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Saudi Arabia’s economy is booming. The government and private sector are on an investment spree.

But young people like Mohammed, a 23-year-old living in the Suweidi neighbourhood on the edge of the capital Riyadh, have yet to taste the fruits.

Passing the time with his older brother Mahmoud at a juice bar, he said he was still unemployed and did not expect his situation to improve.

“There are no jobs. Even people who go to college [which he did not do] don’t find work.”

Yet the two young men, sons of a military officer, are not actively looking for work. Displaying indifference as they live off their family, they said all their friends were jobless.

“We spend our time on the streets,” said Mohammed. “Saudi Arabia is rich, but you need connections to get a job.”

The young men’s case is not isolated. Despite three years of high growth and record oil revenues, narrowing the unemployment gap for nationals in several Gulf states, including Saudi Arabia, is proving a struggle.

It is not that the jobs are lacking. World Bank economists said they were surprised by their findings this month that job creation in the Middle East and North Africa was rising at 4.5 per cent per a year in 2000-2005.

The Bank said the region’s aggregate unemployment rate fell from 14.3 per cent to 10.8 per cent of the labour force, and described this as a ”remarkable achievement”.

But in the economies of the Gulf, many of the new jobs are going to foreign workers. The infrastructure and real estate boom are drawing in hundreds of thousands of new workers from south-east Asia.

Locals are too proud or too capricious to take up low-skilled work, or they emerge from inadequate education systems with insufficient qualifications for higher-paying private sector jobs.

Unlike previous oil booms, when the government was the main employer, the public administration across the region is bloated and official policy is to trim rather than expand employment.

According to Abdulwahed al-Humaid, Saudi Arabia’s deputy minister of labour, unemployment in the kingdom has risen from 9.7 per cent in 2002 to 12 per cent.

The jobless rate among Saudis in their 20s is estimated by economists to be at least twice that.

He recently told the Financial Times that the ministry had approved more than 750,000 visas for foreign workers over a period of almost a year, up from nearly 353,000 permits in 2005.

“It’s a well-known problem,” said Mustafa Nabli, the World Bank’s chief economist for the region. “And as long as there’s open access to foreign labour and the skills of nationals are not there, this problem will continue.”

The challenge for oil-dependent Gulf countries with young populations has long been to turn the demographic bulge – nearly 40m more people are estimated to be joining the labour force this decade, a 40 per cent rise – into an opportunity, or risk exacerbating social and political disenchantment.

McKinsey, the consultancy, said new government measures to close the national unemployment gap were essential if the economic diversification drive under way was to shield the economies of the Gulf from the effects of volatile oil prices.

“There are plenty of opportunities, but many nationals lack the skills. At the heart of this is also the structure of the private sector, which is geared to low cost, low productivity,” said McKinsey’s Jörg Schubert, co-author of a study on the Gulf labour market.

He said attempts to institute a quota system for the employment of nationals, such as the Saudisation programme, had been effective when launched but had shown their limits, providing little incentive for nationals to compete effectively for jobs.

His research indicated that a quarter of national employees in Bahrain, Oman and Saudi Arabia failed to show up for work regularly, while many others left their jobs six or nine months after taking them.

Some private sector groups create ghost companies to bring in foreign workers, a practice that governments eventually turn a blind eye to.

Instead of a quota system, he said, governments should set up employment programmes to train nationals, and should give companies financial incentives to employ them.

Such an attempt is being made in Bahrain, which has created a labour fund that invests the taxes of foreign workers in training and helps finance small private companies.

Saudi Arabia, too, is looking at options to tackle unemployment, including making the recruitment of expatriates more costly to the private sector.

“There needs to be a shift in mindset,” said Mr Schubert, but for that to happen, employers, job seekers and the government “have to work at it”.

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