The capital absorptive capacity of Iraq and Kuwait: a comparative study

Abstract

The background to the study is that of a continuously depreciating income accruing to producers of a wasting asset, oil. This income must be fully utilized in the short-run in order to attain a once and for all opportunity for rapid development. The concept of absorptive capacity can be extremely useful in determining how income can be productively employed to take advantage of this opportunity. The underlying factors for choosing these two particular Arab states are mainly because of their similarities, yet there are certain important disparities in their economic characteristics. Their similarities could be briefly summarised, in that both neighbouring countries belong to the oil - rich Gulf states, both are developing, both are under populated, with qualification in the case of Iraq, and both have to utilise fully the revenues from a rapidly depleting oil assets in a comparatively limited time span. Their differences are as great as their similarities, in that Iraq has had the benefit of oil revenues considerably longer than Kuwait, and that its economy is far more diverse, as agriculture was, and still is the main source of employment. This explains the reason underlying the magnitude of the impact that oil made on social fabric and the economic structure was far greater in Kuwait than in Iraq. In the introductory chapter the relevant definitions of the concept were examined, and the most viable one was chosen for the two countries. The limitations of the concept and the various methods of its measurement were considered and where possible, criticised. The methodology adopted was used as far as possible throughout the study. Chapters 2 and 3 dealt with the economies of Iraq and Kuwait consecutively as a necessary background to the discussion. Chapter 4 examined the concept within the context of the savings investment gap, and the conclusion which emerge from the available empirical evidence. The components of national income were examined, and analysed. In Chapter 5, an open-economy model was applied, as the aggregate level of economic activity in both Kuwait and Iraq is to a greater or lesser extent exogenonaly determined through their openness. In Chapter 6, the government revenue and expenditure was discussed, their determinants, considered and the two economies compared in the light of the differing priorities which the governments in Kuwait and Baghdad have. Finally, the concluding chapter attempted to synthesize the findings of the study its a summarised form of remarks concerning the absorptive capacity of the two economies.