Fiscal constraints and demographic pressures are prompting the GCC countries to remake the extensive welfare models that created and supported a large, prosperous middle class over the past half-century. Established social contracts are facing sustainability issues. In Kuwait, Qatar, and the UAE, for instance, more than two-thirds of nationals work in the public sector. Meanwhile, domestic energy subsidies for nationals incentivize overconsumption – and leave less oil for export at market prices.
Complex challenges of reform
GCC governments are responding to these issues, but the reform challenges are complex. Reducing public-sector hiring and subsidies without careful analysis and action can lead to unintended consequences. For instance, of the 2.3 million Saudis employed in the private sector in the third quarter of 2023, 1.3 million earned less than SAR5,000 (US$1,333) per month, compared to average public-sector wages for Saudis of over SAR13,000 (US$3,465).
Moreover, welfare systems for nationals stranded in the private sector leave room for improvement. Consequently, some GCC countries are experiencing a growing economic divide between often older nationals with well-paid government jobs and younger nationals with lower private-sector incomes, who have to compete with low-wage foreign workers.
Key policy tools to redefine GCC social contracts
What’s needed now is a concerted, integrated effort that can simultaneously achieve fiscal reform, welfare modernization, and a large-scale shift from public to private sector employment. Toward these ends, GCC governments can use five complementary policy tools to remake their social contracts: permanent income supplements; active labor market programs; universal basic income; means-tested social benefits; and a modest minimum wage for foreigners.
Permanent income supplements
Permanent income supplements for lower earners make private-sector employment more attractive to nationals and ensure that the shift away from public-sector employment does not result in “working poor.” If income supplements are accompanied by reforms in the public sector (such as a voluntary retirement scheme), the financial burden of even a generous supplement would be modest compared with the current expense of public-sector overemployment. Financing for income support programs also could come from the continued reduction or removal of energy subsidies, or new or increased fees for employing expatriate workers.
Active labor market programs
Active labor market programs, including lifelong learning, job services, and training, complement income support and already exist across the GCC, although investment in them has been comparatively limited and their quality can be uneven. GCC governments can enhance them by investing in monitoring and evaluation tools.
Further, educational reforms at the primary and secondary levels can integrate citizens productively into the private labor market. In particular, there could be more selective recruitment and better incentivization of teachers, and the modern HR practices and golden handshakes needed across the public sector should extend to the education system.
Universal basic income (UBI)
GCC countries can use universal basic income (UBI) to provide all nationals with a secure income stream, incentives for private-sector work, and a quid pro quo for reductions in public-sector hiring and energy subsidies. Although UBI has generated debate in advanced economies, in the GCC countries – especially Kuwait, Qatar, and the UAE – it would be less economically distortive than much of the current wealth sharing.
In Kuwait, for instance, suppressing energy subsidies would generate enough savings to pay every adult national outside the public sector a monthly grant of about US$700, with a supplement paid for every child of around US$230. These grants could be significantly higher if the government co-financed them from savings generated by the gradual attrition of public employment: A 10% reduction in Kuwait’s public payroll would finance an increase of about US$650 per month in UBI payments to adults outside government.
Means-tested social benefits
By implementing means-testing and unified cash benefits, governments can also ensure social benefits are more equitable and fiscally sustainable. Coupled with systematic labor market activation programs, mean-testing would allow governments to reduce the risk of welfare dependency and increase the integration of nationals into the private sector.
A modest minimum wage for foreigners
Finally, GCC governments can further support the remaking of social contracts by introducing a modest minimum wage for foreigners, helping to promote fair treatment for expatriates. Such minimum wages, where already implemented, have had no serious effect on firm profitability or competitiveness. GCC governments also should continue to modernize the limited welfare arrangements for expatriates, as the UAE has already done. Such changes should include the provision of independently regulated pension arrangements and a greater ability of expatriates to change jobs by further relaxing “sponsorship” rules.
GCC countries can achieve an attractive, inclusive, and productive new social contract because they enjoy a unique endowment: considerable fiscal resources, an ability to plan for the long term, and a young citizen population increasingly willing to engage in the private sector. The challenge is to use this endowment in a fiscally sustainable way that provides opportunities to all nationals, guarantees basic welfare for all, incentivizes and improves the rewards for private economic activity, and minimizes economic distortions.
Professor Steffen Hertog is from the London School of Economics and Political Science, while Sami Zaki is a partner, and Mitcha Sleiman is a principal, at Strategy& Middle East, part of the PwC network.
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