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Abu Dhabi, UAETuesday 18 December 2018

Economics 101: Why green cards could increase innovation in the Gulf

Creating a Gulf version of the US green card system could bolster research and development for the region's economies

Offering Gulf migrant workers green cards, would make them feel more secure about their residency status if they lose their job. Photo: Getty Images
Offering Gulf migrant workers green cards, would make them feel more secure about their residency status if they lose their job. Photo: Getty Images

Saudi Arabia’s economic vision explicitly seeks to deploy permanent residency permits as a means of developing the economy, though little is known about the precise growth-inducing channel that policymakers have in mind.

A new study suggests that creating an analogue to the US green card system may bolster innovation, an attractive corollary for the Gulf countries, all of which are seeking to enhance research and development within their economies.

Before exploring this new research, it is worth highlighting the mechanisms that the Saudi government most likely had in mind when it included green cards in Vision 2030. A salient one is the investment channel.

In many countries in the world, including some of the most advanced economies, if a non-citizen, non-resident invests a sufficiently large amount (possibly millions of dollars), they earn permanent residency.

The green card is partially a generic reward for undertaking actions that are beneficial to the local economy, and partially a tailored incentive: a foreign investor will feel far more comfortable injecting capital if they can monitor their investment first hand, reside in the same country, and be afforded access to the same legal protections as those interacting with the investments.

A more subtle - but potentially more important - factor is knowledge transfer. Gulf labour markets make it extremely easy, by global standards, for foreigners to enter the workforce. In the case of high-skilled workers, this represents a potential gold mine for building the talents of locals in the labour market. Working alongside competent foreigners offers nationals the opportunity to absorb their skills and benefit from their experience at an accelerated rate. This is a key reason why almost all global industries working at the cutting edge feature internationally diverse work teams, with Silicon Valley being the standard bearer.

The problem with the Gulf model is that the flexibility cuts both ways: while it is easy for foreigners to secure an opportunity, it is also easy for them to lose one. Their residency is tied to having a job, and contracts are typically capped at two years, which makes them inevitably insecure about their economic situation.

More importantly, from the perspective of knowledge transfer, the Gulf governments have explicit plans to create jobs for nationals at the expense of foreigners. This makes migrant workers constantly look over their shoulder and fear that a competent sub-ordinate citizen is being groomed to succeed them. As a result, foreigners have very little incentive to engage in the “enabling” knowledge transfer that policymakers envisage, and may even have an incentive to undermine it.

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Read more from Omar Al Ubaydli:

Economics 101: Will VAT diversify UAE government revenues?

Economics 101: Is Saudi Arabia right to pursue austerity?

Economics 101: Do wars ever make economic sense?

Economics 101: What lies behind the Arabian Gulf states’ appetite for mega projects?

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In contrast, in the US, green card holders are no less attractive to prospective employers than citizens, meaning that foreigners need not fear signing their own economic death warrant by building the skills of their colleagues. An appreciation of this dynamic may have contributed to the Saudi government’s decision to pave the way for permanent residents.

A recent paper by Shai Bernstein and Timothy McQuade of Stanford University and Richard Townsend of the University of California at San Diego, suggests an additional channel for Gulf policymakers to keep in mind when they consider permanent residency.

Using firm-level data on innovation and employee characteristics, the researchers find that economic insecurity adversely affects innovation. They begin by noting that much of the technological progress realised by companies is the result of bottom-up efforts by innovative workers. However, they also posit that the creativity required for formulating effective, novel ideas also depends upon employees feeling psychologically comfortable.

While pressure is known to improve productivity in many dimensions, at the cutting edge of the technological frontier, under certain circumstances, experts have surmised that low-pressure environments are more conducive to success. This is why top, in-house researchers usually reside in beautiful departments, cordoned off from the hustle and bustle of the organisation’s daily activities.

The paper’s authors found that employees that experienced greater financial turbulence in the wake of the 2008 global financial crisis, reflected in greater shocks to local house prices, made smaller contributions to their company’s innovation, as reflected in both the quantity and quality of patents associated with those employees.

The Gulf governments are currently implementing long-term projects seeking to improve innovation. The results of this study suggest that in so far as the prevailing absence of permanent residency might contribute to a sense of economic insecurity among foreign workers, it might also indirectly impair bottom-up innovation. Recall that in most of the Gulf countries, migrant workers represent over 75 per cent of the workforce, and represent a disproportionately high percentage of the most credentialed components. They will continue to play a critical role in the sort of innovation the governments are striving for; therefore, understanding the underlying factors that make that innovation more likely is pivotal.

Some sources of economic insecurity are beyond the control of the Gulf governments, such as oil price movements or the international financial system. However, in the case of foreigners worrying about their residency should their job circumstances change, giving them green cards definitely falls within the suite of available policies. Given the economic importance of innovation, an experiment is surely warranted.

Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain