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From Oil To Toil | Economist


AT City Centre mall, Bahrain’s largest, Bahrainis buy, while foreigners operate the tills. Michelle is from the Philippines, and lowers her voice to explain why there are so few Bahrainis working alongside her. “They are lazy,” she says. Whereas she needs to work hard to keep her job and the visa that goes with it, they can do whatever they want, which isn’t much.

As part of a government plan to boost indigenous employment, employers in Bahrain are given targets for the proportion of locals they must hire. The targets vary: in grubby or boring sectors, requirements are lower—large building-maintenance firms can get away with a 5% “Bahrainisation” rate. Sectors with more prestige, like banking or finance, face higher targets, of 50% for larger companies. Small clothes shops face a quota of 30%. Michelle points to the store opposite, which employs some Bahraini staff on the shop floor. They don’t even want to stand up when the customers come in, she grouses—they know they are there purely to keep the government happy, and are not likely to be fired.

Meanwhile, in a room whirring with cash-counting machines at the Bahraini central bank, all the staff are local citizens, robed in their long white national dress. Half of Bahraini nationals with jobs work for the government. This model, of locals stuffing the public sector and private firms hiring foreigners, is common across the six members of the Gulf Co-operation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). In Saudi Arabia, Bahrain’s big neighbour, two-thirds of nationals with jobs were on the public payroll in 2015, according to Jadwa Investment, a Saudi research firm. Whereas other emerging markets and developing countries devoted around 5% of GDP to public-sector wages, a report from the IMF found in 2015 that in the GCC (plus Algeria) they splashed out closer to 12%.

But sliding oil prices since mid-2014 have slashed Gulf countries’ revenues by at least 10% of GDP, swelling deficits and making the old model even less sustainable than it was before. With an extra 3.8m young people expected to enter the labour market between now and 2021, the pressure to find more private-sector jobs for nationals will be huge.

Some countries are less worried than others. In Qatar and the UAE, nationals are so thin on the ground that there are probably not enough of them to fill government positions, says William Scott-Jackson of Oxford Strategic Consulting. In Oman and Bahrain, the situation is less comfortable, though at least unemployment among Bahrainis remains fairly low. Most is at stake in Saudi Arabia, where the unemployment rate is already 11.6% and only 40% of adult citizens are in the labour force. For Saudi women, the participation rate is a dismal 18%.

The tyranny of high expectations

The trouble is that young Gulf Arabs have come to feel entitled to government jobs. Terms are generous and duties light, dulling the incentive for bright graduates to invest in skills needed by the private sector, such as engineering. Few Saudis would consider working in shops or restaurants, let alone on building sites.

The other, deeper, problem is weak demand from the private sector for Gulf nationals. The lure of the public sector makes them expensive, and immigration laws tying foreigners to their employers make non-nationals extra-cheap (see article). Solving either problem would mean tinkering with a fragile social contract between oppressive regimes and populations who tolerate them as long as they put food on the table.

Under pressure, some governments are trying harder to force private companies to hire locals. Oman has extended its list of jobs for which foreigners may not get visas. It now includes marketing, cleaning and camel-keeping. Saudi Arabia plans to expunge foreigners from human resources and telecoms (and appears to be expunging a fair few businesses in the process). In December the Saudi government will tweak its “traffic-light” system, which imposes harsh penalties on firms that employ fewer women, or Saudis in senior roles, than the government wants.

Such quotas are textbook examples of bad economic policymaking. They have existed in the GCC for a few decades now. They corrupt the work ethic of those taken on purely to meet the quotas. One restaurant owner tells of a Bahraini employee who took a holiday whenever he wanted, then demanded extra compensation when he was fired. He will think twice before hiring another Bahraini, he says. Employers don’t like being told to hire people for reasons other than ability and willingness to do the job. So some of them cheat: for example, by adding phantom citizen-employees to their payroll.

Some companies claim to see the quotas as no problem. Jamal Fakhro, managing partner for KPMG in Bahrain, boasts that 60% of his employees are Bahraini, and that in the banking sector the figure is 70%—above what the government requires. But these are exceptions. The quotas create an incentive to give nationals low-wage jobs (which some will not bother to do). Firms treat this as a cost of doing business, like a tax, says Steffen Hertog of the London School of Economics.

Yet a survey by GulfTalent found that, in 2014, 95% of employers in Oman reported that the quota system was a real challenge, as did 84% in Saudi Arabia and 55% in Bahrain. Such heavy-handed regulation is also nightmarish to enforce. In Bahrain, even with between 15,000 and 19,000 inspections a year, it takes five years for the government to visit each employer.

One way to make locals more attractive to employers would be to reduce the pay gap between them and foreigners. Wage subsidies for nationals have worked in the past, but money for them is scarce. The Saudi government recently announced huge increases in visa charges for foreign workers. Bahrain this year allowed employers to ignore the employment quotas if they pay the government a fee for each foreign worker they hire.

The new charge, set at around 15% of the cost gap between locals and Bahrainis, is too low, says Ausamah bin Abdulla al-Absi, head of the Labour Market Regulatory Authority (LMRA), which introduced the scheme. He hopes to increase the charge gradually and nudge employers away from their model of importing vast quantities of low-skilled labour and making their profits in low-productivity sectors. Mr Absi’s vision, which is more likely to rebalance the GCC economies than blunt quotas, requires time. Some see the low oil price as a blessing in disguise, a means of forcing through change. But after decades of living on petro-welfare, change may come as a shock to many.

From the print edition: Middle East and Africa.

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