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What’s behind the growth of Kuwait’s informal economy

Souqs and bazaars are an integral part of the Arab world and in Kuwait, the bazaar mentality - the ideas of mercantilism, entrepreneurship and working for oneself - are deeply rooted. In fact, the country was founded by merchants - risk takers who not only traded goods but who within a few short generations also pioneered what are today some of the leading businesses in Kuwait. Start ups are as common as cupcakes in the region. But in Kuwait, the growth of an informal economy is taking the country in a decidedly different direction from its GCC neighbors, a trend that could have a lasting impact on Kuwait’s economic future.

The costs of doing business
Despite recent government approval of a new law aimed at promoting small and medium enterprises (SMEs), opening a business here can be a nightmare of wasted time, unnecessary costs and lengthy delays. Kuwait’s labyrinth-like bureaucracy, a growing bribe culture among public officials and a wasta network make it hard, if not nearly impossible, for young entrepreneurs to enter the market. Unfriendly regulations - like requiring businesses to have a location (and pay rent) before granting licenses - add to the enormous financial burden on starts up and entrepreneurs, further stifling the growth of the local private sector’s SMEs. According to the Kuwait Labor Market Information Systems (LMIS) website, self employed Kuwaitis represented around 2 percent of the total workforce in 1985, less than 1 percent in 2005 and had returned to an upward trend by 2011 with a little more than 1 percent. Managed by the Central Statistical Bureau, the LMIS also notes that SMEs accounted for around 34 percent of employment in 2002 but that has dropped to 23 percent - a full 10 percentage points - nine years later in 2011. Indeed, in a 2011 report, local investment company, Markaz noted that in comparison with other GCC states, “Kuwait has been a late comer in unlocking the potential role that SMEs can play in its economy. Kuwaiti private sector and SME contribution to employment lacks luster, whereby approximately 85% of the Kuwaiti workforce is currently employed by the government.” A lengthy domestic political struggle and the 2008 global financial crisis - which hit Kuwait especially hard - further eroded the formal economy.

Cupcake culture
But it also created a window of opportunity for local entrepreneurs willing to enter the ‘informal economy’. Trends like home cupcake businesses triggered other ideas among locals and expatriates who began to launch start up Instagram shops and pop up markets like the local farmer’s collective, Shakshooka market. These unlicensed and unregulated businesses offer a rich array of products, services and goods. To give just a few examples, you can now order online or by WhatsApp the following: Fresh baked breads, customized red velvet cupcakes, personal trainers, children’s toys, jewelry, clothes, make up, bike rentals, photocopies, costumes, delivery services, catering, inflatables, bespoke Tshirts, dara’as and bishts, exotic animals and pets, shoes, tuitions and cheat sheets, smoothies and detox drinks, life coaching, preschools, dream interpretation and much more. Like any country, Kuwait has always had a small, informal economy. From air conditioning repairmen to door-to-door soda sellers there has always been the local seamstresses, the neighborhood baqala and the roaming street vendors. What’s new today is the sheer number - and the growing preference for going the informal route. With the growth of farmer’s markets and single day bazaar events, many young entrepreneurs don’t even need or want a formal license to do business. “Why should I get a license and pay rent when I can sell my products over Instagram and at events?” seems to be the general consensus. Some will eventually grow enough to transition into more formal, licensed businesses with brick and mortar premises. But many others may choose to remain lean and rely on casual labor or support from their domestic help to maintain what is often seen as a side income.

Shaping Kuwait’s economic future
The impact of informal economies are widely debated. There are both positive and negative consequences. On the negative side, informal businesses lack licensing and regulation and for things like food service this can result in uncertain quality. Many informal businesses also prefer to remain so in order to avoid taxes - though this is not much of a concern for Kuwait at this point, it could pose a problem longer term as oil revenues slow. Informal businesses do not have government oversight of labor. Official government statistics fail to account for ‘informal’ businesses since they are not registered.

Informal businesses also are not counted as part of the nation’s GNP and do not figure into the statistics on unemployment and other social and demographic numbers. On the positive side, participating in the informal economy allows greater ease of entry into the market - anyone can make cupcakes at home. Informal businesses also do not face the costs associated with licensing not to mention the bribes and wasta now regularly needed to pass even standard government paperwork.

It also creates more flexibility in the market and improves market competitiveness as brick and mortar businesses must learn to compete with their informal rivals. This can, in turn, lower costs as competition heats up. In total, Kuwait’s private sector is dominated by oil revenues. Non oil revenues accounted for less than 13 percent of Kuwait’s budget in 2013 and private sector businesses across the board benefit from oil revenues in the guise of public sector wages and consumer spending.

The growth of Kuwait’s informal souq does not, then necessarily suggest a real growth in the overall economy but more simply a shifting away from the formal toward the informal as entrepreneurs pursue their ideas by bypassing rather than working with the government. Crackdowns on illicit business activity, however, is always difficult both politically and economically and could pose longer term problems for the government’s efforts to divert local employment into the private sector. It will also add to the already difficult task the government faces of trying to build a tax base among local companies for the future.

By Jamie Etheridge

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This article was published on 27/02/2014