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Saudi Arabia – Saudisation at the Crossroads

December 6, 2012

There is much controversy in business circles within Saudi Arabia over the latest measure by the Ministry of Labor to intensify the effort to replace foreign workers with Saudis.

The Ministry has introduced an annual fee of SR2,400 ($640) per expatriate worker payable by private sector companies that employ less than 50% of Saudi nationals in their workforces. Diana Al-Jassem in the Arab News explores the issue in this article.

The problem is that 90% of the private sector workforce is foreign. The reasons are simple. Foreign workers are cheaper than Saudis. Most are tied to a Saudi sponsor, and except through abuses of the system cannot sell their labour to the highest bidder.

Another factor is that many of these workers are doing jobs that Saudis do not wish to do – or so the received wisdom maintains. And I would agree that there are few Saudis who would accept that they were born into of the wealthiest nations on the planet to clean lavatories or slush concrete around on a building site.

Leaving aside the most menial jobs, there is currently a big gap between wages paid to blue collar workers from overseas  – factory workers, technicians and so forth – and what a Saudi would consider to be a living wage. The same goes for non-professional administrators and clerical staff. And I suspect that these are the areas of employment that the Ministry is targeting with the new measure.

The difficulty is that many expatriate workers are in the Kingdom without their families. Their remittances support dependents still living in their home countries where the cost of living is lower. Whereas young Saudis expect to “live in the style to which they have become accustomed”. They want to marry, live in a decent home, raise families and employ domestic workers to provide childcare and attend to menial domestic chores.  You could call this the “Saudi Dream”. And the kind of wages paid to foreign workers at the lower end of the scale will never support that kind of lifestyle.

It’s a problem all over the Gulf region, but greater in those countries with large populations of nationals to support – Saudi Arabia and Bahrain in particular.

Whole books have been written on this subject, and I don’t propose to go through the complex economics here. But a conversation with a Saudi friend the other night set me thinking.

He believes that Saudisation is dead in the water – the current measures will never solve a problem that the country has been wrestling with unsuccessfully for the past thirty years. And he contends that until the current system of sponsorship is abolished, it will remain so. Why he asks, would a private sector employer hire a Saudi national for SR3,000 a month when he can take on an employee from Pakistan or the Philippines for SR1,000 a month? The Saudi can switch between employers at will. An employer might spend six months and considerable resources in developing that person, only to find that the employee takes their new skills to another employer who offers SR4,000 a month.

Foreign workers, on the other hand, are tied to the employer, and need to return to their home countries in order to apply for a new job in the Kingdom. The only exception is in the case of people who are brought in by sponsors who have no intention of employing them, but allow them to work for other companies. Thus the sponsor generates an income of several thousand riyals a year for each worker under their sponsorship in return for doing precisely nothing except renewing their work visa and residence permit every couple of years. Another widespread practice is for sponsors to act as sleeping partners as their foreign employees effective run businesses in their own right, and take a share of the profit. Critics of this practice say that such Saudis are getting something for virtually nothing, though it’s fair to say that they still have responsibility for their employees, and can get into serious trouble if things go wrong.

To compound the wages gap even further, there is a substantial number of foreigners working in the country illegally. These people work for cash in order to stay under the official radar, and almost all are in low paying jobs.

The Ministry of Labor’s recent measures have been designed to stamp out abuse of the system. In addition to the levy on expatriates, the Ministry has introduced the Nitaqat programme, under which companies lose hiring and visa privileges if they fall short of Saudisation quotas. And it is setting up a number of employment agencies through which the large-scale importation of foreign labour will largely be channelled.

One of the reasons why the latest levy is likely to be diluted is that the owners of private businesses in the Kingdom include some very powerful families, as well as a number of senior royals. These people have much influence, both individually and collectively through chambers of commerce. It is clear that they are lobbying furiously against the measure.

I well remember an episode in the 80s when the Arab News ran the front page headline “Saudi Arabia to introduce income tax on expatriates”. The next day, the headline ran “Income tax on expatriates still being considered”. And the day after, it read “Income tax for expatriates rescinded”.

What happened was that the announcement was met by a flurry of actual or threatened resignations by senior staff in the private sector. Senior businessmen went to the top of the government and complained that mass defections by key staff – many of whom were highly paid westerners at the time – would have a catastrophic effect on their businesses. The only way they could keep their top people, they argued, was by paying the tax for them. The tax was therefore effectively on their businesses, not on the individuals. Their argument won the day, and the Ministry of Finance duly received orders to reverse the decision.

This time round, the Ministry of Labor seems to be made of sterner stuff. And they are not without their supporters within the private sector. Prince Al-Walid bin Talal, the country’s leading businessman, weighed in with a defence of the levy, saying that most nations have some sort of tax on employment, and that SR200 ($53) per month was not an onerous sum.

He has a point. But as my friend commented “why does the government need the money? And anyway it won’t work, because you will never be able to persuade workers to replace low-paid foreigners with Saudis in industries like construction, which is where most of them are.” Others are complaining that the additional cost will be passed on to the government and to ordinary Saudis, who will find that the cost of living will rise.

Another measure advocated in some circles is to introduce a minimum wage across the Kingdom. If that wage was set at a level sufficient to allow young Saudi men to live the “Saudi Dream” of a family, home, car and domestic help, the effects would be dramatic. Combined with the other measures, this would seriously deter the private sector from hiring any but those workers whose jobs Saudis will never agree to do. But it’s hard to see how the increased costs to businesses  would do anything but stoke inflation and lead to many small enterprises going bankrupt. Unless, the government agreed to support them over a transitionary period, and special pleading from the worst-affected business sectors resulted in exemptions that applied to manual workers.

All these measures are a combination of carrot and stick.

There is, however, another option that could transform the Kingdom. Again, it was suggested by my friend. Grant citizenship to substantial numbers of foreigners who have been in the country for a long time – perhaps working in jobs that involve a high level of responsibility. Give them the opportunity to start businesses in their own right. Harness their entrepreneurial talents. Use those talents to create jobs. Long-term expatriates, after all, know the country, its culture and business environment as well as many Saudis, and they would be in a strong position to start the kind of small businesses that are the engine of growth in many Western countries.

What’s more, give wealthy outsiders the equivalent of green cards. Encourage them to start businesses. Since 2006, Saudi Arabia has been a member of the World Trade Organisation, and has opened its doors to foreign companies wishing to set up 100%-owned subsidiaries in the Kingdom in certain industries.

But although allowing foreign companies to set up in the Kingdom without needing an agent or Saudi joint venture partner, the hurdles for all but the well-funded are high. The government could lower the hurdles, and in return make it a condition for new start-ups in the SME sector to staff their businesses predominantly with Saudis. That would encourage the kind of businesses that could and would hire Saudis without difficulty.

Perhaps Saudi Arabia should look at the example of its biggest trading partner. The United States has been welcoming immigrants for two hundred years. It has been invigorated by the entrepreneurial spirit of each successive generation of immigrants, many of whom in a generation or two have integrated into society and contributed massively to the prosperity the country enjoys today. The very success of America’s immigration policies has led to fierce opposition to proposals aimed at restricting immigration in the wake of the 2008 financial crisis. Opponents say that shutting the door will stifle the influx of new energy and ambition that immigrants have always brought with them.

Saudi Arabia could be a Muslim equivalent of the “land of opportunity” that is integral to the American national identity. Instead of grudgingly welcoming foreigners and resenting its reliance on them, it could welcome them with open arms, and create an entrepreneurial society unmatched in the Muslim world.

It would take strong and determined leadership to undertake such a transformation. There would be many opposing forces. The current business establishment would fight tooth and nail against the threat to its vested interests. Many members of the indigenous elite of central Saudi Arabia would be disturbed by the prospect of entrepreneurial Egyptians, Jordanians, Pakistanis, Bangladeshis, Indians, Malaysians and Indonesians calling themselves Saudis.

These are the same people who have always looked down their noses at citizens in the West of the country whose ancestors  came from other parts of the Muslim world and settled in Jeddah, Mecca and Medina. Yet many third, fourth and fifth generation Saudis from Jeddah are among the most successful entrepreneurs in the Kingdom. The Binladin and Mahfouz families from Yemen. The Alirezas from Iran. The Al-Amoudis from Ethiopia, and many more from Egypt, Lebanon and other neighbouring countries.

Looking askance at immigration is a natural instinct shared by “indigenous” British and Americans. But in truth, Britain has absorbed waves of conquerors and immigrants over two thousand years. And only a tiny minority of Americans can trace their American ancestries further back than a handful of generations.

If Saudi Arabia can absorb millions of foreigners as guest workers, it can also assimilate many of them into citizenship.

India and China have shown what can be achieved through economic liberalisation over the past twenty years. Saudi Arabia could achieve the same or better. Faced with competition from the “new Saudis”, today’s citizens would need to step up to the plate and prove their worth.

To defray the costs of bringing new citizens into the social umbrella and benefit from the prosperity they create, the Kingdom could introduce an even more radical measure:  universal income tax.

Why taxation?

Because the country’s citizens are addicted to entitlement. The state provides free education and health care, employment subsidies, interest free loans and, recently, unemployment benefit. Utilities such as water and electricity are heavily are subsidised. If this is to be sustainable in the long-term, Saudis are going to have to get used to giving something back.

Today, Saudi Arabia is burning oil and gas equivalent to four million barrels of oil a day on its own energy needs. Every increase in consumption reduces its ability to export. That’s fine while the oil price stays well above $80 per barrel – the level that the International Monetary Fund believes is necessary for the Kingdom to balance its budget. But if it falls below that level because importing countries – like the US – are becoming self-sufficient thanks to new techniques in extracting oil and gas, and other countries step up their investment in alternative energy sources, things will change. With its current social costs and a rapidly growing population, Saudi Arabia’s massive financial surplus could quickly turn to deficit.

The government is investing in its own alternative energy projects, notably in solar and nuclear power. But will that be enough?

Taxation is a tricky subject. For example there would be the thorny issue of “no taxation without representation”. But the Saudi leadership is smart enough to find ways to preserve its power yet still provide an enhanced level of representation. Indeed, it is moving in that direction today.

But the idea of income tax should not be beyond the pale, and is an option that would instil in society the idea that not everything in life is free.

The Kingdom’s ultra-cautious leadership is likely to regard the last two measures as steps too far, at least for the near future. Each could generate a level of social and political instability that it might consider unacceptably risky, especially as the next twenty years in the region are likely to be as turbulent as the last two.

But who knows – perhaps the third generation of the Al-Saud are even today thinking the unthinkable, weighing up the risks and honing their arguments. Too much is changing around them for standing still – or even advancing at a snail’s pace – to be an option in the long term. Every day, as a senior government official told me a few years back, enough babies are being born to fill a new primary school.

Some challenge. But one should never underestimate Saudi Arabia.

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