Question

In late February 2020, Kuwait government took some early initiatives to control the Coronavirus pandemic. For Kuwait, the pandemic is considered to be a Double-Edged Sword, as the lower demand for oil has reduce the nation’s income and has paralyzed the domestic economic activities. Despite government support, many companies continue to lay off workers, which may lead to further reduction of national income.

Q1.​Kuwait government took a major economic policy to restrict the expatriate labor to be 30% of the local population. Will this policy be beneficial or detrimental (hurtful) to Kuwait economy in the long and short run? (explain your answer).

Answer 1

The Corona Virus Pandemic has hit the world economy extremely hard, with the aggregate demand for goods and services falling sharply in almost all sectors. What this then means is that producers make considerable losses on their products and have to layover staff to curtail their cost of operations.

The country then looms through an economic crisis wherein low aggregate demand means lesser production and lesser production leads to lesser income for the working population. This cyclical recession cannot be corrected by economic reforms itself, as the aggregate demand has not reduced due to the forces of demand and supply or any other economic structural problem, but because of a disease which is beyond control for the government of Kuwait or for other countries alike.

Having said that, the Government of Kuwait has taken measures to reduce the impact of the Corona Virus on the domestic labour force by reducing the expatriate labour force to be 30% of the local population. What this means is that those from outside the country may head home as they have no jobs available in the market place.

In the short run, the people of Kuwait may find reserved spots for themselves in the markets wherein they get higher employment opportunities as a result of the action and their overall income remains stable or increases in some cases. However, since the aggregate demand or total demand in the country is falling sharply this effect is said to happen for a very short period of time.

Further, expatriate labour force works at a much lesser salary happily as compared to the local population. This is because currency differences allow for people to send back money to their native countries where the value of the currency is much higher in comparison. This is not true for the domestic people of Kuwait meaning, that the cost of producing the same goods may go up higher in the long run as a result of a proportion of labour force not being available to the producers.

Also, the government may see retrospective measures from other countries who because of this action of reducing foreign labour force of protectionism may also undertake measures such as trade tariffs or barriers for Kuwait and its produced goods. Thus, even when in the short run, the problem of national unemployment may reduce for the country, in the long run this will have a large impact on the economy which may not be corrected unless the country took serious measure to control the problem.

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