Throughout the Middle East and North Africa, officials are working to secure economic prosperity for future generations. In the UAE, the need for economic reform arises from a unique blend of demographics and challenges.
On close inspection, strains on the economy are already visible and threaten to deprive future generations of their share of prosperity. The need for reform is no less urgent because oil revenues have helped to hide structural imbalances and the region's economies, growing by an average of 9 per cent annually in recent years, display no urgent need for change.
But the current economic model of Emiratisation - the active participation of Emirati nationals in the economy - cannot last. Young, working-age adults account for a growing share of the population and are struggling to find jobs.
To secure their prosperity, governments must create a stable middle class, propelled by productive, high-quality jobs in the private sector.
The region should take significant steps away from a system in which citizens rely heavily on governments for their income. Research by McKinsey shows nationals receive on average 93 per cent of their household income either directly or indirectly from government revenues, mostly unearned income.
Almost all working nationals (90 per cent) are in government jobs, and about a third of their household income comes from wages that are very generous compared with similar jobs in other countries and the value they create.
An additional 16 per cent comes from government subsidies for education, health care, electricity, water and gasoline.
Slightly more than 40 per cent comes from other sources of unearned income, such as agencies, sponsorships and rental income from non-freehold properties. The remainder is investment income.
An over-reliance on unearned income and government contributions puts the future prosperity of the UAE at risk.
Subsidies - already Dh70 billion (US$19.05bn) a year - and government employment (four times more prevalent than in comparable economies) leave little room for further increases.
In the UAE, six out of 10 barrels of oil sold go towards financing day-to-day spending, mostly for public-sector salaries and subsidies.
At the same time, market liberalisation, freehold properties, special economic zones and competitive pressures have begun eroding other traditional income sources, such as agencies, rental income and sponsorship opportunities.
From every angle, the revenue model of national households is under threat. And while oil revenues are likely to allow the Government to continue this pattern, today's spending will come at the expense of future generations.
Cracks in the structure are visible. Unemployment has reached an average of 14 per cent and youth unemployment is estimated at 30 per cent.
Government jobs cannot absorb a growing workforce, and nationals are reluctant to enter the private sector, where salaries are, on average, less than half of those offered in the public sector.
At McKinsey, we believe action on five strategic themes will generate the momentum to move forward.
1 Increase wages to reflect real costs. As a rich region near much poorer countries, the UAE is a magnet for low-wage expatriate labour. In addition, the authorities depress labour costs by subsidising business expenses such as infrastructure improvements, utilities and health care. Reforms are needed to increase private-sector wages to reflect real costs, creating pressure for greater labour productivity and gradually shifting the economy toward higher value-added employment.
2 Partner with the private sector. In the UAE and elsewhere, employment programmes focusing on job seekers have failed to place more national workers into the private sector. Instead, governments should work closely with the private sector to anticipate future capability needs and stimulate demand for specific jobs. Such a shift requires private employers to accept their social responsibility and, rather than being compelled to hire nationals, work with governments to stimulate real demand for national workers that offer valued skills. Governments should reward companies that successfully bring UAE nationals into the private sector, creating an elite cadre that other companies will be eager to join.
3 Reduce bureaucracy. Labour markets are burdened with loose immigration rules but complex and restrictive labour market bureaucracy, creating multiple tiers of worker standards and ample opportunities for legal and illegal arbitrage. Regulations such as the sponsorship system block labour mobility, impede productivity improvements and distort the market further. The best solution is the mirror image of this model: tight immigration policies with a bias towards highly skilled expatriates and a more flexible, liquid internal market.
4 Convince the young. While the workforce must accept the transition, only a new generation of workers will completely embrace the new paradigm. Governments must communicate the new rules and model to the next generation of workers and create an incentive system that encourages them to accept the changed environment.
5 Acknowledge the pain. No economic transition benefits everyone. There are those who - because of a lack of skills, motivation or abilities, for example - are left behind. Governments should work to minimise the hardships faced by specific groups and distribute the suffering equitably.
The current model in the UAE may eventually prove unsustainable and threatens future wealth.
For a healthy economy, stable growth in household income must be supported by productivity increases and private-sector gains, rather than government largesse.
Jorg Schubert is a partner at McKinsey & Company's Middle East office and leads the public-sector practice in the region
