US Foreign Policy
Commentary

Investing in the Future: The Arab Gulf States Adapt to the Challenge of Modernization

in Program

There have been so many short-term threats to the stability of the Persian Gulf over the past few years- including the invasion of Iraq and saber-rattling over Iran’s nuclear program- that it would be easy to forget about the long-term challenges the region faces. One subject that the region risks ignoring is the role of Gulf citizens in running their own countries.

Current situation and challenges

In the six countries of the Gulf Cooperation Council (GCC), Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, expatriates account for 70 percent of the workforce. Most citizens work in government jobs with generous compensation schemes and high status, but little real economic output. By contrast, private businesses are dominated by the region’s 13 million expatriates, who make up a third of its population. In the UAE, for instance, 81 percent of nationals work in the government sector, while expatriates make up approximately 98 percent of the private sector.

This system of make-work government jobs has ensured the loyalty of citizens to their governments, and helped introduce a sedentary working culture among what were once largely tribal populations. These were necessary conditions for the establishment of strong states in the Gulf countries. However, demographic realities mean that such systems are unsustainable, and will need to be revised.

Thanks to pro-natalist policies, the Gulf countries have high birth rates and young populations. Even with high oil prices, hydrocarbon revenues alone will not be able to support the increasing numbers of citizens who now feel entitled to comfortable jobs. Gulf citizens are now facing double-digit unemployment rates. Citizens therefore have to be encouraged to enter their countries’ private sectors.

It is not surprising that citizens have not entered in large numbers: market wages are lower than those offered by the public sector, private sector workers get fewer holidays, and few companies offer their employees such benefits as healthcare and education. As a result of the region’s poor educational systems, many citizens also lack the linguistic and technical skills required by private employers. Finally, there is a misperception among expatriates that Gulf citizens are inherently lazy and are therefore not worth hiring.

These problems are not insurmountable. However, economic incentives, rather than political rhetoric, must be the centerpiece of moves to expand participation in the private sector. In order to be competitive, Gulf citizens must work- and be seen to work- as hard as their expatriate counterparts. When their presence in high positions is mandated by quotas, as in the banking sector, they are not forced to push themselves as hard as their expatriate counterparts, and companies avoid hiring them. Additionally, as long as employees of the state are treated substantially better than workers in the private sector, the government will remain the employer of first and last resort.

However, any hasty governmental actions seen to curtail the privileges of citizens will engender disaffection, and could trigger instability. Governments should thus launch a phased plan to encourage the majority of their citizens to seek employment in the private sector.

Strategies

In the short term, further expansion of the public sector should be discouraged. Government hiring should be capped at replacement levels or lower in order to force more job seekers to look to private businesses for employment. Governments can also announce that salary scales for new employees will not be revised upward in the future, even to account for inflation. These two measures will ensure that there is more competition for government jobs, leading to an improvement in the quality of government employees.

Furthermore, governments should strongly encourage current workers to seek employment elsewhere. Government employees in overstaffed departments who wish to move to the private sector should be offered generous compensation. For instance, they could be given half their old salaries to supplement their income for five years. This will decrease the financial burden on the government without substantially decreasing productivity. Governments can also provide seed capital on favorable terms to new businesses that hire at least a certain proportion of nationals.

Simultaneously, governments should make it clear that citizens can be dismissed as easily as expatriates. Many private firms believe they cannot dismiss inefficient national workers, and thus simply refuse to hire them at all. A flexible labor market will encourage businesses to take the risk of hiring national employees for the first time. This, in turn, can help break down stereotypes of nationals being lazy and hard to employ.

In the medium term, there is a need to reform the region’s educational systems. At the primary and secondary level, students should be given better training in foreign languages, particularly English, as Arabic is not the primary language of business in the Gulf. Since the region depends heavily on international trade, language skills will also be valued greatly by Gulf-based companies hoping to employ their own people while doing business outside the region. At the tertiary level, there is a need to improve standards in universities. More students should also be channeled into fields that are economically productive. About two-thirds of Saudi PhDs are said to be awarded in the field of religious studies, but students would be more desirable to private firms if they went into fields like engineering, accountancy, law, and medicine instead. Changing the number of places and scholarships offered in various educational fields could help develop parts of the economy that are not heavily dependent on hydrocarbons or the government.

The long-term goal should be for citizens to compete with expatriates for a range of private sector jobs. While they can afford it, governments should offer all citizens- including those in the private sector- healthcare and education. This, together with visa costs for expatriates, will create some advantages for employers hiring citizens, but without reducing the incentives for Gulf nationals to compete in the workplace with their expatriate counterparts.

The Gulf countries need to prepare for the times when they will not have as much wealth to spread among their national populations. Revenue flows are currently at record highs, with an estimated $500 billion in surplus oil money making its way through the Gulf economies last year alone. This presents governments with a golden opportunity to amply compensate citizens for significant economic adjustments while maintaining high economic growth. In doing so, they can build sustainable economies and avert the risk of future crises without endangering their present popularity. They should thus look critically at their current plans to see how well these tackle expected challenges, and whether crucial issues are being addressed. After all, the future prosperity and stability of the region cannot be divorced from the well-being of the people living in it.

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