GCC: How to Create Jobs for Nationals?

The GCC is growing, helped by crude production and expansionary policies. Despite the sluggish global outlook, the Eurozone recession, and Asia’s deceleration, the six Gulf Cooperation Council (GCC) countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – are growing the fastest in the Middle East and North Africa (MENA) region – led by Qatar, Saudi Arabia and a diversified Oman. In most countries, economic activity is dominated by the oil and gas sector and supported by expansive policies. Over 2011 and 2012, the Iran oil-embargo lifted GCC production, especially in Saudi Arabia, and abundant reserves brought about large budget and external surpluses. Going forward, fiscal policy is likely to support growth across the region, particularly in Oman, Qatar and Saudi Arabia. Central banks will keep importing easy monetary conditions through USD-pegs or close-tracking, providing liquidity to the economy.

Overall job creation is not a problem. About 40 million people live in the GCC. The capital-intensive oil and gas sector creates relatively few jobs, and it employs less than three percent of the GCC labor force. However, the non-oil sector is growing steadily, and creates employment. According to the IMF, over the past 10 years, about seven million new jobs were added in the region. However, less than two million went to GCC nationals. As locals are generally unwilling to accept low-paying blue-collar jobs and often lack the skills required for white-collar positions, about five million vacancies were filled by foreign labor, largely in the private sector. Most of the jobs were created in the low-skill construction sector, but a significant number of foreign white-collar expatriates were also hired, including in the Kuwaiti and Qatari public sector. In other words, the private sector relies mainly on immigrants, and the creation of millions of new jobs has not reduced local unemployment.

Unemployment amongst locals is high and structural. Unemployment rates differ across countries, but ensuring sufficient job-creation for locals is a common priority. In Saudi Arabia, unemployment affects new entrants in the labor market – the youth and, increasingly, university graduates – and has remained above 10 percent for several years. In countries with very low levels of unemployment – such as Kuwait, Qatar, and United Arab Emirates – efforts are made to create more opportunities for nationals in the private sector. Indeed, if labor market structure and dynamics do not change, economic growth alone will not be sufficient to provide much needed local jobs. According to the IMF, over the next five years, another six million jobs will be added. At the same time, the fast-rising GCC working-age population is likely to grow by about 5 million citizens. If past trends are a guide, less than one-third of newly created jobs will go to locals, and an additional 2 million nationals could end up unemployed.

The labor markets are segmented. Oversimplifying, there are two labor markets. The first, for GCC nationals – driven by the public sector and heavily influenced by the benefits it grants – offers greater labor rights, more comfortable working conditions, and better wage expectations. The employer has little or no control over the employee. The second, for foreign workers, far less generous, is preferred by the private sector and buoyed by favorable immigration regimes and rigid sponsorship systems, which restrict internal mobility and make expatriates easier to control than national employees. As a result, private businesses depend heavily on foreign cheap labor but – thanks to the ongoing global crisis – have increasingly enjoyed access to an abundant supply of skilled international expatriates. In sum, high public sector salaries increase reservation wages for locals and crowd out private sector employment.

How to create enough jobs for GCC nationals? Throughout the region, social unrest highlighted the importance of employment for social cohesion. The challenge is to promote the employment of nationals without eroding competitiveness or reducing growth. For example, restricting foreign labor inflow would impose additional costs to local businesses, and GCC governments are reluctant to move in that direction.

Likely policy options have little or no teeth. In the available policy spectrum, the most likely policies are the least suitable to solve structural issues. In other words, political feasibility and policy-impact are inversely related.  

1. Create jobs in the public sector, the favored solution to date. Over the last two years, social demands – and the likelihood of social unrest – rose as oil output volumes and revenues grew, and reserves accumulated at central banks and sovereign funds. Swiftly, governments increased spending in public-sector salaries and subsidies, propping consumption. In 2011 Saudi Arabia increased government spending by 25 percent, mostly in entitlements. In Kuwait, about 80 percent of the national labor force is employed in the public sector. In 2012, civil-service wages were increased by 25 percent and 7 percent of GDP spent on fuel-subsidies. It is not unreasonable to assume that this bonanza-driven spending-spree can continue over the next decade. Paradoxically, over 2011-12, while GCC fiscal expenditures rose, higher oil prices and export volumes improved the fiscal balances. By end-2011, the combined GCC current account surplus had risen to $400 billion, more than 20 percent of GDP on average, official reserves exceeded $1 trillion, and foreign assets were higher than ever. At current rates of production, many GCC countries have proven reserves for another 80 years. However, there is no free lunch: while prolonged policy uncertainty constrains investment, current spending outpaces capital outlays. As a result, infrastructure spending and non-oil exports lag behind and competitiveness indicators deteriorate.

2. Provide incentives and subsidies to increase private sector employment. In the long run, initiatives to enhance the appeal of working in the private sector, stimulate private-sector activity and job creation will be less expensive than creating public jobs.  First, an income-supplementing “salary top-up scheme” for nationals moving to the private sector is likely to facilitate initial recruitment by employers and reduce the workers’ preference for public-sector jobs. To date, Kuwait has implemented this policy with very mixed success. Second, incentivize nationals to acquire productivity-enhancing skills and become attractive for private-sector employment. Saudi Arabia and other GCC countries are implementing new programs to match job seekers with employers, through job placement services and training and education schemes. Third, offer the private sector financial and other incentives to employ nationals, by providing targeted subsidies for hiring of new labor market entrants.

3. Support SME growth. SMEs represent more than 90 percent of the GCC private sector, and employ about 50 percent of its labor force. However, they contribute less than 40 per cent of GDP because they are concentrated in less profitable, low-tech sectors. Governments should facilitate access to credit. Saudi Arabia is providing partial guarantees to SMEs. Government and large corporations’ contracts would also help SMEs grow. Greater and more stable revenues would allow for technology upgrades, financial stabilization and job creation.

4. Make public-sector employment less attractive. Most GCC countries need to reduce public wages and most supporting benefits, otherwise nationals will inevitably prefer the civil service to the private sector. A few countries are considering a tax on foreign workers or additional fees on work permits as a way to reduce cost-differences to the employers, but these measures are unlikely to significantly reduce the preference for Government jobs.

5. Economic diversification via trade exposure. To diversify the industrial base and to induce investment and entrepreneurship in the tradable-sectors, public policies should promote the manufacturing – and export – of new and more sophisticated products while pursuing a stable and competitive real effective exchange rate. The examples are there: the UAE has diversified into service provision. Saudi Arabia has developed a petrochemical industry. Still, real exchange rate overvaluation remains a challenge.

6. Upgrade education and training systems. GCC Governments must better align education outcomes with the skills demanded by the private sector. Training and placement services – already in place in several countries – need to be significantly upgraded.

Not creating meaningful jobs could eventually threaten the existence of the GCC states and cause harm to other countries. The challenges are rapidly evolving into problems. While Governments make a paternalistic use of economic rents – and ‘buy peace’ by increasing wages and living standards – rapid demographic changes are not matched by adequate education systems. The private sector keeps focused on short-term gains, and powerful alliances between ruling and business families keep blocking competition to favor rent-seeking. Monopolistic practices and administrative red-tape keep hampering job creation. Rent-extraction and nepotism widen income inequality. Since the beginning of the “Arab Spring”, not much has changed.

Growth rates are declining below-potential. Between 2012 and 2013, GCC growth will decelerate from 4.6 to 3.8 percent; in Saudi Arabia, it will soften from 4.8 to 3.5; in Kuwait from 4.5 to 3.0. As a result, GCC inflation is expected to remain stable, at 3.2 in 2012 and 3.0 in 2013. In 2013, oil-output might decline in Saudi Arabia, UAE, and Kuwait, possibly depressing local consumption and asset markets. While natural gas exploration and infrastructure should stimulate the GCC economy, Qatar’s rapid hydrocarbon growth is likely to stabilize. Poor credit growth will constrain economic activities and stock market performance, which in turn will induce a rise in non-performing loans in the banking sector.

Without bold structural changes, economic stagnation and persistent unemployment are likely. Fiscal breakeven prices – the price of oil needed to balance the fiscal accounts at current oil-outputs and spending levels – are rising. Most countries need oil at $90/barrel to meet spending commitments. Past savings can shoulder a few years of budget deficit if the fiscal position were to deteriorate because of lower oil revenues or higher expenditures. However, entitlements are hard to cut and in the long run will undermine the sustainability of both fiscal trajectory and growth model. Bahrain, held back by political constraints, is already running a deficit. Kuwait might start running deficit by 2017. The implementation of GCC employment nationalization policies will add to private-sector costs and reduce remittances to other Arab countries.

Reform to create jobs, or face a prolonged stagnation and social unrest. Unless MENA governments pursue meaningful reforms to quickly spur a rapid job-creating recovery, the region risks a few years of structurally-anemic growth and financial instability. To avoid economic hardship and income volatility – which tend to bring about political and social unrest, and eventually strongman rule – it is essential to limit élite-capture by amending rent-capturing regulations and create a viable private sector, hence enabling job-creation.

Prepared for Oxford Analytica as supporting material for the Policy Analysis Workshop: “Job Creation Strategies for the GCC and Abu Dhabi”, Abu Dhabi Department of Economic Development, 2013.