Nitaqat: Towards a Saudi “New Deal?”

Editor’s Note: ‘Saudization’ is a topic that has garnered a great deal of front-page ink in Saudi Arabia of late.  The Nitaqat (“Ranges”) Program introduced in 2011 has staunch advocates and detractors and the ongoing argument between members of the private sector and the Ministry of Labor over recent fee hikes for foreign employees has been especially sharp.

SUSTG has featured a steady stream of reporting on Nitaqat in particular and Saudization in general so we are especially pleased to offer today’s SUSTG Analysis, Nitaqat: Towards a Saudi “New Deal?” by Nathan Field. It is an informed and thoughtful assessment of the meaning of the Nitaqat initiative and the economic – as well as social and political – ramifications of its pursuit.

The associated image of the Saudi population pyramid as of 2010 is intended to reinforce the high stakes for the Kingdom with regard to employing Saudis.  The demographics are unavoidable.  Saudi Arabia must find ways to create more jobs for its young and growing population.  As Mr. Field notes, “Nitaqat is a serious attempt to adjust the employee/employer balance in Saudi Arabia and is, in its own way, as critical to the Kingdom’s long-term social and political well-being as anything occurring across the Red Sea in Egypt.”

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Nitaqat: Towards a Saudi “New Deal?”

By Nathan Field 

An odd feature of ongoing media commentary on reform in the context of the Arab Spring is the neglect of the economic domain.  As if economic problems were not a major cause of the uprisings, and fixing them not a critical part of the solution.

At any of the major Middle East policy blogs and on the Twittersphere, politics completely dominates the discussion.   One almost gets the impression that the long-term stability and prosperity of Egypt depends upon the drafting of a flawless constitution or finding the perfect theoretical balance between Presidential and Military power, and not solving or at least mitigating the massive unemployment problem that has not changed one bit under the new government.

Countries where the most dramatic political discussions are occurring such as Egypt and Tunisia are held up romantically as the epicenters of reform.  By contrast, the Gulf monarchies, especially Saudi Arabia, which are not deeply engaged in activity in the traditional areas associated with political reform, are regularly portrayed negatively, as somehow missing the boat of the Arab Spring.  One commentator at Foreign Policy even seems to suggest that they are  structurally incapable of fixing their problems.

If positive change can only take the form of holding elections or writing new constitutions, than on that basis not much is happening in the Kingdom. But if we take a broader view, and consider that the economic domain is equally important, the situation looks different, especially with Nitaqat, an aggressive Saudi government policy begun in the summer of 2011 and aimed at solving the unemployment problem among Saudi nationals by decreasing the availability of cheap foreign labor.

While rarely receiving more than a superficial mention in Western media, Nitaqat is a serious attempt to adjust the employee/employer balance in Saudi Arabia and is, in its own way, as critical to the Kingdom’s long-term social and political well-being as anything occurring across the Red Sea in Egypt.

The Saudi Reform Context

An often overlooked feature of Saudi Arabia, especially in any discussion on reform, is the power of the Kingdom’s business class, defined here as either Commoners, or members of the House of Saud who have business interests independent of their political status as Royals.

The formative years of the Saudi state, in comparison to other Arab countries, were characterized by an extended period of explosive economic development, taking place in a vacuum of direct government oversight, which led to the emergence of a strong and independent business class outside of easy state control.   The 1940s through the 1980s was a multi-decade “Gold Rush,” an entrepreneurs’ dream and the roots of the strongest private sector in the Arab Middle East formed in this period.

Mohammed bin Laden, for example, built his Saudi construction dynasty by meeting the building needs of the nascent state.  Suleyman Olayan found out a way to solve the logistical problems of international oil companies in the early years of the boom, and developed the massive conglomerate that bears his name today.   Few reached that level of success, but the point is that the Kingdom’s massive development needs, combined with enormous available financial resources, encouraged the growth of a strong entrepreneurial spirit in Saudi Arabia,  and a business class that is wealthier, more experienced and confident than that found in any other Arab country.

Unemployment – A Reflection of Workplace Incentives

Chronic high unemployment among Saudi nationals – in a country of tremendous ongoing economic activity– is due, in no small part, to the incentives presented to the merchant class. For decades the Saudi labor pool has been defined by the widespreadavailability of cheap foreign labor, the majority of which comes from developing countries like the Philippines, the Indian subcontinent, or Arab countries such as Egypt, and who constitute the majority of the Kingdom’s private sector.  In 2009, for example, expatriates made up 6.21 of the 6.89 million private sector workers, a percentage that had actually increased by 30 percent from 2006.

The issue is not with the presence of imported labor per se.   After all, during the first several decades of the “Gold Rush”, the Saudi labor force was not nearly large enough and it was necessary.  Without question expatriates have made major contributions to the Kingdom’s development.

More important is why that situation has persisted?  Why, despite the presence of an imperfect, but still reasonably qualified indigenous labor force, has the government done little to limit the ongoing option of hiring workers from countries such as the Philippines and India?

The simple answer is because it’s been good for business.    Workers from developing countries are cheaper as well as being more compliant and flexible.  Since a job in Saudi Arabia is a lucrative opportunity – no matter how unappealing it might seem to some outsiders — an endless supply of good Indian, Filipino and Egyptian workers is guaranteed.

While easy access to expatriate labor has certainly resulted in greater profits for the merchant class over the past several decades, overreliance on it has caused two major and unsustainable distortions to the Saudi labor market.  First, firms have become addicted and many – especially those on the smaller side — can only stay profitable through exclusively using foreign labor.  Second, the easy availability of so many foreigners has driven down market private-sector wages to the extent that many Saudi nationals cannot make a modest living wage in their own private sector.

Let’s look at the Saudi trucking sector, for example.  Until the 1970s, the overwhelming majority of truck drivers in the Kingdom were Saudi nationals but since then they have been gradually replaced by workers from some of the poorer parts of the Indian subcontinent or often the Horn of Africa.  Five hundred dollars per month is far more than they can earn at home, so there is no shortage of people willing to work those jobs.   That amount, however, is not enough to support even a modest lifestyle, much less a family, for a Saudi national and not surprisingly, most don’t want to work in these companies.

Telling Firms What To Do: Not as Easy As It Seems

Here is the key point that is often missed by commentary on reform in Saudi Arabia:  it takes time for a government to develop the strength to dictate policy – in this case the regulation of the labor market – to its private sector.  The United States, which saw the emergence of a similarly strong and independent business class, did not have full control of its labor market for the country’s first one hundred and fifty years.  (See The Jungle for a caricature of working conditions in the laissez faire business environment in turn of the 20^th century America).

Only with the crisis of the Great Depression was public opinion so strongly with the working class that FDR was able to ignore complaints from businessmen who were anti-New Deal and introduce policies such as a minimum wage and unemployment insurance.

Is the Arab Spring the Kingdom’s equivalent of the Great Depression — the crisis that gives the government sufficient impetus to re-order the commercial environment and push through its own “New Deal?” The Saudi government is certainly going through the same historical process: trying to increase its regulatory control over labor by interfering in the free market –against the will of the private sector – to achieve a social good that it deems necessary for long-term political stability.

Raising the Cost of Foreign Labor

The theoretical underpinnings of Nitaqat –essentially an indirect minimum wage – are sound and assuming the government does not lose focus, will eliminate the business reasons for hiring foreigners by making it more expensive to do so.

Before Nitaqat, if there were two equal candidates for a given job, an expatriate willing to work for five hundred dollars per month, and a Saudi national for eight hundred dollars, basic business logic suggested the employer would choose the least expensive option.  With the minimum wage that is gradually being implemented, there is no cost advantage to hiring the expatriate.   Interestingly, this past week the government added a new tax of $32/month for every foreign workers employed by a company which only further reinforces this point.

While Nitaqat is a long-term policy, initial results suggest that Saudi private sector employment is increasing. The Ministry of Labor recently announced that three hundred and eighty thousand Saudis had been hired during the previous year, more than twenty times the previous five years combined.  Some critics make reasonable complaints about the quality of these new jobs , but the fact is that the only available evidence at this point suggests that more Saudis are being hired because of Nitaqat.

Short Term Pain is Inevitable

Unfortunately, there will be some short term negative consequences of Nitaqat, as there are always tradeoffs when a government interferes with the free market.    By forcing Saudi firmsto hire Saudis, in general, the costs of doing business  will inevitably rise. With higher wages, profits will decrease, and since many of the newly hired nationals will be younger and less experienced, managers will have to spend more time on training instead of running their businesses, and productivity will theoretically decrease.   Inflation – caused by more money in people’s pockets — is also a major risk.  And from a macroeconomic perspective, higher costs for firms could affect the global competitiveness of some of the country’s industries.

No example better illustrates this tradeoff than a June 2011 Royal Decree banning men from working in lingerie shops.  Some Western journalists portrayed this as an issue of women’s rights and to some extent it was, but the real issue is economic as it exposed the extent of the private sector addiction to foreign labor.  It was not Saudi men staffing the lingerie shops, but Indians and Filipinos because that is the only way many of the smaller shops could stay profitable.  The direct result of this decision is that at least one hundred of these stores were unable to comply and were forced to shut down in September when the decree was enforced.  Maybe more Saudi females will be employed because of this, but that is likely of little solace to the hundred or so families who relied upon the income generated from these stores.

On the Plus Side

There are, however, good business reasons why the Kingdom’s firms can and should adopt the minimum wage.  One obvious benefit is that it would increase employee loyalty.  And for big firms hoping to win government contracts (and who can more easily absorb the new costs), voluntarily adopting the minimum wage will likely give them a marketing edge compared to those who drag their feet.  But most importantly, no one will make any money if the system collapses because of revolution due to long-term high unemployment.  And through the Human Resources Development Fund, the government is wisely using it cash to subsidize the cost of new Saudi hires – paying half the salaries of new hires and trainees so that firm do not suddenly have to double their salaries.

Painful But Necessary

Like the US private sector during the New Deal, many (although not all) Saudi private sector firms are resisting what they consider government interference in their affairs.  And there are reasonable objections to the way that the program is being applied to some sectors, such as construction which is more difficult to staff with Saudi nationals in the short-term than say, accounting.   But the reality is that the government has no choice politically and such a hard-line is necessary to show their resolve on Saudization, since it did not for most of the last thirty years.  After all, the country’s firms already enjoy a fairly significant advantage by not having to pay taxes, so the government sees it as reasonable – and essential for the Kingdom’s long-term stability – to reduce or eliminate incentives to hiring non-Saudis over Saudis.

Nitaqat is far more than just an isolated question of Saudi labor policy.  True, the Kingdom does not currently have the raucous political atmosphere of Egypt but, at the government’s initiative, the fundamental relationship between workers and employers is shifting. This is an important, long-term reform trend that is no less meaningful.

Nathan Field spent 2009-2011 working on environment remediation projects in Saudi Arabia with the US firm CH2M Hill and is the co-founder of Industry Arabic.

Contact him at Nathan@IndustryArabic.com

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