Nitaqat Three Years On: A Summer 2014 Report Card

Four years into the Arab Spring, Saudi Arabia has been an oasis of relative calm and stability in an otherwise tumultuous Middle East region. This is partially because the perceived social, economic and political dysfunction resulting from Arab Spring reform movements has had a sobering effect on Saudi perceptions.  In fact, many Saudis consider the chief consequence of the Arab Spring to be unprecedented “Fowda” (chaos).  As a result, the government’s Edmund Burkian message that sudden, radical reform leads to traumatizing political and economic instability is widely accepted.

However, the sobering reality of regional instability has not been the only brake on pressure for political reform in Saudi Arabia.  Meaningful domestic reform undertaken by the government since 2011 has also had an effect. 

In particular, the Ministry of Labor has been leading an aggressive labor reform campaign that has begun to re-balance the labor – employer relationship in ways that are more favorable to normal, average Saudis.  In December 2012, the Saudi-US Trade Group (SUSTG) published Nitaqat: Towards a Saudi New Deal, my analysis of the Nitaqat initiative up to that point.  My assessment was that, based on the available information at the time, some significant results had been achieved in Year One following the Arab Spring.  This article will evaluate the progress of the labor reform program based on the data that has emerged in the ensuing eighteen months.  

As of summer 2014, three years into what must be understood as a long-term project, the available evidence suggests the Ministry of Labor is progressing towards its goals, meaningful progress is occurring and that the foundations of longer-term sustained success are in place.  

STRUCTURAL REFORM:  STEADY PROGRESS; SOME CAVEATS

One obvious way to measure success of labor reform policies is to look at how many jobs a government has created.  However, I would argue that some of the most important developments in the Saudi context over the last three years are more qualitative than quantitative.  Specifically, the government’s ability to regulate its labor market has been significantly enhanced and this is critical for achieving its long-term policy goal of combatting unemployment.

As I described in my 2012 SUSTG piece, a root cause of the unemployment problem can be traced to Saudi Arabia’s relatively recent and sudden emergence as a governing entity over a territory with no history of centralized rule.   It takes time for a government to develop the bureaucratic framework sufficient to control what happens inside its borders.  Moreover, Saudi governance has traditionally been based on a culture of consensus which tends to weaken central authority.  Combined with the fact that the political leadership has called on a powerful private sector for key aspects of the country’s economic development it is not surprising that the labor market has been left largely unregulated and primarily responsive to the interests of business owners.  

Adel Al Fakeih, Saudi Arabian Minister of Labor.

Adel Al Fakeih, Saudi Arabia’s Minister of Labor.

Transparency

Since 2011, the government’s ability to regulate and control appears to be significantly expanded.  Perhaps the most notable development is the shift of the administrative and regulatory reporting documents, such as issuing and renewing labor licenses, from being conducted on paper to the digital sphere. One statistic from Table 37 of the just-released Ministry of Labor 2013 annual report is telling.  In 2009 no Ministry of Labor (MOL) regulatory administrative or reporting services were available online. By 2011, the instances of online services performed by the MOL 7.5 million and rose in 2013 to 24.7 million.  This increased transparency has made it harder for those involved in the visa black market to avoid compliance. The Ministry of Labor’s newfound ability to track company performance and compliance in real-time is critical to increased regulatory control. 

It is in this same context that we should view the Corrections Campaign of 2013.  Before 2011, the Saudi labor market could only be described as chaotic and disorganized.  It was filled with workers coming to the Kingdom to do work that had no relation to what was specified on their visas. To rectify the situation, all workers were required to correct their status to reflect what they were actually doing.  In 2013, 2,952,573 formally changed their employer and 2,687,752 changed their formal job status; another 800,000 could produce no valid reason to be in the Kingdom and were deported.  

Considering that the total number of workers in the Saudi private sector labor force is just over eight million these are staggering numbers.  It suggests that, compared to three years ago, the government has achieved a meaningful increase in control over the who, what, when and where of the Saudi labor market.   

Private-Sector

Making the private sector an attractive work option for Saudis is another hard to quantify but critical benchmark for labor reform. Significant disparities from region to region or across businesses exist in terms of quality of work issues such as when salaries are dispersed, vacation time and work hours.  This has contributed to traditionally low interest in the private sector for many Saudis and, in this regard, the MOL’s efforts to create national standards is an important trend to watch.  One measure of this is intensified inspections of the work place.  In 2013 there were 148,575 inspections, compared to 102,499 in 2012 and up from 66,674 in 2009 (Table 26 of the MOL report). 

The wage gap between what firms can often afford to pay and still remain profitable and what Saudi workers believe to be the minimum living wage is another structural challenge to labor reform. Nitaqat incentivizes hiring Saudis through a variety of taxes that raise the cost of foreign labor.  For example, there is a $53 per month fee for each foreign worker at a company that exceeds the number of Saudis.  The MOL recently reported some progress – the number earning less than $800, the minimum amount deemed to be a living wage has dropped from 356,806 to 109,654.  

Reading between the lines of government statistics, there is still a huge gap.  According to Table 52 of the MOL report, the average salary for Saudi males in 9 of the 14 regions is barely above the $800 minimum wage (and for women it is even less).   Since this is the average and includes workers of all levels, we can assume that the wage that firms can afford to pay for young, untrained workers is often below the $800 mark.  This is a problem that is not going to be fixed overnight.  

The Ministry of the Interior’s crackdown on undocumented workers is an important development in both the context of increasing regulatory control and raising market wages available for Saudi nationals in the private sector.  For decades, there were minimal consequences for Saudi firms that hired undocumented workers. It was not such a good deal for average Saudi nationals who faced constant competition for work from millions of foreigners who would do the job for far less.  Levying real consequenceson employers who use undocumented workers is an important step and a noteworthy feature of the post-2011 reforms compared to earlier efforts.  

Job Creation

The Ministry of Labor in Saudi Arabia

The Ministry of Labor in Saudi Arabia

Any time a government intervenes in a free market to impose a desired social good there are economic costs and some Saudi firms, especially on smaller ones, are having real difficulties because of Nitaqat.  By the end of 2013, 33,142 of the 36,951 companies that had received a Nitaqat classification of Red or Yellow (given to companies making insufficient progress in hiring Saudis) were small businesses (10 to 49 workers). This is about 90% of all firms in these classifications. By comparison, only five “very large” firms (more than 3,000 workers) received Red or Yellow classifications.  This is because larger firms can more easily absorb the higher costs and can often raise their salaries across the board as a competitive recruiting advantage.

As a result 200,000 firms closed their doors in 2013.  To some extent, this is the desired policy outcome for the government because there are many companies whose business model is almost entirely dependent on employing low-cost citizens of countries like India, Bangladesh or the Philippines. This inexpensive labor is great for profit margins but from the government’s perspective is not consistent with the greater good of Saudi Arabia. 

Not surprisingly, Nitaqat is making it more difficult to develop commercially viable small and medium-sized enterprises (SMEs), a proven method for generating new jobs. There are many areas where it is genuinely more difficult to find large numbers of Saudi employees, sometimes for cultural reasons.  One might be interior design, where there are cultural stigmas towards Saudi men going in and out of houses not their own.  

A related critique is that the new system focuses on the quantity of new hires over quality.  During an April 2014 episode of the influential MBC1 political talk show “8:00” a critic minimized the significance of government statistics showing impressive job creation by arguing that they were not “productive” jobs but lower value service jobs.  In his view, only the 200,000 jobs at Saudi Aramco, or Saudi Arabia Basic Industries Corporation, the country’s world-class oil and petrochemicals firms, were considered productive world-class jobs.

There are also concerns about the nature of the statistics, both provided by the government as well as reporting companies. It is difficult to know how big of a problem this is but there are reports of false Saudization, or jobs that companies create to get around the system (paying someone to stay home). 

Ultimately, based on quantitative data alone, real structural reform is occurring. At the end of 2013, nearly 1.5 million Saudi citizens worked in the private sector, up from 781,481 in 2010.  They now account for 15.5% of the private sector work force, compared to just 9.9% in 2009.   In the span of just three years, this is a significant jump.  

Perhaps one of the most important underlying results of the Nitaqat initiative is what has not happened.  Many critics – especially some business owners – argued that the increased government interference in the labor market would ruin the Saudi economy.  Yet three years later, the sky has clearly not fallen.  The country’s economic performance in 2013 was relatively healthy which suggests that overall companies are making the changes and adapting as necessary. 

THE SAUDI WORKFORCE: Increasing the Value of the Rank and File Worker

Saudi Arabia has made a rapid transitionfrom a subsistence nomadic trading economy to aspiring global industrial power.  Whereas many countries made this transition over the span of centuries, the Kingdom has attempted to do it in just a few decades without a mature educational infrastructure in place to train its citizens which has forced it to rely on expatriates to fill the rank and file of its labor force. 

The recurring question is whether average Saudis are becoming more employable to private sector firms.  To what extent are they capable of replacing foreign workers in large-scale numbers?  Are they graduating high school and university with more relevant skills of value to the private sector?  It is difficult to answer this question definitively based on the available information in summer 2014.   

There is however reason for longer-term optimism. In 2013, the government budget allocated $53 billion for education, 25% of total spending, the highest percentage in the world.  Even if we assume that a large portion of this sum will fail to achieve its intended effect, the spending is so vast that the quality of the younger workers can only be improving.  Anecdotally, every Saudi I spoke with believes the annual output of graduates is consistently improving; none believes it is getting worse. 

Attitudes Towards “Hard Work” 

In Saudi Arabia there are at least six million jobs held by foreigners so fixing the unemployment problem for Saudi nationals is not entirely about creating new jobs.  A negative stereotype is sometimes used to explain this predicament – that Saudis are lazy and do not like to work.  I do not believe this is accurate.  What is true is that there are strong stigmas about manual labor or work in certain service industries that do contribute to the unemployment problem and these attitudes must change.  

Clearly, the Kingdom’s establishment media is trying to influence Saudi views on manual or service economy work by constantly promoting the theme of “Saudis becoming interested in” X type of work.  A segment from the April 2014 episode of 8:00, interviewing two young Saudi management trainees at a local MacDonald’s, is a perfect example of this trend.  They are clearly happy to have such an opportunity and when framed as “working for a global company” it has a certain prestige factor and if this attitude were representative of other Saudis it would be a very positive development. 

In fact, I believe, the areas of the economy with the most potential for Saudi employment are blue-collar sectors such as manufacturing, construction and maintenance. For example, just 6% of workers in the construction sector are Saudi nationals, making it one of the least localized sectors of the economy.  This also means it is the sector with the highest number of available, already existing jobs. 

Some dismiss this argument out of hand saying that Saudis just will not work those jobs.  But, the grandfathers of the Kingdom’s younger generation worked with their hands, so there is no long-term cultural aversion to “hard work.”  The issue is primarily one of status; if wages rise, so will interest in these types of jobs.  According to Table 51 of the MOL 2013 report, construction brings in the lowest average salaries for Saudi males at just $937 per month.  However, since this type of work is often for publicly-funded government projects, higher wages can be written into bids without affecting the bottom line of private sector firms.   

Furthermore, there are enough examples of successful industrial or manufacturing projects staffed by Saudi labor to refute the myth that Saudis will not or cannot work in this field (see Mr. Amr Khashoggi’s comments about the situation in his firm during the May 2014 SUSTG  webinar on Saudi Labor reform).    If we look at countries such as Germany or the U.S. where mechanics, construction workers, plumbers, etc., all make attractive wages and have a certain “masculine” status within their communities, there is no reason this can’t happen in Saudi Arabia. 

Women in the Work Force

Perhaps the most overlooked story related to Saudi Arabia is the ongoing and rapid rise in the status of women in the work force. (See a recent SUSTG article by Nouf Al Sidiq and Stefanie Hausheer for more on this trend). 

The numbers are very clear:  a huge jump in the employment of Saudi women in the private sector rising from 55,000 in 2010 to 398,000 at the end of 2013.  

Arguably more important, however, are ongoing social developments. We often read in the media about how bad the situation is for Saudi women compared to other countries.  If this is true I would argue that the differences are relatively superficial and are primarily related to the fact that Saudi society’s interaction with the modern world began much more recently and it has taken longer for it to come to an accommodation between its traditional Islamic values and modern gender balances.  Consequently there is an intense social conservatism, shared generally speaking by both Saudi men and women – which is a contributing factor in limiting women’s unemployment. 

For example, women are often the best candidate for a given job but as the experience of one women working as a receptionist in a male dominated office shows, many employers prefer not to hire them to avoid the hassle.  Any job that requires interactions with unrelated males can be a cultural red-line that many Saudis, employers and potential female employees and their families are wary about crossing. 

However, the MOL deserves credit for a variety of creative schemes that seek to accommodate Saudi conservatism with the economic need for employment.  Witness the case of a new decree requiring more retail shops to close by 9pm instead of 11pm or midnight.  Requiring women to stay away from their homes until close to midnight is something that many Saudis are not comfortable and therefore the job is not appealing to women. So, this type of policy reform should theoretically help generate new employment opportunities for women.

Most importantly, as with the question of ‘appropriate’ jobs for men, the Kingdom’s establishment media is constantly being used as a bully pulpit aimed at gradually breaking down social resistance towards a more active role for women in society.  Not a week goes by that articles with themes such as women overcoming stigmas to be waitresses or the appointment of female paramedics or women gaining interest in blue collar jobs fail to appear in the press. 

The rise in the status of Saudi women is a process that cannot be reversed.  They now make up the majority of students at the university level and with every passing year their increased role in the workplace becomes less of a shock to conservative sensitivities.  This is only a good thing for the fate of labor reform because more opportunities for women in sectors that have traditionally been reserved formally or informally for men combined with an increase in the number of qualified women will create more competition for jobs and force better performance by Saudi men.  This process will inevitably increase the overall quality of the Saudi worker. 

CONCLUSION: 

There is no magic solution to the question of Saudi employment.  The problems described in this article have accumulated over decades and will not be fixed overnight.  Unemployment and underemployment will be a challenge in Saudi Arabia for the foreseeable future.  

However, the Minister of Labor, Adel Faqih, and his team clearly have the strong political support of the country’s top leadership and the government appears to be firmly committed to labor reform. The post-2011 round of reform – something that had been attempted several times before, is producing meaningful and unprecedented results. A 100% increase in private sector employment of Saudi nationals over the course of just three years cannot be dismissed.  And, in harder to quantify areas like attitudes towards blue-collar work or changes in society’s views towards women in the workplace, there is enough evidence to suggest that the trends are moving in the right direction.  

Nathan Field is the co-founder of Industry Arabic and spent several years in Saudi Arabia working on consulting projects with the Saudi government.  Contact him at Nathan@industryarabic.com