The resilience of oil-rich economies to the global financial crisis: Evidence from Kuwaiti financial and real sectors

Abstract

This article investigates the resilience of oil-rich economies to the recent global financial crisis, with a particular emphasis on Kuwait as a case study. We explore how the crisis affected the market power of banks and, furthermore, how the crisis was transmitted to the real sector of industrial growth. Three main results emerge. First, we find that bank competition in Kuwait was only marginally dampened during the crisis period. Second, the financial crisis penetrated the real sector through a weaker and less significant relationship between bank performance and industrial growth compared to the pre-crisis situation. Accordingly, industries depending more on external finance suffered disproportionately more during the crisis. Third, these findings apply to oil-rich Arab countries and, with respect to the adverse real effect of the crisis, to oil-exporting countries. Overall, these results confirm the vulnerability of oil-rich economies to the crisis, requiring appropriate policy actions to support financial stability and prevent declines in real economic activity.