Dreaming big

The initiative looks part of a grander scheme. Bahrain is clearly going the whole way. Only recently, the Council of Representatives (lower house) -- in a landmark development for trade unionism in Bahrain -- approved a draft law that bans unfair dismissal for trade union activity. There, clearly seems to be a method to these initiatives.

Explains Dr Jasim Husain Ali, Head, Economic Research Unit, University of Bahrain: “Labour market reform initiative is part of a wider reform initiative. There are three elements here: labour reforms, economic reforms, and educational and training reforms. We started with labour market reforms because labour is a critical issue in the country. Many thought we should have started with economic reforms. But since unemployment is a big problem in the country, the authorities decided to start with labour market reforms.”

Inevitable
In a way, the labour market reform initiative was inevitable. And the question really was ‘when’, rather than ‘whether!’. Consider some of the concerns staring straight at the face of the Bahraini economy.

Concern One: Over the next decade, nearly 100,000 Bahrainis will enter the labour market, requiring the Kingdom to provide three times more jobs than it did in the past decade. And the Kingdom’s current economic model will not be able to provide enough jobs for Bahrainis, as the historic reliance on public sector employment is no longer sustainable.

Concern Two: Bahraini salaries have been falling for the past 15 years and will slip further if nothing is done. The average wage for Bahrainis was Bahraini Dinars (BD) 420 in 1990. It had declined to BD352 in 2002, and is predicted to drop down further if the Kingdom fails to take remedial steps.

Concern Three: Bahrainis are not wanted by the private sector, which is more comfortable hiring expatriates.
Says Economic Development Board vice-chairman Dr. Zakariya Hijris: “Bahrain must shake off the bad habits of the past to create real job opportunities. It has for too long structured its economic growth on reducing labour costs, rather than increasing productivity.”

Basic Idea: Labour Market Governance
So, what exactly is the basic idea behind the labour market reform initiative? Quips Dr. Jasim: “The idea is to make Bahraini nationals the “employees of choice” in the private sector. This is the first major goal. And for that, the procedure is to apply fees on companies for hiring expatriates. Make the expatriates more expensive. The second goal is to allow free movement of expatriates in the job market.”

Labour Market Authority
The policy reform package, in fact, has been designed to be both robust and flexible in order to quickly and seamlessly respond to changing market conditions. The robustness and flexibility of the system are fostered through the creation of a new regulatory body, the Labour Market Authority (LMA). This body will play two roles. One, it will develop labour market policy and two, it will act as a one-stop shop to manage labour market administration.

Within the scope of developing policy, the LMA will become the consolidator of all labour market data. By doing this, the LMA ensures the consistency, quality and usability of market information. It also ensures that policy development is closely aligned to market information and, thus, reflects the needs and changes of the labour market.

Labour Fund
Now, the money raised through the proposed labour fees will be collected into a Labour Fund to be used for specific purposes, including supporting the locals in securing private sector jobs and investing in the private sector to assist in adjusting to the new policies.

To ensure this, the fund will have several key features. First, it will be accounted for and administered separately from the normal government budget as an independent fund. Second, it will be professionally managed to ensure appropriate returns and judicious planning. Third, its governance structure will involve key stakeholders, who will be able to participate in the decision-making. Fourth, the management and use of the funds will be transparent so that it is clear to all stakeholders how the funds are being used so that decision makers can be held accountable for their decisions. Finally, mechanisms will be established to provide an added level of comfort that the funds are in fact being used in proper ways.

A Kind of Tax?
Is it a kind of tax to be imposed on the private sector? “Yes it is!” says Dr. Hussain M. Al Mahdi, Chairman of Gulf Global Consultancy and a leading economist and thinker (See interview). “As of now, an employer needs to pay BD110 to bring an expatriate, which includes the training levy, work permit and the tax for new work permit. What McKinsey has proposed is that the private sector pays an additional BD75 every month as fees. So the total comes to BD185 per month. It is also proposed that companies pay another BD25 per month for renewal. The total cost for hiring an expatriate in two years will now come to over BD2,400. This is very high.”

Agrees Dr. Jasim: “It’s a kind of tax. But many countries have this system where they consider hiring expatriates a luxury. We in Bahrain have calculated that every expatriate costs the government BD40 ($115) a month. This covers things like health, use of roads, electricity, water, security etc. There is a cost to be paid on behalf of the Bahraini society to hire expatriate labour force.”

But, has this model been tried out anywhere else? The answer is yes. Hong Kong, Japan, most of Europe and North America, Singapore, Indonesia, and Malaysia, all have some sort of fee and/or quota system to regulate the inflow of foreign labour. In fact, Bahrain and the other Gulf countries have among the world’s most lax regulations on in this regard.

Here is another eye-opener example: In Southeast Asia, countries with labour costs significantly higher than neighbours have attracted bulk of foreign investment. Philippines, Malaysia, and Hong Kong have labour costs 30-90 per cent less than neighbours, Singapore and South Korea, but still attract far less foreign investment

Bahrain’s Competitiveness in Region
Will this reform affect Bahrain’s competitiveness in the region? The question has been uppermost in the minds of many. In fact, the companies relying heavily on low cost expatriate labour will be the ones affected most by the proposed reform policy. But then, this segment currently accounts for only 10 per cent of foreign direct investment (FDI) flows into Bahrain. And then, almost 90 per cent of FDI flows into Bahrain are in sectors like real estate, banking and finance, and communications and transportation (Source: EDB). None of these sectors rely on low cost labour.

Minimum Wage Versus Reforms
What about enforcing minimum wage as a superior alternative to the proposed reforms?
While it is true that many successful economies use a minimum wage. However, those economies have far fewer expatriates in their labour markets. In addition, the minimum wage tends to be set at a level that provides a safety net for only a small percentage of the labour force (an average of 7 per cent across several OECD countries) rather than as a means of improving the welfare of a large portion of workers (Source: EDB). Now, it will have two implications:
• If Bahrain were to enforce a standard minimum wage across both Bahrainis and expats, 80 per cent of the proceeds of the wage increase would accrue to expats (Source: EDB).

• A differential minimum wage – one for Bahrainis and a lower one for expats – would simply entrench the existing cost differential between Bahrainis and expats, further hampering the ability of low-skill Bahrainis to compete with expats for private sector jobs. Consequently, Bahrainisation targets would become even more important to securing Bahraini employment, but would be increasingly difficult to enforce. Bahraini unemployment would not be improved.

Concern Over Bahrainisation
There is a general apprehension with regard to Bahrainisation. What happens if private companies stop recruiting locals once the reforms are implemented? According to the EDB version, equalizing costs between expatriates and Bahrainis through the use of labour fees and other policy levers will allow Bahrainis to compete with expatriates on a level-playing field. As long as Bahrainis are able to demonstrate the required work ethic, good attitude, and basic skills, employers will not have a cost incentive to hire expats, the EDB contends. Private sector employers will instead have a strong incentive to find Bahrainis to employ before hiring expats.

Moreover, the proposed policy package includes a series of employment programs that will subsidize Bahraini employment through wage subsidies, better matchmaking between employers and prospective employees, and basic job readiness training. Employers will hire Bahrainis because it makes good business sense, EDB contends.

Besides, during the transition period, Bahrainisation will not be eliminated all at once to ensure that Bahrainis do not experience unnecessary dislocation.

Expat Angle
Says Dr. Jasim: “One thing is for sure, the labour market is not going to stay the same. We also have cases of misuse and mistreatment of expatriates. Many of them are not being treated properly; they are not getting salaries on time; many are living in shabby conditions. But once the labour market reforms come into effect, those exploiting the expatriates will be denied the chance to do so. Expatriates will have the freedom to change jobs.”

However, the expatriate angle is turning out to be a real challenge. Already, there are murmurs of protest. According to a report published in a Bahraini daily, expatriate workers have been excluded from the purview of the labour law for private sector and that articles related to them have been removed from the labour law bill. This has prompted Bahraini human rights activists and trade unions to mull challenging the draft law prepared by the Ministry of Labour.

Says Dr. Jasim: “There are no hard feelings against expatriates here. Bahrain would always need expatriates. The only question is: to what extent, and how many? As of now, 57 per cent expatriate figure is relatively high for Bahrain.

“Locals constitute only 43 per cent of the labour force in Bahrain. Now, this is abnormal in the sense that we have this problem of unemployment here. Unemployment among locals stands at around 14 per cent. This certainly is a serious problem for the country.”

And he adds: “For skilled expatriates, there will always be the demand. For the un-skilled expatriates, it may not emerge a very friendly situation. If the situation is not remedied, we will only be inviting problems.”

Delayed
Bahrain is all set to venture into un-chartered territory. The journey, however, has got a bit delayed. “It should have been implemented in the beginning of January 2006. However, it is being delayed because of disagreements among the concerned parties,” informs Dr. Jasim. “It might be launched on July 1, 2006. Otherwise, it may get delayed until January 1, 2007,” he adds.

There is some curiosity about the status of the proposals now. “It is with Bahrain’s Parliament, which has to approve it. Right now, lobbying is being done to influence the voting of the MPs. We are all awaiting the outcome, but it looks like the MPs are going to approve it,” asserts Dr. Jasim.
 
Dr. Jasim further adds: “Many in the business community are not happy with the proposals. They contend that allowing expatriates to move freely in the job market will only cause problems. In hiring expatriates, they undertake certain costs. Now, suddenly, expatriates will be free to change jobs. Then, what’s the point of spending money on them, employers say. They are also apprehensive that company secrets can be traded. And, companies will try to attract the best of talents by offering them better salaries. Then, they are not happy with the very idea of increasing fees for hiring expatriates.”

What could be the stand of the MPs? “Well, they may demand some changes. They might say that the fee for hiring expatriates should not be so steep. There could be some attachments (conditions attached to that),” predicts Dr. Jasim.

Tightrope Walk
Isn’t it a tightrope walk for the authorities? Sums up Dr. Jasim: “I think the authorities are very careful. They will not antagonise the business community. They want to go slowly. In fact, one suggestion is to implement it in certain sectors of the economy, like the financial services. They may delay its implementation in the construction sector until the very end as it employs a heavy population of expatriates.”

Timeline is crucial for such an initiative. “In all likelihood, the proposals are going to be passed in March or April,” Dr. Jasim makes a guess. “At the end of the day, if the private sector is not pleased, some of them might even think of relocating to some other country.”

Role Model
In the end, it’s not only the Bahraini market that awaits the outcome. The entire region waits with bated breath for Bahrain’s labour market reforms to roll out. For, the path-breaking route will be keenly observed. It will surely serve as a guide for others.

Already, countries in the region are showing interest. Informs Dr. Jasim: “As far as I know, Saudi Arabia’s Labour Minister has shown interest in our labour market reform initiative. The UAE too has shown interest.” And then, the fact is, companies in Bahrain are already doing very well. There is even talk of value added tax (VAT) in the Gulf. Tariffs are being removed, thanks to FTAs. Times are changing in the Gulf. And at a fast pace as well! n