Saudi Arabia announces major reforms for its migrant workers

In observance of the International Migrants Day, Dec 18

On this day 30 years ago the United Nation’s General Assembly adopted the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families. Since then, we celebrate this day as International Migrants Day. The primary objective of the convention is to foster the rights of international migrants. Let us take this anniversary as an opportunity to reflect on the advancement of rights for migrants in one of the main migrant-receiving regions in the world, namely the Gulf Cooperation Council (GCC) countries.

The GCC countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE)—are host to more than 30 million migrants. These migrants represent 51 percent of the GCC’s total population and sent home USD 115bn in remittances in 2019. The share of migrants in population in the GCC region is more than 4 times that in the high-income Organisation for Economic Co-operation and Development (OECD) countries.

To manage this inflow of migrants, the GCC countries have long relied on the much-criticized kafala policy—essentially a sponsorship system that gives employers considerable power over migrants, including over their rights to leave and re-enter the country or to move to another employer. Now, major reforms are underway in GCC countries that are likely to have far reaching implications for migrant workers and their origin countries, as well as the citizens of the GCC.

Saudi Arabia has recently announced a new contract-based system to replace the kafala policy, which will allow most foreign workers to freely enter and exit the country; and to freely change employers one year into their first contract. The reform took place after extensive policy dialogue between the World Bank and the Saudi Government. Free entry and exit and the right to freely choosing an employer is absolutely essential, not only in terms of human rights, but also for the workings of the Saudi economy. We expect to see a much more efficient allocation of labor in the Saudi economy—and hence improved economic growth—over the coming years. 

Granting labor mobility to migrants is a huge step forward, but the actual legislative change is only the first step, according to the new labor strategy of the Kingdom. It opens up an agenda for further reforms to complement this first step in two areas:

  • First, now that foreign workers have the choice to pick their employer, they will also need information about their options. In other words, one will have to develop information channels for migrant workers about job opportunities, recruitment channels for Saudi employers about foreign workers and job seekers; and matching services to bring them together. 
  • Second, meaningful labor mobility will entail short spells of unemployment for foreign workers—and for foreign workers to manage the risk of unemployment will require some form of social protection. The Saudi government is currently working on reforming its end-of-service benefits, which are paid out when contracts expire or are terminated. Instead, the government plans to introduce so-called ‘Mobility Saving Accounts’ (MSAs) for foreign workers—essentially mandatory savings accounts to which both migrants and their employers contribute on a monthly basis and from which migrants can draw during unemployment spells or at retirement. 

It will be interesting to see how these reforms will impact Saudi businesses and Saudi workers. Will there be disruptive effects, especially in the short-run, if wage costs of migrant workers increase? Clearly, many Saudi firms were great beneficiaries of restricted mobility of foreign workers. Restricting the rights of workers to freely choose their employers gave employers significant monopsony power. In economic terms, employers were able to levy considerable profits by employing workers at wages below their marginal value product of labor. In plain words, they could extract profits. At the same time, it discouraged business from capital investments, which affected negatively the productivity of Saudi firms. Will some of these businesses now have to close as the opportunity to extract profits from migrant workers decline? Will we see more capital investments as employers substitute away from labor?

At the same time, there is presently a significant wage gap between Saudis and non-Saudis, which puts Saudi workers at a significant disadvantage in the labor market. Will this wage gap narrow as employment conditions of Saudis and non-Saudis converge, and will it lead to higher Saudi employment? 

For migrants’ origin countries the impact of the reforms seems positive, at least initially. Foreign workers having more rights and possibly getting paid higher wages should increase remittances. At the same time, these reforms might imply a shift in Saudi Arabia and other GCC countries away from the recruitment of lower-skilled foreign workers towards more skilled workers. Would that be good for migrant-sending countries? And if Mobility Saving Accounts were introduced in the GCC, would they keep more of the incomes of foreign workers there and hence decrease remittances?

Only time will tell what the impact of the reforms will be in the short and long term. It will be important to closely monitor the implementation and the impact. Sometimes, the devil is in the details, and depending on how the qualifying conditions for these new laws are defined and implemented, some restrictions on mobility might remain. We already know, for example, that the new laws will not apply to domestic workers. We hope that the government will stay proactive to address this and any other shortcomings that might arise.

Yet, undoubtedly, these reforms were long overdue and will bring many benefits not only to migrant workers and their families, but also to GCC businesses, citizens and economies as well as migrant-sending countries. And while some GCC countries—like Qatar, the UAE, and most recently Oman—have already announced similar reforms, Saudi Arabia’s reforms—as the largest GCC country—could have a signaling effect for the remaining GCC countries and beyond. 

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