GCC’s ex­pat div­i­dend

Pakistan Observer - - OPINION - Sami Mahroum — The writer is the direc­tor of the In­no­va­tion & Pol­icy Ini­tia­tive at INSEAD. ©Project Syn­di­cate

IN Saudi Ara­bia, for­eign na­tion­als ac­count for roughly one-third of the pop­u­la­tion. In Qatar and the United Arab Emi­rates, nine out of ev­ery 10 res­i­dents is an ex­pa­tri­ate. Should th­ese coun­tries’ govern­ments con­tinue to in­vest heav­ily in de­vel­op­ing in­dige­nous la­bor forces, with the aim of de­creas­ing de­pen­dency on for­eign work­ers? The ex­traor­di­nar­ily high pro­por­tion of for­eign la­bor within Gulf Co­op­er­a­tion Coun­cil (GCC) coun­tries is of­ten con­sid­ered prob­lem­atic, be­cause, as some see it, it threat­ens lo­cal cul­tures and na­tional iden­ti­ties, holds down wages, and im­pedes the de­vel­op­ment of do­mes­tic skills and tal­ent. With so many trades and pro­fes­sions dom­i­nated by rel­a­tively cheap over­seas la­bor, the in­dige­nous pop­u­la­tion is of­ten left with few oc­cu­pa­tional do­mains of­fer­ing com­pet­i­tive wages. Th­ese tend to be pre­dom­i­nantly in the pub­lic sec­tor, where oil rev­enues are used to main­tain high pay and at­trac­tive work­ing con­di­tions.

But an im­por­tant di­men­sion of the pol­icy de­bate within the re­gion risks be­ing over­looked: The Gulf States’ large for­eign pop­u­la­tions are not just work­ers; they are also con­sumers. By in­flat­ing the pop­u­la­tion of the coun­tries in which they live, ex­pa­tri­ate work­ers are help­ing drive eco­nomic growth.

In fact, the GCC ben­e­fits from a dou­ble ex­pat div­i­dend: Not just a di­verse con­sumer base on the de­mand side, but also a flex­i­ble, youth­ful work­force on the sup­ply side. As a re­sult, fol­low­ing the rapid de­cline in oil prices of re­cent years, com­pa­nies could lay off thou­sands of work­ers with­out hav­ing to worry about rais­ing the un­em­ploy­ment rate or putting a sub­stan­tial bur­den on gov­ern­ment cof­fers. More­over, pub­lic and pri­vate in­vest­ment in the re­gion — in in­fra­struc­ture, ed­u­ca­tion, health, and other ser­vices — has been geared to­ward the ex­ist­ing con­sumer base, in­flated by the ex­pat pop­u­la­tion. Those in­flows are now caus­ing the GCC pop­u­la­tion to grow four times faster than in emerg­ing mar­kets and the United States, seven times faster than in China, and 10 times faster than in the euro zone.

This trend is ex­pected to con­tinue, with an­nual pop­u­la­tion growth in the GCC av­er­ag­ing 1.8 per­cent — twice the av­er­age for emerg­ing mar­kets. And, ac­cord­ing to an IMF study, pop­u­la­tion growth in the Mid­dle East and North Africa be­tween 1970 and 2000 has raised the an­nual rate of growth of out­put per ef­fec­tive con­sumer by about 0.5-0.6 per­cent­age points. Larger con­sumer mar­kets have suf­fi­cient economies of scale and diver­sity to make the in­tro­duc­tion of new prod­ucts and ser­vices into the re­gion eco­nom­i­cally vi­able. They have the added ben­e­fit of gen­er­at­ing what the econ­o­mist Amar Bhide calls ven­ture­some con­sump­tion: De­mand-led en­trepreneur­ship and in­no­va­tion.

Economies of scale also al­low the de­liv­ery of health, ed­u­ca­tion and other ser­vices, such as en­ter­tain­ment and leisure, at lower prices. And larger mar­kets pro­vide a greater in­cen­tive for in­vestors and traders to en­ter and for govern­ments to pro­vide new pub­lic goods. If not for ex­pat pop­u­la­tions in ru­ral and re­mote ar­eas, there would have been lit­tle rea­son to in­vest in roads, schools, and hos­pi­tals — let alone parks, libraries and the­aters.

GCC coun­tries have made such in­vest­ments for the past four or five decades, and on­go­ing con­struc­tion projects in the GCC are es­ti­mated to run in the tril­lions of dol­lars. In ed­u­ca­tion, en­roll­ment in K-12 schools across the GCC rose from 2.7 mil­lion in 2003 to 10.7 mil­lion in 2012, a com­pound an­nual growth rate of 16.5 per­cent. In­vest­ment in this sec­tor stands at around $150 bil­lion. In health care, to­tal spend­ing in the re­gion is ex­pected to in­crease to $133 bil­lion per year by 2018. The for­eign pop­u­la­tion also pro­vides a hu­man-cap­i­tal div­i­dend to the lo­cal pop­u­la­tion, as tal­ented ex­pats in­tro­duce knowl­edge and in­no­va­tion in sec­tors that the GCC wants to de­velop. Re­search from MIT has shown that an in­crease in pop­u­la­tion size is an im­por­tant driver of tech­no­log­i­cal progress. And stud­ies in Ja­pan in­di­cate that higher pop­u­la­tion den­si­ties cre­ate stronger in­cen­tives for in­di­vid­u­als to be­come en­trepreneurs; a 10 per­cent in­crease in pop­u­la­tion den­sity in­creases the share of peo­ple who wish to be­come en­trepreneurs by ap­prox­i­mately 1 per­cent.

The GCC’s ex­pat div­i­dend could grow much big­ger — but only if govern­ments in the re­gion es­tab­lish the nec­es­sary mech­a­nisms. Such mech­a­nisms should be de­signed to max­i­mize the ben­e­fits that for­eign na­tion­als pro­vide. Work-and-re­tire or in­vest-and-re­tire visas, for ex­am­ple, would en­cour­age ex­pats to save and ac­cu­mu­late pen­sion funds — thereby en­abling them to con­trib­ute even more sig­nif­i­cantly to the re­gion’s rapid eco­nomic growth.

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