Economy And Growth And Its Effects On Unemployment - Research Paper Example

Economy And Growth And Its Effects On Unemployment Introduction Because of poor policies and susceptibility to changes in oil prices, some Middle East countries cannot achieve consistent growth that can create sustainable employment to their citizens. The essay analyzes eight countries in the Middle East. They include Egypt, Turkey, UAE, Saudi Arabia, Oman, Bahrain, Kuwait, and Qatar. These countries are different because they have diverse policies on government spending, wage gaps, and economic diversification. The economy and growth of these countries is important because it determines regional stability. If the economies stagnate, they will trigger violent unrests, which may spiral out of control. In 2011, most of these countries faced the Arab Spring, a popular uprising against oppressive regimes in North Africa and the Middle East. People in various countries protested against their governments’ inability to tackle unemployment and improve living standards. Since then, some of the countries that have recovered from the unrests have adopted policies that contend their populations. For instance, Kuwait and Saudi Arabia increased government spending substantially, bringing down the costs of basic commodities and social services. In order to ensure regional stability, the economies and growth of these countries should be addressed. The eight countries were chosen for comparison because they have five common similarities. First, their economies are susceptible to changes in the global prices of oil. Second, there are no international economic sanctions imposed on them. Thus, one would expect their economies to grow at comparable rates. Third, the countries maintain good relations with the West. The good relations allow them to access the lucrative Western markets, a key incentive for faster growth. Fourth, in all the countries, religion plays a role in policy formulation. Most of the business activities are conducted under Islam values, bringing uniformity throughout the region. Lastly, the countries are ruled by oppressive regimes. Therefore, the regimes do not put into consideration the concerns of the opposition. Comparative analysis In these countries, the global prices of oil determine the stability of the economy; the countries are all dependent on oil in terms of exports or imports. For instance, for the case of Turkey, if prices rise, the production level in its entire economy weakens. Turkey is highly dependent on imported oil and gas. The country imports about 97% of its energy. Since the country has great ambitions of strengthening ties with other Middle East countries as well as maintaining good relations with the West, the dependence on imported energy creates a problem for the country because of this pro-West position. As an illustration, some of the countries exporting oil to Turkey become unreliable if Western policies in the region become unpopular. Although Turkey’s economy is doing relatively well compared to other countries in the region, heavy reliance on imported oil makes the country vulnerable to price fluctuations (Brieck 11). Egypt is in a similar situation with Turkey; it imports refined petroleum products. Although it has its own reserves, the country still depends on imported refined petroleum products because it is yet to develop its refineries. Thus, if oil prices fluctuate, a noticeable effect is felt in the economy. A fluctuation in oil prices is a double blow for Egypt; the country can fail to get a fair price for its oil and also pay more in terms of imports. Bahrain, Saudi Arabia, UAE, Kuwait, Qatar, and Oman are in a slightly different situation with Turkey and Egypt; their economies depend almost entirely on oil exports. For the case of Saudi Arabia, oil exports contribute nearly 45% of the budget revenue. Thus, if there are price fluctuations in the oil market, a deficit occurs in its budget (Brieck 10-11; Alshahrani & Alsadiq 5). Economic Structure Of all the eight countries, Turkey has the most diverse economy. It relies on agricultural and industrial exports to support its economy. It does not depend on a single commodity to propel growth. Unlike the GCC countries and Egypt, Turkey’s private sector is relatively developed. In fact, the private sector has created a significant number of jobs for the people, diversifying the economy. There are no patronage programs; the government does not provide loyalty subsidies on basic items. On the other hand, the GCC countries and Egypt have patronage programs, which have slowed down the growth of the public sector. For example, there are fuel subsidies in all the six countries. Such programs are used by the regimes to calm public tension (Espinoza 10-11). Although Turkey’s economy appears diverse in terms of private sector development, the contribution of exports to the GDP is still low. Most of the Turkish export industries are low-tech and medium-tech. The high-tech industry is yet to reach its full potential. Thus, the exports from low and medium-tech industries have significantly low values at the market compared to high-tech products. Therefore, there is no much difference in terms of the net gain that Turkey gets from its exports when compared to the GCC countries, which depend too much on oil for growth (Gros & Selcuki 4). The UAE, Bahrain, and Oman have relatively diverse economies compared to Saudi Arabia, Qatar, and Kuwait. The three countries have made impressive progress in shifting their economies away from oil dependence. For instance, Bahrain and Oman, which are at risk of depleting their oil wealth, have concentrated on improving their manufacturing and tourist sectors. The UAE has also made similar structural changes in order to reduce dependence on oil. For example, it is improving its manufacturing sector. In recent years, UAE has started producing fertilizers, aluminum, and cement. The country has achieved such industrial activities because of political stability, favorable tax laws, and low costs of energy and labor (Sturm et al. 92). Figure 1 below shows the high-tech exports for 2011. Figure 1: High-tech exports for 2011 (US$) Source: World Bank (Data for 2011) Income Levels Among the eight countries, Qatar has the highest income per capita. In 2012, its GDP per capita was US$ 92,633. On the other hand, Egypt has the lowest income per capita. During the same period, its GDP per capita was US$ 3,256. Table 1 compares the GDP per capita for the countries in 2012. Country GDP per capita for 2012 (US$) Qatar 92,633 Kuwait 56,367 United Arab Emirates 41,692 Saudi Arabia 25,946 Oman 23,624 Bahrain 23,040 Turkey 10,661 Egypt 3,256 Table 1: the GDP per capita Source: World Bank (Data for 2012) Level of Development Qatar has the highest level of development in terms of GDP per capita in terms of purchasing power parity (PPP). Conversely, Egypt has the lowest level of development among the eight countries. Table 2 below compares the GDPs per capita in terms of PPP. Country GDP per capita, PPP (US$) Qatar 130,054 Kuwait 85,660 United Arab Emirates 58,042 Saudi Arabia 52,016 Oman 45,269 Bahrain 41,369 Turkey 18,186 Egypt 10,872 Table 2: GDP per capita, PPP Source: World Bank (Data for 2012) Effects on Employment Government subsidies in the GCC countries hinder the growth of public sector. The public sectors in UAE, Bahrain, Saudi Arabia, Oman, Kuwait, and Qatar are characterized by patronage programs. In all the six countries, the governments employ most people in comparison with the private sector. All the governments in the respective countries deliberately create positions in the public sector in order to reduce unemployment. Thus, a high proportion of the populations work in the public sectors. Although the governments can finance such programs without much difficulty, the programs themselves tend to hurt the long-term growth of the economies. If the governments keep employing many people in the public sector, it is likely that human capital will be trapped in the nonproductive sector. Thus, the situation will hinder the growth of the private sector (Fleischhaker 15). Indeed, in Saudi Arabia, the public sector is virtually stagnant because of the government policies on employment. Since the government is keen on creating jobs for its citizens, it has absorbed many people in the public sector. Although the program reduces unemployment, it increases the country’s dependence on hydrocarbons as the economic driver. The government also provides other incentives such as salary subsidies to its nationals working in the private sector. The program helps in reducing the wage gap between the private and public sectors, but it slows down growth in the public sector. Subsidies also create wasteful consumption of resources, leading to faster depletion of resources. In addition, subsidies also encourage smuggling, depriving the public sector of revenue (Fleischhaker 15). Conversely, the situation is different in Turkey; there are no government subsidies in the form of wages in the private sector. The public and private job markets compete favorably. Thus, the residents do not prefer one sector over another the way it happens in GCC countries. In the Turkish economy, there is no wasteful consumption of resources. Government spending generates distortions in the labor market. In Egypt, there is a policy whereby college graduates are entitled to jobs in the public sector. Initially, the project used to work well for the locals. However, as the number of college graduates increased, the government was unable to absorb all of them at once. Thus, most college graduates were forced to wait for longer periods before they could secure jobs in the public sector. As a result, the long period increased the number of unemployed youth. However, if it were not because of the government policy, the college graduates could have sought employment in the private sector. Therefore, the government policy distorted the labor market (Espinoza 18). By comparison, a similar distortion has occurred in Saudi Arabia. The Real Estate Development Fund, which provides subsidized loans, faced a growing demand for loans. Like the case of Egypt, the Real Estate Development Fund initially served the citizens well. However, as demand for loans increased, the agency faced a new challenge of availing sufficient funds. Since it was impossible to provide sufficient loans to all borrowers at the same time, the Real Estate Development Fund decided to put applicants in waiting lists, which could take up to 10 years to secure the loans. Therefore, the government initiative has distorted the market. It encourages many people to wait for subsidized loans for long periods instead of taking alternative loans from commercial banks (Espinoza 18). High wages in the public sector has distorted the labor market by encouraging people to queue for government jobs. In Saudi Arabia, the lowest pay in the public sector is 30% higher than that of the private sector. The huge gap motivates people to wait for long periods for jobs in the public sector. During the waiting period, the potential employees stay without jobs, increasing the unemployment rate in the country. People prefer to stay for long periods before getting government jobs because they know they would eventually earn more than what they could get if they were to work in the private sector. Although the strategy is beneficial to individuals, it hurts the private sector. It deprives the private sector of labor. The situation forces private sector employers to higher foreign workers who can be paid lower wages (Espinoza 18). Government spending in the GCC countries has stalled the development of cheaper sources of energy. Since the Middle East region is a desert, there is a high potential of harnessing solar power, which is relatively cheap source of energy. However, government subsidies have deceptively made oil prices low, hampering research in alternative sources of energy. Surplus government funding on education has contributed to unemployment in Saudi Arabia’s private sector. Saudi Arabia has used a significant portion of its enormous oil revenues to improve the education sector. Because of the increased public spending, enrollment in public schools and universities has increased considerably since 1990s. The government has also given scholarships to thousands of students to study in foreign universities. Indeed, the government’s initiative has succeeded because there is an increase in the number of educated Saudis. As a result, the job market has flooded with an increasing number of skilled workers. However, the major problem with the government initiative is that there is a mismatch of skills. The students leaving the education system for the job market do not have the appropriate skills to be employed in the private sector. As a result, most educated youth do not find jobs in the private sector (Fleischhaker 19). Employment quotas and levies in GCC countries have reduced production output and increased the costs of production. Saudi Arabia, Kuwait, Bahrain, UAE, Oman, and Qatar have implemented employment quotas for their nationals in the private sector. Although the quotas have helped to improve the employment opportunities for the locals, they have also caused the problems of ghost workers and higher salaries for the locals. Levies on foreign workers have also benefited the locals. For example, in Oman and Bahrain, the levies are used to finance vocational training programs for the nationals. Although the levies appear beneficial to the locals, the real price is paid in terms of production costs and output. Since the private sector relies on foreign experts, the levies discourage the employment of foreigners. However, the organizations that hire foreigners can still transfer the costs to consumers, raising the costs of output (Fleischhaker 21). Foreign dominance in the economy has alienated the natives to the public sector. The private sectors of most of the GCC countries are dominated by foreigners. In all the countries, the government regulations require employers to prioritize the locals followed by Arabs from neighboring countries before considering other foreigners in employment. However, the largely underdeveloped private sector requires highly skilled labor, which the natives do not provide. Therefore, the natives do not find jobs in most private sectors. As a result, they have developed a liking of public sector jobs, which eventually leads to poor allocation of resources to nonproductive sectors (Fleischhaker 15-16). In Turkey, the employment of foreign workers comes with tough restrictions. Potential workers have to prove that they have the adequate skills for the jobs they seek. Conversely, in the GCC countries, there are no such restrictions. Foreign workers can enter the labor market provided they secure work permits from the authorities. Foreign workers in the GCC countries also earn less than the native workers with the same qualifications. Conversely, the situation is different in Turkey. Foreign workers can earn the same amount that the locals get. Moreover, in Turkey, there are certain professions that foreigners are not allowed to do. For example, lawyers and dentists are reserved for the locals (Eurofound). Conclusion In conclusion, the economic diversity differs in all the eight countries. Turkey is the most diverse economy in comparison with other countries. The oil-dependent economies are desperate to bring about diversification. In countries where there is massive government spending, the growth of the private sector is considerably slow. In such economies, growth is also slow because of poor allocation of resources. Massive government spending in terms of salary subsidies or high wages in the public sector distorts the labor market. Excess government subsidies also hinder the development of cheap sources of energy. Employment quotas cut down production in the private sector. Levies on employers of foreign workers also increase the cost of production. Works Cited Alshahrani, A. Saad and Alsadiq, J. Ali. “Economic Growth and Government Spending in Saudi Arabia: an Empirical Investigation.” International Monetary Fund. January 2014. Web. 4 Dec 2014. . Brieck, R. Jennings. “Turkey and Saudi Arabia: a Comparative Arab Spring.” N.p., 13 November 2013. Web. 4 December 2014. . Espinoza, Raphael. “Government Spending, Subsidies and Economic Efficiency in the GCC.” Oxcarre Research. July 2012. Web. 4 December 2014. . Fleischhaker, Cornelius, Hu, Malin, Khandelwal, Padamja, McHugh, Jimmy, Qu, Haonan and Westelius, Niklas. “Saudi Arabia: Selected Issues.” International Monetary Fund. 24 June 2013. Web. 4 December 2014. < http://www.imf.org/external/pubs/ft/scr/2013/cr13230.pdf>. Gros, Daniel and Selcuki, Can. “The Changing Structure of Turkey’s Trade and Industrial Competitiveness: Implications for the EU.” Centre for European Policy Studies. January 2013. Web. 4 December 2014. . “New Law on Foreign Workers.” Eurofound. n.d. Web. 4 December 2014. . Sturm, Michael, Strasky, Jan, Adolf, Petra, and Peschel, Dominic. “The Gulf Cooperation Council countries: Economic Structures, Recent Developments and Role in the Global Economy.” European Central Bank. July 2008. Web. 4 December 2014. . World Bank. “GDP (current US$).” 2014. Web. 4 December 2014. . Read More