Saudization and the Saudi Arabian Kingdom Development - Case Study Example

Saudization and the Saudi Arabian Kingdom Development As a young wealthy nation, Saudi Arabia has a number of social and economic problems. It has a young population, many of whom are unemployed (Fakeeh, 2009). The country is highly dependent on a single resource which is oil and also relies heavily on imported labour to meet the necessities of economic expansion and the further development of the country. As a result, the Saudi government has developed a policy of ‘Saudization’ as a way of replacing expatriates with Saudi workers to solve the problem of unemployment (Fakeeh, 2009). The policy also represents a developmental necessity in the sense that it requires the Saudi government to commit and show eagerness to prove to its nationals that they are more worthy of government attention and action than their counterparts, the expatriates. Saudization was an initiative from Saudi Government to encourage the participation and employment of Saudi Nationals in the private sector of the country. This was started during 2006 which were started in order to ensure that local Saudis get jobs in private sector. Government made the condition that if private sector companies do not hire the locals, they will fail to get the government contracts. Initially government set the level of 75% wherein 75% of the employees will be locals however, in actuality, the figures are relatively low. Human resource development (HRD), according to Harbisson and Myers (1964, cited in Abdulai, 2000), is the process of increasing the knowledge, skills and the capacities of all people in society. Therefore, when there is an increase in the level of skills possessed by individuals, an economy will invariably benefit and develop faster. In case of Saudization, this is more critical because it requires a completely new and strategic approach towards HRM in order to ensure that the locals are engaged and employed by the local firms in order to upgrade their skills and reduce the dependence of country on foreign workers. This essay will discuss as to how the process of Saudization can help to create jobs and support the national economy of Saudi Arabia, a country in the Middle East. Also, the issue and its relationship to the development of the economy will be discussed, as well as challenges that may be faced. Recommendations will therefore be made based on the research findings. Saudi Arabia and its Economy The Kingdom of Saudi Arabia has a centrally planned economy. It’s an oil-based economy with steady government control over major economic activities. The country owns 25% of the world’s confirmed petroleum reserves and ranks as the world’s largest petroleum exporter (OPEC, 2009). The petroleum sector of the Saudi economy accounts for roughly 75% of budget revenues, 45% of the gross domestic product (GDP), and 90% of export earnings. Approximately 4 million foreign workers play an important role in the oil and service sectors, contributing to the Saudi economy (Gianos & Lusignan, 2003). In the earlier years, discussions were focused on the extent to which Saudi Arabia is prepared to increase market admittance for foreign goods and services and the length of time to become fully compliant with World Trade Organization (WTO) obligations. In April 2000, therefore, the government established the Saudi Arabian General Investment Authority to encourage foreign direct investment in Saudi Arabia, and as of November 2005, Saudi Arabia was formally permitted to join the WTO (Al-Asmari, 2008). The Saudi Arabian economy is flooded with family businesses which constitute the backbone of the economy. According to Davis et al. (1997) the family organisations constitute 90% of the trading activities in the Gulf region and 95% of the total organizations in the country. This percentage is relatively high because in other regions of the world, the percentage is between 65% and 80% (Davis et al., 1997). Also, according to the Saudi Arabian Monetary Agency (SAMA) (2006), the overall number of such family organizations is estimated to have reached over 621,000 recently. The higher concentration of family owned businesses therefore outline that there may be relative deficiencies of the family owned businesses in terms of their HRD needs. It has been observed that family owned businesses lack the essential urge to induct decision makers who are outside the family. As such hiring process remains within the hands of family and training and development is imparted through what family has learned over the period of time. The population of Saudi Arabia comprises both indigenes and foreigners. All together they amount to about 25.1 million and still counting (SAMA, 2006). The number of employees in the government sector is no more than 783,300, while their number in the private sector is 5.4 million. This last number illustrates the importance of the private sector in terms of employment and development in Saudi Arabia. However, the majority of the employees in the private sector are expatriates who represent 88.4% of the labour in this sector. The percentage of Saudis in this sector does not exceed 11.63%, according to a SAMA report (2006). The Saudi family businesses, such as the Al-Zamil Group, Al-Rachid Group, Al-Rajhi Group, National Commercial Bank and Ben Ladin Group, are managed by the first generation, and they are regarded as the founders. 20% of family organisations are managed by the second generation, while only 10% are managed by the third generation (Ghalayini, 2003). This explains how the ownership of organisations is not separated from management in the Saudi economy. As a result of this, many managerial issues are being raised in this sector of the economy. It is critical to understand that the family owned businesses and the family’s dominance in the decision making process often creates hurdles for the life long learning which an organization could adapt. It has been argued by Scarborough and Zimmerer (2003) that business performance of the small family owned businesses may not be as good as businesses of same size and risk. They observed that such businesses may often lack the capability to attract new customers and retain the older ones besides having unstructured and disintegrated strategic planning process. This invariably suggests that due to lack of effective strategic HRM, such firms lack that capability and even often fail to develop the same. The subsequent policies adapted by Saudi Government outlined that through systematic training and development, the capabilities of the local firms and employees could be upgraded. It was because of this reason that Saudi Government established HRDF. The HRDF is an autonomous body that supports the training and employment of Saudi nationals. It was established by Royal Decree in 2000 and the fund promotes pre-employment, insertion and on-the-job training through grants and income subsidies to organisations employing Saudi nationals (ILO, 2009). The fund supported 52,000 male and female citizens at a total cost of US$150 million in its first five years since becoming operational in 2002. This amounts to supporting over 10,000 Saudis annually, a figure that is expected to increase in the future. The Fund’s support to the private sector became more generous in the wake of the financial and economic crisis. The Fund paid in advance half of the first annual salary of newly hired Saudis, instead of the usual 50% after the completion of the first year. To date, the HRDF continues to pay 75% of bonuses paid to Saudis who undergo training at private firms (ILO, 2009). Other countries in the region, most notably, UAE, has also introduced Emiratization program under which an initiative was undertaken to ensure that the locals are inducted into the jobs and the overall skill base of the locals is improved. A fair comparison can therefore be made between the Saudization as well as the Emiratization as both initiatives were undertaken as a part of the broader national HRD programs. This was in fact an interventionist arrangement on the part of the Saudi Government to ensure that the larger chunk of the local indigenous population is inducted into the workforce of the country. This effort was also directed at ensuring that the overall level of skills of the local are upgraded and updated in order to meet the future HR requirements of the country. The relative skill shortages and gaps between expats and the local Saudis therefore are attempted to be fulfilled in order to increase the reliance of Saudi Arabia on it own indigenous workforce. The above approach towards national HRD therefore outline that Saudi Arabia has undertaken a more revolutionary approach through an interventionist regime. This has been purposefully done in order to ensure that the local employees are progressively inducted into the national workforce and improve the economic resilience of the Saudi Economy. Apart from this Saudization has actually allowed the Saudi government to take more policy oriented stance towards the HRD and its overall importance to national economy. Saudi Government also enforced five year plans on the advice of IMF during 1958. This has been continued and it is still in practice with an aim to improve the human resource conditions of the country as well as to improve transportation and other infrastructure of the country. It is important however, to note that in terms of human resource development, the overall success of the five year plans has not been so favourable. CHALLENGES AND IMPLICATIONS A major challenge, however, is increase the capability of the private sector to generate jobs and invest into training and development of local employees. This challenge is envisaged as a result of past experience in the economy, such as the lower than expected results that were produced through efforts to enhance the share of Saudi nationals in the labour force. The previous 8th Plan (2005–2009) had expected the number of unemployed Saudi nationals to be reduced to 140,000 by 2009 – almost half the 270,000 figures in 2004 – but unemployment during this period actually increased to nearly 400,000. According to Ramady (2011), however, a survey undertaken in January 2010 showed that Saudi employers were the most optimistic among employers in 14 regional economies. These trends however suggest that the employers may be reluctant to entirely rely on the local Saudis to fill the require skill gap and takeover the jobs of the expats. This reluctance may also suggest the lack of willingness of the Saudi firms to actually develop local Saudi employees to take over more important roles in the future. Also, there is the presence of a lack of protective measures for the unemployed and the absence of a minimum wage. Significant gender disparities persist, though some recent policy pronouncements are providing the basis to start addressing them (Sajini, 2004). The success of the government’s employment policies will very much depend on whether they protect the right of citizens to decent employment by reducing the dependence of the private sector on foreign workers. Probably the most important issue to be faced by the Saudi Government in the wake of executing the scheme would be to improve the skill level of local Saudi employees. Though the development of skills could be achieved in the long run however, to manage the skill shortfall in short run could be disastrous for the country. Another important challenge to be faced by the Saudi Government would be the loss of cross national HRD under which it may lose its essential human resource base of foreign workers. Since foreign workers in Saudi Arabia has formulated a sort of local communities of small nature therefore the overall loss of qualified and technical workforce may result into economic loss for the country in the short run. IMPLICATIONS According to Ramady (2011), Saudization can be a two-edged sword and the government’s natural desire to replace foreigners with Saudis to resolve a growing unemployment problem needs to be a tempered with the long-term consequences to the private sector. These, he argued, might include reduced efficiency, lower productivity, higher costs and an economic slowdown should Saudization be unwillingly enforced. Ramady also proposed that the model be more of a "partnership", exemplified by the commendable results of the Saudi banks Saudization experience, in which both foreign bank partners and the Saudi community benefited in terms of profitability, skill transfer, productivity and product innovation. The higher echelons of Saudi banking is presently dominated and run by qualified and exceptionally competent Saudis. This process, however, took time and time is not a luxury that Saudi Arabia now has in terms of the creation of jobs The likely economic implications, should the policy of Saudization be mishandled, could be a reduction in national income. Apart from this, there could be large gap in the employment level because if expats leave the country. If expatriate workers feel threatened and begin to voluntarily withdraw part of their labour input, they could create economic inefficiencies. SMEs have the potential to play a variety of important roles: (a) selling their own products, usually finished goods; (b) acting as either subcontractors for, or (c) suppliers of raw materials for larger multinational enterprises. There are several great success stories in creating a large number of jobs and relatively low costs. For example, the information technology (IT) job market is booming in Saudi Arabia, and many positions are filled by Saudis working for SMEs (MENA, 2003). Currently, SMEs in Saudi Arabia represent almost 93% of total enterprises and account for about 24.7% of total employment (Sajini, 2004). The mushrooming of the SMEs in the country can further result into deeper penetration of the local family owned small businesses within the economy. Higher concentration of SMEs therefore can create more jobs and develop the skills of current local employees. Saudi Arabia hopes, eventually, to repatriate all foreign nationals, although the Kingdom accepts the inevitability of some selective immigration and naturalization. The Saudi authorities do not seem to have been caught off balance by the large numbers of foreign workers present in the country, and the Kingdom has shown a remarkable capability in managing this large flow of migrant labour (Sajini, 2004). Developing a dynamic private sector is critical because much of the slowdown in employment and non-oil growth has stemmed from the decline over time in the government’s ability, simply through its own expenditures, to stimulate private sector output and expenditure (Looney, 2004a). In addition, the Saudi Kingdom’s current approach to employment creation, the Saudization program, while well intended, has somewhat limited potential to make a significant contribution to the country’s employment needs (Looney, 2004b) RECOMMENDATIONS The replacement of foreign workers with Saudi nationals should be handled with care and caution since it could become one of the most controversial issues, such as a reduction in national income, in the years ahead. This is specially important owing to the fact that there is greater skill shortage gap between the local and foreign workers. The rapid withdrawal of the foreign workers therefore may further enlarge this gap and hence country may face reduction in its total output in the future. Unrestricted labour mobility is a necessary prerequisite for a free labour market that eliminates pools of unemployed expatriates in the Saudi Kingdom.  Production, competence, skills and work principles should be the guiding ethics for recruiting, with preferences given to Saudi nationals that meet these criteria, but also without setting artificially high barriers for nationals to meet before employing them. With the number of foreign workers exceeding that of nationals, the government should be able to weather the employment impact of the crisis on its citizens, by ensuring that the private sector generates in large numbers the types of jobs that are attractive to the increasingly educated Saudi workforce. For there to be a successful handover of responsibilities and technical skills to Saudi labour as part of the Saudization process, there has to be the presence of qualified Saudis, either through skill transfer or learning-by-doing. However, it is not an easy decision for any country to make and especially for one that will need professional expatriate labour in the short-term as a result of the diversification of its economic base into new areas. REFERENCES Abdulai, A. I. (2000). Human Resource Management in Ghana: Prescriptions & Issues raised by the Fourth Republican Constitution. International Journal of Public Sector Management, 13(5), pp. 447-466 [Online], Available at: http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&Filename=Published/EmeraldFullTextArticle/Articles/0420130503.html#0420130503002.png [Accessed 7 March 2011]. Al-Asmari, M. G. H. (2008). Saudi Labour Force: challenges and ambitions. ArtsVol., 16(2), pp. 19-59. Bahgat, G. (2004). Foreign Investment In Saudi Arabia’s Energy Sector. Saudi–US. Champion, D. (2008). The Kingdom of Saudi Arabia: Elements of Instability within stability. Davis, J., Pitts, E. & Cormier, K. (1997). Challenges Facing the Family Companies in the Gulf Region. Fakeeh, M. S. (2009). Saudization as a Solution for Unemployment: The Case of Jeddah Western Region. University of Glasgow Business School. Fandy, M. (2001). Saudi Arabia and the Politics of Dissent. New York/Basingstoke. Ghalayini, B. (2003). Development Strategic Choices (in Arabic). Second Seminar on Family Business in the Arab World Proceedings. Damascus. Gianos, Z. & Lusignan, B. (2003). Saudi Arabia: The regional issues. EDGE Eng 297a. ILO (2009). The financial and economic crisis: A decent work response. International Labour Institute for Labour Studies (Geneva) [Online], Available at: http://www.dol.gov/ilab/media/events/G20_ministersmeeting/G20-SaudiArabia-brief.pdf [Accessed 20 February 2011]. Looney, R. (2004). Can Saudi Arabia Reform its Economy in Time to Head Off Disaster? Strategic Insights, 3(1). Looney, R. (2004). Saudization and Sound Economic Reforms: Are the Two Compatible? Strategic Insights, 3(2). MENA Business Reports (2003). Saudi Arabias IT Employment Sector Grows at Four Percent Per Annum. Middle East Review of International Affairs, Volume III (4) [Online], Available at: http://meria.idc.ac.il/journal/1999/issue4/jv3n4a4.html [Accessed 6 February 2011]. New York, Springer Sciences & Business Media, Inc. Palgrave/Houndmills. OPEC (2009). ‘Saudi Arabia Ranked 13th Most Competitive Economy in World Bank Report’. Reuters [Online], Available at: http://www.reuters.com/article/pressRelease/idUS40553+11-Sep-2009+PRN20090911 [Accessed 1 March 2011] Ramady, M. (2005). The Saudi Arabian Economy: Policies, Achievements and Challenges. Ramady, M. A. (2011). Saudization through new eyes. New York: Springer Sciences & Business Media, Inc. Relations Information Service [Online], Available at: http://www.saudi-us-relations.org/articles/2004/ioi/040902p-foreign investment.html [Accessed 20 February 2011]. Sajini, I. I. (2004). Effects of WTO on Small & Medium Enterprises. Arab News. Scarborough, N.M and Zimmerer, T.W (2003) Effective small business management: An entrepreneurial Approach 7th edition. Prentice Hall. New Jersey. Vassiliev, A. (2000). The History of Saudi Arabia. London: Saqi Books. Read More