II. Economic Structure and Linkages in the GCC Countries
- International Monetary Fund
- Published Date:
- November 1997
Employment is largely influenced by the pace of economic activity and the labor-intensity and efficiency of production processes. The endowment and the price of labor relative to other inputs (capital, natural resources, and land) determine the optimum mix between labor and other inputs. Some inputs are internationally mobile (capital, natural resources, and labor); others are nontradable (land). As such, labor market issues in the GCC countries would need to be viewed in the context of factor endowments and relative prices, and in relation to evolving economic growth, structure and linkages. A number of features and developments stand out:
• The GCC countries have a long tradition of liberal and open economic policies and maintain no restrictions on movements of goods, capital, and labor across their national boundaries. Consistent with their resource constraints, the countries have become major exporters of natural resources and capital, and major importers of merchandise goods and labor.
• The oil and gas sectors dominate the GCC economies: oil GDP has a direct relation to oil production and prices, and non-oil GDP is greatly influenced by government expenditure, which itself is a function of oil revenue. Indeed, government expenditure policies have supported economic activity in the past, and the budget has been used as a vehicle to distribute the oil-export proceeds—either explicitly (e.g., employment, wages, and benefits) or implicitly (free or below-cost provision of utilities, health, and education services).
• High oil prices in the 1970s and the early 1980s were associated with periods of rapid economic growth combined with large fiscal and external current account surpluses.1 This allowed the GCC countries to embark on ambitious investment programs to build up their physical and social infrastructure and diversify their production base. Initially, the emphasis was on construction and industrial development, but the rapid development of infrastructure and industries required the support of, and contributed to the development of, a host of service industries. Rapidly increasing population and per capita income levels also spurred the development of domestic household services. Additionally, economic diversification ushered the development of financial services and non-oil trade activity. Even the capital and resource intensive development of the oil and gas sectors required substantial support from service industries. For these reasons, the service sectors began to emerge as the main contributor to non-oil economic activity and as the principal source of new demand for labor (Chart 1). The shift in sectoral emphasis also implied a change in the composition of labor toward lower skill levels.
• With the continued erosion of oil prices through the second half of the 1980s, economic conditions weakened, and large internal and external financial imbalances emerged, prompting the authorities to implement adjustment policies primarily involving substantial cuts in expenditure. From the mid-1990s, the GCC countries intensified and broadened their efforts to reduce their fiscal imbalances and promote private sector growth and employment creation. The expenditure rationalization policies had to consider not only the relative efficiency of expenditures, but also the social dimension of expenditures, with specific reference to employment, wages, and benefits in the public sector.
Chart 1.Employment and Economic Growth in GCC Countries, 1971-95
Distribution of Labor by Sector in 1960 and 1990
Sectoral Contribution to GDP, 1970-95
Sources: World Bank, World Development Indicators, 1997; UNDP, Human Development Report, 1997; and IMF staff calculations.
• Given the limited resource base of the GCC countries, economic growth required large imports of materials and labor. In view of similar resource endowments and constraints, there was little scope for trade in goods and services between the GCC countries, but the established cultural and political relations with the other countries in the MENA region led to greater economic integration, essentially through labor market linkages.2 Changes in the pace and composition of economic activity were reflected in the inflow of foreign labor. By some estimates, the foreign labor force grew, from a low base, by about 20 percent a year during the boom years, 1975-80, before moderating to 7 percent during 1980-85, and further to 3 percent annually in the next decade as economic growth consolidated (see Al-Qudsi, 1996). Expatriate workers currently comprise about 55 percent of the labor force in Bahrain, 65-70 percent in Oman and Saudi Arabia, and 85-90 percent in Kuwait, Qatar, and the United Arab Emirates (see Nur, 1995).3
Taken together, these factors have contributed to the current setting in the labor market and are defining the broad parameters for labor market issues and policies in the period ahead. In summary, an uncertain oil market outlook has underscored the importance of prudent macroeconomic policies and improved resource allocation to insulate the economies and support the growth of non-oil sector. Budgetary and efficiency considerations have also required a reassessment of government expenditure policies, including those on wages and employment. At the same time, the consolidation of economic growth and shifts in the structure of production in favor of services have moderated the demand for labor, possibly with a bias against higher skill levels. The link between economic growth and employment generation probably has also weakened over the years due to efficiency gains, industrial development based on capital-intensive technologies, and structural shifts in the nature of dependency on expatriate labor.4 As a result, the demand for foreign labor appears to have become less sensitive to fluctuations in overall economic activity.5 Given the GCC countries’ open economic systems, the prices of foreign labor, capital, and natural resources are largely determined by international market conditions, but the price of domestic labor is, to a large extent, a policy variable and a social choice. This relative input price mix has created a bias against the use of national labor in the GCC countries.