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Jun 14, 2016 | 09:20 GMT

9 mins read

The Gulf Will Always Need Migrants

The Gulf Will Always Need Migrants
(RENE SLAMA/AFP/Getty Images)
Forecast Highlights

  • Slumping remittances sent by migrant workers in the Persian Gulf to their homes in the developing world will rebound when oil markets stabilize and Gulf diversification plans pan out.
  • But to appease and employ their growing local populations, Gulf states will edge out some white-collar expatriates in favor of citizens.
  • Since the burden of new taxes will fall on foreign workers, Gulf states will have to rely on public relations to maintain migrant flows.

Oil is the foundation of the Persian Gulf's wealth. But the recent collapse in oil prices has made the six members of the Gulf Cooperation Council painfully aware of the risks of relying on such a volatile commodity. Now, Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates are working to leverage their existing wealth to diversify their economic bases — an effort requiring painful measures that risk upsetting the existing political order, as has already been seen in Kuwait's nascent wage reforms. The coming transition will also take more labor, since workers will be needed for massive infrastructure and construction projects and to staff growing tourism, financial and retail sectors. Yet historically, Gulf state residents have been uninterested in working in the private sector; instead, they prefer the more lucrative public sector jobs.

And so, for decades Gulf states have turned to migrants from South and Southeast Asia to supplement their workforces in virtually every sector. Now there are nearly 25 million non-national migrant workers in the Gulf, primarily from India, Bangladesh, Pakistan and the Philippines. These workers are willing to work for lower wages than their local peers, and the nations sending them have come to rely on the remittances they send home. In 2015, remittances from migrant workers abroad equaled 3.6 percent of gross domestic product for India, 10 percent for the Philippines and 7 percent for Pakistan. These funds not only help stimulate the home countries' economies but also supplement family incomes in tight labor markets, providing an important cushion that prevents social unrest.

Labor relations within this system have not always been placid. The high proportion of expatriate workers in the Gulf has created friction with locals, who resent migrants' perceived ignorance of local culture. Moreover, remittances have slumped since 2015 because of low oil prices, causing massive layoffs and spending cuts. Even so, migrant workers are going to remain a fixture in the Gulf for some time, and in fact, their numbers will likely rise. Host governments will have to find a way to tax migrant workers and secure enough jobs for their restive local populations without discouraging much-needed flows of foreign labor into their countries. 

Remittances Rebound

The stark decline in remittances sent back to the developing world over the past year and a half has put significant strain on some income classes in South and Southeast Asia. According to World Bank estimates, the growth in remittances sent to developing countries has slackened off, falling from 3.2 percent of GDP in 2014 to 0.4 percent in 2015. But this probably will not last for long: Funds are projected to rise again in 2016 and 2017, making a rapid recovery compared with the previous slump, which occurred during the 2008 recession. Because low oil prices are what drove remittances down in 2015, the global oil market's recovery will lead to their resurgence — particularly in the Gulf region.

Once the oil market rebounds, Gulf states will quickly ramp up their public spending. Unlike Russia, whose economy is also driven by oil production and is a key source of remittances to Central Asia, Gulf nations have managed to partly sustain their spending during the economic slowdown by drawing on financial reserves and tapping international debt markets. Though they have had to postpone some projects and lay off workers as their companies continue to struggle, most of their initiatives have maintained their momentum. As the oil market recovers over time, the Gulf region will expand its workforce to take advantage of the more favorable economic climate, attempting to move beyond its overreliance on oil with a newfound urgency.

Meanwhile, expatriate employment will remain steady — and in some cases, even rise — in a number of sectors. Low-paid foreign workers will continue to staff most of the services sectors, including construction, food services and domestic work, as they have for decades. Locals are less interested in filling these roles and consequently are not being trained for them. In addition, the new projects and sectors targeted for growth by governments' diversification initiatives will raise demand for higher-paid expatriate employees to act as executives, managers and consultants.

Locals will push back against foreign workers filling these white-collar jobs, and governments will try to mollify them by replacing some expatriate managers with citizens in sectors such as telecommunications, banking and engineering. Such localization initiatives have been ongoing for the past decade, albeit on a small scale, and they will continue without substantially lowering the number of foreign-born workers employed in the Gulf. In fact, Saudi Arabia's gender, labor and social development minister clarified in early June that despite the emphasis on employing locals in the kingdom's new Vision 2030 plan, Riyadh does not consider reducing the number of foreign workers within its borders a goal. Because Saudi Arabia is the second-largest source of remittances in the world and faces the biggest challenge among the Gulf states in employing its burgeoning youth population, its insistence on retaining high levels of foreign labor bodes well for the maintenance of the labor balance in the rest of the region as well.

This is good news for the South and Southeast Asian states that send a considerable number of workers to the Gulf. Of the countries in the region, India is the biggest Gulf remittance earner, topping out at $1.25 billion, followed by Pakistan and the Philippines. In recent years the Gulf Cooperation Council has also taken to sourcing workers from West Africa, where high unemployment levels have left workers searching for jobs wherever they can be found.

Migrant Burdens

But despite the generally positive employment outlook for migrant workers in the Gulf, they will encounter new difficulties there as well. Though the region's ambitious plans for economic reform will create a steady demand for labor, they will also bring new taxes. Because Gulf citizen employees have a monopoly on political clout in their countries, most of the added tax burden will likely fall on foreign workers.

Currently, the taxes being discussed are flat corporate income taxes levied against companies. In January, Oman introduced a 15 percent corporate rate, and Kuwait followed suit in March with a 10 percent rate. Saudi Arabia has denied rumors that it is planning to do the same, but it, too, may eventually implement a corporate tax. In theory, the fact that these taxes are levied on companies and not individuals should mean that their consequences are felt by local and foreign workers alike. In reality, government schemes to increase the proportion of citizens working in these businesses will indirectly protect locals from the new taxes as companies adjust their expenditures — including wages — to account for the new composition of their workforces. Local workers will want higher pay and have the political influence to demand it, so cuts to wages will largely impact foreign workers who are forced to pick up the slack. The effects of the taxes will dissuade some expatriates from working in the Gulf, and some reports of small-scale "expat flight" have already emerged in Oman, Kuwait and Qatar.

To stem the outflow of foreign workers, the three states that depend most heavily on expatriate labor — Saudi Arabia, Qatar and the United Arab Emirates — will project positive images of their labor markets abroad in an effort to continue attracting the talent they need. Last year, the Saudi Ministry of Labor announced salary hikes for expatriates to justify proposed remittance taxes. Similarly, Gulf media often report on reforms made to the region's restrictive kafala labor laws. (Kafala is a sponsorship scheme that places the rights of workers fully in the hands of employers, who monitor their employees' whereabouts at all times.) These changes have been largely cosmetic, even in the United Arab Emirates and Qatar, which saw considerable media hype in 2015 regarding supposed kafala reforms. Oman, Bahrain and Kuwait also announced plans in 2009 and 2010 to reform the kafala system, but no change has actually occurred, largely because these countries are less dependent on foreign labor than their neighbors. The United Arab Emirates has granted some flexibility to foreign workers by allowing them to switch employers, but the Emirati Ministry of Labor still firmly controls workers' rights. 

Of the Gulf states, Saudi Arabia will face the greatest labor-related challenges in the coming years, even as it tries to cultivate positive perceptions of its labor market to potential migrants abroad. Compared with its neighbors, Saudi Arabia is furthest behind in making the reforms needed to diversify its economy. On top of that, it has the largest population to care for, appease and protect. Many young Saudis will soon be coming of age, and they will need jobs and training. But compared with their foreign counterparts, Saudi workers have low productivity levels, meaning laws that encourage their employment over foreign workers are an economic burden. And indeed, the kingdom is already facing several unique roadblocks to some of its efforts to introduce local labor to certain sectors. An experimental ruling last year that required Saudis to replace all foreign expatriate workers in the mobile phone industry was recently shown to have led to the closure of half the country's mobile phone shops. The measure also failed to substantially increase local employment, thanks to discrepancies in pay and productivity among Saudis. 

To keep their citizens employed, the six Gulf states have announced a string of massive projects and events intended to create jobs, including Expo 2020 Dubai, Qatar's 2022 World Cup and Saudi Arabia's attempt to build out Mecca. But these projects will still require a steady stream of foreign labor that will need to be courted — something that will prove difficult while taxation and nationalization remain the Gulf's top priorities.

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