The Saudi government’s new “instant visa” fast tracks the process of hiring foreign workers for nascent firms, and is accompanied by a one-year grace period on Saudization requirements. Coming in the wake of aggressive moves to limit job opportunities for migrants, including sector-wide bans on the employment of migrant workers, the new policy highlights the challenges of striking the right balance between creating jobs for Saudis and supporting Saudi businesses. The debate is hindered by fundamental analytical errors that proponents of each side make when arguing their case.
On the pro-business side, there is a chronic underappreciation of the negative impact of low-cost migrant workers on innovation. Decades of providing Saudi businesses with an inexhaustible supply of low-cost workers has made them into primitive enterprises: their business model scarcely develops beyond importing foreign goods, putting low-cost foreign hands to work, having a couple of Saudi overseers—usually the establishment’s proprietors—and reselling the imported goods domestically with minimal value added.
Adapting to changes in the economic climate
Counterintuitively, a key flaw in this commercial model is its ability to effortlessly adapt to changes in the economic climate. When business is booming, new workers can be hired instantly at exactly the same wage as before. And when the economy contracts, such as when oil prices fall, the migrant workers on the company’s books are made redundant at the stroke of a pen, stabilizing the firm’s finances. In both cases, managers fixate on migrant workers as the primary control variable, at the expense of considerations relating to productivity and innovation.
To see why, note that in western economies, low-cost migrant workers are largely unavailable. When the economy booms, wages rise, forcing managers to think judiciously about hiring. During a recession, employment protections for citizens mean that redundancies are complicated and sometimes impossible. Consequently, managers focus a lot more on maximizing worker productivity through investments and employee training; and on developing new technologies that are commercially valuable.
These currents are reflected in data on research and development (R&D) spending: the Gulf countries rank below every region in the world in terms of R&D spending as a percentage of GDP, and the limited spending is almost exclusively funded by the government, and occurs in governmental organizations, such as oil giants Aramco and ADNOC.
Low-cost migrant workers and innovation
If Saudi Arabia wants its long-term economic growth to be driven by technological progress rather than by increases in oil prices and production, then it must acknowledge the adverse effect that low-cost migrant workers have on innovation in the private sector, and seek to remedy it.
This brings us to the fundamental error made by proponents of restrictions on migrant workers. Rather than making the case I made above, they make the erroneous claim that if Saudi Arabia bans migrant workers, Saudi businesses will hire nationals in their stead. We know that this is false empirically because all of the Gulf countries have tried this and it has failed. The failure was also expected because national and migrant workers are imperfect substitutes. It is tempting to attribute the attractiveness of migrant workers merely to their willingness to work for a lower wage, or to domestic businesses “lacking patriotism”; but this belies the genuine superiority of migrant workers in many relevant domains, including work ethic, willingness to perform jobs that locals are averse to (waiting tables, collecting refuse, etc.), and their possession of skills that nationals often lack.
Saudis on the whole are well-educated, which may make the skills gap puzzling. However Saudis are too often educated in the areas that help one get a cushy public sector job, and not in those that serve the private sector needs. This is most starkly seen in the limited success of vocational training, especially when compared to advanced economies such as Germany or Switzerland.
Thus, for crude restrictions on the employment of migrant workers to create jobs for Saudi citizens, they must be accompanied by upgrades to the human capital of Saudis that attend to the needs of the private sector.
The appointment of a business leader, Ahmed Al-Rajhi, to the post of Minister of Human Resources reflects an appreciation of the interrelated nature of these issues, as does the new instant visa. The provision of a limited grace period clearly represents an attempt to push Saudi entrepreneurs toward business models that revolve around innovation and technology, and go beyond using low-cost migrant workers to resell foreign products. The wide-ranging complementary reforms to the education system also reflect an understanding of why creating jobs for nationals requires more than simply impeding the employment of foreigners.
But while the new system makes hiring foreign workers “instant”, the results of these comprehensive reforms will be anything but “instant”, requiring many years to bear fruit. A combination of strategic planning, patience and adaptability will be central to achieving success.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.