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Jobs and skills... key bottleneck to non-oil growth

Jobs and skills key to beat Gulf’s oil dependency

DUBAI, November 12, 2014

Now that oil prices have fallen to around $80 per barrel from around $100 in the past few months, the economies of the oil-exporting nations of the Gulf Cooperation Council will be tested. A key question for their future prosperity is: Have they used the time to successfully develop economies that can thrive in an environment of less buoyant terms of trade?

The answer depends of course on the circumstances in each individual country. However, one recurring theme unites them all: sustainable growth that is independent from the vagaries of the international commodities market will require a significant step-up of productive job creation and an improvement in the skills and productivity of their young workforces, said the recent report released by Standard & Poor's Ratings Services.

The report said that while progress in economic diversification in some countries, perhaps most notably in Saudi Arabia, overall the successes are not sufficient to outweigh the structural challenges that need to be tackled.

“The observation that oil and gas dependency has hardly budged, despite the authorities' efforts, goes a long way in explaining why our sovereign ratings in the GCC have barely changed since Standard & Poor's held its first Financial Leaders' Forum in Abu Dhabi five years ago,” the report said.

Of the six GCC members, our ratings on three have been revised since 2008: Qatar and Kuwait were upgraded by one notch to 'AA' in 2010 and 2011, respectively, while we lowered our rating on Bahrain by three notches to 'BBB' in 2011.

The predominant reasons for the latter actions related to the challenges the Kingdom faced after the outbreak of the so-called Arab Spring, as well as the economic consequences of the domestic political conflict.

Diversification away from oil is slow and uneven

Taking stock of the level and development of oil dependency, it appears on first glance that economic diversification is proceeding briskly. Between 2007 and 2013, GCC non-oil real GDP grew on average by 7 per cent per year, which far exceeds the growth of just over 2 per cent in the oil and gas sector.

However, the share of oil and gas in the GCC economies' GDP has actually risen over the past decade. This of course owes mostly to the surge in oil prices over the period, which boosts the nominal value of oil production, the report said.

"Even so, we believe that some of the diversification is to sectors that are themselves dependent on cheap hydrocarbon feedstock for production, such as petrochemicals," Standard & Poor's noted.

Jobs and skills are key bottleneck to non-oil growth

A critical plank of GCC governments' strategies to diversify their economies away from oil and gas has been an enhanced investment drive. The unweighted investment ratio of GCC sovereigns has risen from just over 21 per cent of GDP in 2011 to an estimate of almost 24 per cent in 2014.

Additional projects are likely to be in the pipeline over the coming half decade, some related to showcase events like the Dubai World Expo 2020 and the Fifa football World Cup in Qatar in 2022. GCC governments are currently planning for a pipeline of projects accounting for on average 155 per cent of 2013 GDP, with Saudi Arabia alone planning on $1.1 trillion worth of projects.

However, further investment in physical infrastructure may not be the most direct route to diversification and sustainable increases in prosperity. For example, Saudi Arabia is the only GCC sovereign that is expected to spend a higher share of GDP in investment in 2014 than on average during 2005-2014.

The analysis points to the main obstacle to diversification lying elsewhere: Education, skills, and jobs. The perception about the quality of education is much poorer than that of infrastructure: the GCC average ranking is 53 for education versus 29 for infrastructure.

"In our view, the poorer quality of education leads to underutilized skills potential and a lack of innovation in the economy, which is reflected in the relatively low number of patents registered that originate in the GCC," said Standard & Poor's in the report.

The underdeveloped skills of the local population are also reflected in the very low level of expenditure on research and development: the average among the GCC lies at 0.2 per cent of GDP, less than half of the level of Sub-Saharan Africa and a tenth of the East Asian & Pacific and world averages.

In a global comparison of achievements in mathematics, the GCC sovereigns were clustered in the group of the weakest performers worldwide in both primary and secondary school levels, competing with countries like Yemen and Ghana for last place.

“Therefore, in our view it's clear that educational attainment remains a fundamental weakness in the region and strategies to step up investment into the GCC's human resources remain a priority,” said the Standard & Poor’s Rating Services report.

It appears then that while GCC sovereigns typically spend far more on infrastructure development than the average middle- or high-income country, expenditure on education is typically less than what is observed for their peers, with the exception of Saudi Arabia and the UAE.

The subpar educational achievements also contribute to another bottleneck to growth, in our view: Low labour participation rates, especially among women. The low female participation rate cannot be explained by lower academic achievements.

In fact, the GCC girls outscored boys in the global mathematical tests more than anywhere else in the world. As the labor force grows in most GCC countries by 3 per cent-4 per cent a year and skills remain largely undeveloped, employment and thus genuine economic growth driven by the national population will be challenging to achieve.

The traditional solution in the region has consisted of the public sector largely absorbing the (male) labour force. Low-to-medium skilled private-sector jobs have typically been filled with migrant workers at low wages, mostly from South Asia, leaving few viable private-sector opportunities for nationals who often do not have the required qualifications for better paid private-sector jobs.

Migrants account for over 70 per cent of the population in Qatar, Kuwait, and the UAE. An unusually fragmented labour market has been the result, evident particularly in the UAE where 90 per cent of the nationals in employment work for the public sector, while over 95 per cent of private-sector posts are filled by foreigners. Bahrain and Oman are the only GCC sovereigns where more than half of the nationals in employment are believed to work for the private sector.

However, with budgetary oil revenues on the retreat as prices are currently falling from their 2011-2013 levels, the ability of governments to continue to fulfil the role of employer of last resort for nationals will become more challenging.

In 2012 the average GCC sovereign spent 30 per cent of all outlays on compensation for public employees, versus a global average of 22 per cent, the report said. – TradeArabia News Service




Tags: Jobs | Standard & Poor’s | GDP | Skills | Gulf oil dependency |

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