Massive layoffs likely in Gulf

Economist says foreign workers will be hardest hit by cutbacks in the once booming region.

Many planned construction projects in Dubai have now been cancelled [GALLO/GETTY]

Since 2003, the Gulf Co-operation Council (GCC) countries – including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) – have enjoyed very high growth rates.

By 2006, Kuwait was averaging real annual growth rate of about 11 per cent a year a rate higher than China’s during the same period.

Qatar in 2004 grew in real terms by almost 21 per cent and the UAE saw rates of about 20 per cent during both 2004 and 2005.

Such spectacularly high rates gave rise to the term “turbo” growth. Even though Bahrain, Oman and Saudi Arabia did not enjoy the “turbo” growths of their neighbours, they too averaged a very respectable six per cent between 2003 and 2006.

The growth rates in the GCC countries were fundamentally based on the sharp increase in the price of oil and natural gas which was due to a global economic boom.

During the same period,  the US economy grew at more than a three per cent annual rate, China by more than 10 per cent, and India by more than eight per cent.

Latin America and Africa, continents which were considered laggards in earlier decades, grew by at least by five per cent a year.

Energy demands

This global boom translated into a surge in the demand for energy. Hence, the Gulf countries with their supplies of oil, and the relatively newly-found endowment of natural gas, benefited.

The global demand for oil and natural gas far outstripped the growth in supply, and prices rose to dizzying heights. The peak for the price of crude oil was reached in July 2008, when the price of Texas crude in the New York Mercantile Exchange reached $147 a barrel – the highest ever.

GCC revenues swelled because oil and natural gas are exported not by privately-owned companies but state-owned enterprises (SOEs) like the Kuwait National Oil Company, Qatar Petroleum, and Saudi Aramco.

The oil and natural gas boom in the Gulf turbo-fed the budgetary and fiscal surpluses of the respective governments.

Government spending

In 2007, the Saudi government spent about 23.2 per cent of the country’s GDP, while the Kuwaiti government spent 14.5 per cent. Similarly, in 2006, the governments of Bahrain and Qatar respectively spent 14.2 per cent and 15.6 per cent of their GDPs.

These numbers are not extraordinarily high by international comparisons. The US government, for example, spends more than 20 per cent of the US GDP. What makes the Gulf’s spending numbers so distinctive is that there are no matching levies of income taxes.

Thus, all the government expenditures are net expenditures and, given the large sums, turn out to be very powerful injections into the economy.

The fiscal surpluses of these governments tend to be spent on public goods: water supply, electricity and telephone lines, transportation systems, new K-12 schools, colleges, universities, and hospitals.

While the capital funding for these construction projects comes from trade and fiscal surplus, the labour needed to work on these projects has to be imported.

Imported labour

The construction boom led to an increase in demand for foreign labour -known in the Gulf as “expatriates” – usually recruited from the low-wage countries of South Asia.

The domestic citizens of the Gulf, or the “nationals,” would simply not work for the same low wages.

The high growth rates have not just been the exclusive enclave of the public sector. There have been expansions in the private sector as well.

Low-skilled workers from South Asia will be the first to feel the pinch [GALLO/GETTY]

Nowhere was this more obvious than in Dubai, the commercial heart of the UAE. The Dubai government planned investments in tourism, travel, real estate, and finance.

Doha, the capital of Qatar, was also growing like Dubai, albeit at a lesser scale.

The expansions in those industries also required expatriates. However, unlike construction workers, the jobs in many of these sectors required workers with college degrees and specialised skills.

Expatriate workers soon became indispensable, filling the most menial jobs like sweeping the streets to teaching in newly-installed universities.

Most of the unskilled jobs were filled by expatriates from South Asia. However, as the skill requirements of jobs increased, so too did the presence of expatriates from a more diverse range of regions.

In retail stores the cashiers can be from the Philippines; in banks, the staff may be from Lebanon; and in education, the teachers are likely to be from the UK and the US.

The inflow of expatriates was more of a deluge in the “new” booming countries of Qatar and the UAE, rather than the “old” countries, Kuwait and Saudi Arabia.

By 2008, unofficial estimates put the population of Qatar at 1.25 million, 80 per cent of which were expatriates.

By 2008, expatriates were unofficially reported to constitute 90 per cent of the labour force in the UAE.

Housing boom

The expatriates who arrived in large numbers in Qatar and the UAE were not just producers but also consumers. The biggest single good or service for which they created a demand was housing.

Thus, in addition to government expenditures on infrastructure and buildings, and booming commercial real estate, there was also a spike in residential housing.

By 2007, the inflation rate in rent and home maintenance had reached 29 per cent in Qatar and 26 per cent in the UAE.

But the economic boon in the Gulf now appears to be coming to an end.

The bursting of the housing bubble in the US followed by the global financial crisis has taken the world into a deep recession, affecting the oil-rich region as well.

Stable financial sector

The Gulf banking systems acted responsibly in their financial decisions. They, by and large, stayed away from gambling in the financial derivatives like American and European banks.

The central banks of the GCC countries hold large reserves in the US dollars to meet any short-term crisis.

The GCC central banks are currently holding typically twice the amount of US dollars as domestic currencies. One need not worry about the stability of the financial sector of the Gulf.

Kuwait was the exception as it weathered some financial turbulence including the failure of a major bank in the last quarter of 2008.

The real problem for the Gulf is the collapse of the price of crude oil. At the time of writing, the price of crude has fallen below $40 a barrel.

GCC governments had planned on earning export revenues at about $50-60 per barrel, in order to target their fiscal expenditures.

When the price of oil exceeded $100, such accounting was considered very prudent, maybe overly so. Now, even the assumption of $50 per barrel is too optimistic.

Job insecurity

Gulf governments are now likely to start cutting back on spending. The first sector to be hit will be construction and municipal maintenance. That is bad news for the unskilled and poor expatriates from South Asia.

However, the decline in worldwide economic activity will have its adverse effects across the board. The new, diversified sectors created in the Gulf over the last 10 years will also be hard-hit, leading to massive layoffs of expatriates.

In Dubai, the layoffs will be in tourism, travel, banking, and real estate. These layoffs will affect the more educated, white-collar expatriates.

The new diversified industries of Saudi Arabia, under the mantle of the Saudi Basic Industries Corporation (Sabic), which is a leading manufacturer of petrochemicals, fertilisers, and chemicals will cut back on their output. The same will be true of the new energy-intensive industries, aluminium fabrication in Bahrain and steel production in Qatar.

The only jobs filled by the expatriates which are safe for now are the ones which are supported by the personal income and wealth of the nationals.

These would be domestic servants, household chauffeurs, and those serving education and health care.

But they, too, wonder how long they will remain insulated to the global economic downturn.

Adhip Chaudhuri is a Professor of Economics at Georgetown University.

The views expressed by the author are not necessarily those of Al Jazeera.

Source : Al Jazeera

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