GCC economies will have to make more productive use of their workforces in order to sustain economic growth, according to a new ICAEW report.
Economic Insight: Middle East Q2 2016, produced by Oxford Economics, ICAEW’s partner and economic forecaster, says that productivity growth will become vital as GCC economies continue to diversify away from oil-driven investment and public spending. At the same time, countries will need to create millions of jobs for new entrants to the labour market.
Despite strong GDP growth and previously high oil prices, the GCC region’s overall productivity performance has not been encouraging. Between 2002 and 2015, it made zero or negative contributions to GCC economies at the whole economy level, and showed only marginal improvements when focusing on the non-oil sector. By contrast, output per worker contributed 1.5pp in Singapore and 4pp in Vietnam per year over the same period.
However, this obscures a number of structural movements within the GCC region’s economies – diversifying into new sectors, accommodating an expanding workforce to achieve this and increasing female participation.
Is productivity really ‘everything’?
The extractive sector has an ongoing role to play in funding government spending and thereby boosting living standards in the region. Extraction is probably the highest value-added activity in the global economy, in terms of the value of output relative to labour inputs. There is also a clear correlation across the Middle East between the share of an economy accounted for by extraction and output per worker.
However, the importance of extraction in Middle Eastern economies can skew productivity comparisons in two ways. Firstly, a fall in productivity in extraction (if, for example, manpower is maintained despite a fall in output in mature oilfields) can lower productivity measured at the whole economy level. Secondly, as employment opportunities are generated in non-extractive sectors, this will lower the overall level of output per worker, even if workers in non-extractive sectors are becoming more productive. In other words, even if non-oil sectors individually have rising productivity, the pace of diversification away from the highly productive extractive sector may be sufficient to lower whole economy productivity.
Even non-oil productivity disappoints
As such, what matters is productivity performance in the areas of the economy where most Middle East employees work; specifically the non-extractive sector. Unfortunately, more detailed comparisons of productivity performance using an extractive/rest of the economy split are only possible for a small subset of economies, since it requires data on output (typically available) and employment by sector (less so). A breakdown of output per worker growth is available based on data only from four economies; Bahrain, Kuwait, UAE and Saudi Arabia.
Disappointingly, even after separating the extractive and non-extractive sectors, productivity performance in the region is not particularly impressive. Output per worker in the non-extractive sectors of Kuwait and the UAE fell around 1–2% per year on average from 2002–2015, rose only very modestly in Bahrain, and by 1.5% per year in Saudi Arabia. However, even this disaggregation leaves Saudi Arabia’s performance some way short of output per worker growth in many Asian economies.
Productivity comparisons not the whole story
Oxford Economic’s research does not just tell a story of relatively disappointing productivity growth. It also underlines the extent to which the working-age population has grown over the past 15 years in most economies across the region. For the majority, this represents a mix of natural increase in the native population and an influx of expatriate workers. The two fastest growing populations, Qatar and the UAE, saw annual increases in their working age cohorts of between 8% and 11%, largely driven by inward migration.
Much of this increase in immigration is to support diversification of economies towards domestically focused service sectors, as well as developing infrastructure to support them. In the economies for which detailed data is available, 60–80% of job creation since 2002 has been generated by service firms, with a further 10–20% in construction and a smaller contribution from manufacturing, which tends to be the most productive non-extractive sector.
Increased female workforce participation is particularly pertinent in this respect. Although there is still a long way to go before matching participation rates of other regions, the percentage of females in the workforce has risen steadily in recent years in most of the region’s economies. On aggregate, the female participation rate has risen around 3pp in the region from 2000-2015, compared to falling by over 4pp in Emerging East Asia.
Data does not allow disaggregation of increased female participation across sectors. However, assuming the sectoral distribution of female employment is similar to other parts of the world, it seems probable that women in the region are more likely to work in retail, hospitality and public services, rather than more capital intensive sectors. Rising female participation thereby impinges upon output per worker growth at the whole economy level. Nevertheless, increased female employment is clearly positive in the wider perspective of diversity and better use of countries’ labour forces. Interestingly, survey suggests that women are increasingly targeting higher value-added service sectors such as banking and financial services. Success in this respect would support both overall GDP growth and productivity growth.
Familiar concerns cloud the outlook
Sustaining progress made in diversifying economies, improving female participation, increasing wider native-born employment prospects and reducing youth unemployment, are key to the region’s short-term success, as familiar concerns weigh on the economic outlook.
The tightening in financial conditions has become more pronounced this year, reflected in rising interest rates, tighter bank funding conditions, stock market weakness and rating agency downgrades. With governments set to run large deficits in the coming years and issue larger amounts of debt, there is a key risk that firms will be ‘crowded out’, struggling to raise the finance needed to fund investment. In turn, this will have a damaging impact on productivity performance in the years ahead.
ICAEW Economic Insight: Middle East Quarterly briefing Q2 2016.