Surging wages are risk and reward of Arab Spring

Reuters, Sunday 4 Dec 2011

Regional pay-rises can benefit the Middle East, reducing poverty and stimulating growth -- but they could also undermine the region's competitiveness as the global economy sees slowdown, say experts

Labour protest
Egyptian labour protest - one of the actions that has spurred a wave of pay-rises (Photo: AP)

Under the threat of a strike this year, Egypt's El Nasr Clothing & Textile Co said it was raising wages 15 per cent and boosting workers' allowances, giving permanent contracts to temporary staff, and promoting about 1,500 employees, at a total annual cost of about LE9 million (US$1.5 million).

The concessions made a major dent in the company's finances -- El Nasr reported a net loss of LE11 million for the fiscal year ended in June. But its labour problems did not end; industrial action continued to disrupt shipments as workers pressed additional demands.
Across the Arab world, this year's political uprisings have led to a big rise in upward pressure on wages. Greater political freedom in North Africa is giving labour unions more room to operate, while raising the expectations of millions of low-paid workers who lived near the poverty line under previous regimes.
Wage pressures are rising even in the wealthy Gulf, where rulers have not been toppled and where much work is done by expatriates from South and Southeast Asia. To minimise the danger of social unrest, governments are boosting pay for their citizens in the civil service and state-owned firms.
The trend could benefit the Middle East, reducing poverty and stimulating economies by increasing middle class spending power. But with the global economy slowing and governments facing difficult budget choices, it is risky, economists say.
"Where wage demands in some sectors are justified, this is likely to have a positive impact," said Alia Moubayed, senior economist at Barclays Capital, who covers the region. "But the trend of raising wages across the board, without reflecting increases in productivity, could undermine competitiveness."
Wages in the Middle East and North Africa have been held down for at least a decade by high unemployment, a lack of skilled workers, and low productivity. Per capita purchasing power in dollar terms, not adjusted for inflation, climbed only 52 per cent between 2000 and 2010, International Monetary Fund data shows, less than the 63 per cent for sub-Saharan Africa and 95 per cent for the world's emerging and developing economies. In Egypt, an ordinary factory worker can make $5-7 a day.
The Arab Spring has unleashed a barrage of wage demands. In Egypt, analysts estimate the frequency of strikes may have doubled since President Hosni Mubarak was ousted in February; in Jordan, the Phenix Center for Economics and Informatics Studies says the number of worker protests in the first nine months of this year soared to a record 607, from just 140 last year.
Morocco's port of Tangier has seen months of labour protests this year over pay and conditions, which at one stage prompted international shippers to move services to ports in Spain.
"Until last year we struggled to have any worker representatives in ports in Tangier...Now we not only have representation, we have strong unions," Bilal Malkawi, secretary for the Arab world at the International Transport Workers' Federation, said on the organisation's website.
The example of North Africa has encouraged union activity in several Gulf countries, even though Gulf workers are much richer. In Kuwait, a two-day strike by 3,000 customs employees last month disrupted oil exports, ending after the government said the strikers' demands would be addressed; a one-day strike by Kuwait Airways staff ended with a deal to raise wages 30 percent, local media reported. Kuwait central bank employees rallied for higher pay and stock exchange staff threatened a strike before an agreement was reached.
Under the threat of strikes, governments have raised minimum wages in Egypt and Morocco this year and may do so again as new political parties, with support from poorer sections of society, take power after this year's elections.
Lebanon's cabinet decided last month to hike the minimum wage by 40 per cent, nearly double the cumulative rate of inflation over the past three years. It is now reviewing the decision after the business community protested and an administrative body in the government rejected it.
Such measures pale beside the largesse of some Gulf states in the wake of the Arab Spring. In September, Qatar announced hikes in basic salaries and social benefits for state civilian employees of 60 per cent, with rises of as much as 120 per cent for military staff.
It is not clear how long the increased wage pressures across the Arab world will last. When political unrest eventually dies down, governments may feel less need to buy support from their citizens. But in North Africa at least, populist parties brought to power by the Arab Spring may keep working to reduce social inequality, while labour unions' newfound influence is unlikely to be rolled back completely.
In the long term that could be good for Arab economies, moving them towards the more "inclusive" model of growth that the International Monetary Fund and other experts say is needed to reduce social discontent and cut unemployment. Giving more purchasing power to less wealthy people could stimulate spending in consumer sectors and encourage the creation of more businesses catering to them.
"Slowly these workers are getting together. They are asking for better salaries and better conditions and it's all money that you pump back into your economy," said Nashat Masri, partner at Foursan Group, a Middle Eastern private equity firm which manages a $200 million regional fund.
"Some businesses don't like the concept of raising minimum salaries, but at the same time raising wages gives people a standard of living which means they can afford other products."
But the transition to the new model of growth will not be smooth. Faster wage growth may fuel inflation, which has been restrained in most of the Arab world this year, partly because of good North African harvests, but could rise if economic difficulties force depreciation of countries' currencies.
A bigger threat may be to governments' finances. A 59 per cent hike in the minimum wage for Egyptian government employees this year is expected initially to cost $1.5 billion -- money which the government can ill afford as it grapples with a budget deficit equivalent to about a tenth of economic output.
The oil-rich states of the Gulf can cope better, but even some of them are feeling the pinch. Oman forecasts a higher budget deficit next year and in Kuwait this month the finance minister warned that wage increases posed a "real danger" which might eventually push the budget into deficit.
The most serious risk at present, analysts said, is to the competitiveness of economies. To create millions of jobs for their young populations, North African countries
want to boost exports at a time of slowing global growth. To do that, they need a favourable environment for exporters such El Nasr Clothing, a supplier to big foreign retail chains such as Tesco.
Moubayed said raising wages was not the only or best policy to achieve social justice in the Middle East; countries needed to balance that with other policies, such as reforming tax systems to make them fairer and restructuring public spending to make subsidies less wasteful and spending on social services more efficient -- politically sensitive reforms which governments have had trouble pushing through.
"My concern is legislating wage hikes because of populist policies, without thinking of the impact on the economy -- that would be quite worrying," she said.
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