Kafala-nomics

Everyone has different opinions on the Kafala system. Most of these opinions, however, are derived from either a philosophical or political perspective, with little work done to quantify the issue. This will be the aim of this article, to take a completely numbers-based approach and try to unravel the economics behind Kafala.

Starting from a nation-wide perspective, Kafala, in theory, is thought to be beneficial to a nation’s firms, damaging to local workers, and risky for the country’s domestic currency. But which of the aforementioned consensus, if any, hold true?

Starting with the first consensus, the Kafala system is indeed advantageous at a glance to firms seeking low-skilled workers. Firms can employ foreign workers at a price that is, on average and according to the International Labor Organization, 60% lower than a country’s minimum wage. Meaning that in Lebanon firms with low-skilled job vacancies could either hire two Kafala-bounded migrants for combined monthly average wages at an amount barely equal to the minimum wage under Lebanon’s labor laws. It is important to note that this is only the case for the low-skilled job market. But why would migrants work under such circumstances? In economics, there is always another choice. Since it is assumed that migrants earn more in comparison to what they would earn in their country of origin, the Kafala system presents an interesting insight into the human psyche. Theoretically, the choice to either work under the Kafala system, or stay in one’s country of origin presents a tradeoff. Economists could use migrants’ choices as data to empirically appraise the price per dollar of dissatisfaction. This would also negate any ethical concerns about the kafala system as workers are actively choosing their own destinies. Indeed, this is the argument that most pro-Kafala advocators rely on, but as we’ll discuss later on in this article, this argument rests on the critical assumption that workers have all the information presented to them before making their decisions. That is often not the case.

Moving on to the second claim, is Kafala increasing unemployment rates among locals? In short, yes. However, what is fascinating to note is that this problem is exclusive to Kafala, meaning that ordinary immigrants do not lead to an increase in unemployment. This is a truly remarkable distinction and the reason behind it could lead to the solution of the Kafala-induced unemployment. Nevertheless, claiming that immigration is not having negative repercussions on natives is counter-intuitive to most laymen.

Wages are often sticky, meaning that even when the supply of labor increases, wages do not automatically adjust by decreasing. But then that would mean that there are an increased number of people that are unable to find jobs, thus increasing the unemployment rate, right? Again, this is not necessarily the case. As immigrants become an active part of society, they start spending the money they make within the community, which eventually increases the demand for labor as well. But why is that not the case for Kafala? Well, first of all, one theory that explains the existence of sticky wages is the theory of imperfect information first proposed by Friedman (1968) and Phelps (1968). The two prominent scholars argue that wages are sticky because firms do not necessarily know that they can get cheaper workers. This phenomenon is rendered futile by the Kafala operation as all firms know of the existence of Kafala and the cheap labor it offers, and since local citizens are unable to offer competitive salaries (due to the restrictive minimum wage), we see that almost all low-skilled job opportunities in Kafala- enabled nations are occupied by migrant workers. To exemplify, try to think of the number of Lebanese domestic workers in Lebanon – they are virtually nonexistent. Henceforth, we can see that the solution to such a problem lies in abolishing the Kafala system entirely, allowing for a competitive labor market where firms have to pay both migrants and locals the same minimum wage, effectively decreasing unemployment in the country. Moreover, as migrants are freed from the restrictions of Kafala, they would have to increase spending within the nation for necessities such as rent and food, thus increasing money flow within the borders as well.

Thirdly, if a country is prosperous in other sectors of its economy and has a relatively solid local currency, it need not mind that most Kafala-bound workers are sending remittances to their home countries. However, if a country is facing a currency crisis, then these amounts are starving the local economy from much needed foreign reserves. And they are not the meager amounts most people would have you believe. Philippine’s Overseas Employment Administration states that foreign remittances account for 13% of the country’s entire GDP, a staggering $48.984 billion! Of course, not all of these remittances originate from Kafala workers, but a large portion does.

We have discussed the issue from a macro-outlook, but what about the individual level of the conundrum? We have already touched on the pro-kafala argument of migrants choosing their own fates and said that the false assumption that renders this logical reasoning null is that migrants either do not know the cards they have been dealt or have been falsely or have been falsely tricked into believing that they have a three-of-a-kind when they actually have a pair of twos. What does this mean exactly? Well, as mentioned earlier, the Kafala system presents a theoretical trade-off between income and dissatisfaction, and it is assumed that migrants are consciously making the choice of sacrificing part of their rights for a higher salary. As it turns out, migrants do not have the proper information on either income or rights before making a choice. Kafa, a Lebanese NGO, conducted a survey in 2012 that found out that 84% of Kafala workers weren’t told of the unreasonable working hours they might have to endure (up to 18 hours a day), 78% did not know that they might not get the weekends off, 61% were clueless as to whether they would be able to contact their families or not, and 47% were led to believe that they would earn a higher salary than they actually do. Most importantly, 83% of the workers stated that they wouldn’t have worked under the Kafala system were this information known to them beforehand. To provide further evidence of this claim, a 2014 publication by another Lebanese NGO called Insan Assosciation shows that 67% of Kafala workers had to sign the Standard Unified Contract (their binding working contract) in Arabic, a language they are incapable of reading, with a further 40.6% not even knowing that they were signing their working contract. Almost none fully understood their legal rights and job conditions, meaning that most migrants are deceived into working under the kafala system. And with 77.9% of Lebanese employers withholding their employees’ passports, Kafala workers are now stuck in a place they wouldn’t have chosen had they had the proper information and working under de- grading humanitarian conditions. Thus, we are able to affirm that from a purely economic analysis, the Kafala system embodies all the founding principles of the slavery system, with the notable exceptions that workers are treated with a little more empathy and have some legal protection.

But why are workers manipulated in such a way? In order to understand, let us take a look at the structure of Kafala. Even though the Lebanese legal system allows for employers to directly employ Kafala workers, a 2016 International Labor Organization study found out that 84.7% of employers rely on a third party to handle the recruitment process for them, with 82.6-99.4% of employers paying the agency a lump sum ranging from $1,000 to $4,000. As a result, we can deduce that these recruitment agencies run a business model in which recruitment fees are the central revenue generator. This means that the more workers they get to work under the Kafala system, the greater the profit they accrue, which has created financial incentives to deceive, trick, bamboozle, and manipulate workers into the Kafala trap.

To summarize, the abolishment of the Kafala system is advantageous to local citizens, the banking sector, and the migrants themselves, with downfalls being an estimated drop in the productivity of low-skill employing firms, and recruitment agencies having to shut down all operations.