09 April, 2009

LMRA Taxes, are they any good?

I have ignored this blog for longer than I should, haven't I? I apologize, and that demands a dedicated post on its own.

This blog of mine usually does not delve into politics. If you look at the most used tags, you will surely find politics somewhere at the bottom. My most used tag is of course: Bahrain. Which is why I'm writing today.
His Highness the crown Prince has a vision of where he wants Bahrain to be economically. Thus he established the Economic Development Board (EDB) which in turn established the Labour Market Regulatory Authority (LMRA or sometimes pronounced as: lemra).
LMRA has many goals, but one of the main ones are to make Bahraini's the employee of choice rather than expats, especially if they were unskilled or moderately skilled. The EDB established another entity called "Tamkeen" to help with that but more on it later.

Now, the LMRA is taxing companies, they have to pay BD 10 per month per each expat employee they employ. Once that happens the world goes NUTS! "We are DOOMED" cry businesses. For this tax apparently will break their business. Because I am a blogger and not an LMRA spokesman I can use colourful expressions like "Fuck you, you dumb fuck. You are what is holding us back." But I wont. :)
See, several companies write in the papers saying how doomed they are, some well known papers, oh hell, let me name them: Akhbar Alkhaleej & Alwatan are at the forefront of a media campaign to battle this tax. Alwasat is also defending the majority of shiite readers with stories on how businesses are failing, families are bankrupt, prices are going up for Bahrainis and how maybe, just maybe, the government, maybe (did I say that before?) does not care about us poor citizens. Maybe.

OK people, calm down. Let me explain why and how this works:

1- Too Many Expats, Too many jobless Bahrainis:

We do have way too many expats here, over 50% 0f the population actually. Companies hire in Bahrain for two main reasons: Cost & Stability.
Decreasing costs is at the forefront of any business. So companies here try to pay the lowest salaries possible. But they do that in an unethical way.
Picture your friendly road digging worker. They get at best BD 80 per month. Just a bit over US$ 200. Yes, PER MONTH. Now obviously this is much less than the job deserves. For one, the workers work under the direct rays of our friendly sun. Next they work in roads which anyone in Bahrain can attest how safe that can be. Not to mention the lousy work environments.
This job obviously is worth much more than a mere BD 80 per month. True, it doesn't need a degree, but it is freakishly hard work. What happens is instead of companies paying what the job is WORTH they pay salaries based on MARKET PRICE (See the Supply/Demand image attached). Because there is a supply of cheap unskilled labour, they get away with paying less than what they should. Just because there are many supermarkets doesn't mean we can pay less than 100 fils for a cola can, but companies do. If Bahrainis woun't work for that salary, Indians will. If Indians woun't, Bangladeshis will, if Bangladeshis woun't maybe the Vietnamese will. So companies scoure the Earth looking for the cheapest alternative. This creates an unfair work package. This point leads us onto the next: stability.

Bahrainis will not work for such low salaries. And if they did, it's a matter of months or weeks before they can find better jobs. So Bahraini people will not work for long at unfair jobs. But expats, thanks to a sponsorship system, cannot leave to find another job. They HAVE to stay and work for the greedy employer or be returned home which is often not an option for many of them.
This example was based upon road workers but is true for every job capacity.

2- Making things even:
So since they hire for cost and stability, these reasons must be made equal to Bahrainis and fair for all. The LMRA tax serves to make expats a more costly option. But still, that alone is not enough. So the next logical step is to abandon the sponsorship system and adopt issuing working Visas to expats. Giving expats the liberty to change employers if a better chance come up.
In essence: if Bahrainis will not stay and work for you, eventually expats woun't.
Companies which have crappy packages or working conditions get around the high turnover in Bahraini staff by hiring expatriate ones.
When this system is fully in place, it will mean that companies cannot hire for cost nor stability anymore. They must hire for competency and competency alone. If you can do the job, well, you are hiered.
What this also means is that the salaries will get better organically. If a company suffers from a high turn over of staff because the package or work environments are lousy, then they HAVE to make them better to attract people to stay.
Eventually this will happen:
Companies offer better jobs, better salaries and also have better quality because they hire for competence.
Good no?

So Why are they making a fuss? Because they are greedy.
They want to keep earning money as if its 1985. Same profit model. The thing is, they can't. They just can't. The world is different now.

The companies that are going to be stubborn and stick with unfair low salaries will simply have no one to work for them. They have two choices:
1- Improve working conditions, including salary, benefits and safety
2- Die

If you have no one to run the business, you don't have a business. So businesses better step up.

So companies are complaining about paying BD 10 per month. Big freaking deal! You will not go bankrupt because of that and if you are, then you have another problem.
Lets imagine shall we? You have a business, OK? And you employ 50 expats. Fine? Which means you have to pay 500 per month. OK? See, that should NOT be a problem. Because if you have 50 staff members, and 500 dinars a month puts you in the red, then, you are running a real crappy business my friend! BD 10 per employee should in no way make companies go bankrupt or affect their profit in a significant manner. If it does then here are some solutions:
a- Go to business School you idiot
b- Change the business you are in
b- Sell the business. You are crap and lazy.

Companies that wish to AVOID paying extra fees for expats should simply hire Bahraini's. If you simply click on Tamkeen's website, you can see that they will go out of their way to help you and train all the staff you need for free. There is really no comparison here:
Unskilled uneducated expat + fees? OR Skilled and Educated Local + No fees + lotsa support?

This model will cause the price of goods and services to spike up of course. After all, companies are not used to this. However, salaries should also spike because of this, so theoretically you will not feel it.

I personally feel this is a great step in the right direction. I am passionate about it and can't wait to see the fruits. I know we will soon get into a "Storming" phase, but will eventually move on to the Norming & Performing phases in the future.

If only companies see things the way I do.


BuZain said...

Well written my friend.

abuali said...

I don't have a company but for the sake of the argument I will present the "Dark Side" :).
If I was going to raise prices as a result of raising employee’s salary will the government ensure that they will raise the salaries of all public sector employees with the same rate?
if not then my business will fail for sure cause the largest sector will find my prices unaffordable I don’t think that would be done looking at all the hassle they made to give 50 B.D. to those in need, and oh wait why should I raise my employees salary if the government won’t raise theirs? Didn’t they just incur a 2 billion raise due to the GAT and last year oil revenue were sky high, why should I do what they don’t isn’t it hypocrisy from them to ask for that? And aren’t we a country the signed the GAT and encourage capitalism isn’t it against the rule of globalism and capitalism to be punished cause I’ve chosen to follow the same rules you approved? And why should I change my business process specially when I’m a 70 something small private business owner that is happy with his current way of doing things? Is consistency a bad thing? Is profit a bad word?
That’s what one of them would say  what should I answer him with?.

Redbelt said...

Dear Abuali
Something tells me that we are speaking about you. I have tried to answer that in the article and I'd recommend reading it again. But let me shed some light on the topics you addressed:
For your first question:
Will the government raise salaries? No. Why should they? The whole argument is that change happens organically. The word "organically" means it happens by itself, without someone important signing an increase salary memo. The government here will be affected like any other company. The government cannot keep people working for her for BD 300 if the private sector will give them 600. Eventually: a) they run out of employees because they move to better jobs, or b) offer comparative salaries.
and... well... your other questions are actually answered by the same answer.
OK Let me rephrase and summarize the whole post:
The EDB's initiatives, through Tamkeen and LMRA, are not meant to CHANGE the labour market. They are meant to CHANGE the DECISION MAKING REASONS for the market. Just like water, people will flow in the path of least resistance.
Work is a product, people do not work for anyone, they sell their services. Thinking of it this way, the people and the businesses make decisions on what they think is best, and the rules are changing.
"Is consistency a bad thing?" No. But it is impossible. دوام الحال من المحال. the world is changing. The only things that remain still are dead things. Even trees move and grow.
The world changed Abuali. It's not the same any more.
Your friend should stop being nostalgic and wake up.

abuali said...

:) I'm not an owner of anything I just like debates you should write something about debate teams but that's another story.

Dear redbelt we both know that only few people would prefer private sector even if the pay is higher people like the secure government job, private sector already pay more than public but people insist on working, they like it and why shouldn't they like a job where thing take ages to change it just becomes a habit a job with no mind effort, will that's also another story.

even if you think that salaries will be raised "organically" which is highly unlikely to happen until that happens should companies incur all the harm? and again why don't government raise the pay with all the "profits" they declare because of their "wise" economic strategy if they don't why do they request owners to do so? isn't giving an edge or advantage to any kind of employees even nationals goes against all the principles of free market and globalism that was agreed on between Bahrain government and U.S.A, I know that this is a touchy subject but in other country such as UK they would be counted as unequal opportunity an possibly RACISM.

The Dude said...

Couldn't agree more. Business owners have to be slightly less greedy and exploitative. Oh NO! If you are going broke because of 10BD per person per month, how the hell were you making money in the first place? Lying, stingy, whiny muppets.

moodz said...

Thank you for raising this issue, I've been meaning to talk about this for a while now. I guess it's not exactly the hot issue at the table right now especially after the cancelation of the "sponsorship" laws and the fuss it followed not only within Bahrain but the gulf at the whole.
Anyway.. on taxes. I have a couple of points I'd like to point out in reply to what you have noted.
Unemployment in Bahrain is at an all time low of 5.3% on Jan 2009 according to governmental figures. Which such a low rate, we are considered an economy in full employment (5% is the benchmark btw, anything lower than that is just frictional and structural not cyclical unemployment).

Point being, 5% is not an epidemic by any measure and does not need governmental intervention in anyway, you can in no way have 0% unemployment.
As for the low wages, you have noted the classical supply and demand curve but wrongly interpret it. Now, when assuming an efficient market (i.e one without governmental intervention via quotas, subsidies taxes etc.) one can assume that the market will always move towards equilibrium, (where supply and demand meet) Now if we assume Mr. Gupta here is willing to offer his services for 80 BD per month, and Mr. 3bood on the other hand is willing to pay up to 300 dinars for anyone who will get the job done, Demand and Supply will meet at 80 bd not anywhere else.

Where is the problem there? Cheap labor is a fact of life we have to live with; all economies rely on cheap labor in one way or another. What exactly are you trying to achieve by imposing the taxes? We are not leveling the field for the Bahrainis in any way as the 10BD doesn’t even cut it as it will not encourage business owners to replace cheap labor with Bahrainis. You are not helping the poor expat or the consumer of the final product in any way as the employer will pass on the tax burden because of the inelsastic demand of the labor market. So you tell me, who will bear it but me and you? It's basic elementary economics in action here.
It's all fancy and nice on paper, but it doesn’t stand in the real world. You are talking about an economy that relies on cheap labor, introducing taxes will not fix this in anyway, it will only make money from the fees… I just hope it will be properly invested.

Redbelt said...

Moodz, thanks for commenting.
Your example is flawed.
If this Mr. Gupta IS willing to work for BD 80 and Mr. Emploer man IS willing to pay up to 300, then by all means, Mr. Gupta WILL take that bloody 300!
Moodz, have you ever been given a job offer where you said: "Well, yknow, I would work for a lot less than that! Let us cut that down."
I have been given several offers in my life where they were higher than what I expected, but I still argued to raise it up just to hide the fact that I would work for less.
And even IF Mr. Gupta worked for 80 in a market willing to give him 300, it will be a matter of weeks before someone says "Hey Gupta, I'll pay you 100. Come work for me!"
Gupta will either negotiate back and forth with his employer to reach 300 eventually or he will keep jumping from one employer to another until he reach that 300. Then the other offers will be the same so he will stop jumping.
That is one point, on the other hand, you do know how this sponsorship system is freakingly cruel and unjust. If you do not believe me, come with me, I'll show you people and places then make up your mind if it is a fair way to live.
The hardships they feel at the bottom of the employment pyramid are felt all the way to us. Not as severe but felt nonetheless.

Anonymous said...

I like the article.. But I have to agree with Moodz, how do you ensure that paying that extra BD10 will make company owners switch from expat to bahraini employees? I do agree that cancelling sponsorship makes the employer forced to have a better package otherwise they lose their employees. But now say you have good packages, you pay BD10 per expat, your employees are happy.. Why hire bahrainis?
I think the thing you have missed is to talk about training bahrainis.. I previously discussed this with someone. If we talk about the "road digger" or "painter" or "carpenter" - only here does it not require an education, but in the west you don't just wake up and say I can do carpentry/painting/building etc.. There are schools/colleges to train such skills. If we want to replace expats, we need to develop our bahrainis in all fields. Now they may look down on "painting" but once it is something that is taught as an official skill, and they are recognized by their skill & talent - people will eventually choose trained bahrainis over non-trained expats.
But it's still a mess.. Tamkeen provides training courses for bahrainis but non in manual labour (as far as I'm aware), so you're still stuck with expats.
And then there is the issue of.. Employers feel duped by the fact that "some" businessmen do not pay the LMRA fees, yet benefit just the same from the system. That is what's unfair.