Shrinking the Public Sector in the GCC
In most GCC countries, for some time, over 50% of employed nationals have been working in the public sector—a very large percentage by international standards, as in advanced economies, public sectors usually account for around 20% of total employment. The GCC governments are currently trying to overturn this phenomenon, as transferring jobs to the private sector over the coming years constitutes a key component of the six countries’ economic visions.

There are several reasons for this, with the most salient being the desire to reduce government spending, especially recurring expenditures, which include public sector salaries. As a result, many observers, among them normal citizens trying to understand the government’s economic strategy, regard strengthening the private sector as merely a ploy for avoiding paying salaries to nationals.

In fact, cutting government spending is not the primary advantage associated with such a policy; instead, the key benefit will be reflected in the productivity data at the level of the entire economy.

To fully understand the relationship between the public sector and economy-level productivity, one must first appreciate the reason for high levels of public sector employment. Public sectors all over the world, including the GCC countries, are characterized by inflated hiring and compensation compared to the private sector, due to the difficulty of precisely measuring the output of administrators. Bureaucracies always look to expand their influence by creating new jobs under the control, and by paying their associates generous salaries. Combating this tendency is relatively straightforward when it is easy to measure output objectively and transparently, as that allows auditors to prove that the inflated jobs and salaries are unnecessary for realizing the organization’s goal. When, however, output is difficult to measure—a problem faced by auditors investigating government bureaucracies—it becomes harder to oppose the inflation in jobs and compensation in an objective manner.

Consequently, even in rich economies such as the European Union, average public sector salaries exceed average private sector salaries by 10-20%.

In the GCC, the difference is much larger. For example, in Bahrain during the period 2000-2010, nationals working the public sector earned approximately 55% more than their private sector counterparts. There are other factors that have contributed to this gap, among them the GCC governments’ use of public sector employment as a method for raising citizens’ standard of living, in concert with other techniques, such as subsidies to basic commodities.

Beyond this, public sector jobs all over the world are secure, with employees protected from redundancy. The over-hiring also means that the job is relatively easy and relaxing—in many government organizations, employees know deep down that it is possible to achieve the same level of output at the level of the organization with a significantly smaller number of workers, but that factors unrelated to efficiency prevent the deployment of a more effective organizational structure and work processes. This phenomenon is amplified in the GCC public sectors.

These private-public sector differences have adverse consequences for the private sector, and therefore have a role in explaining the GCC policymakers’ efforts at ushering citizens out of government jobs. Generous compensation and work conditions in the public sector make it harder for the private sector to attract the workers required for productive output. Competition is generally a good thing when the competitors are vying for profits in a level playing field; however, public sectors have non-profit goals relating to bureaucratic creep, and they are well-resourced, rendering the competition with the private sector “unfair,” thereby impairing the private sector’s ability to function effectively. This problem is particularly acute in the GCC, where we find some of the most qualified and competent citizens working in the public sector, holding positions that scarcely make use of their skills, and willingly performing empty bureaucratic tasks, because of the generous benefits. If they were to hold a suitable position in the private sector, they could be highly productive in a way that benefits society, but that remains a remote possibility due to the unreasonably good terms that the public sector offers.

This phenomenon is one of the reasons for the relatively poor performance of non-oil GCC companies in the global marketplace. For example, GCC companies are hamstrung when competing with their European counterparts because GCC companies have to compete with a public sector that pays wages 50% or more higher than the private sector, compared to 20% in the EU. These figures are not the result of low private sector salaries in the GCC; instead, they reflect the generosity of public sector compensation.

There is an additional downside to inflated public sector hiring and compensation, which is inflation in the bureaucratic procedures imposed upon the private sector. Despite the relatively relaxed lifestyle that is afforded to public sector employees, they still want to get promoted, which requires demonstrating one’s status as a crucial link in the production chain. This motivates workers to fabricate bureaucratic procedures, and to complexify existing ones, to guarantee their importance to the organization’s goals, even if that comes at the expense of companies and citizens, who are forced to bear the burden of vapid procedures, such as filling out tiresome forms, and chasing after numerous signatures.

In summary, inflation in public sector hiring and compensation is very costly for the economy, and the GCC countries are no longer able to afford this luxury in the wake of falling oil prices. One of the biggest adverse indirect costs associated with such a tendency is the pressure it creates on the private sector, as factory managers cannot attract the citizens they need to produce, and they suffocate in mountains of red tape. These problems are amplified in the GCC due to the huge role—by international standards—that the public sector plays in employing nationals, and due to the provision of overly-generous benefits that are impossible to reconcile with employees’ productivity or ability. Ultimately, this is the reason why international organizations, such as the International Monetary Fund, have been so adamant about the need to shrink public sectors.

August 2017
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