland 99.0 Singapore 86.2 United States 84 Luxembourg 95.7 Malaysia 81.5 New Zealand 93.8 United Arab Emirates 80.9 United Arab Emirates 90.4 Estonia 80.6 Estonia 84.6 Finland 80.2 Malaysia 81.3 Saudi Arabia 71.6 Saudi Arabia 64.9 Luxembourg 69.6 Kuwait 49.5 Kuwait 67.4 Source: Worldwide Governance Indicators and Doing Business 2020 43 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Educational attainment in the public sector is low but improving > Educational attainment levels in the civil service are low, reflecting low levels of education in the past and low returns to education, except at university level. > Minimum educational requirements and the rise in education levels in the general population are leading to improvements in educational attainment levels in the civil service. > Educational attainment could rise further if high school graduation is required for entry into the civil service. Most public sector employees have only a high school education or less (Figure 9). This reflects the limited returns to increased education before university level. The average salary in the civil service for those with less than a high school degree does not differ significantly whether they have completed primary school or middle school, and the average salary for high school graduates is only marginally above that of those with a middle school education (see Figure 10). Educational attainment is low in the public sector FIGURE 9 Kuwaiti public sector employees by educational level Primary | 1% Not Stated | 5% Intermediate | 12% Post-Grad | 4% Secondary | 22% Bachelor´s Degree | 41% Diploma | 15% Source: Kuwait LMIS 2019 and National Center for Education Statistics 44 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Returns to education are low except for university degrees FIGURE 10 Average net monthly salary by education level Kuwaiti Dinars (KWD) 4,000 3,000 Average Tertiary 2,000 Average Average Average High School Unqualified Average Middle Elementary 1,000 0 Unqualifed Middle School and Apprenticeship 2 years Unqualifed 1 year Apprenticeship Vocational Parallel Education Elementary complete Elementary and Apprenticeship 1 year Elementary and Apprenticeship 2 year Elementary School plus 1 year Middle 1 year Middle School complete Middle School plus 1 year Middle School plus 2 year High School apprenticeship 1 year High School apprenticeship 2 year High School complete High School plus 1 year High School plus 2 years Diploma University Post Graduate Diploma 2 years Masters PhD Post Graduate Diploma 1 year Source: Kuwait Civil Service Commission, June 2019 The same is true for new recruits (Figure 11). In some cases, there may even be negative returns to education: high school graduates with one year of vocational training have a higher average salary than high school graduates with a two-year diploma. Likewise, many who complete a one-year postgraduate, non-tertiary professional training e.g., healthcare machine operators, accountants, and translators, are paid more on average than those with a master’s degree. As long as young, unqualified Kuwaitis can join the public sector and earn a similar salary as those with diplomas, there is little incentive to complete high school. By contrast, PhD holders are paid a significant premium within the public sector, although only a handful of post graduate degree holders join the civil service each year: 24 PhD holders were recruited into the civil service in 2018-2019 (Figure 11) and 131 have been recruited over the last five years. Moreover, Kuwait still struggles with improving the quality of education, despite educational spending levels on a par with OECD countries.20 20 For more on this topic please see the human capital chapter. 45 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Few new recruits to the civil service hold graduate degrees FIGURE 11 New recruits to the civil service by level of education, 2018-19 Percent (%) PhD | 24 | 0% Masters | 208 | 1% Middle or Less | 3,564 | 17% High School | 3,568 | 17% Bachelors | 11,341 | 55% Diploma | 2,052 | 10% New Kuwaiti recruits average net salary by level of education Kuwaiti Dinars (KWD) 4,000 3,357 3,000 2,000 1,533 1,164 1,000 849 850 775 0 PhD Masters Bachelors Diploma High School Middle or Less Source: Civil Service Commission 2019 and World Bank analysis 46 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Educational attainment levels in the civil service are improving, one reason for which is that minimum educational requirements for jobs there have risen. Applicants who have only finished primary or middle school and completed a Public Authority for Applied Education and Training (PAAET) 9-month training course are no longer accepted into the civil service. Under current rules, the following applicants are eligible for recruitment:21 (i) non-high school graduates with a 2-year PAAET training; (ii) high school graduates that are over 25 years old; (iii) diploma graduates (2-year tertiary education certificate); and (iv) bachelor’s degree (4-year tertiary course) and above. Since 2006, managerial-level positions have been available only to those who have completed a bachelor’s degree, or above, with the aim of providing applicants with a greater incentive to study beyond middle and high school. Another reason for the improvements in educational levels in the civil service is that the population in general has become better educated (the share of high school and university graduates is rising in younger age groups — see human capital section). At the same time, the technical demands of civil service jobs have increased, so the public sector has tended to recruit Kuwaitis with higher qualifications. In 2019 for the first time, most new recruits to the civil service had a bachelor’s degree or higher. Legislation is being considered to require high school graduation for public sector jobs. Unlike in most OECD countries, there is no move to exclude high school graduates, since there are several job grades that do not require a bachelor’s degree (e.g., messenger, ambulance driver, cashier, administrative and clerical staff). There are also some technical jobs that do not require a bachelor’s degree but rather require technical or vocational training, for example electrician and plumber. Traditionally, however, most Kuwaitis have not shown an interest in these jobs. In most OECD countries, the core civil service is restricted to degree holders and above, jobs requiring less education such as cleaners, catering staff and drivers are often outsourced to private sector service providers or carried out by contractual staff. PhD holders form a negligible part of the wage bill, as their absolute numbers are so small.22 This is important, as many observers are starting to advocate against highly qualified, senior officials in the civil service, focusing only on their salaries and ignoring the value that they add.23 24 In the future, such high levels of skills will become even more important as technological advances, including automation and artificial intelligence, make many routine jobs redundant. Therefore, it will be important to continue investing in higher order skills and ensuring that such individuals are employed strategically within the civil service. 21 This paragraph is based on a series of meetings between the World Bank team and members of the Kuwaiti government and private sector. 22 Based on data from the Kuwait Civil Service Commission. 23 https://gulfbusiness.com/kuwait-restructure-government-salaries-2019/. 24 https://www.alaraby.co.uk/society/1e700fb3-6bfd-4b37-911f-94b26b05e42d. 47 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR High dependence on foreign workers for education and health jobs > Most doctors, nurses and teachers in the civil service are non-Kuwaitis. > The supply of Kuwaiti doctors is limited by the shortage of medical schools and highly educated Kuwaitis, while an inappropriate salary structure limits the availability of senior medical personnel and key specialists. > Few Kuwaitis wish to become nurses. > The heavy reliance on foreigners for teaching is unusual outside the GCC; progress in replacing non-Kuwaiti teachers with Kuwaitis has reduced the average experience level of teachers and increased the cost. The overall share of foreigners in the civil service has fallen sharply (see above), but the civil service is heavily dependent on non-Kuwaitis for health and education professionals (Figure 12). The bulk of foreign workers come from India (three quarters are nurses) and Egypt (most are teachers). Non-Kuwaitis have higher educational attainment in public sector FIGURE 12 Employees in ministries (excluding Ministry of Defense) by nationality and education level, 2019 Percent (%) of Non-Kuwaitis in Ministries, 2019 Other | 7% Bangladesh | 2% Philippines | 3% Jordan | 3% Saudi Arabia | 5% Syria | 5% Egypt | 46% India | 29% 48 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Kuwaitis and Non-Kuwaitis in Ministries (Excluding Ministry of Defense) by Education Level, 2019 60% 58% Expats Kuwaitis 44% 40% 32% 20% 17% 14% 14% 2% 2% 5% 3% 4% 6% 0% PhD Masters Bachelors Diploma High School Less than high school Source: Kuwait Civil Service Commission 2019 47 percent of civil service workers in the Ministry of Health are non-Kuwaitis (Figure 13), this represents about 70 percent of the 7,000 doctors and about 95 percent of the 25,000 nurses. The heavy reliance on foreign medical personnel in the Kuwaiti healthcare system is not unusual in high-income countries. Many healthcare services in EU countries rely heavily on non-EU staff, including doctors, nurses, and technicians. Most non-Kuwaitis in the central ministries work in health and education FIGURE 13 Distribution of non-Kuwaitis in the central ministries (excluding Ministry of Defense), 2019 Percent (%) of non-Kuwaitis in Public Sector Other 8% Islamic Affairs 5% Health 47% Education 40% Source: Kuwait Civil Service Commission 2019 and World Bank analysis 49 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR 40 percent of workers in the Ministry of Education are non-Kuwaiti;25 the magnitude of the foreign teacher population is unusual. Few countries outside the GCC employ such large numbers of expatriates as teachers in regular positions. The Kuwaiti authorities have moved in recent years to replace expat teachers with Kuwaiti staff, which has helped to place young Kuwaitis in employment but it has also had the effect of raising the education wage bill and replacing older experienced teachers with younger Kuwaiti staff (compare the distribution in Figure 14 with that of Figure 7) who are less educated and have less experience.26 Despite spending per pupil being on a par with OECD countries, Kuwait’s education outcomes remain similar to poorer countries such as Uganda and Egypt. (This topic is examined in greater detail in the human capital section). Non-Kuwaiti civil servants bring experience to the public administration FIGURE 14 Non-Kuwaiti public sector employees by age and gender 10,000 9,473 8,000 Male 7,621 Female 6,899 7,118 6,665 6,000 5,419 5,181 4,887 3,995 4,000 3,406 3,404 2,512 1,596 2,000 1,217 1,045 650 80 32 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60+ Source: Civil Service Commission database 2019 and World Bank calculations The supply of Kuwaiti doctors is limited by a shortage of educational facilities and short supply of highly educated Kuwaitis. Kuwait University’s Faculty of Medicine was established in 1973 and has since developed into an internationally recognized medical school, serving the Gulf region. Enrolment has grown from 48 students in 1976 to the current level of 25 The Ministry of Defense also employs 18,147 expats although this is not shown in Figure 13 and remains outside the scope of this paper. 26 Kuwait Civil Service Commission database, 2019. 50 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR around 90 students in each year of the seven-year program (a total of 655 students compared to a total of about 7,000 doctors employed by the Ministry of Health).27 Most students enrolled at the Faculty of Medicine are women. The shortage of Kuwaitis in senior medical positions and in some key specialties (e.g., accident and emergency) is partly driven by an inappropriate salary structure. Salaries for senior doctors are limited in the public sector, and there is no pay differentiation for different specialties for example, GPs and surgeons are paid the same even though surgeons are scarce and can earn a lot more in the private sector. To retain these professionals and to encourage more doctors to join the civil service, the government now allows public sector Kuwaiti doctors to practice in the private sector; most Kuwaiti doctors working in the public sector have taken advantage of this and work part of their time in the private sector.28 Interestingly, scarce specialty bonuses are offered for non-Kuwaiti doctors; although non- Kuwaiti doctors are paid significantly less than Kuwaiti doctors. Few Kuwaitis want to become nurses: less than 2 percent of Kuwait’s nurses are Kuwaiti citizens, while almost 80 percent come from India. Due to the lack of demand for nursing education, the Kuwaiti nursing school closed recently, and in the preceding 20 years it only graduated 17 nurses, an indication of the low esteem in which the profession is held. Interviews with MOH officials revealed that there are currently more than 2,000 job opportunities for graduate nurses and not a single Kuwaiti applicant even though Kuwaiti nurses receive higher pay and work shorter hours than foreign nurses.29 Despite this disparity, Kuwaitis are said to compare nurse salaries with those of teachers who are paid on a similar if not slightly higher scale, noting that teachers enjoy shorter hours, longer vacations, and less stress (e.g., nurses through exposure to disease). In addition, interviews with MOH officials reveal that nightshifts and weekend duty make it difficult for Kuwaitis (especially married women) to work as nurses. Many also believe that the years of study should contribute to pension-eligible working years. MOH staff report that there are also significant shortages in paramedics, but they are struggling to fill these jobs with nationals or expats. This is largely due to the lack of a special grade or cadre in the Kuwaiti civil service, which means that paramedics are treated and paid the same as general technicians. This is symptomatic of the broader issues around new specialties and new technologies that are creating new jobs and careers, there is an urgent need for the civil service to adjust to new types of work, especially in terms of job descriptions and salary scales. Surprisingly, lots of engineers are waiting for a civil service job, many of whom remain on the waiting list for 18-24 months. This is explained by the fact that around 12,000 engineers graduate from Kuwait University each year instead of the 7,000 or so that are needed.30 Like many other countries in MENA, an engineering qualification is viewed as prestigious and remains highly sought after even if there are fewer job opportunities after graduation. 27 Kuwait Health Science Center, 2020. 28 After 2 pm when official public sector working hours are over. 29 Kuwaitis are paid almost twice that of foreigners, shifts for Kuwaiti nurses are limited to 8 hours while non-Kuwaiti nurses regularly work 12-hour shifts. 30 Interviews with CSC staff. 51 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Women are paid less than men in the public sector > Women are paid less than men in the civil service, in part because some benefits are paid to men rather than women. In 2018-2019, women accounted for 64 percent of new recruits in the public sector and received 87 percent of their male counterparts’ wages when adjusted for age and education. Women entering the civil service are on average a year older and are also better educated (Table 2) than their male counterparts. This gender pay gap is close to the OECD average and much smaller than regional comparators, for example Saudi Arabia’s gender pay gap is 45.7 percent (Figure 15). The gender pay gap in the public sector largely results from payment of the housing bonus to married Kuwaiti men, as the system assumes that they are the de facto heads of household. The system of benefits and allowances needs to be examined in the context of broader civil service reform and in the light of quickly changing social norms in Kuwait and the region. TABLE 2 Kuwaiti recruits to the public sector 2018-2019 Net Salary Share with University Number Percentage Gross salary (KWD per month) Age Degree or higher Female 13,237 64% 968 901 28.65 58.0 Male 7,608 36% 1,106 1,029 27.71 51.2 Total 20,845 100% 1,018 948 28.39 55.5 Source: Kuwait Civil Service Commission, June 2019 52 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Kuwait’s public sector gender pay gap is close to the OECD average FIGURE 15 Kuwait’s gender pay gap in the public sector within comparator countries Percent (%) Luxembourg 4.6 Singapore 6 New Zealand 7.8 EU 23 12.1 Kuwait 13 OECD 35 13.5 Finland 16.5 UK 16.8 USA 18.1 Malaysia 20.1 Estonia 28.3 KSA 45.7 Source: EU Eurostat February 2020, OECD family database, Malaysia salaries and wages survey 2019, Singapore Ministry of Manpower, G20 Women at Work 2019 Note: Gender pay gaps are calculated adjusting for observable characteristics including age and education 53 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Salaries of new hires varies > Salaries vary by ministry and give rise to long wait times as applicants seek out the highest remuneration level. This extends the period for applicants receiving a public stipend rather than working. An initial assessment indicates that starting salaries for new recruits vary widely.31 Accounting for differences in education and age (as a proxy for experience), the State Audit Bureau has been found to offer the highest average starting salary, almost three times the average starting salary offered by Culture, Arts and Letters (Figure 16).32 Such a wide variation in starting salaries is often seen in GCC administrations as the result of a fragmented system in which the civil service ministry does not have the authority to set salaries for all line ministries and agencies. This discrepancy encourages many applicants to turn down multiple offers from lower-paying ministries while waiting for offers from higher-paying ministries. Anecdotally it appears that the average wait time is about 18 months. Some youth may wait for several years and turn down multiple offers in the process, but such long wait times can stifle the enthusiasm of younger workers, and throughout this process applicants are receiving a government stipend. In response, the Civil Service Commission is considering limiting the number of times an individual can turn down an offer and remain eligible for employment and a stipend. Wide variation in starting salaries for new recruits leads to long wait time for the best paying ministries 31 Kuwait Civil Service Commission database, 2019. 32 The salary levels provided in Figure 16, generated by a regression controlling for age and education, are different from actual starting salary levels. The average monthly salary for new recruits is KWD 948, well above the average implied by the corrected data in the figure. For example, the Public Authority for Applied Education and Training (PAAET) pays new recruits KWD 1,553 a month, compared to the KWD 946 shown here, and certain allowances (e.g., hazard pay, being present more than 180 days, etc.) on top of the basic salary can effectively double take home pay. The corrected data gives a more accurate picture of salary differences that recruits may face. 54 0 200 400 600 800 1,000 FIGURE 16 Culture, Arts and Letters 346 Fatwa and Legislation 358 GSSCPD 359 Awqaf General Secretariat 361 Parliament Kuwaiti Dinars (KWD) 369 Ministry of Higher Education 376 P.A, for Minors Affairs 377 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR Sports Authority 399 P.A. for Persons with Disabilities 408 Ministry of Awqaf and Islamic Affairs 419 average salaries cited elsewhere in the text Ministry of Commerce and Industry 423 Petrol Ministry 426 Ministry of Justice 451 Council of Ministers 471 Ministry of Education 475 Ministry of Social Affairs 479 Civil Service Bureau 480 Source: Kuwait Civil Service Commission 2019 and World Bank analysis Ministry of Defense 487 Environment Public Authority 498 Ministry of Public Works 501 Ministry of Information 520 Ministry of Interior 532 Ministry of Transportation 546 Ministry of Finance 549 Ministry of Foreign Affairs 563 Civil Aviation General Administration 574 Kuwait Municipality 603 Amiri Diwan 608 General Administration of Customs 609 Ministry of Electricity and Water 646 Kuwait Ports Corporation 660 Average net monthly salary by ministry and agency, controlled for education and age P.A. for Agriculture and Fisheries 700 General Fire Department 739 Ministry of Health 769 P.A. for Applied Education and Training 946 Note: These average salaries are the product of a regression equation controlling for age and education, and thus do not equal the actual State Audit Bureau 977 55 PART 1 | DIAGNOSTIC | 2. PUBLIC SECTOR References > Government of Kuwait. 1962. Kuwaiti Constitution. State of Kuwait. > Government of Kuwait. 2019. SDGs Voluntary National Review. > Government of Kuwait. March 31, 2019. Labor Market Information System. > International Monetary Fund. 2017. The Economic Outlook and Policy Challenges in the GCC Washington, D.C. IMF. > International Monetary Fund. 2018. Public Sector Wage Bills in the Middle East and Central Asia, Washington, D.C. IMF. > International Monetary Fund. 2019. Government Financial Statistics, Washington, D.C. IMF. > Kuwait Public Policy Center. September, 2019. “Building Kuwait’s Future Human Capital for the Knowledge-Based Economy: Towards an integrated framework for achieving education-labor market alignment” White Paper. Kuwait Public Policy Center. > Lin, Eileen et. al., January, 2020. Singapore’s adjusted gender pay gap. Singapore. Ministry of Manpower and National University of Singapore. > Lokshin, Michael and Martin Ravallion. October 27, 2019. The Missing Market for Work Permits. Policy Research Working Paper Series 9005. Washington, D.C. The World Bank. > McKinsey 2020. February 2020. The social contract in the 21st century: Outcomes so far for workers, consumers and savers in advanced economies. The McKinsey Global Institute. > OECD, ILO, G20. 2019. Women at Work in G20 countries: Progress and policy action. Paper prepared under Japan’s G20 Presidency. > Office of Tony Blair. 2011. Improving the Public Sector Salary System. > Oliver Wyman. 2019. Maximizing employment of nationals in the GCC: Benefits and limits of labor policy instruments. Marsh and McLennan Companies. > University of Oxford. 2017. Higher Education in the Gulf States: Present and Future, Gulf Affairs. Oxford. St. Anthony’s College. 56 3. DIAGNOSTIC PRIVATE SECTOR PART 1 58 Introduction 59 Kuwaiti workers are underrepresented in many sectors 72 Entrepreneurship is lagging 77 The business environment is weak 84 Kuwaitization has worked but its limits are becoming apparent 92 References PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Introduction Fiscal and social sustainability will require rapid growth in Kuwaiti employment in the private sector. This will be a challenge as Kuwaitis have strong preferences for public sector employment, and the ready availability of foreign workers tends to shift investments into low-productivity sectors, where firms cannot afford to pay the wages demanded by Kuwaitis. A comprehensive approach to expanding the private sector and raising its competitiveness will entail: > Labor market and public sector reforms, along with social changes, to level the playing field between workers in the public and private sector; and > Policy changes that support expansion and that increase value-added in the private sector to create the kinds of jobs that will be attractive to Kuwaitis. The first section shows that Kuwaiti employment is concentrated in just a few sectors, where labor productivity is high enough to pay the salaries demanded by Kuwaiti workers. However, these sectors are growing slowly and a continuation of current trends will not provide enough growth in demand for labor to absorb the expected increases in the supply of young workers. The following section considers the low levels of dynamism in the private sector, which must be addressed if demand for Kuwaiti workers is to increase. Policy-related issues that limit firm entry and expansion are also examined, and the final section explores other issues involved in replacing non-Kuwaiti workers by Kuwaitis. 58 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Kuwaiti workers are underrepresented in many sectors > Very few sectors, particularly oil and financial services, which have high levels of capital intensity and productivity, account for the bulk of Kuwaiti workers in the private sector. > Firms in many large subsectors cannot afford to employ Kuwaitis, as value added per worker is lower than the average wage earned by Kuwaitis. > Output and employment in many subsectors with high rates of Kuwaiti employment have stagnated in recent years. At current trends, growth in demand for Kuwaiti workers would fall far short of the supply of job market entrants. > Weak domestic market conditions constrain the growth of private sector Kuwaiti employment, but non-oil exports remain low. > Overall, growth in productivity has been low in recent years. > Technical efficiency at the firm level may be distorted by subsidies, particularly the availability of low-cost foreign labor and low energy prices. Specialization in oil-related activities has driven productivity and wages for many years. As returns to capital and labor in the oil sector grew, so did the gap relative to all other sectors. The booming oil industry’s success rendered other tradable sectors non- competitive for Kuwaiti employment. To cope, Kuwaiti firms resorted to lower cost and often less skilled labor from abroad. Non-oil private production processes became overly labor-intensive and delivered low value-addition. The only way for the private sector to create jobs, is for non-oil companies to raise productivity, which in the Kuwaiti context, requires capital deepening. Across the globe, productivity growth has been strongly associated with increasing the rate at which capital and labor are combined at the firm level, and econometric evidence for Kuwait shows that oil and financial services are the engines of productivity growth. Although medium-sized firms’ productivity benefit from the introduction of capital that makes labor more productive, they still display a significant ‘distance to the frontier’ relative to the leaders in oil. The rest of the economy, however, remains at production scales that yield very low value-added. 59 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Capital deepening and its proper absorption are key to unlocking productivity; capital deepening also means introducing more human capital and other intangibles. The dispersion in productivity across the firm landscape is the result of: (i) the efficiency (or lack thereof) with which factors of production are combined at the firm level, and (ii) the efficiency with which capital is absorbed. Skills are a necessary catalyzer for absorbing such capital and a necessary condition for capital deepening, much as in the intangible capital deepening argument set forth by Corrado et. al. (2006). Sectoral employment of Kuwaitis is highly concentrated. Kuwaiti workers are most prevalent in the oil sector and financial services, and in public or foreign-owned firms; the oil and financial services sectors have relatively low levels of overall employment. Non-oil services also represent a large and more fragmented source of employment for Kuwaitis, while more than 40% of all Kuwaitis in the ‘private sector’ work in 100% government- owned firms (Figure 1). FIGURE 1 Sectoral employment distribution Percent (%) of total employment Top 20 subsectors by total in private sector, 2017 employment, 2017 Subsector Establishments Employment 1 Building and civil engineering 680 152,665 Financial Services | 4% 2 Retail - other new goods in store 10,253 65,570 3 Other business services 1,850 56,424 4 Hotels and restaurants 2,168 54,896 Trade | 22% Non-financial Services 5 Retail - nonspecialized 3,340 44,490 35% 6 Transport services and travel agents 351 38,082 7 Waste services 11 34,862 8 Food and beverages 655 25,448 9 Building installation 385 22,685 10 Transport - pipeline 363 21,155 11 Education (private) 187 20,890 12 Petroleum and natural gas 7 20,365 13 Motor vehicle repair 3,624 17,751 Construction Oil | 3% 14 Post and telecom 38 17,257 21% 15 Banks/monetary intermediation 25 16,995 Non-oil 16 Other services 3,405 15,907 industry 15% 17 Apparel 2,562 14,922 18 Fabricated metals 889 13,327 19 Non-metallic minerals 204 12,464 20 Other transport equipment 17 12,315 Source: Own calculations based on CSB, 2017a, Annual Survey of Establishments 2017 Note: The ‘subsector’ definition is based on ISIC Rev 2, covering 65 activities defined variously at between 2 and 4-digit disaggregation in line with the activities presented in the Central Statistics Authority’s published Establishment Survey results 60 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Many large subsectors have low levels of Kuwaiti employment. Kuwaiti employment is significant in most of the largest sectors but this drops off quickly. For example, the 10th largest subsector (real estate) had annual Gross Value Added (GVA) of KWD 435 million in 2017 and employed 11,500 workers, but less than 700 of these workers were Kuwaiti (Figure 2). Similarly, the 20th largest subsector (building installation) had annual GVA of KWD 140 million in 2017 and employed 22,500 workers, of which only 250 were Kuwaiti. Kuwaiti employment is very low in some large subsectors FIGURE 2 Kuwaiti share of total employment in top 20 subsectors by total value added, 2017 Kuwaiti share of employment (right axis) Log of Gross value added 18 100% Log of Gross Value Added (KWD Thousands) 86% 80% Share of Total Employment 12 60% 56% 51% 40% 6 27% 20% 6% 7% 6% 9% 7% 1% 4% 1% 0% 4% 4% 5% 1% 2% 2% 1% 0 0 Petroleum and natural gas Banks/monetary intermediation Post and telecom Building and civil engineering Refined petroleum Other monetary intermediation Transport services and travel agents Chemicals Retail-other new goods in store Real estate Hotels and restaurants Other business services Retail-nonspecialized Education (private) Food and beverages Transport-water Health and social services (private) Motor vehicle sales Non-metallic minerals Building installation Source: Own calculations based on CSB, 2017a, Annual Survey of Establishments, 2017 Labor productivity in most sectors is far out of line with the cost of Kuwaiti labor. Three- quarters of the subsectors (49 out of 65) have levels of value added per worker that are below the average Kuwaiti wage. Productivity lower than the Kuwaiti average suggests that the production function of most firms and subsectors is not designed to operate with a Kuwaiti workforce. In 2017, these 49 subsectors employed nearly 750,000 non-Kuwaiti workers and just 13,000 Kuwaitis: over 2,500 apparel-producing firms operated with an average annual value added per worker of just KWD 4,600 and employed almost 15,000 workers, but only 3 of them were Kuwaiti. Similarly, 125 wood-products firms operated with an average value added per worker of KWD 5,600 and employed about 1,300 workers, of which only 8 were Kuwaiti. 61 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Good jobs for Kuwaitis will likely come from highly productive and capital-intensive sectors. Kuwaiti employment at the subsectoral level is highly correlated with productivity and wages (Figure 3). Some of the potentially attractive sectors for Kuwaiti workers include: oil and chemicals; banking and financial services; travel and transport; education and health; ICT; and recreation and cultural services. Oil and financial services not only have high Kuwaitization quotas but also offer wage structures that are conducive to attracting Kuwaiti workers: the wage distribution here is more broadly distributed than in other sectors, and most workers earn more than Kuwaitis working in other sectors. This may reflect high returns in these sectors, but also suggests that these sectors are employing Kuwaitis in high value-added technical and/ or knowledge-intense activities. One indication that higher skills are required to work in those sectors is that the average wage for Kuwaitis in the oil sector is nearly three times the overall average for Kuwaitis working outside the government (Figure 4). Similarly, the average wage in financial services is nearly double the overall average. Kuwaiti employment is correlated with productivity and wages across subsectors FIGURE 3 Economic sectors by productivity, capital per worker and employment, 2017 25 Automotive Transport services Motor vehicle fuel sales and travel agents sales Banks 20 Health and social 170 services (private) Refined petroleum Zooming in on this section of the graph Other financial services GVA per worker (KWD thousands) GVA per worker (KWD thousands) 15 Computer Recreation, Culture Services and Sports 120 Other monetary Chemicals Intermediation Water Non-metallic minerals transport 10 Retail Building and 70 civil engineering Insurance Post and telecom 5 Transport - pipeline 20 Rentals Waste services Air transport 0 Base metals -30 Consumption of fixed assets per worker (KWD thousands) Consumption of fixed assets per worker (KWD thousands) Source: Own calculations based on CSB, 2017a, Annual Survey of Establishments, 2017 Note: Bubble size indicates relative total employment level; figures exclude the oil and gas extraction subsector for issues of scaling (e.g., the GVA per worker is too high to fit on chart) 62 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Wages in the oil sector are much higher than in the non-oil private sector FIGURE 4 Average annual wage (excluding in-work wage subsidy) for Kuwaiti workers by sector, 2017 Kuwaiti Dinars (KWD) 45,000 41,011 40,000 35,000 30,000 27,501 25,000 20,000 15,000 14,775 13,132 10,968 11,018 10,000 5,000 0 Oil Non-oil Construction Trade Financial Non-financial Industry Services Services Source: Own calculations based on CSB, 2017a, Annual Survey of Establishments, 2017, and CBS, 2013, Annual Survey of Establishments, 2013 Note: Data trimmed at KWD 100,000 for 1st chart; and data in 2nd chart presents the establishment-level average by sector Several of the largest subsectors for Kuwaitis have failed to generate growth and employment in recent years. Overall, there is a weak negative correlation between the Kuwaiti share of employment and growth in value added, productivity and capital intensity; and key sectors for Kuwaiti workers have been stagnant. Most subsectors that experienced significant value added and employment growth are those where Kuwaiti shares of employment are low (Figure 5). Some financial services subsectors grew modestly, while others declined. Subsectors with the largest shares of Kuwaiti employment have failed to grow 63 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR FIGURE 5 Economic sectors by annual output and employment growth, 2012-2017 25% Air transport Base metals 20% Other transport equipment Recycling Building repair Machinery and equipment 15% Annual Employment Growth Petroleum and natural gas Other financial services Petroleum Insurance Recreation, culture refining and sport 10% Banking Other business -5% services Automotive Other monetary Waste fuel sales intermediation services Water transport -10% Output Growth (Annual GVA Growth) Source: Own calculations based on CSB, 2017a, Annual Survey of Establishments, 2017; and CBS, 2013, Annual Survey of Establishments, 2013 Note: Size of bubble indicates relative level of Kuwaiti employment. Output growth figures are based on nominal output in each year and calculated based on the sector-aggregated statistics published by the Central Statistics Bureau As a result, a ‘business-as-usual’ scenario will not generate enough new employment opportunities for Kuwaitis.33 Expansion is important but most sectors will need more to create significant Kuwaiti employment. Conducting “business as usual” suggests that about 2,800 new private jobs for Kuwaitis would be generated each year, enough to absorb just one in eight new Kuwaiti entrants to the labor market each year (Figure 6), strongly indicating the need to go beyond this and to promote: > Accelerating growth in key sectors; and > Increasing value added and expanding productivity in key sectors to support a higher share of Kuwaiti employment. Business as usual will not generate enough jobs for Kuwaiti nationals 33 A ‘business-as-usual‘ scenario assumes a continuation of output and employment trends from 2012-2017 and no change in the Kuwaiti share of employment or in output per worker. 64 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR FIGURE 6 Business-as-usual Scenario: Number of new Kuwaiti jobs generated by 2035 based on employment growth rate of 2012-2017 Transport - air 296 Fabricated metals 308 Non-metallic minerals 410 Membership organizations 446 Chemicals 636 Education (private) 711 Retail - nonspecialized 1,315 Refined petroleum 2,287 Transport - water 2,418 Health and social services (private) 3,194 Automotive fuel sales 3,306 Banks/monetary intermediation 3,565 Food and beverages 4,077 Recreation, culture and sports 11,172 Petroleum and natural gas 15,470 Source: Own calculations based on CSB, 2017a, Annual Survey of Establishment, 2017; CSB, 2017b; and Labor Force Survey, 2016/2017 Note: ‘Business-as-usual’ scenario assumes output and employment trends from 2012-2017 continue, and no change in Kuwaiti share of employment and no change in output per worker Weak domestic market conditions represent a significant barrier to the expansion of Kuwaiti employment across all sectors. GDP per capita has declined over the past decade (Figure 7). Lower oil prices and (related) fiscal constraints in one period can lead to a significant dampening in consumption and investment in the domestic market in the subsequent period. Output in key sectors like construction, transport, telecom, hospitality, and financial services has fallen in real terms over the last decade, leading to lower aggregate demand and therefore a decline in employment levels. Despite weak domestic conditions, firms continue to rely on local consumption and government contracts rather than export markets. Only around 12 percent of non-oil (goods sector) output is exported (Figure 8), and exports remain highly concentrated in oil. Despite low prices, oil has accounted for 90 percent of goods exports and 85 percent of total exports in recent years. Non-oil goods exports grew by around 10 percent per annum over last decade in nominal terms, mainly from chemicals. Services exports remain relatively small but growing, even if they don’t keep pace with GCC neighbors like Qatar and UAE. Some sectors are emerging as competitive, including insurance (number 2 in GCC but far behind Bahrain) and telecoms (number 2 in GCC behind UAE). Limited non-oil exports are in part due to policy constraints, including poor trade facilitation and barriers to foreign investment (see section on business environment, below). 65 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Per capita GDP growth has been negative FIGURE 7 Kuwait real GDP per capita annual growth, 2000-2018 Percent (%) Overall 20 Non-oil 16 Linear (Overall) 10 6.7 8.8 2.8 3.5 0 -0.1 0.5 0.9 -0.2 1.4 -3.4 -0.8 -2.6 -3.2 -3.9 -4.0 -10 -5.8 -7.9 -12.5 -20 Source: Own calculations based on data from IMF, 2020, World Economic Outlook, 2020, and World Bank, 2020, World Development Indicators Kuwaiti exports are dominated by oil FIGURE 8 Kuwait exports, 2005-2017 USD Thousands 140,000,000 Oil 120,000,000 Non-oil Services 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 0 66 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Services exports, 2005-2017 Kuwait Oman KSA USD millions (current) Bahrain Qatar UAE 70,000 70,508 60,000 50,000 40,000 30,000 18,132 20,000 17,706 11,356 10,000 5,279 0 4,010 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: World Bank Staff calculations based on data from WITS, 2020, UNCTAD, 2020, and CSB, 2017a, Establishment Survey, 2017 Kuwait’s economy-wide productivity performance has been weak over the last two decades. Output per worker in Kuwait was 20 percent lower in 2017 than in 2000. Poor productivity growth was common during this period in countries heavily dependent on oil, for example output per worker was stagnant or declining slightly in other GCC countries, but productivity performance was far worse in Kuwait. In comparison, Saudi Arabia’s output per worker was 50 percent higher in 2017 than it was in 2000. While output per worker in the overall economy has fluctuated along with oil prices, total factor productivity (TFP) has been in steady decline since approximately 2005, suggesting deeper structural factors are at play (Figure 9). Labor productivity plummeted in Kuwait from 2000 to 2017 FIGURE 9 Labor productivity in Kuwait and other countries Labor Productivity Index (2000 = 100) KWT UAE BHR EST FIN LUX 250 MYS NZL OMN QAT KSA USA 200 150 100 50 0 2000 2017 67 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Labor productivity and TFP in Kuwait 1.8 TFP Index, 2011 (Right Axis) 180,000 1.8 GDP per Worker (USD) 160,000 1.6 (USD, constant PPP 2011) 140,000 Labor Productivity 1.4 TFP Index, 2011 120,000 1.2 99,697 100,000 1.0 0.9 80,000 0.8 79,605 60,000 0.6 2000 2017 Source: CID, 2020. Penn World Tables 9.0 Sectors with the highest productivity levels have experienced declines in productivity in recent years. Productivity levels vary dramatically across sectors, and in oil and financial services they are much higher than in the rest of the economy (Figure 10). For example, financial services productivity is almost 10 times that of industry. This cross-sector variation is much more dramatic than in OECD countries, however, as a result of declining oil prices, productivity growth has been negative in these sectors (oil and financial services) but positive, and fastest in services and niche manufacturing sectors. Despite these challenges, employment has continued to grow (Figure 11).34 Productivity is much higher in the oil sector and financial services than in other sectors FIGURE 10 Sectoral productivity, 2017 GVA per Worker, 2017 Index to National Average Non-financial Services 1.2 Financial Services 5.4 Trade (0.6) Construction (0.6) Non-oil Industry (0.6) Oil 14.5 (1.0) 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 Source: CSB, 2017a, Annual Survey of Establishments, 2017 34 This suggests that production is based on low skills that yield low productivity, which biases industry-level production functions to over- utilization of low-skilled labor and underinvestment in capital. 68 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Productivity has declined in high-productivity sectors FIGURE 11 Growth in productivity and employment across sectors, 2012-2017 25% Air transport Base metals 20% Other transport equipment Recycling Insurance and pensions Building repair Machinery and equipment 15% Recreation, culture Annual Employment Growth Petroleum and natural gas and sport Education Other financial services Banking Refined petroleum 10% Automotive fuel sales -5% Chemicals Other monetary intermediation Membership organizations Water transport -10% Annual Productivity Growth (GVA/Worker) Source: Own calculations based on CSB, 2017a; Establishment Survey 2013 and 2017; and CSB, 2013 Note: Growth figures based on nominal (current) output in each year and calculated based on the sectoral-aggregated statistics published by the Central Statistics Bureau At the firm level, markets in Kuwait appear to be operating efficiently and achieving a better reallocation of resources, which has had a positive impact on overall productivity in each main sector between 2013-2017 (i.e., positive allocative efficiency). This indicates that higher productivity firms are gaining market share at the expense of lower productivity firms, suggesting an efficiently operating market. Data suggests the financial sector is working relatively well and markets are broadly competitive (Figure 12). 69 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR The reallocation of resources is contributing to productivity growth FIGURE 12 Relative contribution of within-establishment productivity growth and across- establishment reallocation to overall productivity growth, 2013-2017 Change in value added (VA) per worker at establishment level Change in VA per worker at the establishment level Reallocation Overall change in VA per worker 0.002 0.001 0.000 -0.001 -0.002 -0.003 -0.004 -0.005 -0.006 -0.007 Non-financial All Industry Construction Trade Services Source: Own calculations based on data from CSB, 2017a; Annual Survey of Establishments 2017, and CSB, 2013, Annual Survey of Establishments 2013 Note: The above presents Shapley decomposition of changes in value added per worker for 2013-2017; the analysis is based only on the sample of establishments which were surveyed in 2013 and 2017 (3,476 establishments) At the same time, firms’ technical efficiency could be distorted by subsidies. Subsidized inputs and protected domestic markets significantly influence firms’ choice of production functions (the relative use of low-skill labor, high-skill labor, and capital). Consequently, these biased production functions affect the markets that firms intend to service, they also affect the nature of the products or services they deliver. Firm-level cost structure analysis hints at possible distortions in low-skill labor costs, very low energy costs, and low service inputs (Figure 13). Although identified by the private sector as a major constraint, land/building rental costs seem low. 70 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Firm-level regressions indicate that firm size and capital are important determinants of productivity growth. Overall, regressions show few factors that are significantly associated with productivity. However, whether productivity is measured in terms of output per worker or TFP, firms’ capital-labor ratios are significantly related to productivity growth. Firm size is also significantly related to productivity growth for both measures, but only for the largest firms (non-linear association).35 The low costs of labor, energy and services likely reflect distortions FIGURE 13 Cost structure of key sectors, 2017 Percent (%) Labor Materials Energy and water Rent Other services Gross profits 100% 14.1% 16.4% 6.7% 32.6% 80% 1.9% 14.4% 37.9% 1.0% 0.5% 60.4% 60.8% 0.4% 60% 9.5% 31.1% 56.3% 52.2% 16.5% 40% 3.3% 0.0% 0.9% 3.0% 0.1% 2.0% 10.9% 1.5% 3.6% 8.8% 0.1% 20% 30.5% 0.6% 33.3% 24.0% 23.0% 17.8% 18.5% 5.7% 0% Oil and Non-oil Construction Trade Financial Non-financial chemicals Industry Services Services Source: Own calculations based on CSB, 2017a, Annual Survey of Establishments 2017 35 TFP declines across the firm size distribution, except at the top of the distribution (largest). 71 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Entrepreneurship is lagging > The private sector lacks dynamism, firm entry and exit rates are low. > A strong small and medium enterprise (SME) sector is critical for growth and employment in most countries, in Kuwait employment is highly concentrated in large firms. > Few young firms achieve high rates of growth. > Supporting the entry and growth of young and small firms is important to expanding Kuwaiti employment in the private sector. A dynamic SME sector is important for a sustainable and productive private sector in Kuwait. Globally, SMEs are important sources of job creation – in most countries they are not only the largest source of jobs, but they also account for a overly large share of new jobs.36 SMEs are critical sources of dynamism for the economy, a healthy and innovative SME sector determines the sustainability of growth and job creation in the long term. This is particularly important in an economy like Kuwait’s, which needs to undergo significant transformation over the coming decades. Although SMEs generally tend to be less productive than larger firms, productivity growth in the SME sector, most importantly the positive allocative effects of firm entry and exit, is vital to aggregate national productivity growth. Kuwait’s private sector is segmented between very small and very large firms, and employment is highly concentrated in large firms. This is pattern observed in high-income countries, but the dominance of large firms is more pronounced in Kuwait than in many other countries (Figure 14). Companies with less than 50 employees account for a quarter of employment, compared to almost half for OECD countries and 40 percent in Saudi Arabia. Moreover, in Kuwait 45 percent of all private sector jobs are in firms with more than 1,000 workers and this heavy reliance on very large firms for jobs cuts across sectors: > 38 percent of jobs in industry are in firms with 1,000 or more workers; > 51 percent of jobs are in financial services; > 53 percent of jobs are in other services; and > 66 percent of jobs are in construction. What also stands out in Kuwait is a ‘missing middle’ – mid-sized firms account for less than 10 percent of jobs in Kuwait, versus 20 to 30 percent in comparator countries 36 Haltiwanger, Jarmin and Miranda, 2013. 72 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Two-thirds of Kuwaiti private sector workers are in large firms (more than 200 employees) FIGURE 14 Employment distribution by enterprise size Micro Small Medium Large OECD (2016) 31% 18% 21% 30% Dubai (2016) 9% 13% 31% 48% KSA (2018) 11% 29% 20% 40% Kuwait (2017) 16% 9% 9% 66% 0% 20% 40% 60% 80% 100% Source: CSB, 2017a, Annual Survey of Establishments 2017; OECD, 2020; Dubai SME, 2018; GAStat, 2018; Establishment Survey 2018 Note: The definitions used for SMEs vary across countries and in some cases across sectors within countries. OECD, Saudi Arabia, and Dubai (manufacturing sector) consider firms with more than 250 employees as ‘large’, while Kuwait and Dubai (services) set the figure at 200 employees. The definition of ‘micro’ also varies between 0-9 employees in some countries and sectors and 0-5 employees in others Few Kuwaitis become entrepreneurs. Entrepreneurs make up less than 1.5 percent of the working-age population in Kuwait compared to 10.7 percent in OECD countries,37 although a significant number of entrepreneurs in Kuwait may be considered ‘latent’ as they carry on entrepreneurial activities while also holding a job in the public sector. Entrepreneurs tend to be older than average – close to 80 percent of entrepreneurs are above the age of 35, versus just 50 percent of the labor force. Entrepreneurship is also a route more often taken by women, who account for around 35 percent of entrepreneurs. The low level of entrepreneurship is only one indication that the private sector lacks dynamism. New firm entry rates are low and exit rates even lower; neither exceeded 0.6 37 The data on Kuwait is from the Labor Force Survey, 2016/2017, and on OECD from the World Development Indicators database. 73 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR percent of firms over the period 2014-2017 (Figure 15). These rates are dramatically lower than OECD comparators; for example, firms entering the market make up 6.6 percent of active firms in Finland, 9.8 percent in Luxembourg, 10.7 percent in Estonia, and 14.5 percent in Korea.38 Kuwait’s private sector firms are correspondingly quite old. The median age of a Kuwaiti firm is 16 years, and firms less than five years old account for less than 5 percent of employment, compared to 20 percent in the OECD.39 Globally, young firms tend to be important drivers of innovation and employment growth. In Kuwait, young firms are showing some promise in terms of expanding Kuwaiti employment, especially female employment. However, they remain too small a share of the private sector to have an appreciable impact on overall productivity. Firm entry and exit rates are low FIGURE 15 Estimated firm entry and exit rates, 2014 - 2017 0.7% Entry rate Exit rate 0.6% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.3% 0.2% 0.1% 0.0% Source: Own calculations based on CSB, 2017a; Annual Survey of Establishments 2017, and CSB, 2014, Annual Survey of Establishments 2014 Improving entry and strengthening the growth of young and small firms may be critical for expanding Kuwaiti employment. From 2013 to 2017, the share of Kuwaiti (versus non-Kuwaiti) employment in firms less than five years old rose by 39.4 percent per year, compared to 1.8 percent in firms five or more years old (Figure 16). Similarly, the share of Kuwaiti employment increased by 4.1 percent per year over this period in firms with less than 50 employees, but by only 1.5 percent for firms with 50 or more employees. Improving employment growth in young firms also would help bring more women into the labor market; as of 2017, more than 38 Data refer to years from 2014 to 2017, depending on country. Source: OECD Stat SDBS Business Demography Indicators. 39 OECD, 2016. 74 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR 50 percent of Kuwaiti employees in young firms were female, versus 23 percent in older firms. Less than 1 percent of Kuwaitis working in the private sector are employed by young firms. Young firms increased their share of Kuwaiti employment during 2013-2017 FIGURE 16 Annual growth of the average firm: key statistics 2013-2017 39.4% Annual output growth Annual employment growth (total) 9% Annual growth of Kuwaiti share of employment 7% 4.1% 3.3% 5% 1.8% 1.5% 3% 1% 0% -1% -0.1% -0.5% -0.7% -1.2% -3% -3.0% -3.2% -5% -3.5% -3.9% -4.0% All firms Young Firms Old firms Small firms Large firms (<5 years) (≥ 5 years) (<50 employees) (≥ 50 employees) Source: Own calculations based on data from CSB, 2017a; Annual Survey of Establishments 2017, and CSB, 2013, Annual Survey of Establishments 2013 However, few high-growth firms are emerging from the young firm cohort. Growth performance does not differ greatly between young and old firms, although young firms tend to be more volatile.40 This is a normal pattern, there is a higher failure rate among young firms, but high-growth firms also emerge. These ‘high-growth’ firms, referred to in the literature as ‘gazelles’ or ‘unicorns’, are important because they are typically major sources of job creation and high value-added growth. Typically, young firms are the biggest source of ‘high-growth’ firms, but in Kuwait, the young firm cohort is significantly under- represented here (Figure 17). Firms less than five years old accounted for 7 percent of firms from 2014 to 2017 but made up only 4 percent of high-growth firms.41 40 Data are from the Establishment Survey for the period 2013-2017. 41 Source: Establishment Survey, 2013-2017. We define ‘high-growth’ firms as being among the top 10% of the fastest-growing firms. This is a relative indicator for growth. Typically, we would use an absolute indicator, like firms with at least 20% annual output growth for at least three consecutive years. However, because of the poor overall growth environment in Kuwait, this absolute measure results in just 0.1% of older firms and 0.02% of young firms qualifying as ‘high growth’ between 2014-2017. 75 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Regression analysis shows that across all sectors (except financial services), high growth is positively associated with the initial level of employment (the non-linear relationship suggests that it reflects medium and large firms rather than the largest). This provides further evidence of the lack of dynamism in the enterprise sector and suggests there may be important constraints to growth that are particularly binding for young firms, for example constraints on entry and limited access to capital. Similarly, high-growth firms tend to have more employees than other firms at the start of the high-growth period, indicating that one problem in Kuwait may be related to entry, that is, few young firms start large; furthermore older high-growth firms tend to have high levels of productivity and capital intensity compared to the average firm, but young high-growth firms tend to have close to average levels, which means that the latter may benefit from factors internal to the firm, for example management capabilities, although this finding may also signal that access to finance is a particular challenge for younger firms. The young firm cohort is underrepresented among high-growth firms FIGURE 17 Young firms’ share of all establishments and of high-growth establishments 10% Share of all establishments 9% Share of high-growth establishments 8% 7% 7% 7% 7% 6% 6% 6% 4% 4% 2% 2% 2% 0% Avg. 2014-17 Source: Own calculations based on data from CSB, 2017 Annual Survey of Establishments 2017, and CSB, 2013, Annual Survey of Establishments 2013 76 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR The business environment is weak > Firms operating in Kuwait face multiple policy-related constraints. > Despite recent improvements, much more time is required to start a business or to resolve an insolvent business than in comparator countries. > Contract enforcement is slightly more difficult than in comparator countries. > Trade facilitation is weak. > Barriers to foreign investment impede exports and diversification. > Many businesses face severe obstacles to obtaining credit. > The limited availability and high cost of land constrains industrial development. > A lack of market competition, perhaps related to the dominance of large firms, limits firm entry and expansion. Entrepreneurs in Kuwait face several constraints to starting and growing businesses. Among the main challenges facing entrepreneurs are weak domestic market conditions (discussed above); government requirements that constrain entry, growth, and exit; poor trade facilitation and barriers to foreign direct investment (FDI); limited access to finance; limited availability and high cost of land; and barriers to competition. All these constraints are likely to have a bigger impact on SMEs than they would on large firms or on microenterprises operating informally. Despite recent improvements, Kuwait underperforms comparators on Doing Business indicators related to start-ups. While reforms in the past year cut the time required to start a business almost in half (at least as estimated on the basis of legal requirements), it still takes longer to establish a business in Kuwait than in all comparator countries and more than twice as long as the GCC average (Figure 18). Similarly, it takes more than four years to resolve an insolvent business in Kuwait, compared to an average of about 2.5 years for the GCC. Kuwait’s performance on enforcing contracts, while slightly worse than that of most comparators, is similar to the GCC average. Reforms aimed at reducing the time required to enforce contracts or close a business have not been undertaken in the past 10 years (since the World Bank began preparing the Doing Business rankings). 77 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Essential business procedures take a long time in Kuwait FIGURE 18 Doing Business 2019, time to start a business and register a property Number of Days 61.5 Time to start a business (days) Time to register a property (days) 26.5 23.5 19.4 17.5 17.5 17 16.5 15.2 13 11.5 9.2 8 9.1 10.4 3.5 3.5 3.8 1.5 4.2 0.5 1.5 Kuwait GCC OECD Estonia Finland Luxembourg Malaysia New Zealand KSA UAE USA Source: World Bank, 2019. Doing Business 2019 Kuwait scores poorly on measures of trade facilitation (Figure 19). Some of the trade facilitation barriers, such as certificates of origin or delays in import/export, significantly restrict the potential to expand competitive non-oil sectors, given the relatively small size of the domestic market. Ongoing regional political and trade conflicts further impede opportunities for regional trade, particularly in services, additionally, these conflicts don’t help to attract FDI into services sectors. Trade facilitation is weak 78 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR FIGURE 19 Kuwait’s performance on trade-related indicators Logistics Performance Index, 2018 Score 4.50 3.88 3.89 3.96 3.97 3.76 3.63 3.22 3.24 3.31 3.01 3.00 2.86 1.50 0 Kuwait KSA Malaysia GCC Estonia Luxembourg OECD New Zealand USA UAE Finland Note: Data for OECD from 2016 Doing Business 2019, Time to Import and Export (documentation + border time) Hours Time to Export (Hours) USA 3 9 Time to Import (Hours) UAE 32 66 KSA 48 104 New Zealand 40 26 Malaysia 38 43 Luxembourg 1 1 Finland 38 3 Estonia 3 1 OECD 15 13 GCC 71 97 Kuwait 156 168 Source: World Bank, 2019. Doing Business 2019 Barriers to foreign investment act as a further constraint to exports and diversification. Globally, foreign investors play a leading role in the export sector. Kuwait’s track record in FDI attraction has been particularly weak, and virtually all FDI has been focused on serving the domestic market (Figure 20). Investment policy is partly to blame: FDI faced an environment that prevented 100 percent ownership, restricted access to land and closed off certain sectors. Reforms in the new FDI Law improve access to land and labor, as well as streamline licensing procedures via a one-stop shop. Yet, significant restrictions remain. 79 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Special Economic Zones (SEZs) are increasingly seen as a potential solution to attracting FDI. The huge Silk City project is seen as a flagship for SEZs, but it is in the early planning stages and faces significant opposition. The experience of other parts of the GCC with SEZs offers both hope and lessons for leveraging SEZs. FDI inflows are very low FIGURE 20 Inward FDI (5-years average) Share (%) of GDP 17.1 3.1 3.7 2.3 2.6 1.5 1.8 0.4 0.8 0.9 Kuwait KSA New Zealand GCC USA Finland UAE Malaysia Estonia Luxembourg Source: World Bank, 2020. World Development Indicators Many businesses in Kuwait face severe obstacles to obtaining credit. Kuwait is ranked well below the GCC average on the degree of support provided to SMEs by financial markets, its strength of the financial system ranks similar to the GCC average, but well below that of OECD countries, (based on the World Economic Forum’s Global Competitiveness Index). About 32 percent of Kuwaiti adults are covered by either a private credit bureau or a public registry, compared to 40 percent on average in the GCC and 66 percent in OECD countries. Female entrepreneurs face greater constraints in access to finance, including legal barriers, for example, discrimination in access to credit based on gender is not prohibited by law in Kuwait.42 There is much emphasis on access to start-up capital for entrepreneurs, e.g., through the SME Fund, but there has been less attention to finance to support SME growth, and in particular to accelerate the expansion of high-potential young firms. Access to finance is likely to be particularly important for young firms, whose success is imperative if the private sector is to absorb a large share of Kuwaiti employment in the years to come. 42 Source: Women, Business, and the Law https://wbl.worldbank.org/. 80 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Limited availability and high cost of land are significant constraints on industrial development in Kuwait. This points to the need to set aside areas for specific industrial use through zoning requirements. Various plans are in place for industrial parks and SEZs, but they do not appear to meet the needs of investors. Start-ups are particularly limited by high rental costs for commercial and office space, in part because of regulations that require proof of physical premises to get a business license. However, this requirement is becoming increasingly irrelevant for many new freelance activities and technology start-ups that can operate with very limited space. Growth and productivity dynamics point to lack of market competition as a constraint to firm entry and expansion in Kuwait. As discussed earlier, very large firms dominate the Kuwaiti private sector – 90 percent of all assets are held in firms with over 200 workers and 77 percent of assets are held in firms with over 1,000 workers. Evidence suggests this dominance of large firms, which holds across all sectors in Kuwait, may have negative implications for the growth of SMEs and especially young firms. Regression analysis shows a strong positive association between market competition43 and growth in employment among young firms, i.e., young firms grow better in markets that are more competitive than they do in markets that are more concentrated. Kuwait’s score on the World Economic Forum’s product market index is more than 10 percent below that of the GCC average and 16 percent below that of the US (Figure 21). Institutionally there has been progress in recent years, the Competition Agency has been fully operational since 2017. However, the Competition Law limits the power of the Agency. For example, it is dependent on the Ministry of Commerce and Industry and cannot impose fines directly, and the Law allows for broad exemptions from Competition Law provisions (e.g., for SOEs). Significant trade and investment barriers protect some domestic players but raise costs for all. Finally, the lack of competition in the provision of infrastructure sectors (especially transportation), which are dominated by the public sector, raises firms’ costs, and lowers the scope and quality of services. This has a particular impact on the production of tradables. 43 As measured by the Herfindahl-Hirschmann Index of market share. 81 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Product markets are less competitive in Kuwait than in comparator countries FIGURE 21 Global Competitiveness Index 2018, Product Markets Score 80 72 71.7 66.3 67.7 68.6 64.9 64.8 64.9 62 60 57.9 40 20 0 Kuwait GCC Estonia Finland Luxembourg Malaysia New Zealand KSA UAE USA Source: WEF, 2020. Global Competitiveness Index 2020 82 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Box 1 Behavioral Insight: Entrepreneurship To explore the motivations and the behavioral barriers that Kuwaiti entrepreneurs face, a convenience sample of 262 Kuwaiti entrepreneurs registered to mailing lists and social media of incubators (Erada, Cubicle Services, Tribe and Sirdab Lab) and the SME Fund (78 percent were registered to the latter – survey was conducted between August and September 2020) was surveyed. While this is not a representative sample of Kuwaiti entrepreneurs, the findings are revealing. The “regular” job played or plays an important role. More than half (53 percent) of entrepreneurs had previously held another job, while 38 percent still do. The most common reason for hanging onto another job is that many entrepreneurs (62 percent of respondents with another job) consider their business too small. Owners of larger businesses are more likely to have left their job, presumably if they have grown they are successful. Entrepreneurs often state that they can perform both jobs, they are not ready to take the risk, or they prefer the stability of a regular job. This may indicate that many business owners might not undertake the full transition as long as they feel it is possible to engage in both activities at the same time, and that “still small” is more a perception related to emotions of stability and risk than an objective size. Typical psychological constraints to entrepreneurship, such as risk aversion, may be exacerbated in the Kuwaiti context because of the strong social preference for public sector employment (see section on public sector). This may prevent entrepreneurs from moving away from a public sector job and/or limit willingness to push for rapid growth in their business. Push and pull factors led to business start-ups. In terms of motivation to start a business, the main reason was having a good idea and knowing how to implement it (63%), followed by having a job that is not stimulating (40%), not wanting a boss (37%) and wanting a higher salary (36%). About half the entrepreneurs in the survey decided to start a business while they were already working, a quarter decided while still at school and the rest made their decision during or after higher education. Consideration of these motivational aspects would help develop policies and create information that could persuade public sector employees to start or grow their own business, and ultimately leave the public sector. Some groups would benefit from information about how to access capital, or how to register their business; while other groups would benefit from soft skills training and mentorship from existing entrepreneurs to boost their confidence. 83 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Kuwaitization has worked but its limits are becoming apparent > Kuwaitization quotas are increasing the hiring of Kuwaitis in some sectors, although the use of ‘ghost workers’ or parallel hires of Kuwaitis may be raising firms’ costs. > Kuwaiti employment in many sectors remains extremely low, as firms cannot afford wages demanded by Kuwaiti workers (value added per worker is well below the average Kuwaiti wage) and non-Kuwaiti workers will work for much lower wages than Kuwaitis. > A reduction in the wage gap between Kuwaiti and non-Kuwaiti workers may not increase demand for Kuwaitis, as analysis shows virtually no substitutability between Kuwaitis and non-Kuwaitis in the average firm. > Increasing Kuwaiti employment will require increasing private sector productivity so that firms can afford Kuwaiti workers. Kuwait already has significant experience and well-developed plans for replacement of non-Kuwaiti labor in the private sector. The government mainly relies on firm-level quantitative restrictions (“Kuwaitization” quotas), to compel firms to hire a certain share of Kuwaitis, or otherwise pay fines. The quotas are established at a broad sectoral level, and within sectors at the occupation level. Quota thresholds are updated every few years and determined according to historical trends of Kuwaiti employment in the private sector. They are enforced by imposing fines for each non-Kuwaiti worker employed above the quota. In parallel, and to equalize wages between the public and private sectors, the government also pays subsidies to Kuwaiti workers (i.e., Dam Al-Amala or in-work benefits) in the private sector (see section on social protection). These two policy instruments aim at enticing Kuwaitis to work in the private sector and enticing firms to hire them. Quotas appear to be shifting the balance of Kuwaiti and non-Kuwaiti labor in some sectors, but it comes at a cost. Data from the Establishment Survey suggests that employers are complying with Kuwaitization quotas in most sectors (Figure 22). Regression analysis indicates that high quotas (more than 50 percent) are one of the very few factors significantly associated with Kuwaiti employment across firms. This is one of the reasons the banking sector, where the quota is the highest (64 percent), is absorbing many Kuwaitis. However, the data also shows clear threshold effects – employers tend to hire Kuwaiti workers only when they reach the point at which the quota requires a Kuwaiti hire. In addition, anecdotal evidence suggests the significant use of ‘ghost workers’ or of parallel hires of Kuwaitis simply to meet quotas, which ultimately increases the cost of doing business. 84 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR The Kuwaiti share of employment is close to or exceeds the Kuwaitization quota in key sectors (2017) FIGURE 22 Kuwaiti share of employment vs. national quota in selected sectors, 2017 Quota 70% Reported Kuwaiti share of employment (2017) 64% 60% 60% 57% 55% 50% 40% 38% 30% 30% 30% 20% 21% 20% 20% 18% 10% 8% 3% 2% 0% Insurance Banking Real estate Telecoms Petrochemicals and refining (excluding public companies) Manufacturing Petrochemicals and refining Source: Own calculations based on data from CSB, 2017a; Annual Survey of Establishments 2017, and Cabinet of Kuwait, 2014. Cabinet decision on Kuwaitization quotas Most firms and many sectors do not hire any Kuwaitis. The systematic replacement of large numbers of non-Kuwaiti workers will be a bigger challenge than the enforcement of quotas at current levels. Three-quarters of private sector firms employ no Kuwaitis. Similarly, the median firm in most sectors operates without Kuwaiti employees (Figure 23); in 25 percent of the firms that do hire Kuwaitis, the average share of Kuwaiti employment is only 13 percent. Relatively high shares of Kuwaiti employees are prevalent among large firms, concentrated in the oil and financial services sectors. In contrast, Kuwaiti employment in smaller firms and in non-oil industry, construction and trade is minimal. 85 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Most firms have no or few Kuwaiti workers FIGURE 23 Plot of establishments by relative Kuwaiti share of employment, 2017 1 0.8 Kuwaiti share of employment 0.6 0.4 0.2 0 Percentile of total establishments Source: Own calculations based on data from CSB, 2017a; Annual Survey of Establishments 2017, and CSB, 2013, Annual Survey of Establishments 2013 Note: Excludes publicly owned firms in the oil sector Most firms hire non-Kuwaitis because they cannot afford to pay wage rates demanded by Kuwaiti workers. The “narrow” hiring of Kuwaitis across firms is partially because employers are operating with production functions that cannot support higher wage workers. The financial and oil sectors may offer wages that are attractive to Kuwaiti workers, as they are capital intensive with high value-added per worker (see above). In other major sectors, value added per worker is either slightly more or less than average productivity and is less than the average Kuwaiti wage (Figure 24). At a more detailed level of analysis, 49 of the 65 subsectors have value added per worker levels that are below the average Kuwaiti wage. In 2017, these sectors employed nearly 750,000 non-Kuwaiti workers and just 13,000 Kuwaitis. All of this suggests that the production functions of most firms and subsectors are intended to operate with low-wage, non-Kuwaiti workers and not with the higher-wage, Kuwaiti workers. 86 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Value added per worker is less than the average Kuwaiti wage in most sectors FIGURE 24 Kuwaiti wages relative to productivity at establishment level Kuwaiti wages relative to productivity at establishment level 250,000 Establishments with GVA/worker > average Kuwaiti wage 200,000 GVA per worker (KWD) 150,000 100,000 Establishments with GVA/worker < average Kuwaiti wage 50,000 0 0 50,000 100,000 150,000 Average wages for kuwaiti workers (KWD per annum) Source: Own calculations based on data from CSB, 2017a; Annual Survey of Establishments 2017, and CSB, 2013, Annual Survey of Establishments 2013 Non-Kuwaiti workers are a more competitive option for employers in most sectors and occupations. Even with Dam Al-Amala subsidizing Kuwaiti wages, there is still a significant gap in wage demands between Kuwaiti and non-Kuwaiti workers. The wage premium paid by employers to Kuwaitis (excluding Dam Al-Amala) rises along the distribution, and only reverses slightly for the top 5 percent of the distribution as per the Labor Force Survey (2017) (Figure 25, top panels). Finally, data from the Establishment Survey (2013-2017) indicates that non-Kuwaiti wages are quite low: the average monthly wage for non-Kuwaiti workers in the median firm was just KWD 215, while the average monthly wage for non-Kuwaitis at the 97th percentile was less than KWD 1,000 (Figure 25, bottom panel). 87 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Kuwaiti wages exceed those of non-Kuwaitis across most of the wage distribution FIGURE 25 Differences in wages of Kuwaitis and non-Kuwaitis in the private sector Monthly salary (including benefits) differential between Kuwaiti and Expatriate, Private Sector Actual Difference Without Dam Al-Amala 2 2 1.5 1.5 log (wage Kuwaiti) - log (wage Non_Kuwaiti) log (wage Kuwaiti) - log (wage Non_Kuwaiti) 1 1 0.5 0.5 0 0 Ghost employees? -0.5 -0.5 Percentile Percentile Log hourly wage distribution of Kuwaitis and non-Kuwaitis in the private sector 0.8 Kuwaitis Non-Kuwaitis 0.6 Density 0.4 0.2 0 Log of hourly income Kernel = epanechnikov, bandwidth = 0.1781 Source: CSB, 2017b; Labor Force Survey 2017 Note: The distribution in the chart does not control for skills 88 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Even with a narrower wage gap, employers are unlikely to substitute foreign workers for Kuwaitis. Differences in skills relevance, quality, and productivity (as well as their beliefs and perceptions) may bias employers toward non-Kuwaiti workers. Analysis of the relationship between wages and labor demand shows virtually no substitutability between Kuwaitis and non-Kuwaitis in the average firm (Figure 26). Thus, the potential for a decline in the wage gap to incentivize firms to replace non-Kuwaiti workers with Kuwaiti workers is extremely limited (cross-wage elasticities are mostly insignificant). The only exceptions are in the non-financial services and the construction sector, where an increase in wages for Kuwaitis is associated with a significant but very small increase in demand for non- Kuwaitis, suggesting some minimal substitution effect in these sectors.44 Narrowing the wage gap between Kuwaitis and foreign workers is unlikely to have a significant impact on firms’ demand for Kuwaiti workers FIGURE 26 Elasticity of demand to wages across sectors for Kuwaiti and non-Kuwaiti workers, 2017 Own-wage (non-Kuwaiti) Cross-wage (non-Kuwaiti) Own-wage (Kuwaiti) Cross-wage (Kuwaiti) Non-financial Services Financial Services Trade Construction Industry Overall Source: CSB, 2017a, Annual Survey of Establishments 2017 Note: Bars show coefficient of elasticity; solid bars (grey fill) indicate statistically significant relationship, while non-solid bars indicate relationship is not statistically significant; own-wage elasticity measures the relationship between wages within one group and labor demand for that group (e.g. own-wage elasticity for Kuwaitis measures how a 1 log increase in average wages for Kuwaitis is related to demand for Kuwaiti workers); cross-wage elasticity of demand measures how wages in one group is related to demand for labor in the other group (e.g., cross-wage elasticity for Kuwaitis measures how a 1 log increase in average non-Kuwaiti wages is related to demand for Kuwaiti labor) 44 By contrast, the analysis shows small (but statistically insignificant) complementary effects in the financial services sector. 89 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Substitution in key sectors is feasible if labor demand shifts to higher skills. Some sectors in Kuwait remain highly dependent on low-skilled labor, with the share of high-skilled workers falling way behind that of EU28 countries (Figure 27). There is an opportunity to change the mix of production in these sectors by using more capital and high-skilled workers to be on a par with EU28 countries. Sectors such as ICT, manufacturing, and transport can absorb more Kuwaitis if structural changes in their production functions happen. This has implications for policies with respect to capital, admission of low-skilled foreign workers, and a skills’ policy to ensure the adequate supply of Kuwaiti workers. Sectoral shares of high- skilled workers are much lower in Kuwait than in EU28 FIGURE 27 Share of high skill workers by sector 91% 91% 100% Kuwait 84% 81% EU28 77% 74% 80% 68% 67% 67% 64% 62% 62% 60% 60% 58% 52% 60% 33% 40% 32% 32% 30% 28% 25% 25% 23% 19% 19% 20% 18% 15% 14% 9% 7% 6% 4% 4% 4% 2% 2% 1% 0% ICT Professional & technical Education Finance & insurance Finance Arts & entertainment Health & social Electricity & gas Public admin Mining Manufacturing Other service Water & sanitation Trade Construction Admin support Hospitality Transport Agriculture Source: CSB, 2017b; Labor Force Survey, 2017; and Eurostat, 2020 90 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR Employer perceptions of Kuwaiti workers’ behavior also matters. Behavioral science analysis shows that employers differentiate between two types of Kuwaiti workers.45 Some Kuwaiti workers are viewed as having little ambition to grow in the private sector, while others are perceived as more dynamic and driven. The former are assumed to view working in the public sector as having a back-up plan, or that the availability of a social safety net support reduces their perceived necessity to work hard. Kuwaitis who studied outside Kuwait or in private universities are those who tend to be perceived as more dynamic and driven; interviewees often mentioned that the Kuwaiti educational system does not prepare Kuwaitis to work in the private sector. In addition, young Kuwaitis are perceived as impatient in terms of promotion. Managers often prefer non-Kuwaitis who are lower-skilled and less productive but who “would be willing to keep the boat floating” for a fraction of the cost. 45 Based on interviews with HR managers and focus groups. 91 PART 1 | DIAGNOSTIC | 3. PRIVATE SECTOR References > Cabinet of Kuwait. 2014. Cabinet Decision on Kuwaitization Quotas. > CID. 2020. Penn World Tables 9.0. Center for International Data. UC Davis. www.cid.econ.ucdavis.edu. > CSB. 2017a. Annual Survey of Establishments 2017, Central Statistical Bureau, State of Kuwait. > CSB. 2017b. Labor Force Survey 2017, Central Statistical Bureau, State of Kuwait. > CSB. 2014. Annual Survey of Establishments 2014, Central Statistical Bureau, State of Kuwait. > CSB. 2013. Annual Survey of Establishments 2013, Central Statistical Bureau, State of Kuwait. > Dubai SME. 2018. SME Statistics. > Eurostat. 2020. Skills-related Statistics, www.ec.europa.eu/eurostat/web/skills. > GAStat. 2018. Annual Establishment Survey. https://www.stats.gov.sa/. > Haltiwanger, J., Jarmin, R. and J. Miranda. 2013. “Who Creates Jobs? Small versus Large versus Young”. The Review of Economics and Statistics 9(2):347-61. > IMF. 2020. World Economic Outlook 2020. International Monetary Fund. > OECD. 2016. “No Country for Young Firms? Policy failures and regulations are a greater obstacle for start-ups than for incumbents”, STI Policy Note, June 2016. > OECD. 2020. OECD Statistics, Organisation for Economic Co-operation and development. www. stats.oecd.org. > UNCTAD. 2020. UNCTAD Stat, United Nations Conference on Trade and Development. www. unctadstat.unctad.org. > World Economic Forum. 2020. Global Competitiveness Index 2020. WEF. > WITS. 2020. Trade data by country, World Integrated Trade Solutions. Washington, D.C. The World Bank Group. www.wits.worldbank.org. > World Bank. 2020. World Development Indicators. Washington, D.C. The World Bank Group. > World Bank. 2019. Doing Business 2019. Washington, D.C. The World Bank Group. 92 4. DIAGNOSTIC SOCIAL PROTECTION PART 1 94 Introduction 97 Labor market programs and transfers are small relative to other programs 113 Social insurance transfers are disincentives to work 116 Social safety net transfers 120 Energy and water subsidies are the bulk of social expenditures 121 References 93 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Introduction Kuwait implements a comprehensive cradle-to-grave social protection system. The system provides support at each stage of a citizen’s life, and covers nutrition assistance, free health care, support for education and training, work incentives, job placement assistance, insurance against unemployment and disability, housing assistance, grants and loans for marriage, assistance to divorcees/single women/widows, old age assistance and pensions, and guaranteed public sector employment (Figure 1). However, government spending is mostly dominated by public sector employment and subsidies (Figure 2). Kuwait implements a comprehensive social protection system across a citizen’s life cycle FIGURE 1 Kuwait social protection programs Early Childhood Childhood Youth Working Age Old Age Promotion > University student allowance > Dam Al-Amala > Vocational training > Training/placement services > Student allowance > Startup incentives > Divorcees/single females, > Old age Protection > Orphan assistance > Married student allowance widowed assistance assistance > Jailed assistance > Assistance for persons with disability > Job search allowance > Unemployment insurance > Subsidized basic > Subsidized basic > Disability insurance > Old age Prevention children’s food children’s food > Housing assistance pensions > Marriage grants/loans > House grants/loans > Free health services, ration cards, foods subsidies and power subsidies Wealth Sharing > Guaranteed public sector employment Source: Modified based on Kuwait Social Safety Net Report 2018 94 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Social protection spending is low, and most government expenditures are allocated to public sector employment and subsidies FIGURE 2 Kuwaiti government spending Total 5,433 2,690 Citizen’s Life Cycle Free health care All Stages of Power subsidies 2,257 Food subsidies/ration cards 360 Assistance for persons with disability 126 Total 2,334 Old Age Old age pension 2,300 Old age assistance 34 Total 8,516 Guaranteed public sector employment (wage bill) 7,690 Housing grants and loans 266 Housing assistance 205 Widowed, divorcees, single females, married to non-Kuwaitis, housewives 181 90 Working Age Dam Al-Amala Program Marriage grants and loans 46 Low income families 15 Families of students (with no or low income) 13 Jailed assistance 6 Training/placement services 3 Job search allowance 1 Total 1,708 Youth Vocational training/student allowance 1,693 University student allowance 15 Total 2 Childhood Orphan assistance 2 0 4,000 8,000 KWD Millions Source: Kuwait Social Safety Net Report 2018; and other reports Note: The year for the data varies as it was collected from multiple reports (latest available) 95 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION As discussed, the major goals of the labor market strategy are to improve public sector finances by limiting the growth in the public sector wage bill, and supporting more rapid growth in the private sector; this is also required to absorb the expected increase in young workers, and to serve as an attractive alternative to public sector employment to diversify the economy. This section explores social protection policies that would contribute to these goals in two major areas. The first would support Kuwaitis in improving their employability and incentives for private sector employment. The second would improve the efficiency of the social protection system by finding a way to share wealth more equitably and in a less distortive way than through guaranteed public sector jobs and subsidies. Actions for improving employability would include strengthening active labor market programs and transfers, improving job seeker case management and matching support, and increasing incentives work-capable Kuwaitis who are outside the labor market to look for work. The social protection system, the latter case, could be supported by recalibrating social protection tools towards fostering human capital and increasing workers’ productivity, targeting cash benefits to the most vulnerable groups as well as retraining them in ways that encourage job search and reward work. The programs to be covered under this pillar include labor market transfers and programs (the Dam Al-Amala program, job search allowance and active labor market programs implemented by Public Authority for Manpower - PAM), social insurance transfers (old-age pensions, survivorship benefits, and unemployment insurance), social safety net transfers and allowances (the MoSA family allowance program for low-income earners and specific categories of individuals), and energy and water subsidies. 96 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Labor market programs and transfers are small relative to other programs > Expenditures on labor market programs and transfers are small when compared to spending on other social benefits and public sector employment. > The Dam Al-Amala program has nearly eliminated the public sector wage premium over the private sector for most people, but the public sector still pays substantially more than the private sector for low-income workers. > The job seeker allowance provides a small benefit, mostly to well- educated Kuwaiti job seekers who may not face difficulties in finding employment. > There is little information on the impact of training programs, which are generally targeted to university graduates rather than those most at risk of unemployment. > Improved targeting to focus on those most vulnerable to unemployment, perhaps using statistical methods, could increase the usefulness of active labor market policies. Labor market programs and transfers make up a very small share of the budget within the social protection landscape (Figure 3). Training programs and the job seeker allowance together cost less than 0.2 percent of the amount devoted to energy subsidies, and even the Dam Al-Amala program, an in-work benefit with a significant impact on evening out public and private sector salaries, costs only 4 percent of the amount devoted to subsidies. Overall, government spending on labor market programs amounts to only 0.0007 percent of GDP, a much lower share than in any OECD country (Figure 4). 97 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Kuwait spends little on labor market programs FIGURE 3 Yearly public spending (latest available year) Nominal terms, KWD millions Energy Subsidy 2,257 Transfers to all Students in Public Schools 1,693 Food Subsidy 360 Mortgage Loans for Kuwaiti Families who do not own a House 266 Social Assistance by MoSA 263 Assitance to Persons with Disabilities 126 Dam Al-Amala 90 Marriage Grants 46 Transfers to Higher Education Students 13 Training Programs 3 Job Seeker Allowance 1 Source: Kuwait Social Safety Net Report 2018 FIGURE 4 Public spending on labor market programs % of GDP Percent (%) 2.9 3 2.6 2.3 2.2 2.2 2.1 1.8 1.4 1.4 1.4 1.3 1.2 1.1 1 0.8 0.8 0.8 0.7 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.0007 0.3 0.2 Denmark France Finland Belgium Spain Austria Netherlands Sweden Portugal Luxembourg Germany Switzerland Ireland Hungary Norway Australia Estonia Canada Slovenia Korea Poland Latvia Slovak Republic Lithuania Chile Czech Republic Japan US Kuwait Source: OECD data indicators 98 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION The Dam Al-Amala program The Dam Al-Amala program, an in-work benefit, began in 2001 to narrow the wage gap between the public and private sector for Kuwaitis. The benefit is conditional on having employment in the private sector and is paid directly from the government to the worker’s account. As explained above, the program has eliminated the average wage premium for working in the public sector. When the benefit is taken into consideration, the private sector pays Kuwaitis on average 6.8 percent more than the public sector. A negative average wage premium between the public and private sectors is on par with many OECD countries46 (Figure 5). This wage gap is not greatly affected by the high wages earned by employees of state enterprises in the oil sector, who earn around 40 percent more than other public sector employees. These enterprises make up less than 5 percent of total Kuwaiti employment, and therefore these wage levels have little impact on the discrepancy between public and private sector wages. In most OECD countries, the average difference between public and private sector wages is small FIGURE 5 Average public sector wage premium (with Dam Al-Amala for Kuwait) Percent (%) 25.5 5.8 7.4 1.9 2.5 0.5 -6.8 -5.8 -13.5 -12.3 -12.3 Norway*** Sweden*** Iceland*** Kuwait** Denmark*** Belgium Germany*** France*** Estonia*** Europe average*** Luxembourg*** Source: European countries data from Campos et al. 2017, Understanding the Public Sector Pay Gap; and Kuwait data from LFS 2017 obtained by running an OLS regression, where the log salary (that includes Dam Al-Amala) was run on a public sector employment dummy, in addition to other controls, such as gender, marital status, education, governorate, and age Note: *** Means coefficient is statistically significant at or below the 1% level; and ** Significant at or below the 5% level 46 Campos et al., 2017. 99 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION The Dam Al-Amala program dramatically changed the distribution of private sector wages. Figure 6 shows kernel density plots of the distribution of public and private sector wages, with and without the Dam Al-Amala payments. In the left panel (without Dam Al-Amala payments) the distribution of wages in the private sector is distinctly skewed to the left, meaning that a large share of private sector workers earn wages that are well below the levels earned by most public sector workers. After Dam Al-Amala payments are included (the right panel) the distributions of public and private sector wages are much more alike. The average level of compensation is quite similar in the two (see above), and most low- paid private sector Kuwaiti workers now receive compensation (salary plus Dam Al-Amala payments) that is close to the average. Dam Al-Amala helped increase wages in the private sector by shifting the wage distribution to the right FIGURE 6 Distribution of wages with and without Dam Al-Amala Kernel Density Plots Distribution of Wages (without Dam Al-Amala) Distribution of Wages (with Dam Al-Amala) log (Monthly salary+other benefits) log (Monthly salary+other benefits) Public Private without Public Private with Dam Al-Amala Dam Al-Amala 1.0 1.0 0.8 0.8 0.6 0.6 kdensity kdensity 0.4 0.4 0.2 0.2 0 0 Source: Data based on Kuwait Labor Force Survey 2017 100 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION The program has reduced the difference between private and public sector wages for Kuwaitis along different percentiles of the wage distribution (Figure 7). In fact, workers in the upper half of the wage distribution enjoy a wage premium over the private sector. For instance, workers in the 80th percentile of the wage distribution are paid 7 percent more in the private sector. However, there remain significant differences between wages in the two sectors for different groups. Most notably, a significant public sector wage premium remains for most workers in the lower half of the wage distribution. The difference between public and private sector wages (controlling for workers’ characteristics) is 15 percent and 14 percent at the 10th and 25th percentiles of the wage distribution, respectively (Figure 7). The public sector still pays more for lower educated workers (a gap of 23 percent for workers with intermediate education, controlling for workers’ characteristics), as well as for the youngest workers (a gap of 16 percent for 16-24 year-old workers, see Figure 8). Dam Al-Amala has succeeded in reducing the private/public wage gap across the income distribution FIGURE 7 Monthly salary (including benefits) differential between public and private sector 3 Raw Gap without Dam Al-Amala Gap without Dam Al-Amala after Controls 2.5 Raw Gap with Dam Al-Amala Gap with Dam Al-Amala after Controls 2 log (wagepub) - log (wagepvt) 1.5 1 0.5 0 -0.5 Percentile Source: Data based on Kuwait Labor Force Survey 2017 Note: Controls account for worker characteristics, such as education, age (as a proxy for work experience), marital status, gender and governorate. The y-axis is the difference in log of wages and can be read as percentage difference in monthly wages between the public and private sectors. The x-axis presents different percentiles of the entire wage distribution. The method to calculate the wage gap at different percentiles of the entire wage distribution is called a recentered influence function. So, the gap at the 25th percentile refers to the salary of an individual at the 25th percentile of public wage distribution minus the salary of an individual located at 25th percentile of the private wage distribution. The data include base salary plus benefits. Results are robust even when using hourly wages 101 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Public sector wages exceed private sector wages for the least educated and youngest workers even after receiving Dam Al-Amala benefits FIGURE 8 Public-private wage gap with Dam Al-Amala 30% Gap after Controls 22.5% Raw Gap 16.3% 20% 10% 4.5% 5.1% 4.3% 3.3% 3.5% 3.0% 1.4% 0% -2.9% -10% -7.2% -20% Intermediate Secondary Post-Secondary University Post Graduate 16-24 25-34 35-44 45 Plus Female Male Education Age Group Gender Source: Kuwait Labor Force Survey 2017 A persistent wage premium in favor of the public sector after Dam Al-Amala for some workers could be explained by the disproportionately higher wage premiums in favor of the public sector before receiving the benefit. For example, before Dam Al-Amala, workers in the 20th percentile of the wage distribution received 131 percent more in the public sector compared to the private sector, whereas workers in the 80th percentile received only 40 percent more in the public sector. Moreover, the program provides relatively higher benefits to older workers (as proxied by marital status and number of children) and to workers with university education and specialized fields (Table 1). 102 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION TABLE 1 Dam Al-Amala benefits vary by educational level and field, marital status, and children Degree Single Married College degree: Medicine, pharmaceutics, engineering 790 898 College degree: Law, accounting, information systems, finance, economics, statistics, 740 848 financial management, insurance, int. business, banking sciences College degree: Other majors 690 798 Diploma or high school certificate + training course of no less than 2 years 629 723 High school diploma + training course no less than 3 years 571 663 High school certificate 557 638 Middle school certificate + training course no less than 1 year 517 598 Middle school certificate 511 590 Below middle school 456 534 50 KWD are added for every child up to 7 children Source: Kuwait Social Safety Net Report, 2018 While university-educated workers enjoy a small public sector wage premium over the private sector due to Dam Al-Amala, the share of university graduates in the private sector is comparable to that of workers with secondary or intermediate education, who enjoy a significant public sector wage premium over the private sector (Figure 9). 47 This may indicate that there are barriers to the efficiency of the labor market or that public sector employment confers some non-wage attractions relative to private sector employment. Both are probably true. On the one hand, non-wage benefits such as job security, working hours, and easier working conditions, as well as behavioral reasons, may keep the public sector more attractive to Kuwaitis (see public sector section). On the other hand, the lack of easy access to reliable information to job seekers on available private sector opportunities, and to employers on the supply of potential workers, limits job matching. A frequently updated and well-maintained labor market information system, that provides data in a way that informs job search, would significantly improve the efficiency of job searches in Kuwait. The type of data that already is collected and could be integrated into the labor market information system (LMIS) and made more widely available in easily digestible form includes: > Information on employment growth and jobs; > Number of job vacancies and the vacancy rate by education and skill requirements; > Earnings and wages; and analyses of labor issues (Table 2). 47 The somewhat higher share of private sector workers with only intermediate education may be overstated (see note to Figure 9). 103 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION The share of university- educated workers in the private sector is comparable to that of workers with lower educational attainment FIGURE 9 Kuwaitis working in the private sector by age and education, 2017 Percent (%) All Males 20% Females 15% 11.2% 11.6% 11.2% 10.4% 9.1% 9.9% 9.2% 8.0% 10% 6.6% 5% 0% 15-24 25-29 30-34 35-39 40-44 45-49 Intermediate Secondary University and Higher Age Groups Education Source: Kuwait LFS 2017 Note: The outlier rise in the percentage of women with intermediate education working in the private sector could be attributed to ghost employment. However, this hypothesis cannot be further validated 104 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION TABLE 2 Information available in a labor management information system Type of Information LMIS can Publish Source of information Employment and Jobs Employment growth (actual and projected) Labor Force Survey, Labor Demand Survey, projections New jobs (actual and projected) Job Vacancies Number of vacancies and vacancy rate Vacancy Survey, public job matching platforms, national Education and skill requirements occupation framework Earnings and Wages Vacancy Survey, public job matching platforms Median, average Distribution Analysis Employer Skills Survey, Focus Group Discussions, expert In-demand skills, shortage and surplus assessment, vacancy scrapping, public job matching platforms occupations, highest paying, fastest growing, etc. Initially, the Dam Al-Amala program was correlated with an increase in private sector employment, which rose from about 30,000 employees in 2005 to 67,000 in 2009 (Figure 10). However, the potential impact may have been reversed by a series of significant public sector salary increases in the early 2010s.48 The reversal may also reflect the impact of the 2008- 2010 global financial crisis, which in the absence of a government bailout package may have led to a wave of migration from the private sector back to the public sector. By 2019, almost 74,000 Kuwaitis worked in the private sector, higher than the level in 2009. However, there are reports about using the program for ‘fake employment’ to fulfill Kuwaitization quotas by companies (see discussion of quotas in section on the private sector pillar). Additionally, the impact of the program on increasing the willingness of Kuwaitis to work in the private sector may have been limited because employers were able to offer Kuwaiti job seekers lower wages than they would have otherwise knowing that the Dam Al-Amala program will compensate them for the difference.49 48 https://www.reuters.com/article/kuwait-wages/kuwait-hikes-state-wages-to-act-vs-inflation-idUSL5E8ED0PN20120313. 49 It is hard to empirically investigate this claim, as this would require labor force data before and after the introduction of the benefit to estimate the percentage change in Kuwaiti labor supply in response to wage changes due to the benefit (what is known as the wage elasticity of labor supply). It would also require firm-level employment data before and after the introduction of the benefit to estimate the percentage change in the demand for Kuwaiti labor in response to the wage benefit (what is known as the wage elasticity of labor demand). 105 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Initially, private sector employment rose sharply with introduction of the Dam Al-Amala program FIGURE 10 Number of employed Kuwaitis in the private sector 80,000 73,837 67,000 61,910 60,000 40,000 33,639 31,285 30,000 20,000 0 2005 2009 2014 2015 2018 2019 Source: 2005 and 2009 data are obtained from the Public Authority for Civil Information, taken from Hertog, 2019. Data from 2014 and 2015 are from the Kuwait Central Statistical Bureau. Data for 2018 and 2019 are from www.lmis.csb.gov.kw 106 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION The job seeker allowance program To support Kuwaiti job seekers, the Public Authority for Manpower (PAM) administers the job seeker allowance program and counseling services. The allowance ranges from 75 to 200 KWD, depending on education and marital status, for a maximum of one year after registering with PAM (Table 3). The benefit is conditional on searching for a job and is terminated if the beneficiary refuses a job offer or an opportunity to participate in training on three occasions. While the unemployment rate among Kuwaitis is not high, the importance of support for job seekers is underlined by the fact that about 45 percent of job seekers are unemployed for a year or more (Figure 11), a significantly higher share than in most OECD countries. The program is relatively small: total spending was about 1 million KWD in 2015/2016, and it is not widely used by workers and job seekers. For example, less than 10 percent of students surveyed during a job fair reported relying on PAM to look for a job (Figure 12). The amount of the job search allowance is below social assistance benefits offered by MoSA, encouraging some work-capable beneficiaries to not look for work. TABLE 3 The job seeker allowance varies by education and marital status Benefit (KWD per month) Single Married Bachelor’s degree or above 175 200 Diploma 150 175 Secondary education plus one year of training 125 150 Intermediate education plus two years of training 125 150 Intermediate education plus one year of training 100 125 Less than intermediate education plus one year of training 75 100 Nearly half of unemployed workers are long-term unemployed meaning out of work for a year or more 107 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION FIGURE 11 Job seekers by unemployment duration Percent (%) 25% 20.02% 22.38% 22.34% 20% 15% 14.89% 12.50% 10% 7.87% 5% 0% Less than 1 Month 1 to Less than 3 Months 3 to Less than 6 Months 6 to Less than 12 Months 1 Year to Less than 2 Years 2 Years and More Source: Kuwait LFS 2017 Few job seekers use PAM to find a job FIGURE 12 Survey respondents answer when asked how they expect to find a job Share of Respondents (%) 50% 42.3% 40% 36.5% 30% 26.0% 20% 15.4% 10% 9.6% 6.7% 1.9% 0% Connections or through family and friends By applying to jobs on the internet Through the CSC Through PAAET Through PAM Social Media Starting my own business Source: A 2019 survey performed to a convenience sample of 104 student participants of a job fair 108 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION PAM’s employment support services could be better targeted. More educated Kuwaitis receive a higher job seeker allowance, and 87 percent of workers who visited PAM at least once during 2019 were university graduates or diploma holders, as were well over half of workers placed by PAM in a private sector job. However, Kuwaitis with low levels of education are more likely to be unemployed and tend to have longer spells of unemployment (Figure 13). More broadly, PAM does not do enough to profile several characteristics of workers that tend to be associated with relatively poor labor market outcomes. For example, women, younger workers and workers outside the capital have relatively high unemployment rates; women, older workers, and workers outside the capital tend to suffer relatively long spells of unemployment; and among those of working age, women, older workers, and women outside the capital have the greatest probability of being neither employed nor looking for work.50 Labor market outcomes are poorer for less-educated Kuwaitis FIGURE 13 Unemployment indicators Duration of unemployment by education and gender Percent (%) Less than 3 Months 3 to 12 Months More than 12 Months Tertiary 33.1% Females Upper Secondary and Post-Secondary (Non-Tertiary) 59.1% Below Upper Secondary 44.2% Tertiary 21.2% Males Upper Secondary and Post-Secondary (Non-Tertiary) 48.0% Below Upper Secondary 49.7% 0% 50% 100% Unemployment rate by education Percent (%) 10% 8.6% 7.5% 6.3% 5.7% 5% 0% Intermediate University Secondary Primary and Higher Source: Kuwait LFS 2017 50 Data are from the Kuwait Labor Force Survey. The observation on the probability of being outside the labor force is based on a logistic regression that was calculated separately for men and women. 109 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Many countries profile job seekers based on a series of factors to identify groups that struggle most finding employment, and thus are most in need of support. Such factors may include family income status, history of employment, education, gender, region, and marital status. Various profiling tools are used; some are based on statistics, while others are based on rules. A statistics-based tool is described in Figure 14. The statistical model takes as inputs socioeconomic characteristics of the worker, indicators of his or her job search behavior, readiness for work based on education and health, and opportunities for employment based on local labor market conditions. This model generates a probability that the job seeker will be subject to long-term unemployment. This, in conjunction with a case worker’s subjective assessment, is used to develop an individual action plan (IAP) for gaining employment. FIGURE 14 An example of statistical-based profiling Job Placement Outcomes INPUT 1 Collected and monitored in order Socioeconomic to operationalize a statistical Age, gender, region, model in the future. The Outcomes income predictive capacity increases over time as more placement data is collected by PAM INPUT 2 Motivation Job search behavior INPUT 3 Job Readiness Statistical Long-term Case Worker Output Education, health Model Unemployment Assessment IAP Probability INPUT 4 Opportunities Caseworkers’ subjective assessment can still be informed by The main output of case Local labor market available data in the meantime, e.g., data-assisted profiling. management interventions is a conditions Statistical models can be piloted once job placement personalized individual action outcomes are being effectively collected in quantities that plan. Jobseekers receive full allow for accurate predictive labor market analytics support as long as they comply with this IAP Source: World Bank Global Knowledge 110 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION While PAM is focused on placing university graduates, its policies and approach are not sufficiently coordinated with the private sector, where 45 percent of registered job openings require below-tertiary education. For example, from January 1, 2019 to November 12, 2019, the Civil Service Commission received notices of 3,625 job opportunities for university graduates in the private sector, during the same period 14,390 job seekers with a university degree registered with PAM, indicating an excess supply of 10,765 job seekers (Figure 15). Figure 16 also documents several university and diploma majors that face high competition for available jobs. While this is largely due to lack of productive jobs in the private sector, the resulting gap between labor supply and labor demand, especially for university-educated job seekers, cannot be effectively addressed through PAM’s job search assistance. This implies the need for PAM to focus more strongly on Kuwaitis with below-tertiary education, for whom demand in the private sector may be higher. The supply of university graduates looking for work greatly exceeds the private sector demand FIGURE 15 Number of job opportunities for university graduates in private sector and number of job seekers who updated their data with the Civil Service Commission Number of job opportunities in the private sector received by the commission from 1/1/2019 to 11/12/2019 14,390 Number of job seekers who have uptaded 14,000 their data from 1/1/2019 to 11/12/2019 9,000 Difference 4,000 3,625 -1,000 -6,000 -11,000 -10,765 PhD Master’s University Graduate Diploma High school with 2 year training or more HIgh school with 1 year training High school High school with 1 year experience Intermediate with 2 year training Intermediate with 1 year training Intermediate with 3 year training (or more) Intermediate with at least 1 year experience Intermediate Vocational Training and Parallel Education Unknown Below Intermediate Below Intermediate with training Below Intermediate with at least 2 year experience Source: Labor Market in the State of Kuwait Report 2019 111 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION There is an excess supply of workers in several educational fields FIGURE 16 Number of jobs seekers and private sector jobs registered with PAM Panel A: University majors Difference between 800 the number of job 742 seekers and the need of the private sector 600 587 587 602 The need of the 481 private sector in 2018 458 399 411 Number of job seekers 400 370 383 registered in 2018 200 135 75 90 29 0 0 Industrial engineering Civil Engineering Jurisprudence and Mechanical Law and management systems its fundamentals Engineering Panel B: Diploma majors Difference between 400 the number of job 360 seekers and the need 300 of the private sector 248 259 217 223 The need of the 200 195 196 private sector in 2018 158 125 100 87 92 101 Number of job seekers 71 registered in 2018 1 25 0 Computer Resources Accounting Law Management Engineering Management Source: Labor Market in the State of Kuwait Report 2019 Job seekers registered with PAM, who receive unemployment benefit are also offered training courses. In 2015/2016, there were 5,860 trainees, but the number of trainees fell to 2,369 in 2016/2017, and 3,497 in 2017/2018. PAM also provides job search counseling to job seekers. However, there is no information on placement rates, or on the profile of job seekers who registered and were placed. There is no evidence to indicate whether such programs are closely coordinated with the private sector; or whether the programs are effective at helping job seekers. 112 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Social insurance transfers are disincentives to work > Generous pensions (with net replacement rates above typical international ratios), with short contribution periods, are financed in part by large government transfers to the system, and the pension system remains underfunded. > Provisions for early retirement, survivorship pensions and unemployment insurance discourage Kuwaitis, particularly women, from working longer. Social insurance transfers are designed to support Kuwaitis who have contributed to the system for their retirement and for spells of unemployment. The old-age pension system provides for generous net replacement rates: the monthly basic pension is 65 percent of the insured’s last monthly earnings, plus 2 percent for each year of contributions exceeding 15 years, up to 95 percent of earnings. The average pension in 2016 reached KWD 1,264, close to the average government salary and above typical international ratios. In 2018, the total number of retirees receiving KWD 2,000 or more as a monthly pension reached 15,275; 73,057 received KWD 1,000-2,000, and 34,356 received less than KWD 1,000.51 The average net replacement rate in Kuwait is much higher than in the average OECD country (Figure 17). Pensions in Kuwait are closer to salaries earned while working than in most countries 51 The Public Institution for Social Security (PIFSS). 113 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION FIGURE 17 Average pension net replacement rate Percent (%) 100 90.1 80 64.2 65 65.4 60 58.6 53.1 49.4 42.8 40 32 20 13.1 0 Singapore Malaysia New Zealand USA Estonia OECD Finland Kuwait KSA Luxembourg Source: https://data.oecd.org/pension/net-pension-replacement-rates.htm Note: Net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings These high levels of pension payment are financed by workers’ contributions of 5 percent of their salary, along with 10 percent from both the employer and the government. In 2018, annual government contributions reached above KWD 2 billion per year (4.6 percent of GDP). In addition, the government has provided large one-off injections of capital beyond statutory public contributions, given this expenditure, the pension agency has accumulated a large actuarial deficit in recent years and currently is only about 60 to 70 percent funded.52 Generous provisions for early retirement encourage early withdrawal from the labor market and shorten the working lives of many Kuwaitis. The system was recently revised to allow workers to retire five years earlier than the current age of 55 for men and 50 for women, if they accept a 2 percent reduction in their pension each year, known as the average actuarial decrement. As a result, the age for early retirement in Kuwait is one of the lowest in the world (Figure 18). Despite the average actuarial decrement, Kuwaiti pension provisions are still considered generous compared to other countries. Ten countries in the OECD do not allow early retirement in the public pension scheme. Overall, in countries that allow early retirement, the average actuarial decrement is between 4.6 percent and 5.6 percent, higher than Kuwait’s 52 IMF, 2018. Kuwait: Select Issues. IMF Country Report No. 18/22. 114 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION 2 percent. In addition, the qualifying conditions for early retirement in OECD countries are more rigorous than in Kuwait. These countries have strict contribution conditions for receiving intact early-retirement benefits. In Belgium, for example, early retirement requires 40 years of contributions before age 62, or 42 years of contributions before age 60. In Hungary, early-retirement benefits are provided by a program separate from the old‑age pension plan. Kuwaiti workers can retire very early FIGURE 18 Age for early retirement Years 65 65 63 63 63 62 62 62 61.8 62.8 62 62 62 62 60 60 60 60 60 55 50 49 49 45 Men Women Men Women Men Women Men Women Men Women Men Women Men Women Men Women Men Women Men Women Men Women Men Women Portugal Finland Switzerland Estonia Italy Singapore USA Luxembourg Malaysia KSA Kuwait UAE Source: https://www.oecd.org/els/emp/average-effective-age-of-retirement.htm Other aspects of the pension system reduce incentives to work. Survivorship benefits are provided to sons until the age of 18, but to daughters at all ages unless they find a job. Daughters who find a job lose the benefit as soon as they find employment (an implicit marginal tax rate of 100 percent on earnings). Survivorship benefits also are provided to a widowed wife permanently, even if she is of working age. By contrast, in many OECD countries, widowed persons need to be at or above retirement age to receive permanent survivorship pensions (except for those with a disability or who must care for dependent children). High levels of unemployment insurance may also discourage working. Workers employed for at least six months are entitled to 60 percent of their last salary for a period of six months upon unemployment, whether the worker was fired or resigned voluntarily. However, the take-up of insurance payments has been low, possibly due to low levels of layoffs and shifts between jobs among Kuwaitis. Social safety net transfers do not include activation conditions, or requirements to seek and accept employment. 115 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Social safety net transfers > Safety net assistance is not successfully targeted to intended beneficiaries. > Benefits are generous and are not tied to finding work. > There is a lack of systematic data analysis and follow-up mechanisms to assess the impact of assistance. The MoSA Family Allowance Program, the largest benefits and allowances program in terms of expenditures, is targeted at low-income families with a monthly income of less than KWD 559. A single-person household receives KWD 559, a two-person household receives an additional KWD 121 for a total of KWD 680. An additional KWD 65 and KWD 50 are available for students and those in training respectively. If the household member receives income, but it is less than KWD 559, the benefit is the difference between the income and benefit amount. The maximum benefit for one household is KWD 1,200 and the minimum is KWD 225. The program also provides benefits to specific categories of people, including widows, orphans, divorcees, the elderly, students, former and current prisoners, the families of prisoners, unmarried women, and married women. The number of individual beneficiaries and the amount per individual increased from 2010 to 2016, reaching almost 60,000 people and a total payment of KWD 263 million (Figure 19). The number of beneficiaries and individual payments under the Family Allowance Program rose, 2010 to 2016 116 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION FIGURE 19 MoSA family allowance program 2010-2016 No. of Individual Beneficiaries Amount of Benefit (million KWD) 80,000 300 263 250 No. of Individual Beneficiaries 60,000 Amount in million KWD 200 40,000 150 104 59,983 100 47,797 50,726 51,608 20,000 32,013 31,395 31,128 50 0 0 2010 2011 2012 2013 2014 2015 2016 Source: Kuwait Social Safety Net Report, 2018 Because it uses categorical targeting, most MoSA benefits go to individuals (mainly Kuwaiti women, who are housewives, divorced, or widowed) who may not fall within low-income households (Figure 20). In fact, women account for 76.4 percent of MoSA beneficiaries. This may undermine the efficiency and effectiveness of the program in directing resources exclusively to vulnerable households. Most of the benefits from the Family Assistance go to housewives and female divorcees 117 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION FIGURE 20 MoSA family allowance program 2016 No. of Individual Beneficiaries 70,000 Total Amount (KWD) 300,000,000 262,827,105 60,000 50,000 200,000,000 Amount of Benefits in KWD in 2016 No. of Individual Beneficiaries 40,000 30,000 100,000,000 20,000 10,000 0 0 Elderly Families of Students Incapable of Work Orphans Widowed Divorcees Sick Low Income Non-Married Women Families of Prisoners Married Women to Non-Kuwaitis Other Special Cases Kuwaiti Housewives Students Studying Abroad Total Source: Kuwait government report on social safety nets, 2018 A survey of MoSA beneficiaries highlights the disincentive to look for work. 84 percent of beneficiaries were not interested in finding a job, and 9.8 percent wanted to work in the public sector only. Close to 50 percent perceived MoSA benefits as “Ongoing assistance providing them with stability,” and 25 percent even saw them as “One of their rights and the least they can receive.” Only 25 percent of beneficiaries saw benefits as “Temporary assistance to overcome difficult conditions.” 57 percent of beneficiaries have been receiving benefits for more than two years and 40 percent for more than four years.53 In contrast, allowances for work-capable beneficiaries in many countries are not permanent but are limited to two or three years over an individual’s lifetime, and the beneficiary is expected to engage in an active job search or undergo re-training during this period. Incentives are particularly distorted among women who receive generous cash transfers that remove the need for them to work at all. A profile of female recipients of the Family Assistance Program indicates that 79 percent receive assistance as an individual (with no dependents), and 21 percent receive assistance for themselves and eligible household members. 88 percent of beneficiaries (including eligible dependents) reported that their 53 World Bank, 2015. Based on a representative sample of social assistance beneficiaries. 118 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION health in general is good or very good, and half of them have a bachelor’s or graduate degree; divorced and single women had among the highest rates of educational attainment. Married Kuwaiti women (housewives) make up 28 percent of MoSA beneficiaries, and data from the LFS confirms that married women are 3 percent less likely to participate in the labor market than non-married women while married men are 9 percent more likely to join the labor market than non-married men. Controlling for other determinants of employment, like literacy, level of schooling, age, and gender, the amount of government cash transfers received is significantly and negatively related to the probability of being employed. Finally, the level of benefits under the Family Assistance Program could discourage some recipients from seeking employment. The benefit is KWD 559 per month for an individual, whereas the job search allowance (see above) provides a maximum of KWD 200 per month for a duration of one year. This might induce some work-capable beneficiaries to remain on the social assistance benefit rather than obtain help for finding a job. The Family Assistance Program benefit can be particularly generous for some, given that 7 percent of beneficiaries’ report receiving more than one transfer within the same household 54 and benefits under the program are not linked to active job search efforts. 54 World Bank, 2015. 119 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION Energy and water subsidies are the bulk of social expenditures > The government spends considerable amounts on regressive subsidies for fuel, electricity, and water. The prices of fuel, electricity, and water services for Kuwaiti citizens are set below average prices in the GCC and the US (Table 4). Subsidies are an unequal and inefficient way of sharing wealth. They are regressive, as wealthier households consume more energy, and they are costly, amounting to 4 percent of GDP.55 Low energy prices present a large fiscal “opportunity cost” in terms of foregone revenue that could be used for other purposes. Moreover, they encourage excessive consumption by citizens and inefficient investment by the private sector. Energy prices in Kuwait are low, but subsidies are an inefficient way of sharing wealth TABLE 4 Comparison of prices for energy products between the GCC and the US (October 2018 or latest available) Gasoline Diesel Electricity (USD per liter) (USD per KWh) Kuwait * 0.35 0.38 0.02 Bahrain 0.53 0.42 0.04 Oman 0.61 0.75 0.04 Qatar 0.58 0.56 0.05 Saudi Arabia 0.54 0.13 0.10 UAE 0.68 0.75 0.12 GCC average (excluding Kuwait) 0.59 0.52 0.07 U.S. Prices 0.83 0.87 0.13 Source: Prices for GCC countries come from country authorities and are averages for 90 and 95 octane gasoline. U.S. gasoline (average for mid and high grade) and diesel prices come from the U.S. Energy Information Agency (EIA) and are adjusted for taxes. Electricity tariffs for the United States include taxes and come from EIA * For Kuwait, nationals were exempt from the August 2017 electricity price increases. The overall price is a weighted average of differentiated prices across different sectors 55 IMF, 2019. 120 PART 1 | DIAGNOSTIC | 4. SOCIAL PROTECTION References > Campos, Maria, Domenico Depalo, Evangelia Papapetrou, Javier J. Pérez, and Roberto Ramos. 2017. Understanding the public sector pay gap. IZA Journal of Labor Policy, 6(1):7. > Hertog, Steffen. 2019. Reforming wealth distribution in Kuwait: estimating costs and impacts. London School of Economics. > International Monetary Fund. 2018. Kuwait: Select Issues, IMF Country Report No. 18/22. > Kuwait Labor Force Survey. 2017. State of Kuwait. > Kuwait Social Safety Net Report. 2018. Prepared by the National Development Research Center under the supervision of the General Secretariat of the Supreme Council for Planning and Development. > Labor Market in the State of Kuwait Report. 2019. Workforce Facts for a Year as on 2019-06-30. > OECD. n.d. Ageing and Employment Policies - Statistics on average effective age of retirement. https://www.oecd.org/els/emp/average-effective-age-of-retirement.htm. > OECD. n.d. Average Duration of Unemployment. https://stats.oecd.org/index.aspx?DataSetCode=AVD_DUR. > OECD. n.d. Net Pension Replacement Rates. https://data.oecd.org/pension/net-pension-replacement-rates.htm. > OECD. 2018. Pensions Outlook: Chapter 7: Are Survivor Pensions still Needed? > OECD. n.d. Social Spending database. https://data.oecd.org/socialexp/social-spending.htm. > Public Authority for Manpower (PAM). 2020. Report on University Graduates in Kuwait. > The Kuwait Central Statistical Bureau. www.lmis.csb.gov.kw. > World Bank. 2015. Developing a Strategic Social Safety Net Framework for Kuwait: Prepared by the World Bank to the Ministry of Social Affairs and Labor. Washington, D.C. The World Bank Group. 121 5. DIAGNOSTIC HUMAN CAPITAL PART 1 123 Introduction 124 Education spending is high 125 Educational outcomes and quality of education 138 Maximizing human capital 151 References 153 Annex 122 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Introduction Human capital – the aggregation of knowledge and skills of a population – enables individuals to maximize their earnings potential via increased productivity. 56 Higher productivity in Kuwait is expected to facilitate the diversification of production to non-oil activities and help the country transition to a knowledge-intensive or knowledge-based economy, essential for competing in the 21st century. There is evidence from other countries that higher labor productivity would increase private sector salaries,57 this would help attract more workers to the private sector, away from the public sector, one of the main aims of the reforms. Productivity in Kuwait is held back by several factors, this section focuses on how to improve Kuwaiti workers’ skills and to increase supply of higher skills. The main finding here is that the education system needs to shift its focus from quantity to quality. Children in Kuwait complete 12.4 years of preprimary, primary and secondary school by age 18, placing Kuwait at the upper end of the educational attainment spectrum globally. However, across countries, economic growth is only weakly related to the average number of years children spend in school, but strongly related to the learning that takes place while there, 58 and this is where Kuwait performs poorly. When years of schooling are adjusted for quality of learning, the average of 12.4 years of schooling is only equivalent to 7.6 years of learning, resulting in a learning gap of 4.8 years. Because of these low learning outcomes, children born in Kuwait today will reach only 58 percent of their productive potential as adults. This is the lowest level for all countries that have the same per capita income as Kuwait or higher, as measured by the World Bank’s Human Capital Development Index (2020).59 As one of the world’s highest spenders per capita on education, Kuwait’s per student expenditures are comparable to levels in countries with similar incomes (for example, Finland), but student learning outcomes are not much better than that of Uganda. The next section provides a brief overview of the education system. The third section discusses the quality of education, and addresses preschool education, and learning outcomes, including early grade reading, science, and mathematics. It also describes the gender gap; selected drivers of low quality, including treatment of ICT; teaching and learning processes; absenteeism; and the promise of educational reform. The fourth section considers skills and the potential for moving to a knowledge-based economy, and labor market exclusion. Health is also an important determinant of productivity, but in Kuwait the educational constraints to better productivity are more dominant (Box 2). 56 Becker, 1962. 57 Card, 1999. 58 Authors’ calculations based on data from Hanushek and Woessmann, 2012, and World Bank, 2018:46, and measured based on performance in standardized international assessments. 59 Data are from the World Bank World Development Indicators (WDI), Human Capital. 123 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Education spending is high > The government has devoted enormous resources to education. > The administration of education is highly centralized. Fueled by an interest to diversify away from the oil sector, education has played a central role in Kuwait’s development strategy. The right to education was enshrined in Article 40 of the Kuwaiti Constitution, and since independence in 1961 Kuwait has allocated a generous share of its government budget to education, in recent years the allocations have been among the highest in the world. Compulsory schooling is free of charge and covers all children from the age of 6 through 14 years old. In addition, higher education has been a key focus of the government since independence, although the focus has been on expanding access, rather than on improving quality. Education also features prominently in Kuwait’s Vision 2035, where the goal of developing a knowledge-based economy requires the country to modernize the education system by rewriting the national curriculum and ensuring that this is aligned to the needs of the labor market, particularly to the demands of the private sector. This supports Vision 2035’s goal of developing a capable and productive workforce that can increase the size of the private sector relative to the public sector. Kuwait has public and private schools, which are classified by location, the instructional medium adopted, and gender – schooling is segregated by gender.60 The Kuwaiti educational structure is highly centralized in terms of policy formulation, program development, preparation of content and implementation. 60 K-12 education in Kuwait is split into three levels: primary school (ages 6 to 10, Grades 1 to 5), intermediate school (ages 11 to 14, Grades 6 to 9), and secondary school (ages 15 to 17, Grades 10 to 12). 124 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Educational outcomes and quality of education > Pre-school coverage and quality are low. > Students’ reading, mathematics and science skills are well below international comparators. > Girls perform much better than boys. > Use of computers in the classroom is low. > There is an over emphasis on obedience and memorization. > The system is centralized. > High rates of absenteeism among students and teachers impairs quality. Numerous studies indicate that Kuwait’s education system fails to adequately prepare students for their future careers. For example, AlBadir (2013) finds that employers believe that the ‘quality of education provided by institutions is low’ and there is a need to increase communication across stakeholders in the whole sector. A lack of skills, motivation and weak communication skills are identified as key factors affecting the quality of graduates. Pre-school education High-quality early childhood development (ECD) programs can greatly improve future educational attainment and earnings.61 Kuwait recognizes the importance of investments in early childhood development programs,62 however, pre-school enrollments are low and have declined over several years. After rising from around 35 percent in the mid-1970s to a peak of 84 percent in 2008, the share of Kuwaiti children enrolled in pre-primary programs has fallen to 62 percent (Figure 1).63 In 2017, the last year for which comprehensive international data are available, this share was lower than that of all OECD countries, even though this is high within the context of GCC countries. 61 See Dua et al., 2016 for the impact on a child’s development, Aboud and Hossain, 2011, and Berlinksi, Galiani and Gertler, 2009 on the impact on student performance, and World Bank, 2018: 112-118, on the impact on a broad range of skills. 62 In a meeting in October 2016, then Minister of Education, Dr. Bader Al-Essa, stated that “Kuwait needs to deeply analyze its current situation in terms of Early Childhood Development and inclusive education”. https://www.worldbank.org/en/news/press-release/2016/10/16/early- childhood-development-inclusive-education-keystones-in-kuwait-s-reforms. 63 The reasons for this decline in participation is not clear, though there is some evidence to suggest that families do not believe that public pre- primary programs really add value. 125 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Pre-primary enrollment is low and declining FIGURE 1 Pre-primary enrollment in Kuwait Pre-primary enrollment in Kuwait, 1970-2018 % Gross, to replace with net 90 60 62.5 37.9 30 0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2018 Pre-primary enrollment (% net), 2017 99.5 97.0 95.2 94.9 94.3 93.1 93.1 92.2 90.2 94 100 88.8 88.4 87.3 85.4 83.4 88 83.3 79.2 75.9 75.5 72.7 72.3 80 72.2 71.2 64.6 68 63.7 59.6 60 53.1 43.5 40 19.7 20 0 Saudi Arabia Oman Bahrain Qatar United States Jamaica UAE Mexico Ireland Greece Chile Switzerland Poland Finland Malaysia Australia Austria Lithuania Luxembourg Italy Portugal Spain Denmark New Zealand Iceland Netherlands Korea Norway Belgium France Kuwait Source: World Bank World Development Indicators; and UNESCO Although the ratio of pupils to staff is lower in Kuwait than in almost all OECD countries,64 only three-fourths of pre-school teachers in Kuwait are considered well-equipped with the necessary pedagogical skills to support the developmental requirements of children in pre- school settings and trained to use classroom teaching-learning materials in an effective manner (Figure 2). This share is below that of many comparator countries, including the UAE and several other MENA countries. 64 Data from the Ministry of Education. 126 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Teachers in public pre-primary programs felt that they were inadequately trained on knowledge, attitudes and practices and did not receive any specialist training for dealing with young children. Parents in Kuwait seem to prefer private versus public ECD programs, with a concern that public schools do not prepare children well for primary school,65 66 more research is necessary to adequately evaluate the quality of pre-primary programs. Pre-school quality is low FIGURE 2 Trained pre-school teachers, male and female Percent (%) Jordan 100 Oman 100 Palestine 100 Saudi Arabia 100 UAE 100 Malaysia 99.6 Vietnam 98.7 China, Macao 98 China, Hong Kong 95.6 Costa Rica 87.5 Mexico 84.3 Arab States 84.1 Kuwait 75.4 Bahrain 51.8 Source: UNESCO 2015 Skills levels in reading, mathematics and science Early reading skills help improve student learning outcomes throughout the schooling cycle (including university) and can foster superior cognitive and non-cognitive skills with eventual benefits for the workplace.67 65 Although it is also possible that parents prefer private kindergartens because children are introduced to the English language, while children in public ECD programs are not. https://research.ncl.ac.uk/media/sites/researchwebsites/arecls/alshatti_vol8.pdf. 66 Al Shatti, 2011. 67 See Hernandez, 2011, Bigozzi et al., 2017. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5306315/ and World Bank, 2018: 74 for the impact of early reading skills on educational outcomes. 127 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL The Kuwaiti school system places great emphasis on reading and the acquisition of basic language skills in the early grades, and about 6 percent of all instructional time in primary school is spent on reading instruction (a significant share of school time).68 Nevertheless, more than half of Kuwaiti children aged 10 test below the minimum reading proficiency level on international reading assessments (Figure 3), a much higher level than in most high-income economies.69 More than half of Kuwaiti ten-year olds fail to meet minimum reading proficiency FIGURE 3 Learning poverty: share of children at the end-of-primary age below minimum reading proficiency adjusted by out-of-school children Percent (%) Percent (%) 60 80 51 50 60 51 40 30 40 20 20 10 5 0 0 Netherlands Kazakhstan Sweden Ireland Austria Finland Singapore Lithuania Russia United Kingdom Italy Denmark Macao SAR, China Canada Spain Germany Slovenia Hungary Norway Poland Belgium Portugal France United States Australia New Zealand Israel Bulgaria Georgia China Malta Bahrain UAE Qatar Iran Saudi Arabia Oman Morocco Kuwait Egypt OECD Average Kuwait Source: World Bank WDI and UNESCO, Education Indicators 68 Kuwaiti children attend 255 hours of language-oriented classes in Grades 1 and 2, 229 hours in Grades 3 and 4, and 153 hours in Grades 5 and 6. The calculation assumes that the Kuwaiti school year consists of about 168 working days and on the curricular design of having ten 45-minute classes per week in the first grades, nine in Grades 3 and 4 and six in Grades 5 and 6. A quarter of this time is spent on reading instruction. 69 The PIRLS assessment employs four benchmark points of Advanced (625), High (550), Intermediate (475) and Low (400) that are set by the International Association for the Evaluation of Educational Achievement for PIRLS, based on an analysis of score points. In the most recent PIRLS assessment for Kuwait in 2016, 1 percent reached the Advanced benchmark, 6 percent reached the High benchmark, 22 percent reached the Intermediate benchmark and 51 percent reached the Low benchmark. Kuwait scores the lowest among participating GCC countries with 63 percent of Saudi, 59 percent of Omani, 69 percent of Bahraini, 66 percent of Qatari and 68 percent of Emirati children all hitting the ‘Low Benchmark’. 128 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Student performance on science and mathematics is low. Only 37 percent and 49 percent of 8th grade Kuwaiti schoolchildren reach the low international benchmark in the TIMSS mathematics and science assessments, respectively, much lower than most comparator countries (Figure 4). Shares in the best performing countries in both exams are in the high 90s. These poor results may be partly tied to the low levels and quality of pre-school training (see above), as evidence suggests that scores on tests of numeracy (ENT) and literacy (ELT) before school age (based on self-reporting by parents) are good predictors of 4th grade math attainment.70 Kuwait 8th graders score poorly on international tests of math and science FIGURE 4 Share (%) of 8th graders reaching TIMSS low international benchmark (scoring at least 625) TIMSS Science TIMSS Math 98 Japan 98 97 South Korea 99 97 Singapore 99 97 Slovenia 95 96 Canada 96 96 Hong Kong 98 96 Russia 95 94 Ireland 94 94 Lithuania 92 93 US 91 92 Hungary 88 92 Sweden 91 88 New Zealand 85 88 Norway 90 83 Turkey 70 79 Malta 84 77 Malaysia 76 76 UAE 73 75 Chile 63 73 Bahrain 75 72 Oman 52 50 Lebanon 71 49 Kuwait 37 49 KSA 34 47 Morocco 41 42 Egypt 47 Source: Education Statistics database by World Bank, from the Trends in Mathematics and Science Study (TIMSS), 2015 70 The ENT communicates parents’ reports on their child’s ability to count, recognize shapes, understand written numbers, and write numbers. The ELT asks whether children can recognize letters, read some words or sentences, write letters or words. 129 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL The gender gap in skills In Kuwait, boys tend to fare much worse than girls in some assessments. This reverse gender gap is observed in all GCC countries,71 Kuwait’s reverse gender gap in reading is higher than all OECD countries (Figure 5). One reason may be the segregation of schools by gender for both students and teachers, and the more limited labor market opportunities for women (Saudi Arabia faces similar issues). Given the higher salaries and wider variety of professional opportunities available to men, it is likely that male teachers are not recruited from the top-end of the academic and/or ability distribution, but women are. In short, girls’ schools may get better teachers than boys’ schools. This is consistent with findings that female teachers tend to take more direct ownership of their students’ learning outcomes than male teachers (female teachers ‘strongly agreed’ that student achievement is directly related to teacher’s effectiveness, while male teachers only ‘slightly agreed’).72 Moreover, teachers in girls’ schools seemed to have higher expectations of their students’ abilities relative to teachers in boys’ schools. Reading proficiency in 10-year-old girls is much higher than for boys FIGURE 5 Reverse gender gap in minimum reading proficiency at the end-of-primary age Percent (%) 20 14.1 15 10 5 0 Portugal Slovak Republic Ireland Netherlands Poland United States Austria Canada Sweden Bulgaria Denmark United Kingdom Italy Hungary Finland Lithuania Latvia Russia Singapore Czech Republic Spain Germany France Belgium Slovenia Norway Australia New Zealand UAE South Africa Qatar Oman Iran Bahrain Kuwait Source: World Bank World Development Indicators; and UNESCO Education Indicators 71 See El-Saharty, et al., 2020, and Lynn and Mikk, 2009. In general, the gap is larger across a range of MENA and GCC countries compared to other countries in the PIRLS or PISA samples. 72 Chahine and Khan, 2015. 130 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Similarly, 8th grade girls tend to perform much better in math and science tests than 8th grade boys (Figure 6),73 a ‘reverse gender gap’ much greater than in most high-income countries. One reason may be that in most western countries, cultural stereotypes suggest that female students will need special handholding to succeed in science, technology, engineering and mathematics (STEM) courses, which translates into higher expectations and encouragement for boys compared to girls, and thus poorer performance by girls.74 This ‘reverse gender gap’ is large FIGURE 6 Mean performance on TIMSS math and science scales for 8th grade students Mean performance on the math scale for 8th grade students Difference in points between boys and girls 20 0 Negative gender gap -20 Girls score higher -26 than boys -40 Chile Russia Hungary Italy Sweden Hong Kong Canada Ireland Slovenia Lithuania Australia United States Korea Norway Morocco Georgia New Zealand Japan Turkey Qatar Singapore UAE Saudi Arabia Bahrain Oman Kuwait Mean performance on the science scale for 8th grade students Difference in points between boys and girls 40 20 0 -20 Negative gender gap -40 Girls score higher -60 than boys -72 -80 Hungary Chile Hong Kong Italy United States Canada Australia Russia Korea Singapore Lithuania Sweden Norway Georgia New Zealand Japan Ireland Slovenia Morocco Turkey Qatar UAE Oman Bahrain Saudi Arabia Kuwait Source: World Bank Education Statistics Database, Trends in Mathematics and Science Study (TIMSS) 2015 Despite superior performance on international tests by girls, fewer girls than boys pursue education in STEM fields at university.75 76 73 Although Kuwaiti boys have been seen to do better on some items and demonstrate greater skills in the cognitive domain area of reasoning. 74 Ahmad and Greenhalgh-Spencer, 2017. 75 Note that until recently, men had a lower entry threshold than women in certain colleges, particularly for STEM programs, in Kuwait University (this practice was overturned in a recent court case). 76 Ahmad and Greenhalgh-Spencer, 2017. 131 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Drivers of low-quality education Various aspects of the education system need to be strengthened to improve quality of learning. International assessments find that no single factor determines program quality77 and there are very few quick fixes to addressing the issue of learning outcomes.78 In a very interesting and in-depth study on the performance of Kuwaiti students in the TIMSS assessments, Ahmad (2016) illustrates that there is a need to further align curricula, instruction and assessments if Kuwait wishes to see continued and sustained improvements in student learning outcomes. What follows looks at selected issues that may help determine quality of education in Kuwait, including deployment of information and communication technologies (ICTs), the teacher reward structure, various aspects of teaching and learning processes, and absenteeism of teachers and students. Teaching and learning processes Surveys indicate considerable skepticism about the ability of the Kuwaiti education system to support private sector entrepreneurship. While two-thirds of respondents indicate they are very or fairly satisfied with the quality of schools in Kuwait, only 35 percent believe that the formal education system provides people with the skills and/or training to start a business.79 These concerns are in part driven by the emphasis on obedience and memorization in Kuwaiti education. Surveys show that in Kuwait, obedience is considered much more important than imagination for education (Figure 7). By contrast, the two values are ranked close to equal in the United States, and imagination is ranked higher than obedience in several OECD countries and China. Similarly, students spend a lot of time on memorization: 45 percent of Kuwaiti students in 8th grade are asked to memorize science facts and principles for every lesson or almost every lesson, compared to an international average of 30 percent.80 This level of memorization is the median share in GCC countries, but greatly exceeds the average of 30 percent in OECD countries. Memorization and obedience are important learning tools, however, an excessive emphasis on obedience and memorization may crowd out the development of critical thinking skills and the ability to apply acquired knowledge to real-world problems, both of which are expected of strong job candidates in a modern, knowledge-based economy (World Bank, 2019a: 7-8). 77 For example, the education systems that consistently reported the lowest number of years of teacher experience at the grade 4 level included the worst performer (Kuwait) and the best performer (Singapore) in the set of countries for that year. 78 Burroughs et al., 2019. 79 World Values Survey, 2014. 80 World Bank Education Flagship Report, 2018. 132 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Kuwait overemphasizes obedience and underemphasizes imagination for children FIGURE 7 Important child qualities: obedience vs. imagination Percent (%) of respondents Obedience Obedience Imagination Imagination 70 60 56 50 40 30 20 28 10 0 Estonia Kuwait Jordan Mexico Qatar Chile Slovenia Singapore Russia Poland Spain Australia United States Netherlands Malaysia New Zealand Hong Kong Lebanon Romania Germany Sweden China Japan Source: World Values Survey, 2014 Poor performance on standardized tests, may be the lack of a student-centered approach to teaching. Teaching reading using a student-centered approach would involve monitoring each student’s progress so that tailor-made efforts can be used to identify and address problems early on, to accommodate different approaches to teaching the subject based on the needs of individual students. Given that Kuwait has a national curriculum, teachers have very little authority on what material is taught, and how much instruction time is given to each subject, and that Kuwaiti teachers are expected to follow the core curriculum irrespective of the learning ability by students. Furthermore, a study on the performance of Kuwaiti students in the TIMSS assessments81 shows that curricula and textbooks were not fully aligned, and the same was true for classroom instruction, suggesting a need to more closely align the curriculum with the needs in the classroom. 81 Ahmad, 2017. 133 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Absenteeism High rates of student and teacher absenteeism limit student-teacher interactions, reduce the opportunity for students to learn (World Bank, 2018: 81-82), and lower students’ educational achievement. 82 Eighteen percent of fourth graders report missing school at least once a week, while only 53 percent claim they have never or almost never missed school (Figure 8). Internationally, only 10 percent of fourth graders report missing school at least once a week, while 67 percent report that they never missed school. A student’s decision to go to school is affected by concerns related to the student, the school and the family.83 Student-related factors include ‘peer pressure’, in that students collectively decide to skip school. Students also report a degree of lethargy in participating and feeling too lazy to get out of bed.84 One of the most frequently mentioned factors is private tutors, many parents and students believe that school does not offer the needed grounding to get into top-ranked universities, and therefore engage a private tutor to move the learning goals. Teachers observe that students have no fear of retribution as there is very little chance of disciplinary action. Student absenteeism is high in Kuwait FIGURE 8 Frequency of 4th grade students’ absences Percentage (%) of students Never or Almost Never Once a Month Once Every Two Weeks Once a Week or More 100% 18 80% 9 60% 20 40% 53 20% 0% Indonesia Saudi Arabia UAE Bahrain Chile Denmark Oman Georgia Jordan Slovak Republic Kazakhstan Slovenia Poland Bulgaria International Avg. United States Italy Canada Turkey Morocco Hungary Singapore Serbia Australia Czech Republic Northern Ireland Netherlands England Ireland Portugal Spain Belgium Chinese Taipei France Germany Russia Lithuania Cyprus Croatia Sweden Finland Hong Kong SAR Japan Korea Kuwait Qatar Source: TIMSS 2015, Retrieved from Boston College, TIMSS and PIRLS International Study Center (http://timssandpirls.bc.edu/timss2015/ international-results/) 82 See Abadzi, 2009, and Gottfried, 2010. 83 Alsuwaileh, 2015. 84 A concern reiterated by parents. 134 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL High teacher absenteeism affects the quality of education. Sixteen percent of grade 8 students attend schools whose principal reports that teacher absenteeism is a “serious problem,” compared to only 4 percent of grade 8 students in the OECD.85 ICT usage The use of computers in the classroom is less frequent in Kuwait than in other high-income countries. For example, about 12-13 percent of Kuwaiti mathematics students use computers in school for various purposes, while the average for high-income countries ranges from more than a quarter to a third (Figure 9). However, increasing the availability of computers in school does not necessarily lead to an improvement in the quality of learning. 86 The use of computers will increase quality only if teachers are trained to use the technology to support student development and to ensure that it complements other efforts in the education sector. There are no rigorous evaluations of ICT usage in Kuwaiti schools and teachers have not received the necessary training to use technology in an effective manner to improve outcomes. A wide variety of qualitative studies indicate that when computers are available, associated infrastructure such as classroom networks, interactive whiteboards, and similar equipment is not.87 Greater use of computers, and improved training for teachers should be part of a long-term plan for the integration of ICT into teaching and learning activities. Kuwaiti math students use computers less than math students in other high-income countries 85 TIMSS, 2015. 86 The 2012 PISA results showed that students who were more likely to use computers in school showed a decline in learning outcome measures, and Rabayah, 2014, finds no significant correlations between ICT use and average student achievement. See also Barrera-Osorio and Linden, 2009, and World Bank, 2018: 145-147. However, numerous other studies find the availability of computers for use in lessons is related to higher achievement results in both mathematics and science in high-income countries. 87 Alharbi, 2012. 135 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL FIGURE 9 Computer activities in math lessons Percent (%) students whose teachers have them use computers at least monthly Kuwait 40 International average 33 26 27 20 12 12 13 0 To Practice To Explore To Look Up Skills and Mathematics Ideas and Procedures Principles and Information Concepts Source: TIMSS 2015 International Database Greater emphasis on ICT in schools may require changes to the relative position of religious instruction versus computer training. An analysis of the salaries of public school teachers shows that religion teachers have higher salaries than computer science teachers. Even though teacher salaries in Kuwait are largely determined by years of service, lower salaries disincentivize aspiring computer science teachers from joining the profession. It also may be necessary to evaluate the time devoted to religion in the learning process. Students in Kuwait spend 13 percent of instruction time on religious instruction, compared to an average of 5 percent in OECD countries. The amount of time dedicated to individual subjects rests ultimately on a value judgment, and will need to take into consideration a variety of student needs: student attention is limited, and more religion classes may mean less mathematics, computer science, and other subjects.88 The promise of educational reform Improving educational quality would significantly raise Kuwaiti productivity and incomes over the long term. To illustrate the potential of educational reforms, we ran a simulation assuming that these reforms had been implemented, beginning in 2020. The results show that this would raise the average cognitive skills of children born in 2014 or later by the equivalent of 166 points on the Program for International Student Assessment (PISA) scale, reaching the theoretical frontier of 549 points in the harmonized test score.89 These children would begin entering the workforce in 2029. 88 World Bank, 2019a. 89 Hanushek and Woessmann, 2008. 136 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL The simulations indicate that compound average annual growth in output per worker from 2030 to 2050 would be close to one percentage point higher as a result of the educational reforms. More skilled workers will be able to use capital more efficiently, and the capital intensity of production (here measured by an index of capital relative to hours worked) would be a third higher than in the baseline by 2050. While the rate of return to physical capital investment would be the same under both the baseline and reform scenarios, investment in physical capital would rise by almost four percentage points of GDP (Figure 10).90 The compound average annual GDP growth rate from 2030 to 2050 would rise from 6.9 percent in the baseline scenario to 8 percent under the reforms. By 2050, GDP would be higher by 23 percent. Given that human capital can be a key determinant of export performance and FDI, improvements in human capital could support efforts to diversify the Kuwaiti economy, a key goal of the labor market strategy. In a separate exercise, IMF estimates suggest that raising the quality of education in Kuwait to match that of the top 20th percentile of advanced economies would boost non-oil exports by around 3 percent of non-oil GDP over the long term.91 Improving learning outcomes would boost growth FIGURE 10 Projected impact of educational reform on investment, productivity, and GDP Difference from baseline Percentage point 4.0 3.5 3.5 3.0 2.5 2.0 1.5 1.1 1.1 1.0 0.5 0 Investment Labor productivity growth GDP growth (% GDP) (percentage points) (percentage points) Source: Authors’ calculations Note: Assumes educational reform begins in 2020. Investment/GDP is in 2050; growth of labor productivity and GDP are average over 2030-2050 90 More detailed tables showing the simulation results are provided in the Annex. 91 Source: World Economic Forum (WEF). These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and information availability. They may also not reflect more recent important structural transformations. 137 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Maximizing human capital > Educational attainment in the entire workforce is low. > The share of jobs that predominantly involve routine tasks is high. > Skills mismatches are high. > Education, gender, and age are correlated with labor market exclusion. The availability of skills has implications for productivity, growth, and welfare. This sub- section analyzes how the level of skills for the entire workforce, particularly the availability of a large supply of low-skilled foreign workers, affects the potential for transitioning to a knowledge-based economy. It also discusses how the level of skills of Kuwaiti workers affects inclusion. Workforce skills The combination of the lower quality of education and the availability of foreign workers with low educational attainment results in a low-skilled workforce. The average level of education for workers in Kuwait (including foreign workers) has improved in recent years, with a rise in the share of workers with an intermediate or secondary school diploma (Figure 11, top panel). Kuwait has a lower share of workers with tertiary education among workers aged 25-34 years old (27 percent) compared to most high-income economies (42 percent) (Figure 11, bottom panel). This is due to the low share of tertiary education among expatriate foreign workers. A small share of workers has a university degree 138 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL FIGURE 11 Employment by educational level and educational attainment of 25-34 year-olds Distribution of employment by educational level, percent (%) Primary Intermediate Secondary University 60 51.3 45.2 40 26.6 18.5 20 18.5 10.7 10.5 7.3 0 2016 2018 2014 Source: Kuwait Labor Force Survey 2017 Educational attainment of 25-34 year-olds, percent (%) Percent (%) Tertiary education Tertiary education Upper secondary or post-secondary non-tertiary education Upper secondary or post-secondary non-tertiary education Below upper secondary education Below upper secondary education 100 80 60 74 40 20 9 0 16 Korea Russia Canada Ireland Lithuania Luxembourg Australia Switzerland United Kingdom United States Norway Israel Netherlands Sweden Belgium Iceland France New Zealand Denmark OECD average Spain Estonia Poland Greece Latvia Finland Slovenia Austria Argentina Slovak Republic Portugal Chile Czech Republic Turkey Germany Hungary Colombia Costa Rica Italy Mexico Brazil China Kuwait Indonesia India South Africa Source: OECD Education Statistics Establishing a more competitive, knowledge-based economy will require reducing the reliance on routine tasks in workplaces. Around 32 percent of workers in Kuwait have jobs that are classified as routine tasks, for example on assembly lines or in construction, compared to only 20 percent in the United States (Figure 12). By contrast, the share of Kuwaiti jobs requiring mostly cognitive skills, essential for a highly productive, knowledge- based economy, is 27 percent, lower than in many other countries with the same income level.92 In the US, 37 percent of tasks mostly involve the use of cognitive skills. 92 World Values Survey, 2014. 139 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Interestingly, the share of workers involved in low routine-intensive tasks is 14.4 percent, compared to only 10.4 percent in the United States. The high shares of both high routine- intensive and low routine-intensive occupations reflects the concentration of the economy in the oil sector, the large number of Kuwaitis engaged in public sector work, and the large number of poorly educated expatriate workers occupying a sizeable share of the private sector. A large share of workers perform routine tasks in their jobs FIGURE 12 Task composition of employment by routine intensity Percent (%) High Medium low Medium high Low 100 14 80 25 60 28 40 20 32 0 Mexico Spain Russia Argentina Malaysia Kuwait Qatar Poland Hong Kong Japan South Korea Australia United States Slovenia Germany Singapore Estonia Sweden Netherlands Source: World Values Survey, 2014 The supply of highly skilled workers in Kuwait is concentrated in public sector jobs, the oil sector, and in financial services. Indeed, the share of workers with tertiary education or above in education and health services substantially exceeds the equivalent share in the EU-28 countries (Figure 13). By contrast, most sectors that are dominated by private 140 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL sector activity have a much smaller share of tertiary-educated workers than in the EU-28 countries. This reflects high levels of educational attainment among Kuwaitis, who work predominantly for the public sector (see section on public sector), and the low level of education of foreign workers, who mostly work for the private sector. Highly educated workers are relatively more common in education and health FIGURE 13 Share of high-skilled employment by sector Share (%) of workers with tertiary education or above Kuwait 100% EU28 80% 60% 40% 20% 0% Education Professional, scientific and technical activities Financial and insurance activities Human health and social work activities Real estate activities Public administration and defense, compulsory social security Wholesale and retail trade, repair of motor vehicles and motorcycles Electricity, gas, steam and Information and communication Accommodation and food service activities Construction Transport and storage Mining and quarrying Manufacturing industry Agriculture, forestry and fishing Arts and entertainment Administrative and support services activities Water supply, sanitation activities, waste management and treatment air conditioning supply Source: Kuwait Labor Force Survey 2017; and Eurostats Another way to look at this issue concerns the significant mismatch between workers’ educational attainment and the qualification required for their jobs, based on international assessments of requirements for similar jobs in other countries. If education attainment is higher than this international standard, workers are classified as over-qualified; if the opposite is true, they are classified as underqualified. Over three-fourths of the jobs in Kuwait are characterized by skills mismatches, much higher than in any other high-income country, and more than twice the average level in the OECD (Figure 14). The high level of skills mismatches is largely due to a high share of foreign workers whose educational attainment is below that typically required for each kind of job by international standards. Kuwait fills too many positions with workers with lower educational attainment than the same occupations in other OECD countries. Lower education attainment is usually associated with lower technology use, and lower productivity. 141 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Skills mismatches are higher in Kuwait than in any other high-income country FIGURE 14 Qualification mismatch by nationality and by type Share (%) of total no. of workers Share (%) of total no. of workers Overqualified Underqualified 77% of all workers in Kuwait Skills mismatch driven by suffer from skills mismatch; low skills of non-Kuwaitis. 2X OECD Average Still, 31% of Kuwaiti 100% 100% workers show a skills gap (majority underqualified) 77.2 % 50% 50% 61.9% 35.7% 24.3% 17.5% 0% 0% 6.8% Kuwait OECD average* Kuwaiti Non-Kuwaiti Qualification mismatch by type Share (%) of total no. of workers Overqualified Underqualified 80 60.2 60 17.0 16.8 40 18.9 20 0 Czech Republic Slovak Republic Poland Slovenia Finland Latvia Hungary Luxembourg United States Denmark France Belgium Lithuania Norway OECD Switzerland Austria Sweden Germany Netherlands Canada Estonia Italy Iceland Australia New Zealand United Kingdom Spain Portugal Turkey Greece Ireland Chile Mexico Kuwait Source: Kuwait Labor Force Survey 2017; and OECD Skills for Jobs Indicators 2017 142 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Box 2 Healthy people are productive people There is an extensive literature on the relationship between human health and economic outcomes, and the recognition that health impacts outcomes in different ways. While Kuwait performs relatively well on many health outcomes, there is a growing concern about Non- Communicable Diseases (NCDs) prevalence in Kuwait. The World Health Organization (WHO) defines NCDs as chronic diseases, which tend to be of long duration, and are the result of a combination of genetic, physiological, environmental, and behavioral factors. NCDs generally impact individuals in the second part of their life, and directly affects productivity during working years. Therefore, any Jobs Market Strategy needs to consider this productivity loss in the workforce due to the increasing disease burden of NCDs. A recent study by Finkelstein et al. (2021) illustrates that GCC countries are experiencing a growing burden of NCDs with substantial associated economic costs. Efforts to control the growth of the NCD burden are likely to improve health outcomes and have a positive impact on economic growth. Productivity impacts works both through absenteeism (lost output due to missed work) and presenteeism (output loss due to diminished productivity while at work). Finkelstein et al. (2021) estimate that the cost for absenteeism as a share of GDP is 0.5 percent in Kuwait; the respective costs for presenteeism and productivity are 2.2 percent and 2.7 percent. These estimates represent a lower bound for two reasons – the estimates are limited to those NCDs for which data was available and the estimates used prevalence rates and cost per unit for diabetes mellitus which were on the lower end of the range. Furthermore, the analysis was restricted to issues of absenteeism and presenteeism but did not consider other indirect costs due to premature mortality and a reduced labor force. 143 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Labor market exclusion The Kuwaiti labor force participation rate is 40 percent, or just over half the average rate for OECD countries. Low educational attainment is closely associated with the risk of labor market exclusion. In Kuwait, more than 70 percent of individuals with a university degree or higher participated in the labor market, compared to 26 percent with only secondary and 24 percent with only intermediate education (Figure 15). Highly-educated adults in prime productive age are less likely to be inactive, and older Kuwaitis with tertiary education are more likely to stay in the labor market closer to retirement age. An exception to this concerns youth aged 16 to 29 years, where the likelihood of being unemployed or out of the labor force rises with education.93 This likelihood of being unemployed most typically reflects the time that potential workers give themselves to wait for an appropriate public sector job to be available, rather than taking a job in the private sector (see public sector section). More educated individuals are more likely to participate in the labor market FIGURE 15 Kuwaiti labor force participation by educational attainment Percent (%) 71.6% 26.3% 23.7% 6.7% 0.1% Below primary Primary Intermediate Secondary University and Higher Source: Labor Force Survey, 2017 93 Based on authors’ calculations, using data from the Labor Force Survey, 2017. 144 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Employment rates differ significantly among tertiary-educated adults, depending on the field of study. The education field of choice is strongly related to employment for both men and women, for example pursuing a degree in a STEM field reduces the probability of labor market exclusion compared to studying Arts or Humanities.94 In the latter disciplines, the employment rates for tertiary-educated adults are well below 50 percent, compared to over 80 percent in the OECD (Figure 16), signaling a potentially lower demand for those occupations in Kuwait. By contrast, employment rates for tertiary-educated adults in engineering, manufacturing and construction are similar to rates in the OECD (a notable exception is ICT — see annex for detailed figures showing marginal impact on the probability of being unemployed by field of education selected). Moreover, workers in STEM occupations in health and engineering receive higher wages in the private sector than in the public sector, even after deducting Dam Al-Amala payments (see social protection section),95 and despite the better labor market outcomes, only 17 percent of recent graduates from Kuwait University are in STEM fields, compared to 24 percent among Kuwaitis aged 25-64.96 Employment rates are higher among graduates in some STEM fields FIGURE 16 Employment rates of tertiary-educated adults by field of study, 2018 100 91.3 90 90.2 80 70 70.1 70.4 61.6 60 50 47.3 Kuwaitis Non-Kuwaitis OECD Average 40 Arts and humanities, Natural sciences, Information and Education Health and Engineering, social sciences, mathematics communication welfare and manufacturing journalism and statistics technologies associate and construction and information professionals Source: Kuwait Labor Force Survey 2017; and OECD Education Database Note: Fields of study are ranked in descending order of the difference between Kuwait and OECD average 94 Social contract through public sector jobs distorts the education market as only about 30 percent choose to enroll in STEM fields with the rest opting for Arts and Humanities as a way of accessing public sector opportunities. 95 Based on data from the Labor Force Survey, 2017. 96 Source for recent graduates is Kuwait University, and for ages 25-64 is from the Labor Force Survey, 2014. 145 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Age and gender are also important correlates of labor market exclusion. Youths who are neither employed nor in education or training (NEET) are particularly at risk of both labor market and social exclusion because this group is not improving their future employability through investment in skills nor are they gaining experience through employment. NEET rates reflect the untapped potential of youths in the economy, including those who want to work but are not seeking work - often called the “hidden unemployed” or “discouraged workers”. Women are particularly affected: for 15-24-year-old women, the NEET rate is 16.7 percent, higher than in any OECD country except Turkey and Mexico, compared to 7.2 percent for men, which is lower than in most OECD countries. As most Kuwaiti youth finish secondary school, NEET rates become a problem as they get older, this figure is 16.9 percent among 20-24 year old Kuwaitis, one of the highest rates in the OECD (Figure 17, top panel). An important reason for higher NEET rates for women can be seen in attitudes towards women being educated and working. More than a third of Kuwaitis believe that university is more important for boys than girls, and high shares of Kuwaitis (compared to people in comparator countries) believe that working mothers make things difficult for children, that men should have more right to a job than women, and that being a housewife is just as fulfilling as working (Figure 17, bottom panel). A high share of young women and of youths are neither employed nor in education or training 146 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL FIGURE 17 NEET rate by gender and by age group NEET rate by age group 15-19 year-olds 25 20-24 year-olds 20 17 15 10 5 5 0 Iceland Netherlands Czech Republic Sweden Switzerland Luxembourg Norway Germany Australia Denmark New Zealand Austria Canada Ireland United Kingdom Finland Lithuania United States Portugal Kuwait France Spain Greece NEET rate by gender (15-24) Men 45 Women 40 35 30 25 20 16 17 15 10 5 11 7 0 Italy Spain Greece France Turkey Portugal Canada Denmark Finland United States United Kingdom Austria OECD Average Ireland Australia Norway Sweden Chile Mexico Germany Kuwait Luxembourg Netherlands Iceland Czech Republic Source: Kuwait Labor Force Survey 2014; and OECD Education Database The female labor force participation (FLFP) rate in Kuwait is only 31 percent, lower than in other countries in the same income range, and lower than some GCC countries like the UAE and Qatar, while female educational attainment is surprisingly high. This suggests that Kuwaiti women lack agency in Kuwaiti society. To increase the FLFP rates and improve women’s agency in Kuwait, the government would have to support increasing the freedoms that women in Kuwait enjoy, as well as their ability to participate politically, socially, and economically. Moreover, qualitative studies suggest that women’s choice of jobs is constrained by social and gender norms (Figure 18), segregation, and what is viewed as the ‘suitability’ of jobs for women. There are very few women in decision making roles, and society does not conform to the idea of women in leadership roles. Gender norms may be influencing women’s human capital and labor supply decisions 147 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL FIGURE 18 Responses to survey questions on gender norms Share (%) of respondents who believe university is more important for a boy than for a girl, 2014 43 36 28 23 22 21 20 17 16 16 16 12 12 8 7 5 4 3 Malaysia Kuwait Qatar Russia China Mexico Chile Argentina Japan Germany Estonia Poland Spain Slovenia United States Netherlands Australia Sweden Share of respondents who believe children suffer with a working mother, 2014 79 69 65 65 59 44 43 42 39 36 34 32 32 27 27 25 24 21 21 21 15 15 Qatar Lebanon Hong Kong Kuwait Poland Mexico Singapore China Russia Chile Romania Sweden Germany Spain Slovenia United States Estonia New Zealand Australia Malaysia Netherlands Japan Share of respondents who believe being a housewife is just as fulfilling as working, 2014 45 45 39 33 24 23 22 22 19 16 15 14 13 13 13 13 12 11 9 8 6 5 Qatar Estonia Russia Kuwait United States Lebanon Mexico Germany Australia New Zealand Hong Kong Japan Romania Singapore Chile Malaysia Spain China Sweden Netherlands Poland Slovenia Share of respondents who believe men should have more right to a job than women, 2014 69 62 57 41 40 38 30 30 28 28 26 18 18 17 16 12 10 7 7 7 6 2 Qatar Kuwait Malaysia Lebanon Romania China Singapore Japan Russia Hong Kong Poland Chile Estonia Mexico Germany Spain Slovenia Netherlands New Zealand Australia United States Sweden Source: World Values Survey 2014 148 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL While returns to education are higher for women than for men,97 college-educated women earn 77 cents for every dollar earned by college-educated men. The gender pay gap is substantially larger in traditionally male fields like ICT. Women in ICT earn only 61 percent of what similarly educated men earn, larger than any within-occupation gender pay gap in the OECD countries included in the analysis (Figure 19). The gender pay gap is large in information and communications technologies FIGURE 19 Women’s earnings as a percentage of men’s earnings by field of study, 2017 Percentage (%) Business administration and law Information and communication technologies 100 All majors 90 80 77 70 60 61 50 Latvia Sweden Switzerland United Kingdom Finland Kuwait Australia Denmark Norway Estonia Portugal United States Chile Source: Kuwait Labor Force Survey 2017; and OECD Education Database 97 Tzannatos, Diwan, Ahad, 2016; and Bilo, et al. (2021). 149 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Box 3 Behavioral Insights: there is a clear preference for the public sector employment among university and college students A survey conducted by the World Bank and GS-SCPD with 5,288 students from several universities in Kuwait (Australian College of Kuwait, Box Hill College, and GUST as of March 2021) and PAAET reveal some of the aspirations, preferences and challenges that Kuwaiti students face prior to joining the labor market. Results indicate that respondents make important career choices while in high school (37%) or early in University (34%), which suggests that it is important to intervene early by providing updated information about jobs in demand, internship and traineeship opportunities and early support for job search. Preliminary analysis shows that 62 percent of respondents chose their field of study based on their personal interests, half also considered how their field of study matched their personal capacities, and 40% thought about how easy it would be for them to find a job in their field. Yet, most respondents chose either Business or Engineering as majors, indicating a lack of diversity of major choices but also a lack of coordination between the most sought-after majors and the needs of the labor market. PAM and the Ministry of Youth, in collaboration with Universities and high schools, could provide regular information to prospective students regarding jobs and common in-demand skills. Parents are the most important influencers of the choice of major. Kuwaiti students have limited knowledge about available internship and trainings opportunities, despite expressing interest in pursuing them. Only 19% had participated in an internship, 38% reported wanting to participate but not knowing how to secure one. Similarly, 40% of respondents would also like to participate in a traineeship or training program, but do not have sufficient knowledge of how to apply to these programs. This suggests that expanding the availability of such opportunities and providing suitable information could be an avenue for early exposure to careers in the private sector. Finally, the survey also indicates that it might be more effective to reallocate the existing student stipend/allowance towards services that support students in their labor market journey, including soft skills training, frequent information on job requirements, partnership with private sectors to offer internships, and vocational training. While 83 percent of respondents reported receiving the student allowance, 60 percent of them reported that they would keep studying if they did not receive the allowance, suggesting that the financial need of students is overestimated. A targeted student allowance for students with financial needs could also nudge Kuwaitis into sectors currently dependent on foreign workers. 150 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL References > Becker, Gary S. 1962. “Investment in human capital: A theoretical analysis.” Journal of political economy, 70.5, Part 2: 9-49. > Abadzi, Helen. 2009. “Instructional Time Loss in Developing Countries: Concepts, Measurement, and Implications.” World Bank Research Observer 24 (2): 267–90. > Aboud, Frances E., and Kamal Hossain. 2011. “The Impact of Preprimary School on Primary School Achievement in Bangladesh.” Early Childhood Research Quarterly 26: 237–46. > AlBadir, Anfal Fouad. 2014. “Investigating the skills-gap in the Kuwaiti labour market: perspectives from policy makers, employers, graduates, and higher educational institutions”. > Alharbi, Ghazwa. 2012. “Primary school teachers’ perceptions regarding ICT usage and equipment in Kuwait.” Journal of International Education Research (JIER) 8.1: 55-62. > Barrera-Osorio, Felipe, and Leigh L. Linden. 2009. “The Use and Misuse of Computers in Education: Evidence from a Randomized Experiment in Colombia.” Policy Research Working Paper 4836. Washington, D.C. The World Bank Group. > Berlinski, S, Galiani, S, and P. J. Gertler. 2008. “The Effect of Pre-primary Education on Primary School Performance.” Journal of Public Economics 93 (1–2): 219–34. > Bilo, Simon, Ajwad, Mohamed Ihsan, Alansari, Ebtesam, Alhumaidan, Lama, AlRashidi, Faleh. 2021. “The long shadow of short-term schooling disruption: Analysis of Kuwait civil service payroll data” Mimeo, World Bank, Washington, DC. > Card, David. 1999. “The Causal Effect of Education on Earnings.” Handbook of Labor Economics 3: 1801–1863. Elsevier. > Dua, Tarun, Tomlinson, M, Tablante, E, Britto, P, Yousfzai, A, Daelmans, B, and G.L. Darmstadt. 2016. “Global Research Priorities to Accelerate Early Child Development in the Sustainable Development Era.” Lancet Global Health 4 (12): E887–E889. > Duflo, Esther, Hanna, R, and S.P. Ryan. 2012. “Incentives Work: Getting Teachers to Come to School.” American Economic Review 102 (4): 1241–78. > El-Saharty, Sameh; Kheyfets, I, Herbst, C, and M. I. Ajwad, M I. 2020. Fostering Human Capital in the Gulf Cooperation Council Countries. International Development in Focus; Washington, D.C. The World Bank Group. > Finkelstein, Eric Andrew, Malkin, JD, Baid, D, Alqunaibet, A, Bin Hamad Al-Thani, M, Abdulla Bin Belaila, B, Al Nawakhtha, E, Alqahtani, S, El-Saharty, S, and C. H. Herbst. Forthcoming. “The Economic Burden of Non-Communicable Diseases in Gulf Cooperation Council Countries”, Mimeo. The World Bank Group. > Flabbi, Luca, and Roberta Gatti. 2018. “A Primer on Human Capital.” Policy Research Working Paper 8309. Washington, D.C. The World Bank Group. 151 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL > Gottfried, Michael A. 2010. “Evaluating the Relationship Between Student Attendance and Achievement in Urban Elementary and Middle Schools: An Instrumental Variables Approach.” American Educational Research Journal 47 (2): 434-465. > Hanushek, Eric A., and Ludger Woessmann. 2008. “The Role of Cognitive Skills in Economic Development.” Journal of Economic Literature 46 (3): 607–68. > Hanushek, Eric A., and Ludger Woessmann. 2012. “Do Better Schools Lead to More Growth? Cognitive Skills, Economic Outcomes, and Causation.” Journal of Economic Growth 17(4): 267–321. > Hernandez, D. 2011. “Double Jeopardy: How Third-Grade Reading Skills and Poverty Influence High School Graduation.” New York, USA: The Annie E. Casey Foundation. > Lynn, Richard, and Jaan Mikk. 2009. “Sex differences in reading achievement.” TRAMES: A Journal of the Humanities & Social Sciences 13.1. > Tzannatos, Z, Diwan, I, and Joanna Abdel Ahad. 2016. “Rates of Return to Education in Twenty-Two Arab Countries; An Update and Comparison between MENA and the Rest of the World.” ERF Working Paper 1007, Economic Research Forum, Giza, Egypt. > World Bank. 2018. World Development Report 2018: Learning to Realize Education’s Promise. Washington, D.C. The World Bank Group. doi:10.1596/978-1-4648-1096-1. > World Bank. 2019a. “Expectations and Aspirations: A New Framework for Education in the Middle East and North Africa.” Overview booklet. Washington, D.C. The World Bank Group. > World Bank. 2019b. World Development Report 2019: The Changing Nature of Work. Washington, D.C. The World Bank Group. doi:10.1596/978-1-4648-1328-3. 152 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Annex SECTION 1 Results from simulation of impact of educational reform 98 This economic analysis presents Kuwait’s growth projections under two main scenarios - “baseline” and “reform” scenarios which differ only in the pace of human capital formation. The present value of the difference in long-run GDP growth rates between the baseline and a reform scenario provides the estimated economic impact of the reform. The methodology is based on the endogenous Solow-Swan growth model with the key parameters of the model derived from historical Kuwait data. Formally, we assume that aggregate output is given by the constant returns to scale Cobb-Douglas technology in two production inputs, the physical capital stock and the quality-adjusted or effective labor hours =∅ as follows: = ( ,∅ )= ( ) (∅ ) 1− where is total factor productivity (TFP) which is permitted to depend on quality-adjusted average years of schooling of the workforce, is the total hours worked in the economy in year , the parameter is the income share of capital, and ∅ is the estimated level of human capital per unit of labor hour input given by the formula: ∅ = ( ) where is the estimated return to each year of quality adjusted years of schooling of the country’s workforce. The increase in workforce “cognitive skills,” therefore, affects the country’s growth path directly through increases in the effective labor hour input and the TFP growth rate. We first provide estimates of increasing workforce cognitive skills, as measured using the average PISA score on mathematics and science, on long-term TFP growth rate. Specifically, in the basic model, the long-term average growth rate (between 2000 to 2017) of a country’s TFP is regressed on the country’s performance in the PISA 2000 assessment,99 trade openness, 98 Simulation was done by Dilaka Lathapipat and Venkatesh Sundararaman. 99 Cognitive skills measured by average PISA score in math and science in 2000 only. 153 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL and the initial level of TFP.100 The results of this exercise using a sample of 39 countries where data are available is presented in column (1) of Table 1. The model indicates that a 1 standard deviation (100 points on the PISA scale) increase in workforce cognitive skills is expected to raise a country’s long-run TFP growth rate by as much as 0.939 percentage points per annum. The estimated impact is also statistically significant at the 1 percent level. Column (2) presents the estimated impact of increasing the share of students reaching basic proficiency level (level 2 in PISA) in math and science on long-run TFP growth rate. A 10-percentage point increase in the share of students reaching basic proficiency is expected to raise long- run TFP growth rate by 0.30 percentage points. Similarly, column (3) presents the estimated impact of increasing the share of top-performing students (level 5 or above in PISA) on long- run TFP growth rate. A 10-percentage point increase in the share of top-performing students is expected to raise long-run TFP growth rate by as much as 0.55 percentage points. Again, both estimates of the parameters of interest are statistically significant at the 1 percent level. The key parameter employed in this economic analysis section is the estimated coefficient of the impact of cognitive skills on long-run TFP growth rate from column (1). Columns (5) and (6) present the estimated impact of increasing the share of students reaching basic proficiency level (level 2 in PISA) and the impact of increasing the share of top-performing students (level 5 or above in PISA) respectively, but including Average R&D Intensity, on long-run TFP growth rate. TABLE 1 Estimates of the Relationship between Workforce Cognitive Skills and Long-Run TFP Growth   (1) (2) (3) (4) (5) (6) 0.939*** 0.820*** Cognitive skills 2000 (0.236) (0.239) 2.974*** 2.634*** Share of students reaching basic level (0.732) (0.733) 5.530*** 4.476** Share of top-performing students (1.691) (1.732) 0.259** 0.261** 0.269** Average R&D intensity 2000 (0.112) (0.114) (0.114) 0.004 -0.008 0.053 0.078 0.067 0.129 Trade openness 2000 (0.124) (0.122) (0.146) (0.147) (0.146) (0.171) -1.214*** -1.271*** -1.021*** -1.395*** -1.453*** -1.218*** Log TFP 2000 (0.230) (0.233) (0.218) (0.248) (0.249) (0.240) Number of countries 39 39 39 39 39 39 R-squared 0.541 0.556 0.475 0.588 0.604 0.525 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Notes: i) Dependent variable: Average annual growth in TFP 2000-2017; ii) Cognitive skills measured by average PISA score in math and science in 2000 only Source: World Bank staff calculations 100 This is similar to the approach of Hanushek and Woessmann, 2012, which evaluates the relationship between cognitive skills and long-term GDP growth rate. 154 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL We assume an education reform starting in 2020 on a cohort of 6-year-old students, which will increase the average cognitive skills of Kuwaiti students by 166 points on the PISA scale (reaching the theoretical frontier at 549 points in harmonized test score) for all children born in 2014 and later. These children will start entering the workforce in 2029 and contribute to the country’s economic progress (30 points on the PISA scale is equivalent to 1 year of formal schooling). It is estimated that the resulting impact of the reform on the average of years of quality-adjusted schooling of the entire projected workforce will be as depicted below in Figure A.1. FIGURE A.1 Educational reform impact on workforce average effective years of schooling 0.120 0.100 0.080 0.060 These children will start entering the workforce in 2029 and contribute to the country’s 0.040 economic progress (30 points on the PISA scale is equivalent to 1 year of formal schooling) 0.020 0.000 2060 2040 2050 2030 2020 2045 2055 2035 2025 The reform scenario requires higher levels of investment and a greater degree of capital intensity in the economy compared to the baseline scenario, reflective of changes in the intensive use of knowledge as the economy diversifies and expands. The model specifies that the increase in workforce cognitive skills affects the country’s growth path directly through increases in the effective labor hour input and through the TFP growth rate. Furthermore, the increase in human capital will raise the rate of return to physical capital101 in the economy, which in turn would raise the propensity to save and invest. Under the baseline, it is assumed that the savings/investment rate will stabilize at 30.50 percent of GDP going forward (Figure A.2). Under the reform scenario, the faster rate of increase in human capital would raise the propensity to save/invest in Kuwait to 34.00 percent of GDP by 2050. Under both scenarios, the rate of return to physical capital in Kuwait, estimated to be at around 33.00 percent in 2020, is expected to converge to around 30.00 percent in the long run (Figure A.2, lower panel). 101 Investment in physical capital will increase from the baseline, but the rates of return to physical capital investment will be the same under both the baseline and the reform scenarios. 155 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL FIGURE A.2 Educational reform impact on investment in physical capital Gross fixed capital formation (GFCF) Percent (%) of GDP GFCF %Y (i) (baseline) GFCF %Y (i) (reform) 0.40 0.20 0.00 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 RoRK 0.80 RoRK 0.60 0.40 0.20 0.00 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 The graphs below illustrate that under the baseline, GDP growth is expected to grow between 2020 and 2030 (Figure A.3). The baseline or business as usual scenario would see aggregate labor productivity, defined as output (real GDP in constant 2005 USD) per worker and GDP per capita also rise (in constant 2005 USD). The same is true for the reform scenario. Capital intensity and labor productivity will increase as a result of the rise in human capital. FIGURE A.3 Educational reform impact on capital intensity and labor productivity Capital labor hour ratio K/H (reform) K/H (baseline) 600 400 200 0 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 156 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL Labor productivity growth 20% Output/worker growth (reform) 15% Output/worker growth (baseline) 10% 5% 0% -5% -10% -15% 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 As a result of the increase in workforce cognitive skills, long-run GDP growth rate (from 2030 to 2050) will rise from 6.86% to 8%. See Figure A.4 below. FIGURE A.4 Educational reform impact on GDP per capita growth and GDP growth GDP per capita (GDPPC) growth GDPPC growth (reform) 20% GDPPC growth (baseline) 15% 10% 5% 0% -5% -10% -15% 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 GDP growth 20% GDP growth (reform) 15% GDP growth (baseline) 10% 5% 0% -5% -10% -15% 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 157 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL SECTION 2 Figures showing marginal impact of field of education on probability of being unemployed FIGURE A.5 Probability of becoming NEET by educational level and age group Marginal effects of probit model p(NEET=1)=f(X) Secondary Post Secondary, non-tertiary Tertiary 0% -1% -4% -6% -5% -10% -12% -20% -22% -21% -30% -31% -40% -38% age 16-29 age 30-49 age 50-65 Source: Kuwait Labor Force Survey 2017 Note: 1. Coefficient remains relatively large and statistically significant for all levels of education > Educated youth are at higher risk of inactivity. > For younger Kuwaitis, likelihood of labor market exclusion increases with level of education. > Highly educated adults in prime productive age are 38% less likely to be inactive. > Older Kuwaitis with tertiary education are more likely to stay in the labor market closer to retirement age. 158 PART 1 | DIAGNOSTIC | 5. HUMAN CAPITAL FIGURE A.6 Probability of becoming NEET for tertiary educated adults (16-65) by gender and study field Baseline = Arts and humanities Marginal effects of probit model p(NEET=1)=f(X) Pursuing tertiary education in Health and Welfare reduces Male Female likelihood of labor market exclusion for males by 19% vs. 10% Arts and Humanities 5% 5% 4% 2% 0% -3% -2% -5% -10% -8% -8% -10% -12% -15% -16% -20% -19% -20% Education Business, administration Natural sciences, Information and Engineering Health and welfare and law mathematics and statistics communication Source: Kuwait Labor Force Survey 2017 > The field of education selection is also a determinant of the probability of becoming inactive for both men and women. > Selection of STEM fields reduce the probability of labor market exclusion compared to studying arts and humanities. > A notable exception is the ICT field and business, administration and law for women. FIGURE A.7 Probability of becoming NEET by education level and marital status Marginal effects of probit model p(NEET=1)=f(X) Male Female 10% 6% 0% -5% -10% -9% -10% -15% -20% -18% -20% -25% -30% Secondary Post Secondary, Tertiary Married non-tertiary Source: Kuwait Labor Force Survey 2017 159 Photo by Stewart Innes on Shutterstock PART 2 STRATEGY 1. STRATEGY POLICY RECOMMENDATIONS PART 2 163 Introduction 165 Public Sector 172 Private Sector 177 Social Protection 183 Human Capital 188 The Jobs Strategy recommendations 162 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Introduction This study recommends a comprehensive reform program to boost productivity and growth, and to help all Kuwaiti workers achieve productive and satisfying employment. Achieving this goal will require simultaneous policy changes in four major areas: > Public sector. To restore the sustainability of fiscal policy, it will be necessary to limit the growth in the wage bill by reducing the size of the civil service and constraining salary increases. At the same time, improvements in government efficiency will be essential to support more rapid private sector growth and strengthen the provision of public services. > Private sector. Kuwaitis who formerly would have entered the civil service will have to rely on private sector jobs. To provide jobs at a salary that would attract Kuwaitis, employment and productivity in the private sector will have to increase sharply. This will require a series of reforms to improve the allocation of capital and labor; strengthen the business climate; and increase entrepreneurship, investment, and access to technology. > Social protection. Eliminating the wage premium for public sector jobs for low-skilled workers would encourage more take up of private sector jobs. Improving the targeting and efficiency of government support for job search would reduce unemployment and facilitate a shift from public to private sector employment. Limiting work disincentives in social protection policies would reduce the fiscal burden involved in supporting work capable beneficiaries and enable more resources to be devoted to vulnerable households. > Human capital. Improvements in workers’ skills are essential for building a modern economy and will support more rapid private sector growth. Reforms within institutions and practices at all levels of education would improve learning outcomes and the quality of education; it would also strengthen the links between education and private sector employment; and increase the efficiency of the education and training system. All these reforms must take place simultaneously. It will be difficult, and perhaps unwise, to limit public sector employment if low private sector productivity means few jobs are on offer at wages high enough to support the lifestyles of Kuwaitis. Private sector productivity growth will be facilitated by increasing the supply of high-skilled workers generated by an improved education and training system. Without improving incentives to work in the social protection system, efforts to restore fiscal sustainability could be frustrated by the need to maintain work-capable beneficiaries, limiting the resources available to encourage private sector employment. The failure of any one of these four pillars is likely to mean the failure of the strategy as a whole. What follows is a summary of the policy recommendations for the Kuwait Jobs Strategy, grouped into the four pillars of public sector, private sector, social protection, and human capital. The underlying analysis can be found in the diagnostic paper on the Jobs Strategy. 163 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Summary of policy recommendations Public Private Social Human Sector Sector Protection Capital 1 5 8 12 REFORM AREA 1 REFORM AREA 5 REFORM AREA 8 REFORM AREA 12 Improve public Address market Reform Dam Al-Amala Improve learning sector wage distortions and other design to reduce public outcomes and the bill sustainability barriers for an efficient sector preference among quality of education allocation of labor low-wage earners 2 13 6 9 REFORM AREA 2 REFORM AREA 13 Align public sector REFORM AREA 6 REFORM AREA 9 Strengthen links wages and private Address market Build capacity of between the education sector wages distortions and other Public Authority for system and the world of barriers for an efficient Manpower to better work 3 allocation of capital target job seekers and employment services 14 REFORM AREA 3 7 Improve public sector 10 REFORM AREA 14 performance REFORM AREA 7 Implement Support REFORM AREA 10 system level changes 4 entrepreneurship and Revise social insurance to enhance efficiency reform the business policies to incentivize of the education REFORM AREA 4 climate to expand Kuwaitis to work longer system Generate a strategic private sector plan to replace employment 11 non-Kuwaitis with Kuwaitis in the REFORM AREA 11 public sector Improve efficiency of the social safety net system 164 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Public Sector The policy regime for public sector administration faces three key challenges: > A large and unsustainable wage bill > Weak performance in the provision of government services > Large numbers of non-Kuwaiti workers in some ministries Limit the public sector wage bill Total public sector compensation greatly exceeds that of most countries. Wages, allowances, and bonuses make up 17 percent of GDP, the highest in the GCC and almost twice the OECD average. The wage bill has risen four-fold in the last decade, while government revenues, closely tied to developments in the oil market, have not increased. The resulting fiscal deficits, if continued for a few years in the future, could exhaust even Kuwait’s substantial financial resources. At the same time, generous and secure public sector employment is eroding private sector competitiveness (see private sector section, below). The government could aim to limit the growth in average wages by cutting wages where compensation is well out of line with qualifications (especially for new entrants), setting ceilings on wage levels, eliminating the indexation of allowances, and reducing bonuses. An effort should be made to harmonize allowances with levels provided in the private sector. These measures are essential to the sustainability of fiscal policy and will bring public sector wages closer in line with productivity. Almost all OECD countries took steps to reform civil service salaries following the 2008-10 financial crisis (15 countries froze remuneration, while 7 countries cut remuneration for all levels of staff). In the region, KSA, Bahrain and Egypt have introduced wage freezes, tightened eligibility requirements, and reduced the number of allowances, although these policies have often been rolled back when the oil price has risen. Wage levels would have to be designed carefully, to limit the potential for imbalanced compensation between those who joined the civil service before versus after, and there may need to be some provision for exceptions to avoid creating shortages in key positions. Increases to working hours in the public sector,102 which are lower than in public sector administrations in most other countries, would increase output. This should be coupled with an effort to improve civil servants’ understanding of their roles and goals, as well as those of the department and agency to increase the likelihood of translating longer working hours into higher productivity; it may also discourage those wishing to join the public sector while moonlighting in private enterprises. One possible approach to limiting expenditures while minimizing the impact on workers is work sharing (some OECD countries are experimenting with this), so that two employees work part-time and share the salary. It would be important to also focus on outputs and not just hours spent in the office. 102 The labor code needs to be reviewed to see if this is possible. 165 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS The government could also provide specific support to individuals who i) are unhappy with their job and interested in joining the private sector; and ii) work in the public sector and maintain a family business. In the WB/GS-SCPD survey with public sector employees, nearly half reported being interested in moving to the private sector, but only half of them actively tried to search for a job in the private sector. More men, between 25 and 34 years old, and those with bachelor’s degrees (especially from private/foreign institutions) report being interested in moving to the private sector. Information on private sector opportunities and networking is necessary for graduates and current public employees: 40 percent of those with only public sector experience are interested in moving, but cannot find information, advice, or jobs. Moreover, 20 percent of respondents to the survey reported having a side business. Among business owners, the most cited reason for staying in the public sector job is that the firm is still small, followed by preference for stability of public sector jobs. There may be room to cut inefficient expenditures in other areas, for example subsidies and procurement. This would enable the government to employ more civil servants within the existing fiscal envelope. A detailed public expenditure review would be able to highlight such areas for future expenditure cuts. The number of times an individual can refuse a position in the civil service should be limited to avoid lengthy waits for civil service jobs, during which the candidate is receiving a stipend but is not working. It will be important to review the impact of this policy to see if it results in poorer matches to desired jobs or the withdrawal of some individuals from the labor market. In the long term, establishing standardized pay scales (see below) should reduce or eliminate this problem. A merit-based employment selection and promotion process would help limit the negative impact of the reform on worker motivation. Creating these systems would involve strengthening control over hiring and allowances, linking compensation to employee performance, developing codes of conduct, and strengthening internal controls and transparency. More generally, the reform program should be supported by strengthening public employment and compensation management and should include the development of transparent technocratic institutions. Conducting payroll audits and building comprehensive databases of public employment and compensation would help inform human resource management. Digital technologies can be useful in this context. Controlling wages should be accompanied by efforts to reduce public sector employment, through hiring freezes, caps on hiring for some positions, cuts in some areas, and attrition. A first step, as in Saudi Arabia, Iraq, and Yemen, could be to identify and eliminate ghost workers. There are some signs from the CSC payroll data that ghost workers might be present in the Kuwaiti system. Hiring freezes have been instigated in Tunisia and Oman, while attrition-based schemes have been attempted in Bahrain and Egypt. Romania ran a successful attrition campaign following the 2008-10 global financial crisis whereby ministries could only hire one new employee following the departure of 7 existing employees. 166 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS The sustainability of the public sector pension system could be supported by introducing a defined contribution pension plan. This program could also help stimulate local financial markets. Such schemes have been introduced successfully in many civil services and private sector companies. It would be useful to explore whether a more harmonized pensions system could be structured to improve incentives for workers to move to the private sector. These policies, which could be controversial, would require an effective communications strategy so that all stakeholders, including the public sector, the private sector and civil society, understand why the program is essential. This will help to manage expectations of public employment and explain the rationale for public wage bill reforms and their benefits, i.e., better public investment, social assistance, and improved delivery of public services. Communication also should focus on challenging beliefs and social norms that favor the public sector, for example through the promotion of “role models” of successful Kuwaitis in the private sector (employees and business owners). Improve public sector performance Despite spending more (relative to GDP) on public sector salaries than most other countries, public sector services provision is poor. Kuwait ranked 94th of 193 globally, and last in the GCC, according to the 2018 Government Effectiveness Index, and 83rd out of 190 globally, and last in the GCC, according to the 2020 Doing Business Report. Increasing the minimum educational levels of entrants and providing additional training opportunities is an important step to improve the effectiveness of civil service employees. Education levels among public sector workers could be improved by restricting new recruits to graduates or restricting the number of non-graduate recruits and limiting them to areas where little formal education is required (e.g., clerical work). This policy could be supported by defining work streams and tasks to better understand what skills are needed, and to tie recruitment to this so that potential civil servants would not study less useful areas simply to get a degree. This could be complemented by a study of those services that could be outsourced to the private sector or undertaken by contract labor. Development of a system for verifying degrees would help ensure against the falsification of degree certificates. Education and training could be encouraged by providing additional opportunities to study within the civil service. However, this could be costly if the government pays and if civil servants can take time away from work to study. A less expensive approach would be to offer loans to staff to pay for education, with the potential for promotion on completion of a degree or program. These incentives for training and study will only be useful if offered in a context where performance and knowledge are important to someone’s career. The motivation system for civil servants must be balanced, and based on a combination of monetary, moral, political, normative, and emotional stimuli, as well as being responsive to their job satisfaction. Capacity building should be linked to pre-established goals, with requirements to stay in the position for a set number of years after completion. 167 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Civil servants’ skill sets could be increased by introducing a revolving door scheme between the public and private sectors. This would allow civil servants to test their suitability for private sector jobs and provide additional skills to those who return. Effectiveness could be improved by introducing greater standardization within the civil service. A standardized pay scale for all civil servants would increase the mobility of workers, enabling workers to find the most suitable job for them more easily and would facilitate the exchange of experiences. It would also support the introduction of a meritocratic system. The pay scale would have to be carefully designed, to ensure that it is consistent with controls on the levels of salaries, however one danger with this approach is that it often requires increasing everyone in the cadre to the highest level of pay. This strategy has been adopted in Saudi Arabia and many other countries. Standardized pay also could be encouraged in the state-owned enterprises that have seen significant wage escalation in recent years. A standardized national entry exam could help ensure that the best workers are hired and could be used as a tool for restricting entry. An entry exam would have to be accompanied by controls to prevent applicants from bypassing the system. It would have to be structured to ensure that required skills are selected. A fast track or young professionals’ scheme could be introduced to attract talented youths to the civil service and prepare them for high-level positions. Many developed countries (for example, the UK, the US and Singapore) have introduced such schemes to attract and retain talented staff. More gender-based policies are needed to support women managers and reduce the gender wage gap in the public sector. This may require setting targets for female employment for certain positions at the ministry and department level. A careful review of the drivers of the gender wage gap in the public sector would help identify policies to ensure greater pay equity. The introduction of performance monitoring and incentives for innovation and efficiency are critical steps towards improving public sector effectiveness. Civil service human resources systems need to be overhauled, starting with recruitment, retention and then promotions (the latter should be meritocratic and include a gender target). Individual tasks would be aligned to organizational goals. This effort will meet with considerable challenges, as Kuwait does not have a culture of individual responsibility. It will take time and effort to revamp the system and improve the morale of public sector workers. A selective retrenchment scheme could help to remove non-performers and introduce a meritocratic culture. The goal here is to improve efficiency and the provision of services, rather than to reduce government expenditures, given that the average pension payment is greater than the average civil service salary. It is important to place limits on who could participate, to avoid losing the best staff. Making the scheme voluntary would reduce the expected opposition. 168 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS The program would have to be managed carefully and consistently, considering Kuwait’s previous (and unsuccessful) early retirement program. A special unit could be set up to oversee the process and to monitor key public services to ensure that the retrenchment scheme does not have a negative impact on the quality of service delivery, and to ensure that previously retrenched employees do not return. Retrenchment schemes in other countries have had mixed results; successful schemes focus on their overall objectives and are carefully implemented along with serious change management and communication initiative. Public sector recruitment could be limited to what is required to meet expressed demand and is sustainably funded. The government should not borrow to finance salaries. In conjunction with the policies on retrenchment and a hiring freeze, the goal would be to move to an elite, smaller scale public sector administration. One model could be the Singaporean civil service, one of the highest performing in the world. Not only do they control recruitment, but they have also instituted an “up or out” culture whereby staff are given only a certain amount of time before they are promoted or removed from the service. This culture is unlikely to work in Kuwait, but small steps can be taken in the direction of increased accountability, meritocracy, and a performance culture. Generate a strategic plan to replace non-Kuwaiti workers with Kuwaitis over time Non-Kuwaitis make up 21 percent of central ministry employees, largely due to the Health and Education Ministries, which employ 87 percent of all non-Kuwaitis in the public sector. Foreigners are heavily employed as medical professionals and teachers, due to the limited supply of these skills among Kuwaitis. This limited supply reflects both the lack of institutions that could provide the necessary education and training, and resistance to participation by Kuwaitis in some areas, particularly nursing. The development and expansion of training and skills programs for Kuwaitis, particularly in the medical and educational fields, could encourage greater participation by Kuwaitis. This will be expensive, and it will take time to significantly increase the number of medical professionals and teachers. It also is important to realize that expats can bring in important knowledge, especially in fast changing areas such as health and education. Thus, the cost and quality effects of the replacement of non-Kuwaitis should be reviewed to ensure that increasing the number of Kuwaiti nationals supports other service delivery and performance targets. Development of a nurse practitioner cadre could encourage more Kuwaitis to go into nursing. It will be necessary to raise nurses’ pay and overcome social norms that discourage work as nurses. It may be easier in the short term to continue relying on non-Kuwaitis, particularly as the COVID-19 pandemic may further reduce the number of Kuwaitis interested in nursing. Considerable efforts are required to improve the skills of Kuwaiti teachers and the quality of teacher training colleges. This issue is discussed in the human capital section, below. 169 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Examples on similar policies implemented by other countries Portugal reduced salaries by 5% after the 2008 financial crisis. Freeze public sector wages. 1 Enhances financial sustainability and private sector attrac- tiveness. It can include cuts, ceilings, eliminating indexation of allowances and reducing bonuses. The United Kingdom froze civil service salaries for 2 years and cut parliamentarians’ salaries by 5%. Austria limited new recruits to 50% of retiring staff after 2008. Impose hiring constraints. 2 Trimming the public sector workforce can be accomplished in many ways, including implementing hiring freezes or caps (or cuts) or attrition schemes or a combination. Ireland announced a 12% reduction in staff within two years. Introduce selective retrenchment schemes, which ring-fence skills needed in civil service and avoid return of staff who received a severance package to public sector. These tend Oman sent at least 70% of public sector employees with 3 to be unpopular and require sensitive management. Other over 30 years tenure on forced retirement in 2020. alternatives should be examined first (e.g. freeze wages/ hiring, cut contractual workers, cut work hours, voluntary schemes with redundancy packages). Introduce a defined contribution pension plan, whereby a Many OECD countries have moved to such a scheme, often pension account, with investment options, is allocated to each 4 civil servant. At end of service, the amount in the plan is paid OECD by grandfathering those in existing schemes and intro- ducing a new contributory scheme for new recruits. Some out in lump sum or annuity or both. This guarantees no fund- countries have run a hybrid scheme that shares the risks. ing gap and transfers risks from government to the individual. This is a Kuwaiti phenomenon since other nations do not Restrict number of times an individual can refuse a position 5 in civil service. Reduces time spent waiting for a job and continually offer young graduates work in the civil service. It is usually the other way around, young people are eager costs associated with recruitment. to find work. The Singaporean civil service controls recruitment, it institut- Reduce the size of the public sector and move to an elite 6 smaller scale administration. ed an ‘up or out’ culture, whereby staff have a certain amount of time before they are promoted or removed from the service. In almost all OECD countries, wages in the public sector are Harmonize working hours, bonuses and allowances with the OECD smaller than those in the private sector. private sector, which will also increase output at the same 7 cost. One option for Kuwait is to reduce the salaries of pub- lic sector employees especially those at the entry level to a The European Union sets out maximum working hours per par with the private sector or a portion of it. week for all at 48 hours, and mandates 4 weeks paid holi- day and limits on shift work, days off and night work. Review activities and cut inefficient expenditures to create Most OECD countries perform periodic spending or effi- additional fiscal space. Kuwait should focus on: 1) removing ciency reviews to maintain control over the aggregate level 8 inefficient energy subsidies; 2) reviewing support to loss-mak- ing SOEs (e.g. Kuwait Airways); 3) reviewing oversees medical OECD of spending; they identify wasteful spending or prioritize spending within a given envelope. Since the global financial support program; 4) reviewing wages/salaries; and 5) review- crisis, the use of spending reviews has risen dramatically. ing public procurement and boosting integrity programs. Saudi Arabia Vision 2030 is targeting “improved performance, Introduce performance monitoring and incentives for inno- 9 vation and efficiency. All OECD countries have detailed per- productivity and flexibility of public authorities”, it is also introducing performance measurement in the civil service formance monitoring programs for the civil service. along with customer feedback on direct service provision. 170 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Introduce minimum educational attainment levels in the The UK civil service hires around 20,000 new staff a year, of public sector, which will help improve the quality of per- 10 sonnel in the civil service and incentivize young people to which, 1,000 are recruited to a fast-track scheme which has a minimum qualification of a 2:2 degree (top 25% of graduates). get better educated. For non-degree entrants, vocational skills are also examined. European Commission runs an annual entrance exam the “con- Introduce a standardized national entry exam to ensure 11 higher standards among staff. cours” to test candidates via written exams and interviews on various topics. Passing does not guarantee employment and successful candidates still need to secure a job offer. KSA is currently actively pursuing this strategy, starting 12 Institute standardized pay for cadres across civil service. with job evaluations and external surveys. Next steps are to develop grade structures, single salary spine and financial- ly affordable packages. Provide additional training opportunities within the civil Portugal civil service strategy includes initial training (com- 13 service to improve caliber and capacity of Kuwaiti staff. pulsory for most staff), continuous training and self-training. KSA is bringing in ex-Aramco and private companies’ em- Introduce a revolving door scheme between public and pri- ployees into middle and upper-level management posi- vate sectors. Many countries are wary of such schemes as 14 they can lead to conflicts of interest. Yet, they tend to bring tions, while the UK eliminated the vesting period for civil service pensions to attract experts to join the public sector with them tremendous skills/expertise to the public sector. for a short period of time. US Presidential Management Fellows (PMF) Program is a 2-year flagship leadership development program at the Introduce fast track or young professionals’ scheme. This 15 will help talented employees rise quickly through the bu- entry level for advanced degree candidates. Fellows get 160 hours of training and a 4–6-month development as- reaucratic ranks to leadership positions. signment, challenging work assignments and potential for career advancement upon completion. KSA Saudization scheme (Nitaqat) places quotas for Saudis Approve a strategy to replace non-Kuwaitis with Kuwaitis in 16 the public sector. in private businesses, bans employment of foreigners in 22 admin. professions and hiked fees on employment of expats. UAE’s Emiratization program has been in place for 10 years Develop training and skills development programs to gradu- and achieved great success in the public sector. It focuses ally replace non-Kuwaitis, especially in health and education heavily on providing education and skills to train any locals ministries. Kuwait has no nurse training college and number 17 of places at the medical school is capped at 200. Training from high school dropouts to graduates in skills that were needed. Generous research grants to UAE university and and overseas scholarships need to be expanded to assist Dubai School of Government have allowed a thorough analy- more Kuwaitis to fill these jobs. sis of the program’s successes and remaining challenges. Develop a nurse practitioner cadre to encourage more Ku- Canada, Netherlands, and the US currently have nurse waitis to go into nursing. This step should help alter the practitioner or physicians’ assistant cadres. Australia has a 18 negative perception of the nursing profession among young cadre but requires years of experience as a floor nurse and Kuwaitis and elevate its status. training before admission to the cadre. Remove gender restrictions on civil service recruitment or in- Kuwait still has some gender restrictions on where women clude targets for female recruitment in some sectors. Eliminate 19 other barriers to female labor force participation (e.g., review can work (e.g., female engineers are barred from lucrative jobs like site engineers for oil firms), and recruitment requests by work hours, provide creche facilities, allow part-time work). ministries and agencies continue to be based on gender. 171 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Private Sector The ready availability of low-skilled foreign labor has encouraged firms to focus production on low value-added activities, reduced capital utilization and limited adoption of new technologies. Production is concentrated on hydrocarbons, and non-oil exports are minimal. Entrepreneurship is limited, and several constraints impair the profitability of private sector activities. The private sector strategy needs to be predicated on the elimination of the distortion of wage levels, worker demand, and employment requirements introduced by the public sector. As long as Kuwaitis are entitled to secure, highly compensated and not very demanding public sector jobs, efforts to encourage greater private sector employment will be futile. Expand sectors that support Kuwaiti employment and reduce gender disparities Private sector production is broad-based, yet resources and jobs continue to be concentrated in the oil and financial sectors, despite negative productivity growth in recent years. Most firms’ production functions are low value-added, they rely on cheap labor and subsidies, and are thus not designed to operate with a high-wage Kuwaiti workforce. There is a significant difference in compensation levels and access to employment between men and women, and low substitutability between Kuwaiti and foreign workers. Allowing non-Kuwaiti workers to change jobs freely could improve current production by enabling workers to seek more productive (and higher paid) employment. Labor mobility also would enable market forces to drive a more efficient allocation of new investment, as some firms expand to take advantage of the increased availability of workers. Patience will be required, as the economy-wide impact is unlikely to be evident in the short term; some firms may even see a decline in competitiveness in the short term and may exit the market, as such policy support may be necessary to help negatively affected firms to raise investment to substitute for lost workers. Firms need new incentives to invest in human capital (i.e., training in technical skills and management capabilities) to help address the lack of essential skills in some areas. Raising the minimum wage in high-priority sectors could support an overall increase in the cost of non-Kuwaiti labor and force employers to consider adopting more capital- and technology- intensive production functions. The direct impact on Kuwaiti employment is likely to be small, given the low substitutability between Kuwaiti and foreign workers, but increased demand for skilled labor would encourage greater employment of Kuwaitis. This policy should be undertaken only once the introduction of labor mobility for foreign workers has led to a new wage equilibrium, with wages determined by the market. 172 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS The introduction of a high-skills visa program could help to close skills gaps and promote knowledge spillovers. This will be critical in the short-to-medium term to raise returns to investment and transfer knowledge to Kuwaiti workers. Over the long term, the lack of skills should be addressed by additional investments in human capital (see section on human capital, below). Effective communication regarding this policy is essential, as both the high-skills visa program and improved labor mobility could intensify competition for some jobs held by Kuwaitis. Promote capital deepening and open new opportunities for exports to enhance productivity Firms are not efficient at converting capital and labor into output, only very large establishments have reasonable levels of productivity. The returns to capital are poor, mainly due to a lack of technology adoption and innovation, and the lack of availability of skills. Only about 12 percent of non-oil (goods) output is exported. Targeted subsidies could be used to promote capital deepening (for example, some OECD countries provide firms with subsidies for research and development). Subsidies could have an important impact on investment, which is constrained in Kuwait due to limited access to finance and the large supply of low-skilled foreign workers. This could be balanced by the removal of less effective subsidies, such as those for utilities, although that would be subject to considerable opposition. The broadening of financial instruments could help promote capital deepening, particularly by small firms. For example, SMEs in several European countries use leasing instead of borrowing to finance the acquisition of capital goods. This would support the switch to more capital-intensive activities, which would enable firms to pay the salaries required to hire more Kuwaiti workers. However, this policy may have little impact on investment if firms cannot find employees with the skills required to operate the machinery. The promotion of deep free trade agreements, with a focus on services and investment, could open opportunities for exports in high-priority sectors, support inward and outward investments, and provide important support to help Kuwait shift away from full dependence on oil. An example is the European Free Trade Association-Gulf Cooperation Council trade agreement that includes services. While regional agreements hold the greatest promise in economic terms, their feasibility may be limited due to the difficult trade policy environment in the GCC region. Support entrepreneurship and reform the business climate to expand private sector employment Capital subsidies, currently directed at start-ups, could be rebalanced to support efforts by SMEs to expand into new sectors. Targeting will be difficult, however and benefits should not be linked to size, as this can discourage firm growth. Entrepreneurship levels are also low in Kuwait, entrepreneurs form only 1.5 percent of the working-age population. Only 25 173 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS percent of private sector jobs are in firms (SMEs) of less than 50 employees, compared to an average of 50 percent in OECD countries. The main obstacles holding back entrepreneurship include a weak domestic market, business environment constraints, limited access to finance and land, and barriers to competition. The government’s program to improve the business environment could continue, with a focus on reforms for starting a business, obtaining land, undertaking construction, and insolvency. This ongoing agenda has general support from the private sector and government, and there is some evidence it is encouraging more firm entry. Initial stages of reform were relatively easy, but further reforms may be more difficult (e.g., land issues). It is unclear whether further business reforms will have a significant impact on employment of Kuwaitis in the short-to-medium term. Strengthening competition law and institutions (to ensure effective enforcement) could open markets for young firms to enter and expand. This effort will be challenging to implement, as competition enforcement is complex and there will be strong (if implicit) opposition. An expansion of SME preferences in government contracts could help to address the issue of insufficient competition in public contracting, one of the biggest markets for private sector firms. Subcontracting arrangements with large firms may also need to be supported. Legal reforms are necessary to remove barriers to accessing finance for female entrepreneurs. For example, discrimination in access to credit based on gender is not prohibited by law in Kuwait, limiting opportunities for female entrepreneurs. As with female employment (see below), the removal of legal barriers may not be enough to encourage large scale female entrepreneurship because of social norms that may hold women back from becoming entrepreneurs. Shift employers’ preference from foreign low-skilled to local high-skilled workers Three fourths of all establishments employ no Kuwaitis, and 95 percent of private sector workers are non-Kuwaiti, and analysis suggests most employers hire Kuwaitis to meet official quotas, but many firms cannot afford to absorb Kuwaiti workers and view non- Kuwaitis as more competitive. The provision of financial/fiscal incentives to introduce ICT in production would raise productivity and increase the demand for workers with specialized skills. Legal reforms are required to improve the work environment for Kuwaiti females. Promoting greater female labor force participation is the quickest route to increasing overall Kuwaiti employment in the private sector. However, legal reforms may not be enough by themselves, as tradition and social norms also are obstacles to women working. 174 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Examples on similar policies implemented by other countries Reform the admission system and gearing it towards attract- Multiple countries provide long-term visa for high-skilled 1 ing and retaining high skilled workers can support the shift to workers along with other benefits, including: UK, Japan and a more productive economy. OECD. OECD Qatar allowed expats to take new jobs without the sponsor’s Reform (expand) labor mobility for Non-Kuwaiti workers. permission and has abolished exit permits for most workers. Reforming migrant sponsorship rules (e.g. requiring expats 2 to have a sponsor to take a job and to obtain sponsor’s ap- proval to switch jobs) can help address inefficiencies in the labor market. UAE allowed expats to take on new jobs without sponsor’s permission after contract renewal. Exit permits do not exist. Raise minimum wage in high priority sectors - only after mo- Qatar raised minimum wages to 1,000 Qatari riyals applica- bility is reformed. Once market forces determine the new 3 wages, if the wage gap persists, a general minimum wage ble to all workers. Companies must also provide food and accommodation or a stipend of 800 Qatari riyals. could help level the playing field. Offer incentives for firms to invest in human capital. Finland’s Joint Purchase Training offers partial financing 4 Incentives can help shift the demand for labor to higher and technical support to firms seeking to train, reskill, up- value-added production. grade their workforce. Portugal's Qualifica Centers are one-stop shops for guidance Introduce a skills certification framework. Conduct active out- 5 reach to adults with low skills to engage them in learning. on lifelong learning targeting low-skilled adults, unemployed and NEET youth, as well as for recognition of competences. Improve the work environment for Kuwaiti females through Legal reforms in China (e.g. paid paternity leave and laws/ 6 legal reforms to promote female labor force participation. policies promoting gender equality). OECD countries (e.g. Sweden) traditionally allowed for tax Encourage firms to introduce capital via targeted subsidies. OECD credits on investments and have moved to more precision Using subsidies (grants and tax concessions) on specific 7 items (i.e. machinery and equipment) to facilitate adoption in instruments (employing tax credits, but also more target- ed grants) to specific industries facing market failures (e.g. of technology. alternative energy sources). Broaden financial instruments to make it easier and less costly for firms to introduce capital. Explore new approaches The following countries are examples where tax concessions to finance applied to technology such as: asset-based financ- 8 ing; state guarantees; tax concessions; generous grace peri- are allowed on leased equipment: Hungary, Italy, Lithuania and Netherlands. ods; factoring; venture capital; equity-based financing; vast use of SCIs; leasing. 175 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Ensure skills are aligned to the needs of new technology The following countries have national and local boards/ (transfer/adoption) and ensure that technology transfer, 9 adoption and integration include the transfer of skills committees that ensure demand-driven skills development: Scotland, Ireland and Mexico. through sectoral boards that guide firms. Promote deep free trade agreements, particularly with re- gional partners, focused on services and investments. FTAs The European Free Trade Association (EFTA) – Gulf Cooper- 10 will support export development and investments as an im- ation Council (GCC) trade agreement that includes services. portant component in Kuwait's shift away from full depen- dence on oil. Saudi Arabia implemented a record number of business Continue with business environment reforms, with focus on reforms in recent years. It was ranked among the top 10 11 reforms for starting a business, land and construction, and global business climate improvers in the Doing Business insolvency. 2020 report (it made the greatest strides in the area of starting a business). Allow capital subsidies to finance SME growth - not only Japan and most OECD countries allow for tax concessions, 12 start-ups. This could have a significant impact in expanding through accelerated depreciation, tax credits and other con- Kuwaiti firms in new sectors. OECD cessions to provide an incentive for firms to invest and grow. Many countries have put in place mechanisms to enforce Strengthen and enforce competition law and institutions. This 13 will help open markets for younger firms to enter and expand. competition laws (e.g. anti-trust legislation), including: OECD USA and OECD countries. Expand SME preferences in government contracts. Need to address insufficient competition in government contracts Ireland by adopting the ‘European Code of Best Practices 14 since there is a program already in place aimed at increasing Facilitating Access by SMEs to Public Procurement Contracts’. private sector share of government contracts. Introduce legal reforms to remove barriers to accessing fi- nance for female entrepreneurs. Women increasingly a large Saudi Arabia made access to credit easier for women by pro- 15 share of entrepreneurs in Kuwait and therefore, need to ad- hibiting gender-based discrimination in financial services. dress barriers to entry specific to females. 176 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Social Protection Kuwait’s social protection system does not incentivize private sector employment enough, it provides inadequate support to job seekers and may even encourage some recipients to not work by providing more lucrative cash transfers. Revise Dam Al-Amala design to reduce preferences for the public sector Dam Al-Amala provides a subsidy to all Kuwaiti workers in the private sector, with the goal of equalizing wages between the private and public sectors. Reducing or eliminating the premium for public sector employment is essential for the success of efforts to limit public sector employment and increase private sector employment. While the program has succeeded in eliminating the public sector wage premium for many people, its design is inefficient. As a result of its targeting design, the program is overpaying workers at the high end of the wage distribution who are more likely to be well-remunerated in the private sector. However, the program is not paying enough to workers at the bottom half of the wage distribution, for whom the wage premium in the public sector is the highest, as shown previously. As a result, a wage premium in favor of the public sector, even after accounting for Dam Al-Amala, persists for some segments of the Kuwait workforce. For example, employees with intermediate education earn 23 percent more (including Dam Al-Amala payments) in the public sector compared to employees with similar characteristics in the private sector. Dam Al-Amala could be reformed to target workers based on their wages, not education, marital status, and number of children, as is current practice. Additionally, the transfer should be made more progressive by channeling a higher share of the payment towards low wage workers, and significantly reducing the amount of transfer to workers at the upper end of the wage distribution. While policy makers may be concerned about the educated and skilled Kuwaiti workforce findings jobs in the private sector, Dam Al-Amala is not the best way to address this. Indeed, demand-side reforms to encourage job creation and improve productivity in the private sector are crucial for absorbing educated Kuwaitis into higher value-added jobs that can support their reservation wages. Using the Kuwait 2017 labor force survey, we show in Figure 1 below that the program, as currently designed, provides roughly the same average transfer per worker across the various Kuwaiti wage deciles in the private sector. However, given that the wage premium in favor of the public sector is the highest among workers in the lower half of the wage distribution, the program shows that its targeting is not the most efficient. Figure 2 shows the simulation of the average transfer per worker that is needed to close the entire wage gap between the public and private sectors for all workers across the wage distribution. The average transfer per worker in the private sector in the simulated reform scenario is highly progressive. Workers in the upper half of the wage distribution need a much lower benefit amount to close the wage gap than what they are currently receiving. The budget under the simulated reform scenario remains neutral, therefore, the reform is about restructuring the existing budget, rather than adding to it. 177 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS FIGURE 1 FIGURE 2 Current design Simulated reform scenario Average transfer per worker (left y-axis) Benefit as a % of total transfer (right y-axis) 1,467 1,600 25.0 1,600 25.0 1,264 1,400 1,400 1,157 20.0 20.0 1,200 1,200 982 918 1,000 1,000 889 15.0 15.0 857 847 800 806 774 743 800 800 698 678 670 677 634 10.0 10.0 600 600 400 400 280 5.0 5.0 169 200 200 0 0 0.0 0 0.0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Decile of private sector workers based on salary without Dam Al-Amala Decile of private sector workers based on salary without Dam Al-Amala Source: Kuwait 2017 Labor Force Survey data Note: The simulation methodology in Figure 2 relies on constructing a counterfactual public sector employee for each private sector employee. In other words, for each private job worker, a corresponding public job worker is found based on propensity sector matching that relies on a set of observables included in the survey Build PAM capacity to better target those in need, including job seekers PAM’s job search assistance is inefficient. The benefit is higher for those with higher educational attainment, even though they are at less risk of unemployment or of dropping out of the labor market than those with lower levels of education. PAM targeting is weak, focusing on the university-educated, even though 45 percent of private sector vacancies registered with PAM are for jobs that don’t require tertiary education. PAM’s counseling services are not well coordinated with private sector employers, and its programs are not monitored or evaluated for effectiveness. Less than 10 percent of job seekers expect to find a job via PAM. PAM’s case management approach could be shifted from its sole focus on university graduates towards job seekers facing multiple employability barriers. A profiling system should be implemented to focus on workers with the highest probability of long-term unemployment; this should be used by case managers to inform each job seekers’ level of targeted support, including access to the job seeker allowance. The system could follow two approaches: > High quality support for the hard to place, focused on early detection; and > Innovative online services to complement in-person support, especially for the relatively easier to place such as university graduates. 178 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS PAM could coordinate better with the private sector by collecting data on vacancies, identifying growing occupations and skills requirements, and re-orienting training programs towards skills that are in demand by the private sector. PAM could focus on offering vacancy and matching services to employers in the growing sectors that have low levels of Kuwaiti employment. This could be done in two ways: > PAM could work on training and matching Kuwaitis, likely those with secondary education or below, in some of the growing low or semi-skilled sectors with wage structures that are below the reservation wages of average Kuwaitis and that have been mostly dominated by expatriate workers, e.g., services and niche manufacturing sectors. Dam Al-Amala could play a key role in encouraging Kuwaitis to take up some of these jobs. > PAM could continue with training and job matching, especially for university graduates in sectors where the share of high-skilled workers is much lower than in other advanced economies (e.g., ICT, mining, manufacturing, construction). The success of this approach would depend on the effectiveness of other pillars of the Jobs Strategy to expand productivity in those sectors to support a higher share of skilled Kuwaiti employment. Many workable MoSA beneficiaries could be assisted to join the labor market by expanding PAM’s resources and capacity to do outreach, intake, registration, profiling, placements, or referrals to training services for skilling/reskilling. Labor market programs and transfers (e.g., Dam Al-Amala, job search allowance, training programs) need to be evaluated for actual effectiveness on Kuwaitis’ employability outcomes. Additionally, monitoring systems that collect/track employment data on PAM beneficiaries after placement should be strengthened, and improvements to the labor market information system would support these recommendations. Many of these recommendations involve complex processes that would require significant human resources and technical capacity within PAM. Revise social insurance policies to incentivize Kuwaitis to work longer Social insurance plays an unexpected role in discouraging employment, for example, generous unemployment insurance, even for voluntary resignation, may prolong periods of unemployment. The very low retirement age (45-50) and substantial net replacement rates (65 to 95 percent) encourage workers to retire while they are still productive. The generous survivorship benefits are provided to daughters at all ages, but are revoked if they secure a job, providing a strong incentive to stay out of the labor force. And the permanent benefits that widows receive mean they do not have to work, regardless of their abilities. The retirement age could be increased significantly to incentivize workers to keep working. Early retirement schemes could be strengthened in line with international experiences highlighted above. 179 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Eligibility of survivorship pensions could be restricted to dependents (male and female) up to 21 years old, 26 if in education (except for the disabled), and to widows until they re- marry. Entitlement would remain if they find work, although the level of the benefit would fall as income rises (with a percentage of the amount of the benefit disregarded for this calculation, to maintain work incentives). To strengthen work incentives, unemployment benefits could be limited for workers who have quit their jobs voluntarily. Approaches in other countries that could be considered for Kuwait include requiring a fixed-term waiting period before benefits are provided (e.g. Austria, Denmark) or reducing the overall entitlement period (e.g., Australia, UK), and eliminating any entitlement to benefits (e.g., Canada, US). Improve efficiency of the social safety net system Reforms to the social safety net system could improve efficiency and strengthen work incentives. MoSA benefits are not sufficiently targeted to the most vulnerable households. Benefits are higher than unemployment allowances and are not linked to active job search requirements, limiting incentives to look for a job. Benefits are provided for long periods: 57 percent of beneficiaries received benefits for over 2 years and 40 percent for over 4 years. The MoSA benefit schedule could be revised to better target vulnerable Kuwaitis by eliminating categorical targeting. Eligibility could be based on the household’s welfare, which can be measured by wage income of working members within the household, jointly with assets and other proxies for actual expenditures, such as rent, or car or house value. This approach would increase incentives for non-vulnerable Kuwaitis to look for work and would improve the impact that MoSA benefits have on welfare. Moreover, MoSA cash benefits could be revised to encourage work by embedding an appropriate earnings disregard into the design of a means-tested targeting scheme. An earnings disregard allows beneficiaries to keep a portion of the benefit as they begin earning wage income. As families work and earn more, the benefit declines but total income (benefit plus wage income) increases. This design rewards low-income families for working. A well- functioning targeting system is required before implementing an earnings disregard. Improve capacity and coordination between MoSA and PAM to better monitor beneficiaries that are capable of working. Reductions in cash benefits could be imposed on work capable MoSA beneficiaries who fail to seek employment, participate in training offered to them, or refuse suitable job offers. Such requirements might generate substantial opposition, given that some beneficiaries who are work capable view MoSA benefits as an entitlement from the state. The social protection system could be made more efficient by consolidating the various assistance schemes. A unified framework for targeting, assessing eligibility, and implementation could also be established. Resources devoted to costly subsidies and public employment should be reduced, and the savings channeled to programs that cultivate human capital or increase worker productivity. The feasibility and desirability of a universal basic income in lieu of subsidies and wage premiums in the public sector could be considered. 180 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Examples on similar policies implemented by other countries Reformulate the objectives of Dam Al-Amala from a broad to The United States Earned Income Tax Credit (EITC) and the 1 a narrowly targeted program, focused on increasing the in- United Kingdom Working Tax Credit (WTC) are two examples of centives of low wage workers to join the private sector. programs that top up the wages of low-income workers. The US EITC offers a refundable tax credit for low- and moder- ate-income workers. Workers receive a credit equal to a per- centage of their earnings up to a maximum credit. Both credit Target workers based on their wages. The benefit amount rate and maximum credit vary by family size, with larger cred- 2 could be set as a share of workers’ wages. its available for larger families. The UK WTC provides a benefit to boost income of working people with low income. The amount varies based on income level and number of children. The US EITC is progressively targeted: benefit goes up as in- come increases till it reaches a certain threshold, before start- ing to gradually decline with each additional dollar of income afterwards. In 2020, the income threshold for a family with 3 Channel a higher share of the payment towards low-wage 3 workers. children was $19,330 to get the maximum credit of $6,660. As income increases afterwards, this credit gradually declines until it reaches zero at an income level of $50,954. The UK WTC is also progressively targeted, and the benefit will start going down once the beneficiary earns over £6,420 a year. Revise PAM's case management approach to focus on job Australia uses the Job Seeker Classification Instrument to as- seekers in need of assistance. Having a profiling system can sess job seekers likelihood of finding a job based on 18 factors 4 help determine the groups with highest chances of long-term (e.g. employment history, education, etc.). After profiling, the unemployment and improve targeted support. public employment office focuses on vulnerable job seekers. In the OECD, long-term unemployed benefit more from train- Enhance efficiency of existing counseling services and train- 5 ing programs based on profile of job seekers. OECD ing compared to other programs. They also benefit from pri- vate sector job subsidies (Card, Kluve, and Weber, 2017). Strengthen PAM's coordination with the private sector, by Germany’s public employment agency conducts intensive em- actively collecting existing vacancies, identifying growing oc- ployer outreach to register available vacancies. As of 2019, it 6 cupations/skills, and re-orienting training programs towards had 1.48 million registered employer vacancies and 305,400 skills in demand by the private sector. apprenticeships. Expand PAM’s resources/capacity. Enhancing outreach, in- OECD countries spending on active labor market programs can take, registration, profiling, placements, or referrals to train- reach up to 3% of GDP (vs. Kuwait’s 0.0007% of GDP). Most of 7 ing services for skilling/reskilling can lead to higher activation OECD their public employment offices focus on helping recipients of rates among work capable individuals. social assistance benefits graduate from welfare. Evaluate labor market programs and transfers, and strength- The USA continuously draws lessons in program (re-) design 8 en monitoring systems tracking employment data of bene- through four decades of evaluating labor market and social ficiaries. programs via large-scale experimental studies. Strengthen the Labor Market Information System (LMIS) and USA LMIS produces high-quality info and tools for use by job 9 expand its analytical capacity. seekers, employers, workforce development professionals. 181 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS 12 OECD countries (Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Poland, Portugal and Spain) tightened access to early retirement by raising eligibility age and/or extending contribution requirement. Many countries 10 Revise early retirement laws. OECD also increased the actuarial decrements for early retirement (average adjustments in OECD range from 4.6-5.6% compared to Kuwait’s 2.5% deduction). Turkey, Netherlands, Poland and UK do not allow early retirement via the old-age pension system. Switzerland treats children of both gender equally and con- Equate benefits between daughters and sons of diseased siders them dependent until they are 18. It also imposes age 11 pensioners and incentivize survivorship pension beneficia- limits for when the spouse can access permanent disability ries to work. benefits If she has no dependent children or disability (min. eligibility age is 45). Poland delays the start of the benefit period (suspension) to Revise unemployment insurance rules to exclude compensa- discourage voluntary unemployment, imposing a waiting period tion for individuals who resign voluntarily. Countries gener- of 90 days starting on the day they register as unemployed. ally enforce one of three penalties: 1) Suspensions: impose a 12 fixed-term waiting period on the claimant; 2) Sanctions: also Australia imposes sanctions of 8 – 12 weeks. impose a fixed-term waiting period but subtract from the overall entitlement period; and 3) Disqualifications: eliminate the claimant’s entitlement to benefits altogether. In Canada, voluntary resignations results in disqualification from entitlement to benefits. OECD countries determine eligibility depending on the house- Revise MoSA targeting mechanism to better reach vulnerable hold’s welfare, which can be based on a combination of wage in- 13 Kuwaitis. This ultimately leads to more efficient spending and OECD come of working members, jointly with assets and other proxies better labor market outcomes. of actual expenditures (e.g. rent, car value, house value). The United States Supplemental Nutrition Assistance Program Redesign MoSA cash benefits to encourage work. Could be provides nutrition benefits to low-income families. 20% of done by embedding adequate earnings disregard into target- earned income is disregarded when calculating benefit amount. ing scheme, which allows beneficiaries to keep a portion of To qualify, net income of a family of 3 must be at or below pov- 14 the benefit as they start earning income from work. The more erty line ($1,732) for a max benefit of $505 monthly. The benefit they earn, the less the benefit but total income (benefit + in- equals: max benefit - 30% of net income. A family with a net come) increases. wage income of $173.2 has a net income of $136.6 (after disre- garding 20%) so benefit is $505 – (0.30*$136.6) = $463.4. Netherlands work-first programme helps applicants find Activate work-capable beneficiaries of social assistance into work directly after applying for welfare benefits. Applicants the labor market. Can be done by implementing a work-first work with supervision or do temporary work to gain benefits 15 approach via improving MoSA capacity/coordination with PAM and must draw up action plans containing their obligations to monitor if beneficiaries are looking for work, partaking in to labor integration (e.g. finding work) and consequences of training, and accepting suitable job offers. non-compliance. Many OECD countries have one-stop shops to facilitate the in- 16 Consolidate and unify various assistance schemes. OECD tegration of social protection and employment services. Consider implementing a universal basic income scheme to State of Alaska in the United States implements a universal 17 consolidate various allowances and in lieu of costly subsidies basic income to share wealth with its citizens. and public employment. 182 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Human Capital Kuwait’s workers need to develop the skills required to build a modern, information-based economy. Educational quality is low and learning outcomes are poor, with a significant mismatch between Kuwaiti workers’ skills and the skills required for production to be competitive in a modern economy. The education system suffers from poor coordination, limited monitoring and evaluation and is therefore not very efficient. Foreign workers have been filling private sector job vacancies, while Kuwaiti workers are typically concentrated in the public sector. Improve learning outcomes and the quality of education Internationally standardized tests show that educational outcomes are behind that of other regional and OECD countries, despite high expenditure on education. Students accumulate a learning gap of 4.8 years by the time they reach working age, and children born in Kuwait today will reach only 58 percent of their productive potential as adults. 51 percent of children are unable to read and understand a simple text by age 10. The Kuwait National Curriculum Framework for school education emphasizes the importance of improving learning outcomes, which now needs to be translated into action with clear goals for doing so in the classrooms across the country. This is in line with the government’s focus on strengthening student learning as the central tenet of education policy. A preliminary goal should be to increase the share of students who meet minimum proficiency levels in international assessments such as PISA, TIMSS and PIRLS. Kuwait needs to promote a culture that encourages learning through inquiry, inquisitiveness, and experimentation rather than being based on rote-learning. It is important to establish well-defined learning targets and ensure that the teachers and resources needed to meet these targets are available. Teachers should be helped to establish a growth-mindset environment, so that all students can improve their performance at their own pace, and according to individual learning strengths. Significant teacher professional development programs will be required to develop this culture of high learning, particularly as inquiry- based learning has not been the main approach to teaching in Kuwait. Access to quality early childhood development (ECD) programs could be expanded, with the goal of universal participation. There is a need to develop the necessary strategic vision for ECD, improve integration with general schooling, address concerns of equity in access, ensure that pre-school facilitators are well trained, and strengthen planning and implementation capacities. A reasonable target is to aim for pre-primary enrollment rates of about 85 percent in 3 years. 183 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS The quality of teaching needs to be improved; teacher training programs must be adequately aligned with the new curriculum, and teachers need to be trained to implement the new curriculum. Teaching quality could also be improved by introducing uniform admissions standards for teacher education programs. Pedagogical training should include the use of technology in the teaching and learning environment, and there needs to be differentiated instruction to address issues confronting older teachers, who may not be as tech-savvy as their younger colleagues. Student assessments could provide information on how best to improve learning in particular subject areas, rather than to judge student abilities; these assessments also need to be reviewed in terms of construct, design, and frequency, and there is a need to ensure that teachers and students understand the purpose and objectives of assessments. Assessments could be used to help establish a culture that promotes meritocracy, while ensuring that children understand that they are simply another way of improving learning, rather than something to fear. This will require a significant change to the learning culture in Kuwait, assessments are generally used to determine a student’s progress. Assessments need to be diversified to include: a snapshot of learning; a summative exercise between levels to capture a student’s portfolio of achievements; a formative assessment that helps identify continuous learning that takes place in classrooms, and perhaps most importantly, the day-to-day ability of teachers to assess student progress in the classroom. Strengthen links between the education system and the world of work The educational system has had limited success in providing the skills required by the private sector in Kuwait; 31 percent of Kuwaiti workers have a mismatch between their educational level and the qualifications required to fulfill their job, most of whom are considered underqualified. The role of the Education and Training Authority (BQA) should be strengthened to improve articulation across all relevant schooling levels. While the current national quality framework (NQF) in Kuwait focuses mainly on higher education, it could be used to improve and strengthen articulation across different platforms, institutions, and sectors by identifying these and placing them within the context of the NQF. To some extent this is already being done in that students do seem to be able to move between PAAET and Kuwait University programs. However, this process could be significantly improved by focusing on institutional and curricular articulation to support progression through the system. Gaining the cooperation of all parties may not be easy - for example, engineers often do not want to see technicians making progress towards becoming engineers. Promote market relevant programs to help address the issue of skills/qualifications mismatch. This can be best achieved by working closely with the public and private sectors to develop curricular content within a relevant framework. The private sector should lead on the improvement of curricular content, rather than respond to requests from the Ministry. This is being done to some extent, but this must be an actual change in function, and not 184 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS just in form. India offers a good example of using industry associations to identify the skills on which training centers need to focus, at the same time as ensuring, that other critical subjects for society, for example, fine arts, history, Quranic studies, literature and languages, and even basic sciences, are not left out. Curricular reforms could ensure that more time is spent on in-demand subjects, and that these subjects are promoted through information campaigns (for example, communicating the market relevance of coding, data science, etc.) and by financing scholarships for special programs. Curricular reforms are already in place, but it needs to be viewed as an on-going activity with a clear plan for revisions. The content of curricular reforms should be left to individual institutions (for post-basic levels of education), but this decentralized approach is difficult to achieve. The attractiveness of vocational programs could be improved through professionalization. Many countries have struggled with this, but education and training may have reached a point where this has changed naturally because of the number of medium- and high- skilled jobs that are considered as vocational and because of the growth of the gig economy. Kuwait can focus on excellence in the PAAET system, participation in skills competitions, and improving articulation across qualifications and platforms. Improving parity between general education and TVET would be invaluable in improving overall skills mapping. Work or practical experience needs to be incorporated into basic and post-basic training programs to support transition from school to work. This can be done readily in the public sector and state-owned enterprises by decree, private sector organizations may have to be encouraged to support this initiative, perhaps with some form of incentives. Implement system level changes to enhance efficiency of the education system Multiple public and private stakeholders impede coordination in the education sector; the education monitoring and evaluation system is weak and closed. A high-level commission could be established to improve and strengthen coordination and collaboration across all relevant ministries, institutions, agencies and organizations, the private sector, and other key stakeholders. Monitoring, evaluation, and feedback mechanisms should be strengthened at all points across the education system. A system of data collection will support educational planning, help drive evidenced-based policy, support institutions in expanding or reducing program offerings, and help improve the overall efficiency with which the educational system is managed. 185 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Examples on similar policies implemented by other countries OECD Many countries have clearly defined objectives to improve Continue to strengthen the focus on student learning as the student learning outcomes, and do this by having defined central tenet of Kuwait's education policy. Making student 1 learning as part of the national discourse and establishing learning targets, adoption of a universal approach, and en- suring students and teachers have all the necessary resourc- clear goals should help improve learning outcomes and pre- es to achieve the intended targets. These countries include: pare Kuwaiti children for the future of work. OECD, UK, Singapore and Canada. Engender and develop a culture of high learning expectations. Most OECD countries incorporate various elements of these in 2 A culture that promotes learning via inquiry, inquisitiveness, and experimentation combined with effective leadership, a OECD their school education programs, combined with independent systems of measuring and reporting learning outcomes, and climate for learning and appropriate learning structures. more recently, introducing 21st century skills in their schools. Expand access to quality early childhood development pro- Most OECD countries have high preprimary enrollment rates OECD grams and increase pre-school enrollment rates. The im- (e.g. France 100% and Belgium 98% among 5-years old). At- 3 portance of early childhood education and care cannot be over-emphasized. It helps to build/improve a child’s cognitive tention to early childhood education and care programs has grown dramatically in recent decades with substantial public ability, socio-emotional growth and lays the foundation need- investments being made to these programs and implemented ed to support lifelong learning. through decentralized provision. Improve professional development and management of Many OECD countries have professional development pro- teachers. Kuwait should improve the quality/relevance of grams. Best programs have common features: ability to at- initial teacher preparation programs and quality of teach- 4 ers graduating from those programs. This can be done by OECD tract/recruit top students to the teaching profession, include ‘clinical practice’ in pre-service curriculum, teacher evalu- revising curriculum, recruiting teacher trainees from top ation practices emphasizing growth, and in-service training students, and ensuring that their career ladders and renu- tailored for individual teachers. meration are well defined. In countries with highest educational outcomes, teachers Improve skills of Kuwaiti teachers and the teacher training take 4-year degrees, receive early mentorship, take part in 5 college to smoothly replace thousands of non-Kuwaiti teach- curriculum development, and are well remunerated. Coun- ers without impacting the quality of education outcomes. tries with the best teacher training colleges include Finland, Singapore and Korea. Continue to strengthen student assessment systems and use Top performing countries have well-designed student assess- results to support student learning outcomes. Assessments ment systems. OECD is assessing the Assessment of Higher 6 should be reviewed regularly and used to improve the stu- OECD Education Learning Outcomes to assess graduates’ abilities dents’ learning. upon graduation. Articulation across different parts of the education and skills Improve articulation across all relevant schooling levels by 7 strengthening the role of the BQA. development spectrum or different qualification levels allows for continuous learning and mobility between vocational and general higher education (e.g. Australia). Promote market relevant programs to address the skills mis- match. Best programs tend to be developed when the private India utilizes its industry associations to determine the need- 8 sector leads the process of improving curricular content, in ed skills that training centers should focus on teaching. coordination with the public sector. 186 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Undertake curricular reforms. Curricular reforms should be Finland reformed the national core curricula at all levels of on-going to ensure that more time is spent on in-demand education between 2014 and 2017 to strengthen the educa- 9 subjects, and that these subjects are promoted both through information campaigns (e.g. selling the market relevance of tion system ability to face a rapidly changing world. Similarly, Ireland undertook rapid curricular reforms in the 1990s for coding, data science, etc.) and by financing scholarships for students who needed additional support. special programs. Sweden created pathways for students to move from up- Improve attractiveness of vocational programs through pro- per-secondary VET to post-secondary education and training fessionalization. Kuwait should focus on excellence in PAAET 10 system, participation in skills competitions and improving ar- to make VET more attractive. Other countries have included short-term training programs, digitization of TVET and skills ticulation across qualifications. systems to make TVET more attractive. Many OECD countries have work-based learning, apprentice- ships, and other training that involves practical work. These Incorporate practical experience into training programs to 11 support transition from school to work. OECD programs support demand driven training and ensure train- ees have the opportunity to practice in industry and for po- tential employers to find experienced employees. Jordan in 2015 established a National Committee for Human Resources Development to develop an integrated, strategic and Establish high-level commission to strengthen coordination 12 across stakeholders. well-defined system for human resources development. Mean- OECD while, most OECD countries have standing committees that look into these issues (e.g. UK, Australia and New Zealand). The best performing countries in the world have, over the Improve monitoring, evaluation and feedback mechanisms. years, supported a shift from a focus 'only on inputs and 13 Collection of such data will support educational planning, help drive evidence-based policy and improve the education- OECD processes’ to also include a focus on outputs and outcomes. Output and outcomes-based budgeting has become the norm al system efficiency. in many countries in the OECD. 187 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS The Jobs Strategy recommendations Public Sector 1 Short-term (< 1 year) 2 Medium-term (1 – 3 years) 3 Long-term (>3 years) > Freeze public sector wages > Harmonize work hours, bonuses, > Introduce defined contribution allowances with the private sector pension plan > Impose constraints on hiring > Institute standardized pay for > Reduce the size of the public sector > Introduce selective cadres across the civil service retrenchment schemes > Provide additional studying > Monitor performance opportunities within the civil service > Review activities, cut and offer incentives for inefficient expenditures innovation and efficiency > Introduce a revolving door scheme > Introduce minimum educational between public and private sectors attainment levels > Restrict number of times > Introduce a standardized an individual can refuse a national entry exam position in civil service > Remove gender restrictions > Introduce fast track or young professionals scheme > Develop training and skills development programs > Develop a nurse practitioner cadre > Approve a strategy to replace non-Kuwaitis Private Sector 1 Short-term (< 1 year) 2 Medium-term (1 – 3 years) 3 Long-term (>3 years) > Introduce labor mobility for > Reforming the admissions system > Introduce a skills non-Kuwaiti workers certification framework > Introduce incentives for firms to invest in human capital > Raise minimum wage in high priority sectors > Promote capital deepening via targeted subsidies > Promote deep free trade agreements > Promote capital deepening through > Strengthen/enforce competition broadening financial instruments law and institutions > Continue business > Introduce legal reforms to remove environment reforms barriers to accessing finance for female entrepreneurs > Rebalance capital subsidies to include SME growth (not only start-ups) > Introduce legal reforms to improve the work environment > Expand SME preferences in for Kuwaiti women government contracts > Provide financial/fiscal incentives to introduce ICTs in production processes 188 PART 2 | STRATEGY | 1. POLICY RECOMMENDATIONS Social Protection 1 Short-term (< 1 year) 2 Medium-term (1 – 3 years) 3 Long-term (>3 years) > Reform Dam Al-Amala to target > Reform PAM's case management > Shift system away from costly workers based on their wages in a approach subsidies and public employment, and progressive manner invest more in programs that foster > Enhance efficiency of PAM’s existing human capital > Evaluate labor market programs and counseling and training services transfers, strengthen monitoring > Expand PAM’s resources and capacity > Reform survivorship pension eligibility > Strengthen coordination with private > Revise unemployment insurance rules sector to omit compensation for individuals who resign voluntarily > Strengthen LMIS > Activate work-capable beneficiaries on > Reform early retirement laws social assistance into the labor market > Reform MoSA benefits to better target vulnerable Kuwaitis > Redesign MoSA cash benefits to encourage work > Consolidate various assistance schemes Human Capital 1 Short-term (< 1 year) 2 Medium-term (1 – 3 years) 3 Long-term (>3 years) > Continue to strengthen focus on > Engender and develop a culture of high student learning as central tenet of learning Kuwait's education policy > Continue to strengthen student > Expand access to quality early assessment systems and use results to childhood development programs support student learning outcomes > Improve professional development and > Improve articulation across all relevant management of teachers schooling levels by strengthening the role of the BQA > Promote market relevant programs > Improve attractiveness of vocational > Undertake curricular reforms programs through professionalization > Incorporate practical experience into > Improve skills of Kuwaiti teachers training programs to support transition from school to work > Establish high-level commission to strengthen coordination across stakeholders > Improve monitoring, evaluation, and feedback mechanisms 189