Inflation is an opportunity to recalibrate Gulf public sector salaries

The generous nature of public sector salaries in the Gulf contributes to the chronic weakness of the private sector, and its perpetual dependence on migrant workers. The current bout of consumer price inflation is an opportunity to lower civil servants’ real wages, which will help strengthen the private sector and contribute to realizing the economic visions.

In 2020, average salaries in the Kuwaiti public sector were $6,000/month. That average is likely to be an understatement, since it includes the approximately 20 percent of public sector workers who are migrant workers, who likely earn considerably less than their Kuwaiti colleagues. A similar picture exists in the other Gulf countries.

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In contrast, the average in the UK is around $2,700/month, and in Ireland it is $3,600/month. Moreover, civil servants in the Gulf are not known for their high productivity or extreme work ethic. In fact, the Gulf public sector departments suffer from high levels of overstaffing, due to decades of using civil service jobs as a way of raising people’s living standards, rather than as a means to ensure high quality public administration.

As a result, civil servants in the Gulf receive salaries that far exceed what can be justified by their productivity. This is reflected in the fervor that many young Gulf citizens express for a job in the public sector.

In contrast, in countries like the UK, I have never heard of anyone coveting a government job because of the remuneration. Easy lifestyle and good job security? Sure. But high salary? Never.

Having high public sector salaries damages the economy in two main ways. First, it shrinks the talent pool available to the private sector, by giving nationals a highly lucrative alternative to the kinds of jobs that 90 percent of the world’s population must do daily. This makes it very difficult for businesses to operate competitive commercial models where the primary labor input is local citizens. It is also a major reason for the low productivity levels that Gulf companies typically possess.

Second, seeking an alternative to nationals, the private sector develops a fixation on low-wage migrant workers. The whole business model is skewed further away from investing in local human resources, toward exploiting an inexhaustible supply of expatriates. This reinforces the low productivity and contributes to anemic levels of innovation much seen in Gulf businesses.

The Gulf governments have become aware of the adverse contribution that high public sector salaries make to their economies, and this is clearly conveyed by their economic visions, which emphasize shifting the labor force out of the public sector toward the private sector.

The straightforward instrument of simply slashing public sector wages is politically unacceptable, despite the IMF making this recommendation to Gulf countries in the past.

Such a move would engender strong pushback, whether in the Gulf or in any other country, including rich ones like the UK and US. The Gulf governments are left with offering generous early retirement packages and slowing public sector hiring, but both these techniques are very slow ways of empowering the private sector.

Consumer price inflation offers a potential backdoor. While rapidly rising consumer prices are generally an undesirable phenomenon due to their negative effect on purchasing power, and the economic instability they bring about, they do have a small upside that a skillful government can exploit. They can use them to recalibrate wages.

When annual inflation is around 2 percent, as it has been for the last few decades in the GCC, and public sector salaries automatically rise at a similar rate, then real wages – which mean wages adjusted for inflation – stay approximately constant. However, if inflation suddenly jumps to 10 percent, and wage increases freeze or remain low, then real wages fall.

This accelerates the process of enabling the private sector to compete for nationals, and therefore contributes to the transition to the private sector led economies that the visions call for.

To clarify, this is not some sadistic tactic conceived by an anti-Robin Hood. For those near the poverty line who find their real purchasing power shrink, there should be income supplements through an effective social support system, such as the Citizen’s Account in Saudi Arabia. But people need to realize that the prevailing system is not sustainable, and it is their children who will pay the price if the government fails to empower the private sector.

Moreover, some of the savings should be used to boost the earnings of bona fide stars in the public sector. The rigid earnings tables used in civil services usually prevent outstanding employees from securing the financial rewards their efforts merit, causing disenchantment and demotivation. Giving them bonuses will help address the lethargy that is widespread in many government institutions across the Gulf region.

Ultimately, the Gulf countries are looking to emulate Western ones, with dynamic and innovative private sectors leading the economy. If they want that transformation to succeed, they need to pay attention to the details, including how public sector salaries compare to those in the private sector for nationals. There are no rich career civil servants in highly innovative countries like the UK, and this is not a coincidence that the Gulf countries should simply brush off.

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