Economics 101: Private sector hiring can help GCC countries solve the resource riddle

In countries with a large natural resource income that accrues to the government, public sector employment is one of the most straightforward ways of raising living standards.

There are many theories about how natural resources can hurt rather than help an economy. The need for such theories arises when we look at the world’s 10 richest countries by oil reserves: Venezuela, Saudi Arabia, Canada, Iran, Iraq, Kuwait, UAE, Russia, Libya, and the US – a list that contains almost as much economic hardship as it does prosperity.

Previously in this series, we explained how Dutch disease and volatility can undermine economic performance – the "resource curse". An alternative possibility is that natural resources can lead to underinvestment in education – but what is the precise mechanism? The key is public sector hiring, which distorts labour markets and the market for education.

In countries with a large natural resource income that accrues to the government, public sector employment is one of the most straightforward ways of raising living standards. This medium was doubly attractive in the Gulf countries during the 20th century because the departure of the British created a need for an expanded civil service. Today, in many resource- rich countries, including the GCC, over 50 per cent of employed nationals work for the government.

The problem with public sector jobs, however, is that most are administrative, and it is difficult to measure the value of the associated tasks. The private sector also faces the same problem, but companies typically have profits that help management to gauge a worker’s contribution. In the public sector, the difficulty of measuring productivity is accentuated by the fact that the organisation does not generate conventional revenues, nor does it target profits.

As a result, governments face great difficulty in determining an appropriate wage for these workers, since the typical solution of setting remuneration equal to a worker’s contribution to profit does not apply.

The standard remedy is to benchmark wages to the private sector: devise a systematic way of measuring a worker’s skills and qualifications, see what such a profile usually earns in the private sector, and use that as the basis for the public sector wage.

The problem with this solution is that most benchmarking systems do not distinguish between different educational specialisations. In the public sector, human resources departments treat a doctorate in cultural anthropology as equally valuable to a doctorate in mechanical engineering, even for a position that requires technical skills.

Ultimately, this is due to the instability of the market values of differing specialisations. The pressure of profitability forces private sector companies to nimbly adjust to market dynamics, but governmental organisations are much slower to adapt.

As a result, public sector hiring standards and salary benchmarking gives workers an incentive to acquire educational qualifications, but not necessarily those that are genuinely valuable in the global economy. That is why it is common for public sector workers to get a MA in their favourite subject, or in one that is relatively easy, and to then demand a pay raise, without any regard for whether their newly acquired skills enhance their productivity — a wasteful form of credentialism. In the private sector, workers do not dare make such outrageous demands, preferring to enrol in programs designed to help raise their job performance.

In many countries, this problem is confined due to the limited size of the public sector. However, in resource-rich countries, government domination of employment leads to an educational market that does not satisfy the needs of a modern economy. Consequently, entire generations of citizens end up investing in qualifications that would yield very small returns in global markets, tantamount to underinvestment in valuable education.

This is one of the reasons why the GCC countries now place such an emphasis on boosting private sector hiring at the expense of public sector jobs, a strategy that will unquestionably improve the economy in the long-run. The former UK prime minister Tony Blair once chanted: “Education! Education! Education!” Resource-rich countries should adopt the slogan: “Productivity! Productivity! Productivity!”

Omar Al Ubaydli is programme director for international and geopolitical studies at the Bahrain Center for Strategic, International and Energy Studies, and an affiliated associate professor of economics at George Mason University. He welcomes economics questions from readers via email ( or tweet (@omareconomics).

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