By Sylvia Westall and Ahmed Hagagy
KUWAIT (Reuters) - In most countries, a 25 percent pay rise would buy peace from labor unions, at least temporarily. When Kuwait's cabinet announced such a rise for government employees this month, customs workers responded by going on strike, followed by staff at the state airline.
The oil-rich emirate escaped the kind of violent anti-government protests seen elsewhere in the Middle East during last year's "Arab Spring" uprisings. But it is paying a price in the form of relentlessly escalating wage demands which a weak cabinet is proving unable to resist.
Labor unions, emboldened by populist sentiment stemming from the Arab Spring, are pressing their case with industrial action. Meanwhile, the cabinet has been undermined politically by a snap election last month that saw the Islamist-led opposition win control of parliament.
The result is an upward spiral of wage settlements which can be absorbed in the short term, thanks to the country's oil wealth, but which could threaten economic stability in the long term, officials and analysts say.
"It is like dealing with a child. When he cries you give him chocolate to stop crying. This is a disaster; this is not a professional way to manage a country," said Naser al-Nafisi of the Al-Joman Centre, an independent economic consultancy based in Kuwait.
"The pay rises should happen in a reasonable way, not by giving a rise to one group and not to another. There should be for example a raise every year or every three years in line with inflation, not 50 percent or 100 percent or 25 percent without any economic consideration."
Buying social peace with public sector wage hikes and government handouts is a tradition in the Arab Gulf. Last year, Kuwait's government gave a cash transfer of about $3,600 and free food to each of the country's roughly 1 million citizens; around 2 million foreign workers in Kuwait were excluded. Earlier this year, the government offered newly wed Kuwaitis a $7,200 "gift" and an interest-free loan of $21,500 to help them set up house.
The resulting increase in state spending infuriated Kuwait's last central bank governor, who resigned in February after 25 years in the post, complaining about high expenditure. The finance minister warned last year that rising public sector wages were "a real danger" to state finances.
But lavish government spending has not succeeded in placating the population as well as it has in most other Gulf countries. This month saw Kuwait's second nationwide wave of industrial unrest in five months.
Around 3,000 Kuwaiti customs workers went on a week-long strike, disrupting traffic at ports, although delays to oil exports were apparently avoided. Employees at national carrier Kuwait Airways grounded planes for three days during a walkout; they got a 30 percent pay rise last year but are demanding a further 30 percent.
By the standards of most countries, Kuwaiti workers are fortunate. Under the government's latest salary plans, customs inspectors will get a basic starting salary of 1,200 Kuwaiti dinars ($4,310) a month tax-free, while a junior law clerk will make around 840 dinars.
But representatives of major unions, which essentially represent Kuwaitis rather than foreign workers, say pay increases are not being distributed fairly and that wages have failed to keep up with the cost of living for several years. Inflation reached a three-year high of 4.8 percent last year, although it is far below levels of over 10 percent hit in 2008.
The cabinet, which is appointed by a prime minister hand-picked by the ruling family, is not in a good position to resist union pressure because it has been weakened by the election result. Opposition lawmakers have endorsed strikers' call for better pay and criticized economic policy.
Wage disparities have "led to inequality...and therefore a lack of justice, which is forbidden by the constitution", parliament speaker Ahmed al-Saadoun, a prominent opposition figure, wrote on his Twitter feed last week.
Last month's snap election was called after protesters encouraged by opposition lawmakers stormed parliament, accusing the premier of corruption and demanding his resignation. To some in the cabinet, giving in to wage demands clearly seems wiser than risking fresh chaos at Kuwait's parliament, which is the most democratic and independent legislative body in the Gulf.
Some commentators in local media have suggested deploying the army at border points or taking striking workers to court in order to end the labor disputes, rather than offering wage increases. Another proposal, which seems unlikely to be implemented among Kuwait's pampered citizenry, is to set up a force of volunteer workers including retired people.
"The government should not put the country in this sort of position. It has to confront the strikers," said economist Jassem al-Saadoun, director of the independent al-Shall Centre in Kuwait. "There has to be a minimal level of respect, otherwise the situation will become very critical."
By putting pressure on private sector companies to match state pay hikes, the government's liberal spending on wages undermines Kuwait's stated goal of encouraging private business and diversifying its economy away from oil.
"Pushing up public sector wages hurts the private sector in an already difficult environment and may lead to inflation," said Liz Martins, senior Middle East economist at HSBC in Dubai.
"It is not a long-term way of stimulating growth, it's a short-term fix," she said, adding that Kuwait already attracted the lowest amount of foreign investment among the Gulf oil exporters because of its unstable politics and unfavorable business environment.
A longer-term issue is whether the government can afford the higher spending. For now, it has plenty of money; because of high global oil prices, it posted a budget surplus of $47 billion in the first nine months of 2011, nearly double the surplus in 2010.
But its rising expenditure on wages is pushing up the "break-even" oil price which it needs to balance its budget. In 2011, that price was around $82 per barrel, according to a Reuters poll of analysts.
Acting finance minister Nayef al-Hajraf was quoted by local media as telling parliament last week the break-even price had jumped to $109.50 for the next fiscal year starting on April 1.
That may well have been an exaggeration for political effect; most analysts do not think the break-even price is nearly that high. But Hajraf's basic point was correct: rapidly rising wages mean any sharp fall of oil prices in future - Brent crude is currently around $125, not far from a record high - could start to pressure Kuwait's state finances.
The extent of this pressure is unclear partly because the government is not releasing detailed data on its plans; a draft of next fiscal year's budget, revealed last week, envisaged a 13 percent rise in total spending to about 22 billion dinars but did not include all of the 25 percent public sector pay hike.
In a public discussion at an economic conference this week, Bassam Ramadan, country manager for Kuwait at the World Bank, said government spending might be unsustainable in coming years since oil prices could fall.
"The medium-term fiscal framework is not looking good if they continue at this rate of spending without putting much more systemic process into such salaries and compensations," he said, adding that bureaucratic red tape and inefficiency were hurting the economy by driving away investors.
Saadoun at the al-Shall Centre said the government needed to break out of the cycle of rising wage demands and settlements by tackling the root causes of workers' complaints, such as inequality and corruption, rather than by handing out subsidies and awarding fresh pay increases.
"You are ultimately buying political loyalty...and this is not treating (the problem). The way to combat corruption is to tackle those who are getting their hands on that money."
(Additional reporting by Mahmoud Harbi; Editing by Andrew Torchia)