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Postcard from Saudi Arabia: The Grey Entrepreneurs

April 15, 2014

Employment is a perennial hot topic in Saudi Arabia. Successive Ministers of Labor have struggled with the conundrum of how to replace foreign labour with qualified Saudis. The latest figures from the Saudi Central Department of Statistics and Information suggest that as of the last quarter of 2013 the unemployment rate for males is around 6%, and that among females who want to work it’s 36.7%.

One statistic I have never been able to find is for multiple employment in the Kingdom. By this I mean the number of people who work in more than one job, or who carry out a number of activities that might not technically be regarded as employment but are nonetheless income-producing.

It’s well known that many Saudis in government jobs have businesses on the side. They may be anything from import-export to small family shops. Though there are restrictions limiting their extra-curricular business activities, it seems that many government employees are adept at getting around them.

On a recent visit to the country I encountered a couple of examples of what is effectively an alternate economy. Not black, because taxation in the Kingdom is minimal, but certainly sufficiently grey to creep under the radar of the official employment statistics.

The first example emerged from a casual conversation with a couple of young Saudis in a hotel lobby. After going through the ritual enquiries “where are you from?”, and “what do you think of Saudi Arabia?”, we started talking about their jobs. One works in the private sector, and the other with what you could describe as a semi-government organisation – a company wholly owned by the government.

People kept coming up to them to say hello, and I wondered why they were there. Training perhaps?

Mohammed and Abdullah (not their real names) proudly produced a lavish brochure with pictures of watches, other accessories. They turned the pages and showed me the logo of a Swiss university, and details of its distance learning MBAs and PhD courses. It seems that they are into network marketing.

The way network marketing – also known as multi-level marketing – works is that when you sign up with a company, you start by selling their products to your friends. You get commission on the sales. Then you recruit two people to sell to their friends. You get commission on their sales. They then recruit two of their friends, and so the story goes, your network grows to tens or even hundreds of people. The larger your network, the more commission you earn. It’s a time-honoured system in the West, though much criticised because of the inflated income expectations many of the operators appear to engender in their recruits. In many cases, such schemes actually break laws against pyramid selling in the US and the UK.

Mohammed and Abdullah did not seem to be concerned about any ethical considerations. They considered themselves to be entrepreneurs. Both said that they are doing very well. Mohammed claimed that he earns more than his day-job salary in commission. Abdullah, who has a smaller network, is apparently well on his way towards doing the same.

It seems that many of the sales agents are women. And certainly network marketing would be a logical outlet for non-working women who have time on their hands and plenty of female friends. There are enough of them – a 2012 survey by consultants Booz and Co claimed that 78% of female graduates were unemployed. Some prefer not to work. Others are not allowed to by their families or are put off working because of the low salaries on offer. But network marketing allows them to earn money from the comfort of their own homes and without breaking any social taboos.

I asked the two guys when they thought they would be able to give up their day jobs. Neither said that they were planning to do so – clearly they have enough spare time for network marketing despite holding down full time jobs. They told me that the marketing company assured them that they should be able to make enough money to stop working altogether within three to five years. Retire is probably not the most appropriate word to use when you’re talking about a couple of people in their twenties. So I asked Abdullah what he would do when he reached that point. “Sleep!” he said with a big smile.

I was curious as to whether these guys were pioneers. How widespread is network marketing in Saudi Arabia? Before they went back to their friends, I posed the question. The answer came back loud and clear: 1.2 million people.

I have no idea whether or not this was a gross exaggeration – it’s not, according to several people I spoke to subsequently – or whether my new friends’ claims about their own success stacked up. But even if you halve their estimate of the number of network marketers, they would represent a very significant percentage of the working-age population. It’s also worth noting that neither of them said that there was any problem with their effectively having two jobs.

But I did discover that in 2012 the Saudi government banned the company Mohammed and Abdullah are associated with. A local newspaper reported at the time:

“This network marketing activity involves deception of citizens and has been banned in a number of countries,” the Ministry of Commerce and Industry said.

The ministry urged Saudis and expatriates not to take part in the activities of such network marketing companies.”

“This business activity has not been registered with the ministry. Moreover, there have been official instructions in the past banning activities that involve deception and stealing others’ money through falsification,” it explained.

The ministry stressed that it would take all measures to stop this form of business activity in the Kingdom with the support of relevant agencies.”

I suspect that the company in question eventually managed to persuade the Ministry that it was not breaking any rules, which was why my friends were openly talking about their involvement. Or maybe they changed their business model to address the concerns of the religious establishment that network marketing might be forbidden under Islam.

If not, then large numbers of people in Saudi Arabia would seem to be earning income illegally but with apparent impunity.

My second encounter with Saudi Arabia’s grey economy came a couple of weeks later, when I got into conversation with another parallel entrepreneur. Hamza (also an assumed name) is a 29-year-old government worker. In his “spare time” he runs a car importing business. He has over twenty staff and three showrooms.

Hamza’s business is used cars. My immediate thought when he told me about his company was that he must surely have some stiff competition from companies much larger than his. All around the country you can easily find used car sellers. Some are huge. But this is a country where the death toll on the roads is a fifth of that in the US, but whose population is one tenth of the size. Drive from Dammam to Riyadh on the six-lane highway and you’ll see plenty of evidence of the reckless habits of Saudi Arabia’s drivers in the form of detritus on the side of the road. So would you buy a used car when you don’t know its accident history?

Hamza’s solution is to import used car from the US, where drivers are somewhat more careful with their cars. Each car he sells has a certificate from the US guaranteeing its accident-free history. Clearly this assurance is a comfort for his customers, because last year he sold 400 cars.

His next business, he told me, will be importing motorbikes into the Kingdom. Given the love of bikes among young Saudis – go to Riyadh any weekend and watch the kids doing wheelies in Olaya and Tahlia Streets and you’ll see the evidence for yourself – I reckon he’s on to a winner.

I was impressed, and told him so. Here was a guy who will be running a very big business in ten years’ time if he keeps going at his current rate of expansion. But one thing didn’t make sense. Why, with this obviously successful business, was he still working for the government on a very modest salary? He gave a cryptic reply: “I’ve been working in this job for four years, and I need to convince my family that I’m capable of holding down a government job”. I didn’t press him further, but I suspect that the respectability of working for the government was more important to his family than his burgeoning career as an entrepreneur.

For a young Saudi a government job is the key to a good marriage and much else besides. One of the factors that prevent the private sector from employing more Saudis is the perception of risk, especially at the smaller end. Families – and equally importantly, families of prospective brides – will accept their sons working for one of the big industrial firms like Saudi Aramco and SABIC on the grounds that they’re virtually part of the government. Banks are fine, as are the long-established family conglomerates. But go lower down the scale to the level where young entrepreneurs like Hamza operate and the greater the chance that status-conscious Saudi families will view your career prospects with increasing scepticism.

Which could explain why Hamza works eight hours a day for the government and spends the rest of his waking hours on his own business. For all that, he must be good at delegating, because he insisted that he didn’t work at weekends.

If these stories are representative of a wider phenomenon, it’s no wonder that Minister of Labor Adel Fakieh is scratching his head to come up with ways to get more Saudis into paid employment. Nitaqat, the quota system by which the private sector is judged on its success in replacing foreigners with Saudis, and Hafiz, the employment benefit scheme of which many of the unemployed women avail themselves, can only partly address the problem if large numbers of women are finding ways to create incomes for themselves outside employment, and if large numbers of government workers are running businesses on the side – either in their own right or through proxies.

The concern must be that those benefiting from the grey economy are likely to be from the better-educated and better-connected echelons of society. If this is the case, the question still remains of how to prevent the underprivileged and undereducated members of Saudi society. The last thing the country needs if it is to maintain stability and social cohesion is a growing perception that the rich are getting richer and the poor are becoming a marooned underclass.

Add to the employment conundrum an education system whose well-documented shortcomings are contributing to a lack of work readiness on the part of high school graduates, and staunch resistance to labour reforms among powerful business owners and you wonder how the Minister doesn’t wake every morning with a severe headache. If he doesn’t have the toughest job in the Saudi government, I don’t know who has.

Mohammed, Abdullah and Hamza are living proof that entrepreneurial spirit is alive and well in Saudi Arabia. The government’s challenge, it seems to me, is  – rather than curtail their activities – to find ways of harnessing that spirit in the interests of the greater good by making entrepreneurship not only socially respectable but an accepted and celebrated bedrock of the national economy.

Not an easy task, but a critically important one.

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