GCC Demographic Shift To Trigger Reform Policies

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GCC Demographic Shift To Trigger Reform Policies 02 - Jul - 2012

Kuwait Financial Center “Markaz” has released a new strategic report that focuses exclusively on the demographic shift happening in the GCC region and its implications on key sectors like education, healthcare and labor market. The population is the driving force of an economy; they are the unit by which economic output is realized and as such, they should be invested in and shaped in a manner to better influence economic growth.

That being said, population – no matter the structure – constitutes a burden on the country’s fiscal budget. An old population will be exiting the workforce, and hence their productivity will drop, while at the same time their retirement compensation, i.e. social security, will be drawn upon, pressuring fiscal reserves. Conversely, a very young population also requires a great deal of government expenditure, particularly in welfare-based states such as the Gulf, in terms of education, subsidies, and wages.

The GCC is in a unique position of having an extensive welfare system based on hydrocarbon revenues. This has created a strain on fiscal reserve as the demographic structure is skewed towards the younger population which is entering the labor force in higher numbers each year.

The GCC has a low population, when compared with other regions, totaling 45mn people in 2011, less than 1% of the global population. Moreover, the region is young with 54% under the age of 25, though this is expected to rise to about 36 by 2050.

Although the GCC currently has a wide base to its population pyramid, denoting a large youth population for elderly support, by 2050, this is expected to narrow with a widening towards the higher age groups as the population ages with lesser reproduction to sustain the pyramid. Decelerating birth rates are already being experienced due to family planning, women entering the labor force, and increased marriage ages.

GCC Population Pyramid – 2010/2050

Source: US Census
GCC countries are known for their generous and extensive welfare system. Most government services such as healthcare, education, housing, electricity, water, gas and even commodities such as food are at no cost or are at highly subsidized prices. Except for Oman where local companies are taxed, taxes in the other GCC countries mainly consist of foreign corporation income taxes. Combined with the welfare system, the current demographic structure has created several pressure points for the GCC economies. The report pinpoints these pressure points, explains their implications and offers alternative reforms for them as follows:

  • Housing: Increasing demand for housing with a rising population requires additional spending on infrastructure. Housing projects are low yield investments, making it harder to attract companies. Public private partnerships would help make housing projects more attractive to foreign investors.
  • Education: GCC governments also need to allocate more of their budget towards education in order to develop the human capital and also to equip them for private sector jobs. Apart from increasing the quality of teachers, policy makers should also focus on strengthening the administrative set-up to govern the increasing number of schools.
  • Employment: Government sector dominates GCC economies by being the biggest employers of their citizens. GCC nationals lose motivation to compete on a global level in the private sector as public sector employment offer them higher wages with more attractive benefits and require less labor skills. GCC Governments should impart vocational training for low skilled workers and also identify & eliminate unproductive jobs.

About Markaz

Kuwait Financial Centre 'Markaz', with total assets under management of over KD888 million as of March 31, 2012, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.