MIDEAST MONEY-Surging wages are risk, reward of Arab Spring

DUBAI, Nov 30 (Reuters) – Under the threat of a strikethis year, Egypt’s El Nasr Clothing & Textile Co said it wasraising wages 15 percent and boosting workers’ allowances,giving permanent contracts to temporary staff, and promotingabout 1,500 employees, at a total annual cost of about 9 millionEgyptian pounds ($1.5 million).

The concessions made a major dent in the company’s finances– El Nasr reported a net loss of 11 million poundsfor the fiscal year ended in June. But its labour problems didnot end; industrial action continued to disrupt shipments asworkers pressed additional demands.

Across the Arab world, this year’s political uprisings haveled to a big rise in upward pressure on wages. Greater politicalfreedom in North Africa is giving labour unions more room tooperate, while raising the expectations of millions of low-paidworkers who lived near the poverty line under previous regimes.

Wage pressures are rising even in the wealthy Gulf, whererulers have not been toppled and where much work is done byexpatriates from South and Southeast Asia. To minimise thedanger of social unrest, governments are boosting pay for theircitizens in the civil service and state-owned firms.

The trend could benefit the Middle East, reducing povertyand stimulating economies by increasing middle class spendingpower. But with the global economy slowing and governmentsfacing difficult budget choices, it is risky, economists say.

“Where wage demands in some sectors are justified, this islikely to have a positive impact,” said Alia Moubayed, senioreconomist at Barclays Capital, who covers the region. “But thetrend of raising wages across the board, without reflectingincreases in productivity, could undermine competitiveness.”

DEMANDS

Wages in the Middle East and North Africa have been helddown for at least a decade by high unemployment, a lack ofskilled workers, and low productivity. Per capita purchasingpower in dollar terms, not adjusted for inflation, climbed only52 percent between 2000 and 2010, International Monetary Funddata shows, less than the 63 percent for sub-Saharan Africa and95 percent for the world’s emerging and developing economies. InEgypt, an ordinary factory worker can make $5-7 a day.

The Arab Spring has unleashed a barrage of wage demands. InEgypt, analysts estimate the frequency of strikes may havedoubled since President Hosni Mubarak was ousted in February; inJordan, the Phenix Center for Economics and Informatics Studiessays the number of worker protests in the first nine months ofthis year soared to a record 607, from just 140 last year.

Morocco’s port of Tangier has seen months of labour proteststhis year over pay and conditions, which at one stage promptedinternational shippers to move services to ports in Spain.

“Until last year we struggled to have any workerrepresentatives in ports in Tangier…Now we not only haverepresentation, we have strong unions,” Bilal Malkawi, secretaryfor the Arab world at the International Transport Workers’Federation, said on the organisation’s website.

The example of North Africa has encouraged union activity inseveral Gulf countries, even though Gulf workers are muchricher. In Kuwait, a two-day strike by 3,000 customs employeeslast month disrupted oil exports, ending after the governmentsaid the strikers’ demands would be addressed; a one-day strikeby Kuwait Airways staff ended with a deal to raise wages 30percent, local media reported. Kuwait central bank employeesrallied for higher pay and stock exchange staff threatened astrike before an agreement was reached.

Under the threat of strikes, governments have raised minimumwages in Egypt and Morocco this year and may do so again as newpolitical parties, with support from poorer sections of society,take power after this year’s elections.

Lebanon’s cabinet decided last month to hike the minimumwage by 40 percent, nearly double the cumulative rate ofinflation over the past three years. It is now reviewing thedecision after the business community protested and anadministrative body in the government rejected it.

Such measures pale beside the largesse of some Gulf statesin the wake of the Arab Spring. In September, Qatar announcedhikes in basic salaries and social benefits for state civilianemployees of 60 percent, with rises of as much as 120 percentfor military staff.

RISKS

It is not clear how long the increased wage pressures acrossthe Arab world will last. When political unrest eventually diesdown, governments may feel less need to buy support from theircitizens. But in North Africa at least, populist parties broughtto power by the Arab Spring may keep working to reduce socialinequality, while labour unions’ newfound influence is unlikelyto be rolled back completely.

In the long term that could be good for Arab economies,moving them towards the more “inclusive” model of growth thatthe International Monetary Fund and other experts say is neededto reduce social discontent and cut unemployment. Giving morepurchasing power to less wealthy people could stimulate spendingin consumer sectors and encourage the creation of morebusinesses catering to them.

“Slowly these workers are getting together. They are askingfor better salaries and better conditions and it’s all moneythat you pump back into your economy,” said Nashat Masri,partner at Foursan Group, a Middle Eastern private equity firmwhich manages a $200 million regional fund.

“Some businesses don’t like the concept of raising minimumsalaries, but at the same time raising wages gives people astandard of living which means they can afford other products.”

But the transition to the new model of growth will not besmooth. Faster wage growth may fuel inflation, which has beenrestrained in most of the Arab world this year, partly becauseof good North African harvests, but could rise if economicdifficulties force depreciation of countries’ currencies.

A bigger threat may be to governments’ finances. A 59percent hike in the minimum wage for Egyptian governmentemployees this year is expected initially to cost $1.5 billion– money which the government can ill afford as it grapples witha budget deficit equivalent to about a tenth of economic output.

The oil-rich states of the Gulf can cope better, but evensome of them are feeling the pinch. Oman forecasts a higherbudget deficit next year and in Kuwait this month the financeminister warned that wage increases posed a “real danger” whichmight eventually push the budget into deficit.

The most serious risk at present, analysts said, is to thecompetitiveness of economies. To create millions of jobs fortheir young populations, North African countries want to boostexports at a time of slowing global growth. To do that, theyneed a favourable environment for exporters such El NasrClothing, a supplier to big foreign retail chains such as Tesco.

Moubayed said raising wages was not the only or best policyto achieve social justice in the Middle East; countries neededto balance that with other policies, such as reforming taxsystems to make them fairer and restructuring public spending tomake subsidies less wasteful and spending on social servicesmore efficient — politically sensitive reforms whichgovernments have had trouble pushing through.

“My concern is legislating wage hikes because of populistpolicies, without thinking of the impact on the economy –that would be quite worrying,” she said.

(Additional reporting by Suleiman Al-Khalidi in Amman andSouhail Karam in Rabat; Editing by Anna Willard)

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