As Gulf populations grow governments and businesses will be faced with new challenges in dealing with an ever-expanding army of consumers and job-seekers. Luiza Karim looks to the future and finds that there may be hard times ahead.

In the oil-rich Gulf, it is easy to believe that the sun will always shine down on the economy. Certainly, compared to its poorer relatives in North Africa and the Levant, not all is doom and gloom. In fact, far from it. But, stripping away the glossy veneer, there are specific factors that will change the heydays for good. The combination of rapid population growth, inadequate education reforms, rising unemployment and optimistic nationalisation policies, could prove quite damaging in the long run. The longer term need for real diversification, labour market and educational reform will open new industry sectors and bring with it great marketing opportunities as well.

Market Openings

The Gulf in general remains a curiously lop-sided market as a result of the extreme youthfulness of its population. Demographically, its adult market is much smaller in size than its child-to-teenage market which has profound implications for the purely private sector. The latter, excluding such de facto public sector enterprises as Sabic in Saudi Arabia, amount to barely a quarter of the economy, but contains some sectors that look set to grow rapidly. Key areas, such as food, clothing, cosmetics, toys and sports equipment are likely to grow steadily, fuelled by high rates of indigenous population growth.

According to a report carried by Business Monitor International, within this sector, supermarkets and consumer lines carried by supermarkets are expected to grow particularly fast. Neither oil nor government policy will impinge much, since the increased spending on these goods will, if necessary, come from repatriated income used to maintain the Gulf's standards of living at current levels.

The steady growth of fast-food outlets - and of franchising in general - can be expected to continue. Almost anything to do with domestic entertainment should prove successful, given the Saudi government's prohibition on cinemas and lack of structured external entertainment.

In general, there is likely to be an increase in internal tourism. Other sectors targeting this youth market - such as computers, telecommunications and information technology - should also do well. Private sector provision of services, such as education, training and health care and new prospective sector utilities providing electricity and transport can be expected to flourish.

Sectors liable to be adversely affected by a fluctuating oil market and/or pressure on government finances include the construction industry, agriculture and an array of public services. It is not yet clear how banks and financial services will fare.

Population Statistics

Reliable statistics are rare, but most experts believe that all countries in the Middle East are experiencing rates of population growth far in excess of global average, and probably exceeding 2.5 percent a year.

Such rapid demographic growth poses a number of serious problems for government officials. According to statistics provided by the UN Population Division, rates of growth will fall very little between now and the year 2010, meaning that a majority of people will be very young. The median age will rise from 21.5 years in 1995 to 24.3 years in 2010. Up until 2010 no more than two-fifths of the total population will fall in the age bracket of 25 to 59 years at any time. Put this way, in the year 2000, 26.3 percent of the Middle East population as a whole will be aged between 6 and 18 years.

The knock-on effect is that more schools will have to be built, more teachers trained and ultimately, more jobs created. By the year 2010, less than a quarter of all children in this age group will be receiving any formal education. If such trends prove correct, the quality of the workforce in the Middle East will almost certainly deteriorate over the next 15 years. In Egypt, the failure of the education system is suggested by the fact that foreign multinationals have found it necessary to establish their own training academies.

Another important demographic shift within the region is the movement of people from rural to urban sites. Such internal migration produces drastic changes in income distribution and patterns of consumption as well as posing serious problems for policy-makers who must find the funds to develop all the urban facilities by the new migrants.

Toils and Trouble

Saudi Arabia and the smaller, oil-rich Gulf countries face a significant labour problem. For decades, they have depended on expatriates to perform all kinds of menial tasks. In times when these economies were booming, the foreign work force in some of these countries became disturbingly large. Foreigners also brought new religions and customs that were unwelcome in a strict Muslim society. Gulf governments have been trying to reduce the expatriate population for several years. In Saudi Arabia, round ups of illegal immigrants result in mass deportations as many of the workers are present illegally and remain in the informal sector. Others have lost their original jobs as growth has slowed down, but have remained as unwelcome guests. As governments are forced to cut back on their spending for social purposes unrest is bound to rise.

Rising Unemployment

The situation in Egypt is quite complicated. A number of the country's structural reforms are being reshaped by fears of rising unemployment. The government has finally realised that it will not be able to achieve the eight percent rate of growth in GDP needed to create jobs for its fast-growing population. The privatisation programme has been the first to suffer. Fearing another series of riots such as those experienced in the 1970s, officials have imposed various limitations on the number of job cuts. Skill shortages are another serious problem, despite the growing number of unemployed. The challenge of finding jobs for GCC nationals is increasing. Although GCC governments have already drawn up plans for the replacement of a large number of foreign workers with locals and imposed minimum quotas of nationals to be employed by the private sector, analysts estimate the number of job seekers in the region will reach nearly seven million in the next five years.

At present, unofficial estimates put unemployment in the region at about 27 percent. With more than half of the GCC populations under 20 years old, these states are only now waking up to the need to find jobs for their people.

It was only in April of last year that the GCC Consultative Committee decided to hold a meeting to discuss the employment of national manpower. The meeting came in response to a call by GCC leaders at their 19th GCC summit to give GCC nationals equal employment rights in all member states.

It is forecast that by next year there will be an estimated one million GCC nationals in the labour market. It is planned that around half of them will take new jobs, while the remainder will fill jobs now held by expatriates. However, many GCC observers believe this is a highly optimistic planning and warn that unemployment will become a serious issue in the GCC in future years.

Saudi Arabia has already reacted. In June, it announced a plan to create jobs for locals by ordering public sector entities signing management contracts with foreign states and international organisations to employ and train Saudis. Under this scheme, the government will give Saudis jobs already held by almost 60 percent of the estimated five to six million foreigners working in the Kingdom.

As in Saudi Arabia, the public sector is the main employer of nationals in the UAE. At present, this sector is suffering from chronic overstaffing. Therefore, the UAE government is now facing the task of encouraging private companies to hire nationals in place of expatriates. According to unofficial estimates, the UAE currently has 16,000 unemployed nationals. Over the next decade, nearly 300,000 nationals will graduate from college.

Oman is also making steady progress towards replacing foreign workers with local citizens. The number of Omanis working in the country's private sector rose by 25.3 percent in the first four months of 1999, to 47,397 compared with 37,817 during the same period last year. The number of expatriate workers in the Sultanate at the end of April declined by 6.9 percent to 449,298 from 482,527 during the same period last year. The decline in the number of foreign workers was due to the expulsion of some 21,879 foreign workers from the country.

Meanwhile, Oman is pushing local citizens to take jobs in the private sector to replace the large number of expatriate workers who run various aspects of the economy. Foreigners make up around 600,000 of Oman's 2.2 million population.

In Kuwait, where 94 percent of Kuwaitis are employed by the state, unemployment was a central issue in the campaign for July's parliamentary elections. A month earlier, Kuwait passed a law aimed at pushing citizens into the private sector by partially subsidising their salaries and introducing a quota system. The law could facilitate the implementation of a long-delayed and controversial plan to privatise basic service firms, which are currently used as employment centres for Kuwaitis.

Reality Check

Manpower planners in the GCC believe that healthier economic conditions could create ample employment opportunities towards the end of the 1990s. However, planning and reality may not be the same.

Most job opportunities in the GCC region by the turn of the century are expected to be in the private rather than in the public sector and in technical and managerial occupations rather than clerical and administrative. Therefore, finding skilled nationals willing to fill these posts will not be an easy task.

Government Pressure

The high rate of population growth will place heavy spending demands on economies for the next twenty years at least. Demographic growth will require an annual average of $10bn of capital expenditure alone within the GCC on public utilities and infrastructure. Though increasing oil revenues may allow GDP growth rates to keep up with population growth rates in some states, these revenues cannot create the necessary number of jobs. Oil revenues could once have been counted on to substitute disguised unemployment, in the form of public sector jobs but chronic overspending and drops in the price of oil have reduced the surpluses and budgets that once allowed such extravagance.

A further problem is that the future of oil incomes remains unclear, even for those states with large reserves. Though demand is set to rise by around 65-70 percent by 2020, a number of factors still threaten future oil revenues. It is clear, therefore, that the Gulf states will face increased pressures to provide stable GDP growth, job creation and increasing amounts of capital expenditure. Meeting these requirements will prove extremely difficult, almost irrespective of oil revenues received.

The solutions chosen by each country reflect the unique mix of resources and preferences of the state involved. Some, like Saudi Arabia and Bahrain, have been slower to react. Others, like Yemen, Qatar, Kuwait and Oman have adopted individual aspects of economic reform vigorously. The Iraqi regime and the opposition give indications of radical post-sanctions restructuring. President Khatami has recently spelled out the economic issue for Iran.

The short-term response to increasing budget deficits remains the reduction of government spending. Whereas infrastructure development was once the first item to be cut during economic downturns, governments have now increasingly outsourced funding through privatisation, foreign investment and capital markets.