Education reform and job creation in Saudi Arabia and across Arab countries could come under the glare of publicity in the coming months as successful popular revolutions in Egypt and Tunisia renew the urgency to address these most-pressing social dilemmas. For years, improving the quality of education in a bid to engage youth in the Kingdom's expanding economy has been a top state priority. Saudi Arabia's budget dedicated to education spending has more than doubled in size since 2005. Allocations for education and training programs in 2011 amount to 26 percent of the country's record SR580 billion budget, or SR150 billion ($40 billion).
With unemployment among Saudis hovering around 10 percent according to the most recent Labor Ministry estimations - and youth unemployment as much as four times greater than that in some age brackets - education and labor market reform are the foremost challenges facing the country.
Concern over whether the education system is arming students with relevant technical skills for the work force is paramount since only one out of every 10 employees working for a Saudi private sector company is a Saudi citizen. This scenario must be drastically reversed if the private sector can shoulder the burden of future job creation to meet the needs of the 66 percent of Saudis below the age of 30 in 2009. Of the country's indigenous population of 18.5 million, 47 percent are 18 years old or younger.
In recent years, ministries and publicly linked firms absorbed many new job market entrants, offering better salaries and greater job security than private sector work. Yet the bias among Saudi citizens toward government jobs has had the effect of weakening public sector productivity, stifling labor competition, and propelling current expenditure upward. Comprising recurrent costs on items only used once such as salaries, current expenditure has almost doubled since 2000 and is a key cause for rampant public overspending. The government sector's ability to create jobs will erode as it seeks to curtail unnecessary spending growth; otherwise it will have few alternatives than to keep on hiring.
Even while juggling these factors, it remains unlikely that Saudi Arabia will witness a similar degree of popular instability now facing North African nations. Income differentials are not as wide and the Kingdom has an enormous stash of oil wealth it can draw on to finance schemes to sooth popular frustrations without exerting too much strain on its budget. Saudi Arabia held SR1.65 trillion ($440.4 billion) in net foreign assets at the end of 2010, a figure we expect to rise to record levels of at least $471 billion by the end of this year due to higher oil prices and anticipated rises in output among OPEC producers. Brent oil prices have topped $100 a barrel this month stemming partly from unrest in Egypt, while WTI oil prices have held near $90 a barrel, after averaging $79 a barrel last year.
Meanwhile, the government slashed its debt-to-GDP ratio to 10.2 percent last year from more than 80 percent just seven years go, giving it the financial muscle it needs to formulate short- and medium-term policies to enable its population better cope with inflation, housing shortages and the tenuous job market. Saudi quality of life indicators have improved in re- cent years unlike oil-importing countries in North Africa, but recent floods in Jeddah are a reminder that complacency is not an option. Policies designed to ease the burden of high property prices and escalating food costs, as well as infrastructure upgrades to better avert flooding damage, are necessary to quell concerns of citizens.
Job creation
Saudi Arabia's young population is swelling in size and throwing light onto a pronounced and risky trend toward joblessness among youth. Overall Saudi unemployment was about 10 percent in 2010, according to preliminary indications from the Labor Ministry that would mark a slight decline from 10.5 percent in 2009, although higher than 2008's rate of 9.8 percent. This fails to capture a more complex predicament facing Saudis under 30 years of age, more and more of whom are completing studies to find there are not enough appropriate jobs on the market. Unemployment among youth below the age of 30 was 27 percent in 2009.
Some 39.3 percent of Saudis between the age of 20 and 24 was unemployed in 2009 - up from 28.5 percent in 2000, according to data of the Central Department of Statistics & Information (CDSI). Youth aged 25 to 29 also faced 20.3 percent unemployment in 2009, more than double the ratio in 2000 of 9.9 percent. The Kingdom releases employment data annually, generally with a few months lag.
The gender gap is one factor exacerbating the youth un- employment figures. Female jobless rates are much higher than those of males: overall unemployment among women in 2009 was 28.4 percent, including joblessness of 45.5 percent for women aged 25-29. Even excluding female unemployment, joblessness among men was also substantial in 2009. Men aged 20-24 experienced 30.3 percent unemployment, while 12.7 percent of men between the ages of 25-29 are without work. While a large proportion of unemployed women are university graduates, many men without jobs do not hold higher degrees. A whopping 78 percent of unemployed women hold university degrees, compared with 16.9 percent for male university graduates. Women holding bachelors degrees account for 35 percent of total unemployment.
The swiftly growing pace of youth unemployment is happening despite the net addition of 673,601 jobs by the private sector in 2009, Labor Ministry data show. Only 9.9 percent of labor force employees in the private sector were Saudi nationals that year, down from 13.3 percent in 2008. Between 2005 and 2009, less than 9 percent of the more than 2.2 million jobs created in the private sector went to Saudis, according to our calculations from official data. While private sector growth slowed to just 2.7 percent in 2009, it was able to generate new jobs for expatriates.
As many young Saudis struggle to find work, 982,420 work visas for foreigners were issued to the private sector in 2009, more than double the number granted in 2005, according to Ministry of Labor data. In 2007 and 2008, more than 1.2 million work visas were issued in each year. Ministry data show 6.21 million of a total 6.89 million private sector employees in 2009 were non-Saudis, up almost 30 percent from 2006.
This reveals the ineffectiveness of so-called "Saudization" policies in remedying the disparity. The dearth of jobs for Saudis has complicated social norms of marrying young and setting up a home. The cost of buying single family homes is fast becoming out of reach for the majority of Saudis whose monthly income is below SR8,000 ($2,133), in most cases a fraction of that. High property prices and limited supply are aggravated by a want for supplementary home financing.
The government is simply unable to absorb all of the new workers entering the job market. In 2008, as the economic cycle peaked and then began to correct swiftly with the onset of the global financial crisis, the state hired 69,726 employees in its largest employee addition of the decade, according to data cited by the Saudi Arabian Monetary Agency (SAMA). We anticipate in 2009 and 2010, employee additions were even greater as government sector GDP expanded more than 11 percent. This did not have a markedly positive effect on the job scene, however, as unemployment rose to 10.5 percent in 2009 from 9.8 percent in 2008. What has emerged is a scenario where the private sector perpetuates the Saudi unemployment problem while state strives to act as a cushion restraining higher jobless numbers.
What can be done?
In late January, Saudi labor minister said the kingdom must create five million jobs by 2030 to meet the demands of the young, male-dominated workforce. The minister spoke of the private sector generating three million, or 60 percent, of these jobs. Regional employment conditions are moving along a similar trajectory; according to the Arab League, Arab countries need to create 40 million jobs by 2020 to tackle un- employment. The source of the unemployment problem differs in Saudi Arabia, however. In oil-importing North African states, unemployment happens because job creation fails to match growing labor force participation, whereas in Saudi Arabia, a reliance on expatriate labor is the core problem.
Saudi policymakers have stressed their concerns over joblessness, targeting in the 2010-2014 development plan to halve unemployment among nationals to about 5.5 percent.
In the 2005-2009 five-year plan the government aimed to slash unemployment to 2.8 percent, whereas it rose to 10.5 percent in 2009. It is vital to bridge this gap between outlined state objectives and the outcome - otherwise the Kingdom could contend with much steeper rates of unemployment in the future, which would threaten to feed popular discontent. According to our forecasts, unemployment could rise to 10.7 percent this year and 10.9 percent in 2012.
The nonoil private sector is clearly expected to take on a bigger economic role by 2014 with the state aiming for private sector GDP growth of 6.6 percent per year, on average, in what would be the most-aggressive growth in three decades. State expectations of private sector job creation are equally substantial. It wants to raise the number of employed Saudis by nearly 30 percent to 5.04 million by 2014 from 3.9 million now, accounting for more than half of total employment of 9.4 million. Private sector firms are expected to soak up a massive 73.1 percent of the new jobs, implying annual growth of 2.5 percent. Some 27 percent of the new jobs are seen providing opportunities for specialists and technicians in scientific, technical and humanities fields. Saudi labor force participation is forecast to rise to 39.3 percent by 2014 from 36.7 percent now, below a Middle Eastern average of 50.4 percent and North African average of 51.5 percent, according to the International Labour Organization (ILO). Female labor participation of less than 12 percent in 2009 is the lowest in the region, where rates surpass 20% and in some cases - Kuwait, Qatar, Syria, UAE - more than 30 percent, United Nations data show.
A robust private sector creating jobs for nationals and higher education programs tailored to suit the economy's needs are essential so the state can move away from heavily subsidizing water, electricity and fuel that are draining its financial resources. But we are many years away from this scenario and current rates of economic growth are too low to make a meaningful difference in the job market. Private sector GDP growth should surpass 6 percent per year (as it did only one year of the past decade) in order to catalyze job creation. Yet in 2010 the sector expanded 3.7 percent and revised CDSI data show the private sector grew just 2.7 percent in 2009, down from a prior estimate of 3.5 percent. In both years, the government steered the economy, its growth rate upped to 5.2 percent in the 2009 revision, and rising to 5.9 percent in 2010.
Limited incentives
Jobs created in the next 20 years would need to be skilled and unskilled positions that appeal to Saudis and offer decent wages. The Ministry of Labor has indicated the goal is to create jobs that would attract high wage earners in order to reduce the gap between nationals and expatriates in the private sector. At the moment, private sector companies have greater incentives to employ foreign labor, particularly from the South and Southeast Asia. Foreigners tend to demand lower wages than Saudis and, in many technical posts, they are more highly qualified than some of their Saudi counterparts.
Another crucial deterrent for private sector companies has been labor laws which make it prohibitively difficult to fire Saudis and easy to fire expatriates. The labor law should instill less protection and engender greater competition among Saudis if the private sector can take its place as the first and last employer for nationals.
The private sector's dependence on foreign cheap labor is a dilemma. Ministry of Labor data show that across the spectra of jobs, average wages of Saudis generally far outpace those of expatriates. For instance, the average salary of a Saudi working in an engineering support role in 2009 was SR2,678 per month, compared with a much lower SR561 per month wage for a non-Saudi in an equivalent role. The average private sector wage in 2009 was SR3,137 per month for nationals, four times the equivalent wage for expatriates of SR765. The data likely reflect a large pool of low-wage expatriate laborers recruited as the Kingdom steps up infrastructure spending. Average wages must be viewed with caution due to the likely differentials within each category.
General public sector wages, distributed by rank, can vary widely from a low of just under SR2,000 for a fresh employee to well above SR20,000 for more senior roles after several years experience. More specialized roles, such as doctors, pharmacists, professors or judges, benefit from higher pay scales, according to Civil Service Ministry data.
Setting minimum wages for private sector employment and limiting the working day to eight hours could help boost the numbers of Saudis working in private sector roles, in addition to offering them pension plans similar to those offered for the public sector. There has been an ongoing discussion about introducing a minimum wage for workers, particularly in sectors where many nationals are employed. This could be one measure introduced in the short term appease workers who feel they are underpaid, and could also attract more Saudis to private sector employment. Any minimum wage regulation would need to be enforced and would be effective only if expatriate labor inflows are curbed in the coming years and existing expatriates are phased out.
Saudi Arabia's labor market would need to shift from one relying on cheap labor to one exhibiting high wage equilibrium to encourage Saudi participation. Higher wages provide incentives for employees to work and, over time, become more productive rather than hopping from one job to another seeking higher wages. This trend has curtailed efforts to offer on-the-job training; once Saudis feel more secure in private sector positions, training programs will more naturally be able to flourish.
The static notion that Saudi employees prefer and seek desk-bound managerial positions also must change due to economic necessity. The work ethos of nationals can evolve as new opportunities are created; if given the right wages, Saudi employees will opt for lower-skilled positions and eventually menial jobs. There is a risk that a higher wage environment will exert pressure on inflation, but regular Saudis armed with bigger disposable incomes on the whole offers positive support to the general economy. The concept of cheap expatriate labor in perpetuity is not a viable option for the Kingdom's national security as it fuels unemployment. The private sector will need to move toward reliance on real productivity gains in capital, total factor productivity and labor productivity.
The role of SMEs
Saudi Arabia's 2010-2014 plan speaks extensively of developing ways to substitute Saudi nationals for expatriate labor in the private sector. For instance, it suggests implementing employment-related clauses in privatization strategies to guarantee more jobs to nationals. Until the government develops feasible policies to stimulate growth of the small- and medium-enterprise (SME) sector, the job situation is unlikely to be remedied. One pressing issue is that state-financed mega projects are often awarded to big contractors and developers, which have tended to restrict the trickle-down benefit to SMEs, thus constraining their ability to generate new jobs.
The 2014 plan explores the possibly setting up a body to oversee the SME sector that would help SMEs establish, and obtain financial, technical and administrative support in order to increase their ability to recruit Saudis. Aiming to raise the ratio of Saudis to total employment to 53.6 percent in 2014 from 47.9 percent, the plan articulates many objectives, including:
Encouraging the private sector to boost spending on research and development such that the sector accounts for 23 percent of total spending in this area by 2014.
Providing soft loans to the private sector to encourage the use of modern technology, reduce dependence on expatriate labor, especially unskilled labor.
Supporting investment in new economic cities on condition that Saudis are employed, and offering incentives to the private sector tied to hiring Saudis.
Increasing female participation in the workforce by an average of 6.5 percent per year to raise the number of female workers to 948,700 by 2014 from 692,500 in 2009.
The youth development challenges facing Saudi Arabia have been noted by global bodies such as the ILO, which said in a report this year that Middle East unemployment is the highest in the world. "Rising living costs, including those for housing and food, add to the challenges the Saudi government faces, not so much in terms of the ability to introduce expansionary fiscal and monetary measures, but more in terms of offering its citizens sustainable employment opportunities," the ILO said in its study, Global Employment Trends 2011.
Bridging the skills gap
A common criticism of Middle East education is the emphasis placed on rote memorization rather than the use of more analytics in teaching techniques. The result is youth often lack skills to effectively compete for private sector employment. While this issue is being tackled by Saudi authorities, it will take time before the full benefits are felt in the work force. Improving education is absolutely vital to tackling the unemployment quandary as joblessness among Saudis holding bachelors-level or higher degrees is substantially lower than among those just completing high school. In 2009, 36 percent of job seekers held only high school diplomas, while only 7 percent were university graduates.
In its development plan, Saudi Arabia highlighted quality of education as "one of the main issues of concern to many people in the Kingdom, whether engaged in education or interested in it, for assuring quality of education ensures outputs that can contribute actively to development". Science and mathematics curricula, for instance, "are deficient" and demand greater priority, bearing in mind cultural requirements for carefully tailored religious education.
The World Economic Forum also underpinned the need for better quality education in the Kingdom in its latest competitiveness report. While Saudi Arabia moved up seven places to 21st overall in terms of competitiveness, it ranked a low 74th in health and primary education and 51st for higher education and training. "Health and education do not meet the standards of countries at similar income levels," WEF said in its report, adding improvements in education quality were taking place "from a low level".
The government has taken these shortcomings seriously. Under the 2014 plan, it aims for university entrants to grow 4.5 percent per year through to 2014 to reach 375,300, from 315,300 in 2010. University graduates are also projected to rise 7.2 percent per year on average to 318,300 by 2014 from 240,800. The Ministry of Higher Education is placing more emphasis on technical, engineering, science, computer science and medical programs. The 2014 plan says education policies will work to improve the scientific and practical skills of Saudis to enable them "to meet requirements of the transition to a knowledge society".
New universities tailor their curricula based on these themes. In 2009, Saudi Arabia opened the King Abdullah University of Science and Technology (KAUST), its first co-educational institution with an endowment of $20 billion. The university is governed by an independent board and has attracted faculty and students from around the world, including many from the Kingdom. There has also been a marked improvement in Saudi graduates of science programs at public universities. In 2009, more than 25,000 students graduated with degrees in science-related fields, an almost four-fold increase from 2004, according to data of the United Nations Educational, Scientific and Cultural Organization (UNESCO).
Still, many students at the kingdom's 24 public universities continue to pursue degrees social studies, religious studies, history, and literature - areas that have already been saturated in the labor market. Humanities and arts remain the single-largest majors chosen by Saudi students, accounting for 41 percent of total university graduates in 2009, according to UNESCO. The total number of humanities graduates more than doubled 2004.
In addition to higher education, authorities recognize the need to retrain teachers in primary and secondary schools. The state plans to fund major expansion in vocational training in the plan, which stresses the need to boost the private sector's role in education. Preliminary plans call for the building of about 25 technology colleges, 50 industrial training centers and 28 technical institutes. Meanwhile, the King Abdullah Scholarship Program has sent 90,000 high-achieving Saudis to pursue graduate studies abroad. The return on the massive investment in this scheme will be tested as returning students strive to enter the labor market.
Productivity waning
Boosting employment opportunities for Saudis will be an up- hill battle in the coming years. Despite the economy growing a decent 3.8 percent last year, Saudi companies were reluctant to recruit new staff. In our Q1 Saudi business confidence index, the proportion of executives who said they planned to hire new staff hit the lowest level in more than a year.
Most companies did not layoff employees aggressively during the period of weak economic performance in 2009 and 2010, and the result was an expected decline in productivity in both public and private sector companies. Government sector productivity has suffered due to big employee additions without a simultaneous gain in the output of government services. In 2009, productivity fell almost 5 percent according to our estimates from 2008 due to a jump in new employees. Essentially, a good deal of government hiring appears designed to ease employment bottlenecks rather than to fill gaps in employment.
Productivity improvements are a key catalyst for sustainable economic growth, yet the private sector, too, faces a productivity challenge. The sector's productivity - real nonoil private sector GDP divided by the total number of employees - fell 7.4 percent in 2009 compared with 2008, after jumping 23 percent between 1999 and 2007. Finance is one sector where productivity rates have declined quickly in recent years, linked to a slowdown in the bottom-line performance of banks. In 2007, 2008 and 2009, cumulative bank profits fell year on year. Over the same period, productivity of the finance sector dropped more than 10 percent. Manufacturing, construction, wholesale and retail trade and transport and communications have also witnessed productivity declines. By contrast, productivity of the electricity, gas and water sector improved 30 percent from 2006 to 2009, reflecting the sector's dynamism as the state strives to build capacity.
This underpins the challenge the government will face in the coming years to both boost public sector productivity and build a better platform for private sector growth to accelerate. Higher productivity increases national welfare and improves competitiveness of companies and national economies. High productivity is also essential for improvements in per-capita income and quality of life. It allows for growth without inflation and pulls together the proper backdrop for social spending. In our view, productivity is - in the long run - the only sustainable engine for job creation for the private sector.
Broad-based reform push
In conjunction with education and labor market reform, Saudi Arabia and other regional countries are likely to maintain and introduce new policies, such as price controls or subsidies, to help their populations cope with the rising cost of living and alleviate discontent. Such policies should be carefully thought out to avoid stoking inflation. In November, the Saudi government announced it would not phase out an inflation allowance that had raised salaries of state employees by 15 percent over the last three years to help them cope with price rises. That increment has not stoked inflation in our view as it merely enabled employees to maintain their standard of living.
There is a risk that food prices could rise this year due to global pressures, although in January Saudi food inflation fell to 6.8 percent from 7.6 percent a month earlier. Rental inflation also eased slightly to 9.8 percent from 10 percent a month earlier, pushing inflation to a nine-month low of 5.3 percent. Basic commodity prices can be capped should prices surge later this year. Our expectation is that annual inflation will ease to 5.1 percent in 2011 from 5.3 percent last year, with risks to this forecast to the upside.
Improving infrastructure, particularly ill-equipped sewerage systems in many neighborhoods of Jeddah, is another critical area of focus for the state. Jeddah has been plagued by massive, atypical flooding on a number of occasions in the past two years. More than 120 people died in flash floods in November 2009 that damaged thousands of homes. There were also a number of deaths following flooding in January this year.
Furthermore, resolving a housing market dilemma is a crucial way for the state to resolve societal inequities. The cost of housing in the kingdom has spiraled in recent years due to inadequate supply, which the state aims to rectify in the coming years through the construction of 200,000 new housing units per year through 2014. Once the long- awaited mortgage law is enacted, likely later this year or 2012, borrowers will eventually be able to secure loans at lower costs because of the legal backing involved in mortgage financing.
In the meantime, it would not be surprising to see repeats of the state's move this month to have its Real Estate Development Fund write off SR585 million worth of housing loans granted to 3,276 people who died after Sept. 11, 2007, relieving the debt burden on their families. The fund also set aside SR1.5 billion for loans for both building and financing around 6,000 housing units.
Short-term remedies aside, in the medium term jumpstarting the private sector will have the greatest bearing on resolving the unemployment dilemma and ensuring Saudi youth have opportunities to progress. Complacency in addressing the country's labor challenges is not an option as the Middle East steps up reform efforts in the face of populations demanding more freedom and a better quality of life.
© Arab News 2011
