A fierce political battle could determine Kuwait's long-term economic future. (page 1 of 2)

By Nick Henry London
The outcome of the battle between the reformists and the conservatives will shape the Kuwaiti economy for the next decade, and possibly beyond.

The conflict has been simmering for years, without ever really coming to a head. But ever since a controversial cabinet reshuffle in February, which saw two crucial posts - finance minister and oil minister - go to politicians from outside the ruling family, it was clear that a showdown was imminent.

Youssef al-Ibrahim, the US-educated, reformist finance minister, got things started in June. During the final meeting of the National Assembly before its lengthy summer recess, he proposed a string of reforms that he pledged would "reconstruct the Kuwaiti economy." They included slashing taxes on foreign firms from 55 percent to 25 percent, imposing a corporate tax (although a modest 2.5 percent) on listed Kuwaiti firms for the first time and an excise duty on imported luxury goods. The reforms have won widespread approval from independent economists. In July, the International Monetary Fund (IMF) published a report applauding the moves by al-Ibrahim, encouraging him to push ahead with the reform process and agreeing to help with technical aspects of the changes.

But it has been a very different story inside Kuwait. Many of the country's 50 MPs have been vociferous in their opposition, and have ensured that it has progressed at a snail's pace over the past three years. In 1999, Emir Sheikh Jaber al-Ahmed al-Sabah took the drastic step of dissolving parliament and forcing re-elections after he grew frustrated at MPs' persistent efforts to sabotage his reforms.

Why are MPs so opposed to the process? "You have to remember that MPs rely on their constituents for their seats," says one Kuwaiti economist. "The reforms are aimed at dismantling the very system which the vast majority of Kuwaitis depend upon for their high standard of living. Are they really going to vote for MPs who did away with that system? It puts members in a difficult situation."

Welfare state. At present, the Kuwaiti economy is dominated by the government. Some 94 percent of the Kuwaiti national workforce is employed in the public sector, around half of whom are believed to be in unproductive or absentee positions that exist merely to provide employment. Kuwaiti nationals also enjoy one of the most benevolent welfare states in the world, with heavily subsidised water, electricity and health care. The government accepts that this is unsustainable, given Kuwait's rapidly expanding young population, and is striving to create a market-driven economy with a dynamic private sector that will provide opportunities for ever-growing numbers of Kuwaiti graduates and school-leavers.

Al-Ibrahim is well aware of the vested interests seeking to derail the process. "Parliament is a labor union," he said earlier this year. "It is a natural result to see the majority of MPs defending their labor unions." Matters are further complicated by the interests of influential Kuwaiti trading families, of which there are around 40. They have thrived under the existing system, which has protected them from outside competition with legislation such as exclusive distribution agency laws and high taxes for foreign firms. Many will suffer if these barriers are swept aside in favor of a level playing field, as al-Ibrahim wants to do. There is no evidence that these families have tried to bribe any MPs, but their influence in Kuwaiti society should not be underestimated.

Nowhere is the rift between MPs and the government more evident than in the oil industry.