Trade Agreements and Trans-Border Flows of Labor

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Table of Contents

Benefits and Risks of Expatriate Workforce
Labor Mobility Policies in Saudi Arabia’s Future Regional Free Trade Agreements
Implications of the Saudi Vision 2030 have on labor mobility
Conclusion
References

Trade agreements and trans-border flows of labor contribute significantly to the growth or decline of a country’s economy. In Saudi Arabia, following the discovery of oil, the country embarked on a journey to economic growth and modernization. Consequently, the expatriate workforce was needed to provide the needed skills for development because the locals could not meet the emerging labor demands. However, with time and changing population demographics, the Saudi government started the Saudization program to create job opportunities for the local youth entering the job market, especially in the private sector.

In 2015, Vision 2030, a 15-year strategic plan to transform the country in different ways, was adopted. One of the key pillars of this plan is to reduce the rate of unemployment in the country through different strategies including restriction of the expatriate workforce. The purpose of this paper is to discuss the benefits and risks associated with the dependence of large numbers of expatriate workers and assess whether Saudi Arabia should include or exclude labor mobility in future regional free trade agreements. The implications of the Saudi Vision 2030 on labor mobility are also elaborated.

Benefits and Risks of Expatriate Workforce

In 2017-2018, the number of expatriates in Saudi Arabia was estimated to be around 10.7 million, which accounts for close to 30 percent of the country’s population (Global Media Insights, 2019). Relying on such large numbers of expatriates has both benefits and risks as explained in this section.

Benefits

The first benefit associated with a large population of expatriates is associated with an increased demand for goods and services. According to Mohamed (2013), “A large and growing expatriate labor force means more consumers in the domestic economy, and thus can have potential benefits in the form of higher consumer demand” (p. 16). Most people relocate to foreign countries to improve their career prospects, which boosts the host country’s economy in different ways. Such expatriates are engaged in productive labor, hence they have a certain level of purchasing power and as potential consumers of goods and services, they stimulate economic growth.

Moreover, the entry of large numbers of expatriates in the labor market directly expands the size of the workforce thus increasing output, which is among key economic growth drivers (Vaiman, Haslberger, & Vance, 2015). The gross domestic product (GDP)of a country is subject to the labor outputs in any country.

In addition, expatriates balance the host country’s demographics. For instance, the available local workforce might be aging hence the need for young and energetic workers to maintain productivity. Another advantage of large numbers of expatriate workers is that they are a significant source of human capital. Expatriates directly contribute to economic growth by meeting shortfalls in human capital that may not be met by the local workforce due to a lack of requisite skills or other factors (Baruch, Altman, & Tung, 2016).

For instance, after the discovery of oil in Saudi Arabia, the local workforce could not meet the rising labor demands and thus expatriates came in to bridge that gap. Skilled labor from expatriates powers innovation, which is a key driver of economic growth.

Risks

One major problem of large numbers of the expatriate workforce is the huge outward remittances from the host country. Normally, expatriates remit a sizeable part of their salaries to their home countries to support their dependents and invest for their future financial wellbeing. This factor has two significant effects on the host country. First, it means that a huge part of the income generated in the country is not reinvested back into the economy to stimulate further growth. Therefore, the local economy in a way is “robbed” of its resources, which affects the circulation of money and ultimately leads to stalled growth.

Second, the huge outflow of foreign currency from the affected countries piles pressure on the foreign market exchange (Alagidede & Ibrahim, 2016). This scenario might weaken the country’s currency against major foreign currencies, which makes imports expensive and cheapens exports ultimately affecting economic growth adversely. Large numbers of expatriate workers crowd out local labor thus affecting employment dynamics in the country.

In most cases, expatriates are more skilled than the locals, which makes them attractive to employers due to the value they bring to the workplace. Consequently, unskilled locals become unemployed or relegated to low cadre positions in the market. Such low positions attract poor salaries and wages, which compounds the earlier mentioned problem of outward remittances. A large expatriate workforce could raise government expenditure through the need to expand different services such as immigration oversight and policing to cater to a growing population.

Labor Mobility Policies in Saudi Arabia’s Future Regional Free Trade Agreements

Labor mobility is the ease with which workers can seek employment within and between economies. Therefore, it can be divided into two – geographic mobility which is the ability of an employee to work at a given physical location, and occupational mobility defined as the ability of a worker to change jobs within an economy. Based on this understanding, Saudi Arabia should include geographic labor mobility restrictions and exclude occupational mobility when negotiating regional free trade agreements. First, geographic mobility limitations will ensure that locals are not crowded out of labor leading to unemployment.

In this respect, Saudi Arabia should come up with a strategic plan that allows expatriates to occupy positions that cannot be competitively filled by local labor. According to Hertog (2018), about “38% of Saudi citizens of working age hold a job, compared to 60-80% in advanced countries…despite the government’s monumental job creation effort, most Saudi citizens aged 15 to 64 do not hold a job” (p. 5). In other words, unemployment rates among locals in the country are high, which is a poor economic growth indicator.

On the other hand, occupational labor mobility should not be restricted because such a decision affects productivity negatively. Currently, under the provisions of the Ministry of Labor and Social Development (MLSD), occupational mobility restrictions are evident, especially under human resources regulations of the Nitaqat policy (Peck, 2017). For instance, an expatriate cannot change employers without a formal transfer of sponsorship, which is a long process (Khan, 2018).

Such labor mobility restrictions make expatriates attractive to employers because they can be exploited, as they are unlikely to quit or change jobs. This practice drags the country behind in terms of international labor regulation standards. Additionally, it encourages the preference of expatriates over locals for job openings, thus affecting the Saudization efforts. Therefore, policymakers should consider relaxing the sponsorship rules to allow expatriates to work anywhere they prefer in the country. In addition, as Hertog (2018) suggests, the government can consider introducing a robust green card program to award deserving expatriates residency that is not subject to employment status.

Implications of the Saudi Vision 2030 have on labor mobility

As currently constituted, the Saudi Vision 2030 will affect labor mobility negatively, especially concerning expatriates. The Nitaqat laws governing labor dynamics within the framework of Vision 2030 are designed to discourage expatriates from working in the country. First, expatriates can only be employed for a specific period and they cannot switch employers without changing their sponsorship. Second, foreign workers are subject to different prohibitive levies.

For instance, in 2017, each dependent of an expatriate was subjected to a levy payable by the employee and in 2018 new fees were introduced to all foreign workers in the country. Khan (2018) posits, “Each of these three levies is incurred on a monthly basis but must be paid as an annual lump sum in order to renew a foreign employee’s or their dependent’s Iqamas. Further, the levies increase incrementally on a yearly basis” (para. 11). Ultimately, most expatriates are currently exiting Saudi Arabia citing these tough requirements under the Vision 2030 program.

Conclusion

The Saudi Arabian labor market has evolved significantly since the discovery of oil reserves in the country. Expatriate workers have been a sizable part of the Saudi workforce as they meet shortfalls in the demand for skilled labor. Relying on a large number of foreign workers increases the demand for goods and services together with introducing innovation through skilled labor to stimulate economic development. However, this scenario creates an excessive outflow of a country’s foreign currency, thus affecting exports and imports. Saudi Arabia should restrict geographical labor mobility but liberalize occupational labor mobility in future free trade agreements. Part of this proposal is addressed in the Vision 2030 program, which will discourage expatriates from working in the country.

References

Alagidede, P., & Ibrahim, M. (2016). On the causes and effects of exchange rate volatility on economic growth: Evidence from Ghana.Working Paper. Web.

Baruch, Y., Altman, Y., & Tung, R. L. (2016). Career mobility in a global era: Advances in managing expatriation and repatriation. The Academy of Management Annals, 10(1), 841-889.

Global Media Insights. (2019). Saudi Arabia’s population statistics 2019. Web.

Hertog, S. (2018). Can we Saudize the labor market without damaging the private sector? Web.

Khan, M. (2018). Working toward Vision 2030: Key employment considerations in Saudi Arabia. SHRM. Web.

Mohamed, A. Z. (2013). The expatriate workforce: Boon or Bane. Quarterly Economic Bulletin, 1, 13-20.

Peck, J. R. (2017). Can hiring quotas work? The effect of the Nitaqat program on the Saudi private sector. American Economic Journal, 9(2), 316-347.

Vaiman, V., Haslberger, A., & Vance, C. M. (2015). Recognizing the important role of self-initiated expatriates in effective global talent management. Human Resource Management Review, 25(3), 280-286.

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