Saudi Arabia’s Shoura Council just approved a special residency permit for entrepreneurs, investors, and skilled expatriates. This is a potentially positive step for the economy, as it addresses a part of a key existing barrier to knowledge transfer.
Let us start with the immediate positives. The openness of Gulf labor markets – including the Saudi Arabian one – has been central to the increased living standards experienced by both Gulf citizens and the migrant workers residing in the Gulf. However, the short- and medium-term benefits afforded by their flexibility have created a long-term flaw, which is that they give very poor – and sometimes negative – incentives for knowledge transfer from foreigners to citizens.
More specifically, migrant workers - who have fixed-term contracts that an employer can choose not to renew – will understandably be reluctant to build the skills of their colleagues bearing Gulf citizenship, because they fear that successful capacity-building will result in the Gulf citizen replacing the migrant worker. The same applies to a foreign entrepreneur working with a local partner: Too much capacity building will make the foreign entrepreneur expendable.
This is a key reason for the persistence of high numbers of migrant workers in the Gulf, especially in the high-skilled bracket, where the attractiveness of migrant workers cannot be attributed to low wages. Employers regularly complain, for example, that despite the availability of IT courses in universities to Saudi citizens, foreign talent still has to be procured.
In OECD countries such as the US, migrant workers have a clear and relatively quick path to permanent residency and citizenship, largely eliminating the fear of enabling a citizen to replace them. As a result, there are positive incentives for knowledge transfer, as everyone prefers to work with more competent colleagues.
However, in Gulf countries such as Saudi Arabia, traditionally there have been no structured analogues to green cards, until now. By running this new system in tandem with the existing one, Saudi Arabia can potentially have its cake and eat it too. In the unskilled worker category, it can benefit from the flexibility of the prevailing system, which keeps wages low, while in the skilled worker category, it can use the new system to incentivize knowledge transfer.
This puts it at an advantage compared to OECD countries, where a desire to limit the aggregate presence of foreigners in the labor market means much tighter limits on entry, especially in the low-wage category. But to get the most out of this new system, additional steps are necessary.
In particular, none of the Gulf countries, including Saudi Arabia, have ever had a structured knowledge transfer policy. Countries like Singapore have gone way beyond putting a foreigner in the same team as citizens and hoping that the knowledge will transfer from one to the other by osmosis. Instead, they used structured incentives and intelligent placement.
For example, in the area of scientific research, Singapore used to hire first-rate foreign professors near the end of their careers, and put them in charge of the best young Singaporeans. They would then provide the foreigners with large compensation (to attract them) and a large bonus contingent on the improvement demonstrated by their Singaporean mentees, for example based on the number of papers that the Singaporeans publish either alone or with the foreign professor. By courting the foreign superstars near retirement age, Singaporean authorities eliminated the foreigner’s fear that they would be replaced by their mentees, as the foreigner was looking forward to retirement anyway.
Saudi Arabia can adopt similar strategies. It can also contractually obligate (or at least reward) migrant workers for transferring their skills to citizens, as traditionally, this has not been an explicit performance criterion. Moreover, following Singapore’s example, it may want to surround the best foreign talent filling in gaps in the local labor market with the best Saudis talent.
Foreign investors and workers who make notable contributions to building the abilities of Saudis should also be recognized at the government level. For example, the UK bestows honorary knighthoods to non-citizens who have contributed to relations between their country and the UK. Such a rare distinction can act as a powerful incentive for international-level talent to transfer their knowledge to young Saudis.
At present, the potential returns from introducing permanent residency are amplified, as Muslims are feeling less and less welcome in the traditional destinations in OECD countries. For example, in a 2018 poll of over 5,000 U.S. citizens, Muslims were the ethnic/religious group to receive the lowest approval rating (48%). At the same time, Saudi Arabia is making massive upgrades to the religious sites within its borders, most notably Makka and Madina, rendering the Kingdom even more attractive to Muslims than before. Saudi Arabia is therefore well-placed to use its new visa policy as a way of attracting top Muslim talent from across the world. With the right complementary policies, the biggest winners could be young Saudis.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.