As the Arab world undergoes fundamental changes, its leaders must adapt fast or risk popular uprisings – a lesson that has not been lost on the countries of the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. With their neighbours embroiled in internal conflict or in the midst of difficult transitions, and with discontent rising at home, the Gulf states are eager to stem the tide of revolution.

Gulf countries depend on imported labour

Indeed, the GCC has offered generous aid, totaling roughly $ 160 billion so far, to countries swept by the Arab Spring. Furthermore, to cool domestic political tensions, some of the Gulf countries have announced additional spending packages that include significant wage hikes, substantial increases in public-sector jobs for their citizens, and higher unemployment benefits.
Simply put, the Gulf states are relying on their wealth to ward off revolution. After all, the majority of their population has benefited immensely from decades of rapid, natural-resource-based economic growth.

But the GCC economies are also rife with structural problems that short-term economic packages will not address — bloated public sectors, heavy dependence on imported labour, and endemic unemployment, especially among young people, who make up a disproportionately large share of the population. The region needs sustainable policies aimed at bringing about much-needed economic diversification. Indeed, without profound structural change, the favorable standard of living that underpins the Gulf states’ political stability is likely to erode.
The public sector is by far the largest employer of GCC citizens: in Saudi Arabia, the government employs 80% of the indigenous workforce; in Kuwait, the figure is 93%. An estimated 45% of Saudi Arabia’s government budget is allocated to public-sector salaries.

The GCC countries’ new spending packages are likely to perpetuate public-sector hypertrophy. Unproductive measures, such as public-sector wage increases, will have the immediate effect of crowding out further the private sector. Next year, salaries for federal employees in the UAE will rise by 30-100%, while their Qatari counterparts’ wages will rise by 60-120%. But it is not certain that the additional spending will trickle down to the rest of the economy. In fact, because most consumer goods are imported, it is unlikely that domestic companies will benefit at all.
Reducing public-sector dependence requires increasing citizens’ involvement in local businesses, so increasing the private sector’s role in generating employment is vital. Yet very little attention has been paid to promoting entrepreneurship, despite its potential to channel the youthful dynamics unleashed by the Arab uprisings in a positive direction. Wealthy locals, for example, could be given incentives to invest in start-ups, while the government could provide low-interest loans and defer repayment until a particular profit threshold is reached.
But strong legal fundamentals are no less important for creating a business-friendly environment. Ensuring that intellectual and other property rights are adequately protected for citizens and foreigners alike is essential, as is reducing corruption.

Not all Gulf countries have been impermeable to change. In response to social-housing shortages – and rising tensions over increasingly conspicuous social inequality – Oman’s leaders pledged to build 2,500 housing units for low-income families, and to support technical training tailored to job creation. Likewise, Bahrain signed a $ 550 million public-private partnership for housing, 75% of which will be allocated to construction of units for low-income people.

Still, according to the Bertelsmann Transformation Index – which aims to measure various aspects of economic development in non-liberal countries, or countries in a democratic transition – the GCC states’ transformation indices range from “limited” to “very limited,” largely owing to corruption and a lack of transparency.

In some countries, such as Saudi Arabia and Oman, perceptions of corruption are linked to the absence of meritocracy. Moreover, the overriding importance of personal networks helps to maintain – or even increases – socio-economic inequality and hinders inclusive growth, as do weak intellectual-property laws and cumbersome bureaucracies.

If Gulf leaders are serious about avoiding social unrest, they should take advantage of gains from today’s high oil prices to finance labor-market and intellectual-property reforms, thereby encouraging private-sector growth and providing greater opportunity for all. International institutions could help by offering technical assistance. For example, there could be scope for cooperation within the European Union-GCC Joint Action Program, which already includes a section on “Exchange of expertise and information�in economic integration.”

New private-sector jobs could generate a wave of dynamism in the Gulf region, helping it to move away from overreliance on energy exports and forge a new path towards sustainable long-term growth. A successful transition would give real opportunities to a generation of unemployed young people, thus enabling them to take responsibility for their futures – and the future of the region.

Nael Shehadeh is an associate researcher at the Gulf Research Center Foundation.
Copyright: Project Syndicate/Europe’s World, 2012. Exclusive to the Sunday Times