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Executive summary
Countries in the Gulf Cooperation Council (GCC)1 region have an opportunity to build a new approach to social programs and human capital productivity. They can move from the social welfare model, in which the burden falls mostly on the government, to social investment, in which the government creates a market to enhance societal well-being. This approach emphasizes human capital productivity as critical to economic growth. It aims to maximize social impact while generating positive financial returns. This is in contrast to the current social welfare model, which is financially unsustainable and economically damaging as it encourages dependence on the state.
Social investment involves the entire life course of citizens: Investments that will enhance citizens’ well-being and education are applied at an early age so that they become as productive as possible during adulthood. To effect this, governments need a cohesive set of policies to address the root causes of social issues, rather than treating them after they emerge. The private sector and citizens should support governments in implementing these policies. Governments can instill a sense of responsibility in their citizens, such as encouraging parents to be more active in their children’s education and health. Governments could also involve the private sector through impact-based social investment models.
At the Ideation Center, we have examined how social investment practices can improve human capital productivity in the region. In this paper, we focus on youth inactivity and unemployment, as well as obesity. We identify several relevant initiatives and assess their social and financial impact. These examples show how spending to prevent problems is more efficient than spending to solve problems after they emerge.
For this approach to succeed, governments should provide the right ecosystem and enabling environments. They should adopt performance-based budgeting and use innovative financing tools, and develop impact assessment and data-sharing practices.
1. The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
An unsustainable model of social welfare
The COVID-19 pandemic has exposed the limitations of existing social welfare systems globally. It has increased pressure on governments to secure, enhance, and increase social protection and well-being for their citizens, placing state resources under tremendous strain. This is a particular issue for countries in the Middle East, which use a social welfare model that creates a strong sense of dependence among nationals. Today, more than 80 percent of GCC youth expect governments to subsidize their social needs, such as education, healthcare, housing, energy usage, and other forms of benefits. Simultaneously, the reliance of GCC and other Middle East economies on volatile oil revenues means that they cannot meet social expectations indefinitely. This could lead to the unpalatable prospect of reducing social programs.
The burden of social welfare spending in GCC countries is greater than it sometimes appears. Official social welfare spending has averaged around 36 percent of total public spending in the region in recent years, compared to 43 percent in Organisation for Economic Co-operation and Development (OECD) countries. However, that does not take into account indirect social welfare. GCC countries do not levy income tax. They also have some of the largest publicsector wage bills in the world. Much of this is related to the government using public-sector jobs to reduce unemployment among their nationals. As a result, some 61 percent of GCC nationals were employed in the public sector in 2018.
Other factors also make the current model unworkable in the long term. There has been rapid population growth, an increasing incidence of chronic diseases, and a growing healthcare burden. For example, in Saudi Arabia, healthcare spending grew by 8 percent in 2019 and was expected to increase at a compounded annual rate of 12 percent by 2020, even before the COVID-19 pandemic. The youth bulge in the region means that governments must allocate more for future retirement benefits, adding to the region’s already generous pension schemes that provide over 70 percent of previous salary, compared to 59 percent in OECD countries. Some estimates project that the ratio of retired people to workers will triple in the coming years, worsening the fiscal burden. Education costs are also growing because of the need to keep pace with swiftly changing labor market requirements.
Shifting to social investment
To make their social initiatives sustainable, governments should adopt a social investment approach. Social investment maximizes the impact and effectiveness of social programs and reduces costs in the long run. This approach acts as a catalyst for sustainable and inclusive economic growth, the reduction of inequity, and innovative forms of service delivery.
Social investment involves a shift in mind-set from repairing social ills reactively to addressing their root causes proactively. In this approach, governments still take full responsibility for the socioeconomic needs and well-being of their societies. However, they ameliorate society and prevent problems, helping citizens to become more productive, by creating a market for social investments that blends the financial returns on investment (ROI) with social returns. Governments will need to redirect a share of their social welfare budget to social investments to achieve this change.
Social investment emphasizes human capital productivity as a vital force for economic growth. This means focusing on improving people’s education, skills, and health early in life so that they can improve their employment prospects and their participation in the economy and society as adults.
“Systems thinking allows governments to develop a holistic understanding of the social system and its dynamics and identify where problems start.”
Conclusion
Governments can better meet the needs of their residents and unlock economic growth by developing a social investment mind-set that is participatory and centered on human capital productivity. In this manner, they can empower their populations to thrive and be equipped with an adequate quality of life.
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