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GCC rapid development and laissez-faire labor policies

I write this week from Abu Dhabi, where an interesting discussion is taking place about the role of UAE nationals in the private sector. At the National Council, that serves as a federal Parliament, during a meeting lasting seven hours, the UAE minister of labor revealed that nationals numbered only 20,000 in the private sector, out of a total labor force of four million in that sector.
In other words, nationals represented a mere half of 1 percent of all workers in private businesses, confirming what many visitors to the UAE notice.
Most of those nationals working in the private sector (60-65 percent) are employed in banking and financial jobs, as it was made clear during the session.
He also estimated that only 200,000 to 300,000 jobs in the private sector could be nationalized. These jobs would be more than enough to absorb any unemployed nationals. However, the minister said that national job seekers preferred to go for government jobs instead.
A National Council member lamented the fact that nationals who joined the private sector held low-paying jobs, hinting at one of the reasons for nationals’ flocking to the government sector, where they had a better chance at landing higher paying jobs.
Reliance on foreign labor has resulted in an unusual demographic structure in the UAE. Out of a total population of about eight million people, only about one million are nationals. The rest are guest workers, business people and their families.
This state of affairs is repeated, in varying degrees, in other GCC countries. In Saudi Arabia, the GCC country with the largest native population, only about 800,000 Saudis work in the private sector, just about 10 percent of total employment in that sector. Those working in the private sector represent only 4 percent of the total Saudi population.
Thus it appears that GCC countries, without meaning to, have adopted a unique path of development that is now coming under strain. While this model has allowed them to develop quickly, economic growth has relied mainly on foreign labor. When they struck oil about 70 years ago, GCC oil producers began by trying to train and re-tool the local labor force to manage the new oil economy, imposing stringent quotas of nationalization on oil companies. That policy largely succeeded in the government and a few sectors where governments had large stakes.
However, as oil wealth multiplied beyond the economic capacity of their economies and public sectors, the private sector was called on to complete the job. The private sector, seeking to cut costs and maximize profits, resorted to foreign sources of labor. Instead of waiting until local labor was trained and readied for the demands of sudden development, they invited foreign guest workers, trained and ready to go. The fact that GCC countries were surrounded by places with high populations, low wages and significant unemployment levels made it easy to import labor from those countries.
During the first decades of oil-fueled development, there were enough jobs in public and semi-public sectors to employ all available native workers. As such, there was no need to enforce restrictive labor policies outside those sectors. As a result, reliance on foreign labor in the private sector grew dramatically, to the situation now where in several GCC countries foreign labor accounts for 99.5 percent of total employment in that sector.
This model of development is rare in economic history, and there are probably no parallels in modern times.
However, those laissez-faire labor policies are coming under scrutiny. The current review is propelled by concerns about growing unemployment, as well as social and security concerns about the near absence of nationals in the private sector.
The Saudi case is a case in point. Lessons learned from it could help other GCC countries avert a similar fate. Last week, the minister of labor in Saudi Arabia announced that there were two million unemployed nationals! That figure is more than four times the last official estimate, published in 2009, when the number of the unemployed was put at 450,000 or 10.5 percent of the Saudi labor force at that time.
If the new estimate is true, it indicates that the unemployment problem has seriously worsened during the past three years.
The Labor Ministry estimated that only 14 percent of jobs in that sector could be nationalized. That is about 1.1 million jobs. It has recently adopted drastic measures to try to accomplish that task, to the chagrin and loud protests of the business community. Although the ministry maintains that nationalization rules have been on the books for some time, businesses object to the sudden change to in that laissez-faire labor atmosphere, where they could hire the least costly workers from any country they chose.
But let us assume for the sake of argument that the Ministry of Labor is able to nationalize every job that could be nationalized according to its calculus. In other words, let us assume that out of the two million unemployed Saudi nationals, 1.1 million were hired to fill all those jobs that the ministry believes could be nationalized. That would still leave about 900,000 Saudis without jobs, permanently. If you add to that stock about 200,000 job seekers entering the labor market every year, you are talking about a rapidly escalating challenge — unemployment in the high double digits.
This is one of the principal challenges facing GCC countries: How do you maintain rapid economic growth while making sure that nationals are employed and your business people are thriving? Put another way: How do you balance the interests of workers and employers while maintaining healthy rates of development? What are the social and security implications in all of this?
There are no easy answers, but it is a good sign that a serious debate has started.

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