Saturday, February 19, 2005

Economics of Development in Bahrain

There is a famous story recounted in business school, an MBA myth maybe, about the consultants who were hired to do an extensive study to come up with a solution to make the commuter trains run on time. After many months of research (and exorbitant fees), they proclaimed they had the answer. They had worked out a solution that would absolutely guarantee that each train would leave its station on schedule and arrive at the next station exactly on time: Don’t open the doors at any of the stations.

There are a number of lessons to be learned from this parable:
1. People will always mess up any system, because that is the nature of humanity
2. It is easy to come up with a solution for a specific problem, but that solution may then create other types of problems
3. The third lesson is about consultants, but is an entirely separate topic of discussion

No doubt the economies of our region are undergoing fundamental and serious issues which must be addressed before they spiral out of control. Despite the false sense of security created by high oil prices and the amount of development in sectors like retail, real estate and industry, there remains an acute awareness that things are not all rosy.

Perhaps the greatest results of the McKinsey Report (though I’m not sure why people call it that as it does not have their logo on it) on labour market reforms in Bahrain are the admission that we are facing a serious unemployment problem that will only compound in the future, and bringing that discussion into the public arena.

I don’t think anyone will particularly argue with this fact, though I have a few reservations about ho they came up with their numbers. For the first time, we are hearing statistics associated with unemployment and comments on Bahraini workers that serve to shock the nation into sitting up and taking notice. By hitting them where it hurts.

While in general agreement, I still felt a twinge whenever my fellow countrymen were referred to as lazy and unproductive, but what about the solution itself? They have proposed the introduction of a levy to increase the cost of cheap foreign labour so as to make them unattractive to local employers when compared with local talent. The idea being to artificially equate between the two so that the Bahraini ends up being more attractive.

Being a student of economic theory, this strikes at the heart of some fundamental issues in economic thought, but which are too boring to recount here. Suffice it to say, we are seriously messing with the system here.

All of this aside, what are the real issues here? Or, what are the issues the reforms do not address?

1. Work Ethic
There is no denying that we have become a dependent nation. There was a letter in the GDN recently, rebuking one of the hotels for limiting their recruitment open day to the morning hours, when the claimant was unable to attend due to his mother being unable to drive him. Now that is what I’m talking about. That is not being lazy, that is a complete lack of understanding that if he wants the job, he has to get up off his ass, find a ride (a friend, a relative, a bus, a taxi, whatever) and go to the bloody interview himself. We cannot expect to be carried around forever and this is the crux of the problem.

2. Inflation
It is inevitable that some (if not all) of the new fees will be passed on to the consumers. This will have knock on effects throughout the economy. By McKinsey’s own estimate, Bahrain will face around 8% inflation once the labour fees are in place. That is a substantial number that can make or break a small economy such as ours.

3. Strategic Direction of the economy
I think it is safe to assume that when the reforms are implemented, certain industries (such as construction) will be hit harder than most, and that many of them will either move offshore or simply shut down. Fine, the UK decided that it did not want to be a manufacturing centre for heavy industries and slowly phased them out, but they had an alternative plan for what industries they wanted to focus on. Do we have such a focus? Have the consultants decided what type of an economy we are going to be? (Holding back the gag-reflex for when the phrase ‘knowledge based economy’ is mentioned).

4. The Training Fund
This is the one that really gets my goat. It is estimated that by 2009, the new reforms will raise about BD 220 million annually. The fund will be presided over by a joint committee comprising Government & Private sector individuals who will determine how the fund will be distributed. I am in no way casting any aspersions over the way the Fund will be managed but I would, however, like to know what the Committee intends to do with the cash. What programmes are going to be introduced to re-train the unemployed? Who will manage them? What systems are going to be introduced to ensure that everyone gets a fair shake? Who will develop and oversee the implementation of the training programmes? Are there any specialist institutions or colleges or teachers that have been mandated to run these programmes?

In my opinion, it is this last point where the entire exercise falls flat on its face. The entire point of this whole exercise is to help unemployed Bahrainis to be reintroduced into the workforce. At present, the intention is to begin looking into that - the training programmes - after six months. Six months ! Between the summer and the year end is simply not enough time to organise an integral part of an economic programme that the future of our economy depends on.

I want to digress a little here to do some general hole poking, in no particular order:
· How would we expect to have more women coming into the workforce (30,000 by the end of the decade) when we will be effectively doubling the cost of domestic workers? We must assume that they are all unmarried or have no children. It is also likely we would lose a similar (if not a larger number) of women currently employed because they will be unable to afford domestic help.
· Ghost workers are, in a sense, a form of private sector social insurance.
· How will we fill all these jobs? There simply are not enough people interested in doing many of the jobs foreign workers do.
· What is the obsession with one-stop-shops anyway?
· I got very worried when the whole process was described as a floating rate that would be, “being managed like a tap which can be turned on and off”

What seems to be absolutely certain, in all of this chit-chat, is that these reforms will be implemented in about 10 months time. And that’s when the pinch will come. A gentle nibble at first, but one that will to grow to affect every aspect of our lives. I started with one so I will end on an ancient parable that comes from these very Islands; change is inevitable.


Anonymous said...

Also, there is a fundamental flaw in the mathematics of McK's calculations.

McK state that the cost to an employer of an expatriate labourer is BD110/month. On this basis, and believing that Bahrainis will nopt work for less than 220/month, in 2009 an employer will have to pay BD1200 pa extra by way of visa charges to hire an expatriate (ie BD75/month plus BD600 over 2 years). So the cost to an employer of a Bahraini will be, say, BD220/m but an expat BD110+BD100 ie about the same.
Now the fact is that currently, the cost of an expat labourer to an employer is wages of BD110 PLUS current visa charges,housing, food, transport, airfare every 2 years etc ie an additional minimum BD120 ie total current cost to employer is about BD230 and not BD110 that McK quote.

So all McK's calculations which derive from this including the proposed visa monthly and two-yearly charges are wrong.

The Johnster

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