How Iraq's invasion of Kuwait dealt a lasting economic blow to the region

Kuwait declares independence and a coup takes place in Iraq

In particular, when Kuwait declared independence in 1961, the Iraqi prime minister at the time, Abdel-Karim Qasim, claimed Kuwait would remain dependent on Iraq. Kuwait's emir, the late Sheikh Abdullah Al-Salem Al-Sabah, wisely summoned British forces to help counter this threat, curbing the Iraqi claims.

But ever since the late 1940s and early 1950s, there has been turbulence in the region. Arab countries had suffered a wave of military coups against the traditional regimes that ruled these countries after gaining independence from Britain or France.

The Israeli occupation of Palestine and the declaration of the State of Israel in May 1948 provided justifications for rebellion and anger, and perhaps illogical reasons for toppling existing regimes. The military — mostly middle class or lower — succeeded in taking power and adopted politically and economically reckless policies.

The Gulf states, including Kuwait, which began to enjoy oil revenues since the beginning of the 1950s, were able to guard against the effects of events in other countries with good governance. But that immunity wasn't complete, as ambitions remained hidden or declared, as was the case between Iraq and Kuwait since independence in 1961.

Despite the end of Abdel-Karim Qasim's claims after the 1963 coup in Iraq and the recognition and admission of Kuwait by the United Nations, problems between the two countries persisted and flared up from time to time.

And when the Ba'ath Party came to power in Iraq in 1968 — for the second time — Iraqi infighting continued. Clashes on the Kuwaiti-Iraqi border broke out in 1973, and two Kuwaiti police officers lost their lives. After Saddam Hussein gained absolute power and became president of Iraq in 1979, things began to develop uncomfortably for the entire region — especially with the start of the Iran-Iraq war in September 1980.

Iraq-Iran war

Iraq's war with Iran had human costs. Over eight futile years, the two countries suffered hundreds of thousands of deaths and injuries, and many soldiers and officers spent many years of their lives in detention.

The Gulf states, of course, stood with Iraq following Iran's intransigence regarding ending the war under acceptable conditions; they also granted Iraq aid and facilitated loans to finance the hostilities and meet other burdens.

Loans borrowed by Iraq during the war exceeded $80bn, with Saudi Arabia and Kuwait being the main lenders. Kuwait facilitated Iraq's use of its ports and infrastructure during that war, exposing its sovereign territory to repeated and varied attacks by Iran. Kuwaiti oil tankers were attacked by the Iranian navy, which required US help to defend them.

Kuwait affirmed its commitment to supporting Iraq by virtue of their Arab nationalist and neighbourhood relations, while seeking opportunities to bring an end to the war and make peace in the region.

An economically ravaged post-war Iraq

By the end of the war in August 1988, the government and people of Kuwait were ready to rebuild Iraq and invest in its various economic sectors, as its economic conditions had deteriorated and the living conditions of large segments of the Iraqi population had worsened.

On the eve of the Iraqi occupation, Kuwait was still facing the crisis of the collapse of Souk Al-Manakh — an irregular stock market — eight years before. The collapse resulted from the use of future sukuk, or cheques, to settle the purchase of shares in an uncontrolled and unregulated financial market contrary to international standards.

Kuwait had a population of 2.2 million in 1990 when the Iraqi army entered the country. The country witnessed widespread destruction of its infrastructure including the electricity grid and water network.

Ports, the airport, and many basic buildings owned by the state or the private sector were destroyed, not to mention the systematic looting of private homes, buildings, and shops, and the theft of all kinds of commodities and goods.

Even more difficult, the vital oil sector was destroyed as more than 700 oil wells and field and extension facilities were burnt. The fires raged for nearly nine months until the last well was extinguished in November 1991.

Kuwait was ravaged by the interruption of production during the seven months of occupation, and then as a result of fires and sabotage in the oil fields.

The country didn't have oil revenues until sometime after its liberation, prompting borrowing from international financial markets. Some $5bn in financing was provided to cover public spending commitments and investment in reconstruction work.

The government had to use part of its sovereign wealth fund, about $17bn, to finance the liberation and then to meet the needs of citizens at home and abroad and cover the expenses of the government in exile.

The challenges of rebuilding

The occupation of Kuwait and its aftermath presented major challenges to economic management. Restructuring public finances to meet the commitments related to liberation, reconstruction and rehabilitation was the most important.

There was also the need to repair the oil sector, and the public expenditure required to manage the country and provide income to citizens.

Fortunately, Kuwait had a sovereign fund and that also helped it borrow from the global financial system, helping its creditworthiness.

The other challenge was to provide the necessary labour to operate various institutions, facilities, shops, and workshops and to carry out the necessary construction work.

During the occupation, Kuwait lost its best expatriate workers. Most of the Palestinians who worked in teaching and healthcare left, as did owners of small and medium enterprises that operated in the distribution of goods and services.

Many people who left had previously worked in government institutions with basic jobs. There were also people in the banking sector, large private sector companies and institutions, and various media organisations, that also left. The number of Palestinians in Kuwait before the invasion was estimated at 350,000. No more than 60,000 remained after liberation.

Asian communities also left Kuwait during the occupation, but most of them were marginal workers and were able to return quickly after liberation. Many Indians held important jobs in banks, accounting offices, industrial workshops, automobile agencies, and other key businesses in the country.

During the occupation, Kuwaitis were forced to work in jobs which they avoided previously, including maintenance, car repair, restoration of sanitary systems in homes, carpentry work, bakeries, or the operation of cooperatives and their markets. However, after the liberation of Kuwait, they gave way to expatriate workers.

Many economists in Kuwait have raised this issue and the need for the government to build on the experience of self-reliance to foster a different work culture among citizens that would bring them back to the pre-oil era.

The government didn't favour structural decisions and policies; it responded to the demands of the private sector and the family sector by allowing a wide range of employment from abroad, especially marginal, non-professional employment.

Monetary measures

The National Assembly, in agreement with the government, rushed to issue Law No. 41 of 1993 on the purchase of hard debts.

The legislation stipulated that the state would take responsibility for the monetary support provided by local banks and investment companies, subject to the supervision of the Central Bank of Kuwait and the Kuwait Finance House, prior to August 2, 1990. The cost was approximately 4.3bn Kuwaiti dinars, or $14bn.

This law reinforced unhealthy tendencies. Claims to sell consumer loans surged since the law relates to debts arising from dealing in shares. Immediately after liberation, the government backed personal loans and real estate credit bank loans, incurring liabilities itself.

In addition, each citizen who remained steadfast inside Kuwait during the occupation was given 500 dinars, about $1,600. There was also support for citizens who resided outside the country during that period.

As the country spent heavily to fund its recovery from the occupation, Kuwait's public finances were hit hard.

Populism over reform

The consequences of the occupation for the national economy were profound.

There was no restructuring after it, and the chance to move toward sustainable development and modify the labour market, or to increase the role of the private sector, was not taken. Nor was there any move over demographic composition, or to overhaul the educational system to provide the workforce needed.

Political populism in the elected national councils after liberation was reinforced, and the role of the cabinet to counter these costly tendencies was disrupted.

Despite waxing and waning energy markets, Kuwait has been able to consistently generate adequate oil revenues over the past three decades. It has also boosted the value of assets managed by the Future Generations Fund, established in 1976, which is currently valued at $803bn.  

But the fund – which grew thanks to oil revenues under a law that allowed 15% of state revenues to be deducted annually in its favour – has faced difficult decisions in recent years.

The state budget has been under pressure since 2014, when oil prices started to come off their peak, putting pressure on big public spending with the government and parliament stopping short of spending cuts.

Kuwait will continue to face clear economic dilemmas unless the political authorities – the Council of Ministers and the National Assembly – face the facts of the modern economy and the necessary structural reforms which are needed within a short time.

Read more: Economic reforms face uphill battle in oil-dependent Kuwait

Wider impact

The economic repercussions of the occupation not only affected Kuwait but also the entire Arab economy.

The money wasted on militarism and wars could have been used in development work in various Arab countries, enhancing the possibilities of Arab economic integration, providing more job opportunities for Arab youth, and reforming education, healthcare, and housing systems in various Arab countries.

No doubt, Iraq paid a high price for the adventures of Saddam Hussein's regime from the 1980s until his fall. It could have become a model country with a diversified economy and might have had economically viable manufacturing industries that could be turned into export industries in a few years. The agricultural sector could also have been reformed and rehabilitated.

In addition, Kuwait and Iraq may have the capacity for economic integration, as the Kuwaiti private sector is aware of the conditions of various economic sectors in Iraq – this qualifies it for investment and investment management to improve the efficiency of the Iraqi economy.

The other Gulf countries were ready to develop the capabilities of the Iraqi economy to benefit the host and investor countries. All of this could have improved living conditions in Iraq and enhanced political security.

There's no doubt that the experience of the Iraqi occupation of Kuwait was bitter, with negative consequences for Kuwait, Iraq, and other Arab countries: it disrupted economic development domestically and regionally, planted the seeds of political instability, and contributed to the tyranny of religious and sectarian extremism in this region of the world.