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Wed 15 Jan 2014 12:49 PM

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Saudi’s crackdown on illegal labour will work

Kingdom’s move to expel foreign workers is the right thing economically, if not morally

Saudi’s crackdown on illegal labour will work
Daniel Shane

Saudi Arabia’s decision to expel hundreds of thousands of illegal foreign workers will prove to be positive for the kingdom economically, despite being morally questionable.

It is estimated that up to 1m overseas workers left the country during a seven-month amnesty last year, with thousands more being deported in the weeks since.

The crackdown by authorities marked the end of decades of turning a blind eye to discrepancies in migrant workers’ paperwork. Saudi’s labour sponsorship system was also commonly abused, with cases of migrants paying extortionate fees for visas issued in the name of bogus companies.

These developments have no doubt had a devastating effect on some parts of Saudi’s 10m-strong expat community, with long-term families being uprooted and reports of communal violence in some cases. In terms of economics though, it makes sense.

The policy is the latest attempt in Saudi’s haphazard strategy of creating more opportunities to gets its citizens into private sector employment, known as Saudisation.

Like elsewhere in the Gulf, the majority of working age Saudis are employed in the public sector, which acts as an effective mechanism for the world’s largest oil producer to trickle down its hydrocarbons wealth to citizens via handsome pay packets and generous benefits.

Due to factors including soaring domestic energy consumption and the possibility of energy independence in the US, it appears that the gravy train is about to shudder to a halt. Saudi’s 2014 budget will show the smallest increase in a decade (a modest 4.3 percent), while the International Monetary Fund has said that if the kingdom maintains its current rate of expenditure it will fall into deficit by 2016.

It is clear that the public sector will not be able to absorb the huge swathes of young Saudis coming into the workforce, meaning the private sector will have to pick up some of the slack.

While it is unlikely that many Saudis will actively pursue careers in street sweeping or brick-laying, recent reports have suggested that more locals are taking up employment in sectors such as retail, particularly women.

Many of the fears reported regarding the crackdown have centred around the impact on productivity and inflation. The figures do not appear to support this, however.

According to the latest purchasing managers’ index from Saudi Arabian British Bank, output in the non-oil sector ticked up to a three-month high during December, with the rate of job creation at its highest since March.

The crackdown also appears to have had little ill effect on inflation, one of the areas expected to be most impacted, falling from 3.7 percent in August to 3.1 percent in December.

The recalibration of the employment sector could also benefit the country’s economy in other ways. Given the higher staffing costs it will likely incur, private economies will be encouraged to operate more efficiently, and it could also help rebalance Saudi further towards a more knowledge-based economy.

The policy could also have a major impact on consumer spending patterns. Currently, overseas workers in the kingdom save and remit more than $34bn out of the country every year. By getting more Saudis into the workforce, households will as a result spend more within the local economy.

As with much that goes on inside the kingdom, the reasoning behind the policy appears sound, though the execution has left much to be desired.