7 spoilers to look for after Saudi migrant labour reforms

7 spoilers to look for after Saudi migrant labour reforms

After decades of relying on migrant labour for most menial labour positions throughout the economy, the Saudi government is cracking down on illegal migrant workers. However, several problems may jeopardise the positive effects of the reform. Here are 7 of them.

Over 1 million migrant workers have left the country since March. Obviously, this is having a huge impact on the local economy, with many basic services shutting down, companies losing large numbers of workers, and labour prices spiking. However, the short-term pain of adjustment will result in longer-term economic gain as unemployment among Saudi nationals drops, and the private sector deals with higher labour costs by becoming more efficient.

This may be true, but it is by no means a foregone conclusion. The situation could easily unravel, and given the fact that the transition was not adequately planned, it is questionable whether the government has the wherewithal to coordinate such a massive change to their economic model.

Here is a list of 7 spoilers and further policy reforms that observers should be on the lookout for to see which path the Saudi economy will take over the next year or so.

1. Reform of the kafala system.

If the government wants to make a serious attempt at improving the Saudi immigration system, it has to change the labour laws. The current kafala, or sponsorship, system is deeply corrupt. Labourers often pay extortionate fees to their Saudi sponsor. Sponsors often “employ” the migrants in fictitious companies, forcing them to find jobs on the open market, in breach of their visa requirements. Labourers have no legal recourse should they be exploited or have their contract terminated and often do not have enough money to leave the country.

The kafala system has become very profitable, and as such a powerful lobby has emerged to prevent changes to the system. Unfortunately, the Ministry of Immigration is not very powerful, and has little capacity to pursue the necessary reforms. However, without new immigration laws, a system so open to abuse will continue to create problems.

2. Retraining Saudi nationals for the skills and expertise the economy needs.

The Saudi private sector by and large relies on foreign labour rather than Saudi nationals. While some argue this is because of an overabundance of cheap foreign labour, many contend that it is instead a result of Saudi nationals having poor skills and preferring cushy government jobs with high pay and short hours over lower-paid private sector jobs that they see as beneath them.

Increasing the number of Saudis in the private sector is a serious hurdle. Part of this problem will be eased by the wage increases resulting from a diminished supply of labour. But the bigger problem is creating a national labour force the private sector wants to employ. The government has announced the launch of  initiatives to support Saudi youths in the job market, including vocational training programmes. But it will take some time to build these skills, and the labour market will likely not see any relief in the short term.

3. Providing support to enterprises until retraining has an impact.

The exodus of foreign labour caused many businesses to close in the days after the 4 November deadline, and if new employees can not be found, many small enterprises will likely go out of business. An impromptu plan had to be created to allow construction companies to swap workers, as they feared they would be unable to complete key projects. There has also been hesitation among contractors to bid for new contracts since they do not know where their labour supply will come from.

The government has plenty of money to support these enterprises as they deal with the huge drop in labour supply, but as of yet it has not done so.This is a huge mistake.SMEs are a crucial part of any healthy economy, and without them the already meager Saudi private sector will cease to play any significant role in economic growth.

4. Shrinking the government and expanding the private sector.

This leads to the next point – the government needs to step up efforts at economic diversification and privatization. Shrinking the government and expanding the private sector will solve several problems.

First, it will signal to the population that the government will no longer act as the default employer, so they should start looking for work elsewhere.

Second, it will (hopefully) be accompanied by a streamlining of processes and greater efficiencies in government bureaucracies.

Third, if the government can trigger private sector growth through privatization programmes, this will likely have knock-on effects that will spur growth in other industries.

Fourth, diversification will ensure a healthy economy that will be able to transition to a post-oil environment.

5. Shifting to a more capital-intensive, high-skill economic model.

As labour becomes more expensive, the hope is that private enterprises will become more efficient and shift to a more technology-intensive business model. This makes a lot of sense. With a population of only 20 million and a per capita GDP of almost US$21,000, the Saudi population does not have a comparative advantage in cheap abundant labour.

They do, however, have capital a-plenty. And they have a fairly well-educated population (even though the quality of this education has room for improvement). Thus, it makes much more economic sense for the overarching economic model to be focused on capital intensive, high-skill industries rather than the importation of cheap, low-skill labour.

6. Avoiding social unrest.

The government has for years used public employment as an integral component of its welfare state. The population has come to expect reliable, state-sponsored employment as part of the social contract. If this changes, it could trigger social unrest.

So far, public opinion has been supportive of the crackdown. But as the economy shifts to a more independent model, attitudes may change. Fear of this will likely cause the government to backtrack, stalling necessary economic reforms and potentially having a long-term negative effect.

7. Avoiding inflationary pressures.

As prices and wages rise after the removal of foreign labour, inflationary pressures are a potential concern. This may be compounded by the effects of greater domestic spending, if Saudis spend domestically the wages that were previously remitted to migrant labourers’ home countries.

It is, of course, too early to tell if this is going to be a serious concern. But pegging the riyal to the dollar is an important cornerstone of Saudi monetary policy, and if adjustments become necessary, this could have serious ramifications.

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