World Economy

(P)GCC Needs “Unprecedented” Reforms

(P)GCC Needs  “Unprecedented” Reforms  (P)GCC Needs  “Unprecedented” Reforms

The crash in oil prices is not the only challenge confronting the Persian Gulf Arab states in West Asia. Economic disorder and lack of opportunity are contributing to instability in the region, stated Bahrain’s minister for industry, commerce and tourism, Zayed al Zayani, while kicking off the recent IISS Bahrain Bay Forum.

He emphasized the need for “unprecedented” economic reform across the Arab states in the wake of lower oil revenues. These policies include generation of millions of jobs for the youth in these economies that continue to depend heavily on expatriate labor from India, Pakistan, Bangladesh and Philippines, Chandra Mohan wrote for the IPS.

Persian Gulf Arabs face the prospect of a demographic dividend of a youth bulge in the population rapidly turning into a curse, thanks to high and rising rates of unemployment for those between 15 to 24 years of age. The highest rates are in Saudi Arabia (28.7%), Bahrain (27.9%), Oman (20.5%) and Kuwait (19.6%) -- four of the six-nation (Persian) Gulf Cooperation Council that also includes Qatar and the UAE.

Bridging the Skills Gap

The prospect of lower oil revenues certainly will constrain the Arab states to diversify their economies away from dependence on this commodity. Countries like Bahrain seek to focus on education and training, communications and infrastructure and promoting a start-up ecosystem for fostering entrepreneurship.

The level of ambition is also high as they intend to generate high skill jobs and build a knowledge-based economy. The technology sector in these states is expected to grow by 10% per annum over the next five years while spending on technology in the Middle East as a whole is expected to touch $200 billion.

However, the transition to this brave new world requires bridging the skills gap. The labor market in this region depends heavily on low skilled and low wage earning migrant labor. More than 80% of the workforce in private sector employment in Bahrain is comprised of expatriates. It goes up to 96% and 98% in Kuwait and Qatar respectively.

Gender Discrimination

Another source of dualism is that women are not adequately represented in the labor market due to pervasive gender discrimination in these conservative economies. Although women’s enrolment in higher educational institutions is rapidly rising of late—a case in point are courses in financial services in Bahrain which attract a lot of women—female labor force participation rates are well below 30% as against the global average of 50%. Jobless among young females is as high as 55% in Saudi Arabia which is three-times higher than that of young males, according to the World Bank’s World Development Indicators.

Persian Gulf Arab states’ labor market thus is “locked in a low skills, low wages and low productivity equilibrium” argued Frank Hagemann, deputy regional director of International Labor Organization, at one of the sessions at the Bay Forum. This dualism is reflected in a substantial wage gap between the private and public sector.

Exploitative Conditions

At the lower end, the living and working conditions of migrants is sub-standard and highly exploitative in nature. Dependency-driven employee-employers relations are rife.

Low oil prices complicate the efforts of the Persian Gulf Arab states to address these distortions without throwing out the baby with the bathwater. If revenues continue to decline, a worry is that it reduces the fiscal space to pay nationals in the public sector. At the same time, there is a compulsion to reduce subsidies on water, electricity and school fees that will disproportionately hit the expatriate workforce. The Persian Gulf Arab states' economies thus will make it more and more difficult for  expatriates to work in these economies. Over the near-term controls on migration appear inevitable, regardless of the heavy dependence on such labor at present.

The transition to a higher skills, wages and productivity equilibrium is far from easy. It entails changes over a generation. For instance, in Saudi Arabia, 40% of the graduates come from humanities or Islamic studies while only 4% are engineers.

Only 17% of firms in these states provide on-the-job training as against the global average of 35%. The best bet for these countries is greater gender empowerment in the labor market than expat-bashing policies to reduce sources of instability.