KUWAIT, April 2 (Reuters) - With a youthful, well-educated population, strong relationships with both neighbours and world powers, and a strategic location on the Gulf, major oil producer Kuwait should be as dynamic a hub for the region as Dubai or Doha.
But while others in the Gulf have powered ahead, attracting foreign investment and developing infrastructure, Kuwait has stagnated, frustrating the people of a country once seen as a Middle East trailblazer.
This frustration is especially evident among young Kuwaitis, cosmopolitan and often educated abroad, who complain of bureaucratic red tape and dysfunctional politics, but also acknowledge complacency among their fellow citizens.
Although thousands took to Kuwait's streets in 2011 and 2012, seeking moderate political reforms, the demonstrations eventually fizzled, at least partly due to Kuwaitis' alarm over the chaos and rise of Islamists in the Arab Spring countries.
Kuwait's system of government handouts and well-paid, comfortable state jobs also blunted calls for change, whether in politics or in the state-reliant economy, observers say.
"We are very lucky that we are financially very comfortable," said Maha al-Baghli, president of the association of business and professional women in Kuwait and an advocate for female entrepreneurs.
"On the other hand, it is not encouraging entrepreneurs and hard work," Baghli told Reuters.
Sandwiched between Iraq and Saudi Arabia, the country is one of the world's richest per capita, and more than half of its 1.2 million citizens are under 25.
Kuwait's leaders point to political deadlock in parliament that makes it difficult to get things done. But many observers say the government's frequent personnel changes, layers of bureaucracy and general ennui are also to blame.
"We don't take the government seriously. They talk, but they do not do," said one Kuwaiti newspaper editor, who asked not to be named because of the sensitivity of the topic.
The trauma of Saddam Hussein's invasion in 1990 deepened an innate cautiousness in Kuwaiti society, some believe.
When asked in 2010 why Kuwait appeared to have lost position to other Gulf states, its emir, Sheikh Sabah al-Ahmed al-Sabah, told Germany's Frankfurter Allgemeine Zeitung:
"Every country follows its own path, according to the demands of its society."
Kuwait's parliament is the oldest and most influential in the six-nation Gulf Cooperation Council. The assembly can block legislation and interrogate ministers, who are selected by a prime minister chosen by the emir.
Relations between the elected assembly and government have often been fraught, however, with six parliamentary elections since 2006 and more than ten different governments, resulting more in political stasis than dynamism.
In addition, members of the ruling family tend to hold the top government posts, while 84-year-old Sheikh Sabah has the final say on state affairs.
The political stand-offs are seen to be a main factor holding up economic reforms and a 30-billion-dinar ($106.5- billion) development plan for major infrastructure projects, announced in 2010, aimed at turning Kuwait into a regional centre.
The plan includes projects such as a new airport, refinery and housing. One major residential city project, planned for years in the southern desert near the Saudi border, appeared on a recent visit to have made little progress.
Shafeeq Ghabra, professor of political science at Kuwait University, said there is a growing sense that the current system is not working.
"There needs to be a political system which is more representative, more equal and more grassroots, with new blood at the highest level - that is able to deal with the issues that have been mounting over the past two decades," Ghabra said.
"You cannot freeze yourself in a moment in history."
Kuwaitis compare their financial centre to Dubai, ruled by United Arab Emirates Prime Minister Sheikh Mohammed bin Rashid al-Maktoum.
"It's leadership," said the editor, when asked about what makes the UAE, also home to Abu Dhabi, work. Kuwait's government has not implemented a strategic vision, he said.
"(Sheikh Mohammed) has a vision, he has a plan. From arriving at the airport until you leave. You respect this."
The UAE also brooks no dissent, however. The contrast highlights the fact that Kuwait's example of limited greater freedoms has not impressed its neighbours, commentators say.
"The failure of Kuwait to keep pace with its neighbours does have an unfortunate side-effect of dampening support for even partial political participation," said Kristian Ulrichsen, Gulf expert at the U.S-based Baker Institute.
"Rulers elsewhere look at the political deadlock and take the lesson that this is what happens when too many unpredictable elements are brought into the decision-making process."
One thing that infuriates young Kuwaitis on a day-to-day level is how much easier it can be to do business in other Gulf countries - even next door in deeply conservative Saudi Arabia.
When Shawaf al-Shawaf wanted to register his kitchen tools business in Kuwait, the bureaucratic process took six months. In Saudi Arabia, it took him less than a day.
"If I need to go to a government department, I cancel my whole day because I know I will spend the whole time there," said Shawaf, 24, who set up his company Dolsten in late 2012.
A 2013 World Bank ranking on the ease of doing business puts Kuwait at 104 out of 189 economies, by far the lowest in the GCC. The next lowest, Qatar, is at 48 while Saudi Arabia is at 26 and the UAE leads at 23.
The government says it wants to make bureaucratic processes easier for small and medium-sized companies and support youth initiatives, and has set up a 2 billion dinar fund to help such projects.
But people in Kuwait say the country will only carry out serious economic and political reforms if faced with a crisis, such as a steep fall in oil prices. Oil accounts for nearly all of the state revenues.
In addition, high government wages and generous benefits will not be sustainable forever. The International Monetary Fund says spending could exceed income as early as 2017 if it continues to grow at the current rate.
"I don't think that change is likely unless it is forced on them," a Western diplomat said, declining to be named because of the political sensitivity of the subject. ($1 = 0.2816 Kuwaiti Dinars) (Editing by Sonya Hepinstall)