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Will Possible Labor Policies by Gulf Countries Affect Remittances to South Asia?

Ceren Ozer's picture

My entry last week gave a quick profile of the South Asian overseas workers and discussed the crucial role of remittances received from the Gulf Cooperation Council (GCC) countries (Saudi Arabia, the U.A.E, Kuwait, Qatar, Bahrain and Oman) for South Asian economies. Today I’d like to discuss whether changes in the labor market policies of the GCC countries could jeopardize job prospects for South Asian migrant workers.

Creating jobs for GCC citizens is already on the top of the agenda in some of these countries and is bound to gain more momentum with the youth bulge. Efforts to create jobs for nationals through the “nationalization of the labor market” have been further intensified as a response to the recent events in the Middle East. Across the GCC, additional policy measures are being announced highlighting the need to replace expats with nationals in private and public sector. These messages have been the strongest in Saudi Arabia, but also in the U.A.E. and Kuwait.

• The Minister of Labor of Saudi Arabia announced a “Saudization program, which he said “consists of regulations and mechanisms that will change the fundamentals of the job market and seek to achieve incremental employment of Saudis and ban the private sector from employing non-Saudis if sufficient local hands are available…The ministry will no longer allow the employment of non-Saudis denying the rights of the local people. Companies and establishments that do not follow the new recruitment guidelines and regulations will be punished.”

The U.A.E. is creating a fund which will provide funding for training and make copayments to the U.A.E. citizens who join private sector and their employers in order to reduce the pay gap between the public and private sectors.

In Kuwait, there is some pressure from the National Assembly to restrict the holding of public sector jobs by expatriates so that skilled positions could be replaced with nationals. The National Assembly also submitted recommendations in March on tackling unemployment in the context of the mega development ventures planned up to 2014, which involve toughening penalties against companies that hire non-Kuwaitis and replacing up to 60,000 of foreign workers.

Will these changes have a direct impact on the South Asian workers, and if so how? What will be the impact on remittance flows?

I believe a serious negative impact on job prospects and the remittance flows is unlikely: first, segmentation in the GCC markets dictate that the low skill jobs that most South Asian workers hold in the GCC are unlikely candidates to be “nationalized”. Second, the GCC countries’ growth prospects remain strong particularly in sectors such as construction which attract many South Asian workers.

South Asian workers are unlikely to be replaced with nationals because the GCC labor markets are particularly segmented in two dimensions. The first segmentation is between public and private sectors where former pays significantly more and, on average, is less demanding. The second is between expatriate and national workers; the wage gap, albeit differing according to skill levels, is very high. Public sector salaries raise the reservation wages (the lowest wage rate at which a worker would be willing to accept a particular type of job) of the nationals; therefore, it makes more sense to wait for a government job than to take a lower paying private sector job. GCC nationals also have significant sources of non-wage income that further raise reservation wages.

Due to high reservation wages from the 1980s onward, the GCC private sector switched to lower paid Asian workers, and continued hiring them even during economic downturns as an effective cost cutting strategy. This segmentation is further solidified under the sponsorship system, which strictly limits the labor mobility of foreign workers and serves as the legal basis for temporary residency and employment in the GCC. Workers cannot enter, work, change jobs or leave the country until they have permission from their sponsor.

The new and “improved” nationalization policies* in the short-run could include a combination of a migrant tax and quantitative restrictions on the number of foreign workers by certain sectors and jobs. If history is any guide, we can be assured of a strong lobby against any quantitative restrictions by the private sector as foreign workers will more expensive and affect companies’ productivity and profit margins. Such restrictions faced heavy resistance in 2005 for instance and were eventually in Saudi Arabia and Bahrain. GCC specialist Steffen Hertog** and others argue that such quantitative restrictions may than target the skilled and the semi-skilled levels, where wage gap between the expats and the nationals are lower and therefore politically easier for authorities to put restrictions on the number of foreign workers in these jobs.

Growth prospects and construction plans in the GCC actually have the potential to increase remittances to South Asia. Oil prices continue to rise and housing shortages in countries such as Saudi Arabia, Oman and Bahrain is likely to secure a construction boom. Qatar has seen its natural gas revenue rise and will be building in preparation for the 2022 World Cup. These new construction sites are likely to employ South Asian workers.

Due to all these factors, I believe that in the short-sun, “nationalization” policies would NOT affect low-skill jobs such as in construction and contracting (drivers, security guards, housemaids etc.) where salaries are low and nationals have no interest in taking these jobs. Having said that, much of this will depend on whether the GCC labor policy changes are based on sound analysis. A populist reaction (rather than a well calculated policy response) may lead to a certain migrant tax or an unofficial freeze (as one that was put by Saudi Arabia on Bangladeshi workers) which will certainly be harmful to the job prospects of unskilled workers.

*So far the GCC labor market interventions focused on imposing quotas and penalties on private companies with limited effectiveness. There are several ways that “nationalization” policies are imposed in the GCC. One common policy is nationalization quotas which have not been very effective. For example, Saudi Arabia requires since 1995 that companies would increase nationalization by 5 percent every year. A look at table 1 in my previous blog will suffice to show that this has not worked. There are also nationalization quotas by sector such as in the U.A.E., but these proved particularly difficult to implement for the retail and insurance sectors. In similar vein, the GCC countries impose that certain job categories are reserved to nationals (such as secretarial jobs, front office positions in tourism agencies etc.) but compliance has been very difficult to monitor. There are also salary and training subsidies to nationals and their private sector employers.

**This analysis overlapped with a great lecture by the LSE professor Steffen Hertog on the “Gulfization” of private employment in the GCC, which was organized last week by MENA Chief Economist Office. The lecture’s summary will be posted as a brief; I will make the link to it available in my blog. I thank my colleagues Sanket Mohapatra and Kevin Carey for ideas and discussion on this topic.

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