Following the 1970s oil boom, the Gulf Cooperation Council (GCC) countries developed a generous welfare model offering a wide range of benefits to nationals, including public-sector employment, energy subsidies, a variety of non-means-tested categorical benefits, and free public services such as education and healthcare. Governments now understand that this implicit social contract needs reform, given fiscal constraints and demographic pressures.
GCC governments recognize that their established social contracts are not sustainable. Fiscal constraints, demographic growth, and the inability of public sectors to absorb employment and serve as a social safety net are eroding the social contract. Fortunately, GCC governments are responding to these changes. They have reduced or eliminated subsidies, for example, replacing some of them with less distortive and regressive cash grant systems, such as the Citizen Account Program that Saudi Arabia introduced in 2017.
The need for reform
Although the social contract in the GCC countries has created, and supported, a large and prosperous middle class in the past 50 years, some of its core components have resulted in economic distortions. In Kuwait, Qatar, and the United Arab Emirates (UAE), for example, more than two-thirds of nationals in employment are in the public sector. Such government overemployment encourages bureaucratic sluggishness, lowers accountability, uses talent inefficiently, and distorts labor market incentives for nationals. Fuel subsidies also have undesired consequences: They encourage overconsumption of fossil energy and foment regressive consumption patterns in which richer households benefit more from state resources than poorer households.
Reducing public-sector hiring and subsidies without careful analysis and action can lead to unintended consequences. Of the 2.3 million Saudis employed in the private sector in the third quarter of 2023, 1.3 million earned less than SAR5,000 (US$1,333) per month, compared to average public-sector wages for Saudis of over SAR13,000 (US$3,465).
Welfare systems that could benefit such nationals stranded in the private sector are underdeveloped. Consequently, in some GCC countries, a divide is growing. On one side are (often older) nationals with well-paid government jobs. On the other side are younger nationals with lower private-sector incomes (excepting the managerial and entrepreneurial elite). Although some GCC governments have deployed temporary grants and support systems for nationals outside public employment, these efforts are insufficient to bridge this income gap and maintain the old guarantee of middle-class life.
Key policy tools for a new social contract
There are five policy tools that GCC governments can consider as they redesign their social contracts:
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Permanent income supplements for lower earnersPermanent income supplements for lower earners can make private-sector employment more attractive to nationals. Such income support ensures that the shift away from public-sector employment does not result in “working poor.” If income supplements are accompanied by reforms in the public sector (such as a voluntary retirement scheme), the financial burden of even a generous supplement would be modest compared with the current expense of public-sector overemployment.
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Active labor market policiesGCC governments can increase their investment in active labor market policies to increase citizens’ integration in the private sector. These policies include lifelong learning arrangements, job advice and matching services, and support for training in the private sector. Many activation programs already exist across the GCC, such as Nafis in the UAE and the Tamheer and Doroob programs in Saudi Arabia.
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Universal basic income (UBI)GCC countries should consider adding UBI to their new social contract. It would, in effect, serve as an unconditional, fixed dividend generated by a country’s hydrocarbon and investment revenues. Although UBI has generated much debate in advanced economies, in the context of the GCC countries, it would be less economically distortive than much of the current wealth sharing.
A UBI could work in Kuwait by redirecting current energy subsidies into monthly grants for nationals. Suppressing energy subsidies would create enough savings to pay every adult national outside the public sector a monthly grant of about US$700, with a supplement paid for every child of around US$230. Existing public-sector employees could receive a grant of US$195 to include them in the new system and compensate them for somewhat higher energy costs. -
Means-tested social benefitsGovernments should combine means-testing with systematic labor market activation policies. The combination can reduce the risk of welfare dependency and increase the integration of nationals into the private sector. Similarly, GCC governments can introduce a general, means-tested, non-contributory state pension. Such a pension would minimize the risk of old-age poverty for nationals who have been unable to contribute to formal pension systems.
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Integration of foreign residents through dedicated welfare toolsGovernments should ensure that reforms to the social contract do not inadvertently make expatriates worse off. Foreign residents in GCC countries are not part of the established social contract. Nonetheless, they are an important element of GCC economies and societies. GCC governments should consider introducing a modest minimum wage for foreigners to prevent employers from passing on foreign labor fees by cutting wages at the bottom of the market.
The established social contract
Additionally, GCC governments should continue to modernize the limited welfare arrangements for expatriates, as the UAE has already done. Such changes might include the provision of independently regulated pension arrangements beyond the customary employer-provided “end of service” benefits. These can be difficult to claim in practice and can disappear when employers go bankrupt.
The GCC countries have already achieved a measure of welfare reform. The next step is to build on these achievements to create a new social contract that provides for the equitable well-being and labor market inclusion of nationals in a sustainable and productive manner.
A new generation of nationals would benefit from a simplified, more transparent, and more market-conforming welfare system. Under such a system, they would receive stronger incentives to enter the private sector while also enjoying welfare guarantees and improved opportunities for a middle-class income.
GCC countries can achieve an attractive, inclusive, and productive new social contract because they enjoy a unique endowment. They have considerable fiscal resources for welfare and employment policies, an ability to plan for the long term, and a young citizen population increasingly willing to engage in private economic activity. The challenge is to use this endowment in a fiscally sustainable way to ensure basic welfare for all nationals and maximize productive economic opportunities for all.
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