Saudi Arabia’s quota policy for hiring local people has negatively impacted businesses, study finds

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NOTNationalization policies, and in particular Nitaqat, aim to increase Saudi employment in the private sector, which Saudi citizens have always avoided seeking or seeking better paying jobs with better working conditions in the public sector. Our analysis shows that the policy has increased the number of Saudis working in the export sector, but this achievement has come at a significant cost to businesses, as well as to the competitiveness of the economy as a whole.

In Saudi Arabia, the third largest migrant country in the world, by the end of 2019 more than three quarters of the 13.4 million employees were born abroad. The share of foreigners employed is even higher in the rest of the Gulf. It exceeds 80 percent in Kuwait and Oman and reaches almost 95 percent in Qatar.

The current social contract is a contract by which governments redistribute oil rents by guaranteeing jobs to their nationals in the public sector, while foreign workers are employed in the lower paid private sector, mainly in retail and construction. However, as dependence on oil to provide subsidies to local families in the form of public employment has become unsustainable due to declining incomes, youth unemployment has increased dramatically, threatening the political stability of these countries.

As a result, since the early 2010s, governments began to impose a series of workforce nationalization programs, with the aim of increasing Indigenous employment in the private sector. These policies generally took the form of quotas for the hiring of indigenous people or taxes on foreign hiring by private companies. (All GCC countries – Bahrain, Kuwait, Oman, Qatar, United Arab Emirates, and Saudi Arabia – have implemented a variant of a quota policy.)

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Nitaqat and exporting companies

We investigated how a strict nationalization policy, the Nitaqat initiative in Saudi Arabia, which was adopted in 2011, affected the competitiveness of private non-oil exporting companies. Our rich data allowed us to examine a wide range of outcomes: firm exports, employment decisions (composition and size), labor costs, and exit rates.

To explore the unintended consequences of the policy, we analyzed the performance of companies in the most productive sector of the Saudi economy – exporting.

We have focused on exporting companies for several reasons. First, exporting companies represent the “best” companies in an economy and, as such, are particularly important for the competitiveness and growth of the country. Exporters tend to be much bigger, more productive, more technology and capital intensive, pay higher wages and employ more skilled workers than their non-exporting counterparts. Second, for the particular case of Saudi Arabia, the performance of non-oil exporting companies is of great political importance. The Saudi government has stated in its long-term growth plan (Vision 2030) as one of its strategic goals to “increase the share of non-oil exports in non-oil GDP from 16% to 50%.” Finally, we have access to a new dataset that includes all export transactions in the Kingdom between May 2006 and June 2016.

To estimate the effects of Nitaqat on exporting firms, we took advantage of the policy design that sets a threshold for the minimum share of Saudi workers in a firm. There is a threshold per combination of industry and company size, and it is set so that just over half of the companies in the group fall below this threshold. Those below the quota face severe restrictions in their ability to hire foreign workers and are therefore forced to change the composition of their workforce to continue operating.

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Negative impact at different levels

Our results suggest that the policy had a negative short-term effect on competitiveness.

Firms below the quota threshold were 7 percentage points less likely to export. For companies that continued to export, the value of exports declined by around 14% and export volumes by 20%. Estimates of the effects on productivity per worker are large and negative, but not statistically significant. These pervasive effects on exporting companies suggest that the Saudi government’s long-term goal of increasing the GDP share of non-oil exports is undermined by policies encouraging companies to hire more Saudi nationals through quotas and reductions. Specimens.

These results, combined with an increase in the wage bill due to a change in the composition of employment, suggest that the policy has been very costly for companies and has eroded their competitiveness.

The mechanisms behind this result are as follows. While the policy has been successful in encouraging companies to increase the Saudis’ share of the private sector, this has been achieved by both increasing Saudi hires and reducing expatriate employment. Companies have disproportionately reduced the number of foreign workers, resulting in a decrease in the total number of employees per company.

Using wage data, we find that the payroll of companies below the threshold has increased because Saudi wages are much higher than foreign wages. We also find that the average salary of Saudis has declined, suggesting that Saudis hired because of politics were paid less.

Firms below the threshold increased the share of Saudi women in their workforce, suggesting that the policy had a positive effect on increasing female participation in the workforce. The effect on the hiring of women is particularly important: we find that the policy has led companies below the threshold to more than double the share of women in their workforce.

Overall, these short-term effects suggest that companies have adapted quickly to the implementation of the policy. One year after the policy, more than 60% of companies below the threshold had exceeded it.

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The consequences are not short-term

To study whether this rapid adjustment had medium-term consequences for exporting companies, we extended our analysis to a few more years. Our estimates suggest that these short-term effects persisted – three years after the policy was announced, firms below the benchmark were relatively less likely to export, had fewer employees, weaker exports, higher payrolls and a greater proportion of women in their workforce.

These results confirm that Nitaqat imposed significant constraints on exporting companies, especially those with very low Saudi shares in the baseline scenario.

Finally, we compare the effects on exporting firms with the effects on non-exporting firms. In support of the hypothesis that exporting firms are more resilient, we find that they have been able to adapt more successfully to politics – in particular, they have hired Saudis at a higher rate. high, their total workforce has shrunk less and their wage bill has shrunk. not increase as much. These results, combined with the negative effect of Nitaqat on the value of exports, strongly suggest that the production of non-exporters probably also declined.

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Long-term analysis will uncover more

Our results also provide evidence of the relative quality of Saudi and foreign workers. In particular, our results suggest that the higher wages of Saudi workers were not close to being offset by higher worker productivity – our estimates instead point to a decrease in productivity per worker. To comply with the quotas, companies appeared to have increased the hiring of low-paid and low-skilled Saudi workers. This result suggests that, contrary to what Conrad Miller (2017) found in his study on the regulation of affirmative action for employment in the United States, the low representation of Saudis in the private sector is not due to high fixed costs to identify high quality workers.

Our analysis focuses on the short to medium term – we look at changes one to four years after the policy is implemented. A longer-term analysis will reveal other adjustment mechanisms implemented by companies. For example, such a mechanism could be changes in technology reduce the need for now more expensive labor in favor of more capital. In addition, better information on the skills the private sector needs could lead to more productive investments in human capital by Saudi youth. Skills mismatch has been identified as one of the main drivers of low productivity of the Saudi workforce in the private sector economy.

Patricia Cortés is Associate Professor (Markets, Public Policy and Law), Questrom School of Business, Boston University. She tweets @cortespatico.

Semiray Kasoolu is Manager (Impact Solutions) at Y Analytics. She was previously Research Director at the Growth Lab at the Center for International Development at Harvard University.

Carolina Pan is Director of Research at Power for All. She was previously a researcher at Harvard University and a consultant for the IDB, the World Bank and the United Nations. She tweets @carolina_ines_p.

This article is an edited excerpt from the author’s working paper ‘Nationalization Labor Market Policies and the Performance of Exporting Firms: Evidence from Saudi Arabia‘, first publication by the National Bureau of Economic Research. Read the full article here.

(Edited by Prashant)

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