The Gulf Cooperation Council (GCC) countries are known for having an abundance of migrant workers who constitute well over half of the labor force. Among the millions of expatriates in the GCC, skilled workers have played an especially important role in the growth of GCC family businesses during the latter half of the twentieth century. The guest worker visa system used to employ and manage these upper-echelon workers has much in common with the system used by the Ottoman Empire to recruit and administer elite infantry units, known as Janissaries. Specifically, both systems provide the recruits with special privileges to secure their loyalties while hamstringing their abilities to forge their own independent power bases. Consequently, the expatriate accountants, consultants, lawyers, and other assorted professionals plying their trade in GCC family companies from 1960–2010 can be seen as modern corporate Janissaries.
Moreover, the contemporary corporate Janissaries of the GCC have—just like their Ottoman antecedents during the eighteenth century—entered their twilight years, as a variety of economic and institutional developments have undermined their effectiveness. In particular, the economic visions that are seeking to transform the Gulf economies from oil-dependence to knowledge-based economies require far-sighted businesses willing to invest in homegrown research and development, and this goal is difficult to reconcile with the highly short-term outlook engendered by relying on skilled migrant workers. As a result, the time has come for GCC family companies to adopt more sophisticated forms of corporate governance.
The Principal–Agent Problem
To understand how these systems emerged and how they operate, we first need to understand what economists refer to as the “principal–agent problem”. The leader (principal) of an organization has neither the time nor ability to perform all of the organization’s work and so they must delegate tasks to assistants (agents). Think of CEOs delegating to senior executives, and ministers delegating to undersecretaries.
The leader’s quandary is: how to ensure that the employed agents function according to their interests? How do leaders guarantee that these agents do not pursue their own goals, especially when they aren’t available to monitor every decision? There is always a risk that the agent will deviate from the issued instructions in an attempt to serve their own agenda.
The Tribal Solution
The oldest and most primitive solution is for leaders to employ their kin, especially their children. Family members are genetically predisposed to having affection for one another and for having shared interests. Further, in the event of a crisis, they are much more likely to loyally stick around than are “mercenaries” from outside the family.
The appeal of hiring kin as agents is reflected in basic forms of political organization, namely the tribal structures that have dominated the Middle East for millennia. The chieftain will appoint their brothers and, when old enough, their offspring to important positions due to their relative trustworthiness. In contrast, those with weak blood ties to the leader are excluded from consideration due to a fear that they might pursue their own interests contrary to those of the leader, and, in extreme cases, mount a coup.
Family companies in the Gulf, which have been the backbone of the private sector since the twentieth century, have also favored this strategy. A founder will most likely employ siblings, offspring, and cousins, especially in positions that require trust, such as the executive team and board of directors. Analogously, family businesses have traditionally been reluctant to hire competent compatriots from outside the family circle for important positions because they cannot be trusted to serve the leader’s interests.
Institutionalized nepotism is a temporary fix, but eventually breaks down when the leader’s employed relatives start forming their own families and the organizational chart expands, creating conflicts of interest among siblings and cousins and undermining the trust advantage that tribal structures enjoy in both political and corporate domains. Moreover, restricting hiring to the leader’s kin creates a very shallow talent pool and prevents merit-based norms from entering the organization. Competitors that are able to mobilize talent from beyond the family will threaten organizations that insist on close kinship.
This is why, historically, tribal political units are only able to control limited land areas and population sizes and are easily conquered by states that have military and bureaucratic structures that are both impersonal and merit-based.
Similarly, family companies in the GCC often dissolve or splinter when ownership transfers to the second generation, and especially when it transfers to the third generation. The inability to reconcile the owners’ incongruent visions regarding how the company should be run as well as limitations to hiring new blood frequently prove fatal.
Impersonal Alternatives to Tribalism
Is it possible to have an alternative political/corporate structure where the leader can impersonally hire talented agents, and where those agents are loyal to the leader? The basic formula that leaders have relied upon throughout human history is giving their agents some sort of elite privileges that make their responsibilities highly lucrative, and then engineering the situation so that those agents don’t pursue any outside interests.
There are two broad strategies for realizing this latter goal. The first is stopping agents from having children, which can be done physically, as in the case of the court eunuchs that frequently served medieval kings, or legislatively, as in the case of the Catholic Church banning its priests from marriage and procreation. In both cases, the elite privileges play an important role, because the risk of losing those exclusive privileges and falling to the rank of a “common person” motivates the agent to remain loyal.
The second strategy, which was developed by the Egyptian Mamluks and subsequently refined and perfected by the Ottoman Turks, is to physically separate the agents from the rest of society, and to legally prevent them from passing their elite privileges on to their offspring. These are the basic elements of the Janissary system.
In particular, the Ottoman Turks—who were Muslim—used to capture and enslave non-Muslim children from Eastern Europe and Central Asia who had above-average levels of height and strength. They would be separated from their families and be raised in closed, monastic enclaves, where they would receive special training in military combat and other disciplines. Upon graduating, they would become elite units of soldiers serving the Sultan, and unlike conventional slaves, they would earn high salaries and other perks.
Janissaries were not allowed to get married until the age of forty, and even after forming their own families, the most important benefits of being a Janissary were not transferrable to their offspring: the children of Janissaries were initially banned from being Janissaries themselves, a rule reinforced by the fact that Janissaries were forced to convert to Islam, meaning that their children were Muslim by birth (while Islam permits slavery, the children of a Muslim cannot be slaves).
Janissaries were highly effective combat units that allowed the Ottoman Empire to aggressively expand its territory. Unlike tribal military units, advancement within the ranks of Janissaries was impersonal and merit-based. Moreover, the talent pool was several orders of magnitude higher than in any tribal structure. Crucially, none of this came at the expense of loyalty to the Sultan, because Janissaries were cut off from the general public and therefore unable to forge their own power bases via their own offspring or otherwise. Moreover, the threat of being excommunicated and hence losing their privileges in the event of disloyalty acted as an additional motivator.
The Kafala System in the GCC
Fast forward to the twentieth century, and the Kafala system used in the GCC has led to the genesis of modern, corporate Janissaries. Prior to the discovery of hydrocarbons in the GCC, the indigenous populations in this region were extremely small due to the arid climate. The difficulty of eking out a living meant that there were significant nomadic elements in the population, further contributing to the low levels of population growth. Moreover, the educational systems were very limited in size and scope, with higher education institutions such as universities only arising in the latter half of the twentieth century.
As a result, while the hydrocarbon reserves discovered and developed by the GCC countries gave them the capital they needed to grow, they still lacked the requisite labor. This was true both in terms of volume—the many hands needed to build infrastructure—and quality, as specialties such as doctors, lawyers, and engineers were not available locally in sufficient numbers.
A quick solution to plugging the gap in labor markets was to bring in expatriates in large numbers, and the Kafala system was designed to facilitate just that. In particular, under the Kafala system, a local citizen or corporate entity (known as the kafīl) would sponsor expatriate laborers. Sponsorship meant employing the expatriate and being responsible for them financially and legally.
Unlike Western immigration systems, the process of hiring migrant workers under the Kafala system is fast and contains minimal administrative and financial hurdles. Moreover, there are few limitations on the number of expatriates that an individual or company can sponsor. Consequently, millions of migrant workers of all skill levels have worked (and continue to work) in the GCC during the last fifty years, and they have become the dominant component of the labor force (averaging over 75 percent).
It is also important to note that, prior to 2010, the power relationship between GCC sponsor and migrant worker was quite asymmetric; with the exception of certain highly-skilled workers, the migrant workers would not have been able to change jobs during their stays without their sponsors’ approval, and their residence permits were also tied to their jobs. Further, their families could not typically accompany them. Unlike the immigration systems operated by advanced economies such as the United Kingdom and United States, the migrant workers had no path to permanent residency or naturalized citizenship, making their livelihood extremely dependent upon their sponsors.
High-Skilled Expatriates as Modern Corporate Janissaries
When analyzing the Kafala system, researchers have tended to focus on its impact on low-skilled workers. However, in terms of the Kafala system as a novel solution to the principal–agent problem, and its similarities to the Janissary system, the focus is on the skilled professionals, such as the accountants, the lawyers, the executives, the developers, the consultants, and so on.
Like Ottoman Janissaries, these workers are highly dependent on the principal. It is important to note that in general, migrant workers in the GCC—unlike Ottoman Janissaries—do not satisfy any definition of slavery, since, for the most part, they come of their own volition and are free to quit their jobs at any time (trafficking does occur, but it is not the typical case). However, under the Kafala system, even skilled professionals used to face considerable constraints on their abilities to change jobs, and their immigration statuses were tied to their sponsors, creating significant dependence similar to that of Ottoman Janissaries.
While migrant workers in the GCC almost always earn considerably more than they would doing the same job in their home country (otherwise, they would just go home), the pay gap is especially large for those with higher skill levels. For example, Western professionals have historically found working in the GCC particularly attractive due to the absence of income taxes, let alone the eye-catching fringe benefits (lodging, children’s private school tuition, business class tickets for the family to travel home annually, and so on). These are loosely analogous to the elite privileges enjoyed by Janissaries during the middle ages, and they helped ensure the loyalty of the expatriate workers to their GCC employers.
Both Ottoman Janissaries and skilled migrant workers in the GCC are agents who have weak ties to the local population and who find it difficult to carve out any influence or independence from their principal. In the case of migrant workers in the GCC, the fact that they are of a visibly different ethnicity to locals and the frequent absence of their families reinforce their sense of separation from the local population, much like the Janissaries, who used to reside in their own enclaves and who were ethnically distinct from locals.
Finally, both systems imply a large expansion in the size of the talent pool available to principals looking to hire agents. In light of these similarities, the modern corporate Janissaries of the GCC have—like their Ottoman antecedents—facilitated a higher level of performance than was possible under a tribal structure by allowing for a more impersonal and merit-based system of recruitment and advancement.
As the GCC economies grew rapidly during the 1970–2010 period, relying on brothers and offspring within family businesses started to become a significant impediment to growth, and hence to taking advantage of enticing commercial opportunities. Moreover, the rapid pace of globalization meant that improving corporate performance was not just a luxury: it was a necessity lest the family businesses be marginalized by aggressive multinationals.
As a result, during the latter half of the twentieth century, GCC family companies began to hire these corporate Janissaries in significant numbers, giving them important positions in the business, such as chief financial officer, elite advisory roles, and sometimes even chief executive officers. These were positions that were traditionally occupied by family members, with all of their shortcomings. It remained rare, however, to see nationals from outside the family occupying an important position, as they—unlike corporate Janissaries —were likely to push back against the owners, or look to advance their own agenda.
The Demise of the Janissary
While Janissaries are more effective than primitive tribal structures in both political and corporate domains, they also have deep flaws that limit their long-term viability. In the case of the original Ottoman Janissaries, the hiring system was inhumane and was gradually becoming less tolerable over time as the Enlightenment unfolded. Moreover, an important contributing factor to the system’s demise was the Janissaries’ irresistible desire to have their own families.
In fact, in the late fifteenth century, the Ottoman Sultan eventually capitulated to the Janissaries’ demands, allowing their children to enter the elite corps after three hundred years of exclusion. Thereafter, the Janissaries slowly tribalized, and the system devolved and began to exhibit the very weaknesses it was designed to overcome: factionalism, personalized recruitment, and nepotistic advancement.
Although these weaknesses are not relevant to understanding the demise of the modern corporate Janissaries of the GCC, there is an additional weakness that does play a role. When Janissaries operated within the parameters of the original design (when children were excluded), Janissary corps were quite short-sighted, as they had little to gain from theoretically pursuing any long-term investment or other projects that would survive beyond their lifetimes, since their heirs will be excluded from bearing the fruits of their labor.
That is one reason why Ottoman Janissaries were largely fixated on imperial aggrandizement, as these efforts yielded immediate, material returns that were transferable to their children. This in turn is why an eventual major source of internal pressure in the Ottoman Janissary system was the drying up of opportunities for conquest.
The ills of fixating on short-term goals are equally apparent among the corporate Janissaries of the twentieth century GCC family companies. While government oil revenues were rising—either due to rising prices or high production—as they were for much of the pre-2014 era, the economic pie was also increasing, and so companies could become more profitable simply by scaling up their operations.
However, when economic pressures arose due to falling hydrocarbon revenues and rising populations, businesses needed to innovate in order to compete: and in the modern economy, innovation is a fundamentally long-term activity. Under these circumstances, the weaknesses of corporate Janissaries were clearly exposed. They were ill-equipped for innovation for two reasons.
First, the prospects of contributing to innovation-centric projects were unlikely as those were generally long-term ventures. GCC work visas for migrant workers are capped at two years, meaning that the risk of non-renewal and having to start afresh is salient in the minds of a corporate Janissary. Thus, buying expensive machines on which returns would take a few years to materialize, or paying for the education and training of apprentices, are all unattractive options despite their importance to technological progress within the organization.
Second, from the 1990s onwards, GCC governments have gradually been imposing nationalization policies on the private sector: or, in other words, implementing quotas to facilitate the hiring of GCC citizens. These regulations made migrant workers fearful that competent citizens could replace them. For this reason, knowledge transfer from high-skilled workers to the rest of the company—a critical element of innovation—was actively impeded by migrant workers. This can be as simple as ostensibly doing a bad job at training colleagues in skills that make the migrant worker distinctive and hence valuable.
Any organization with narrow knowledge silos is almost certainly doomed to low levels of innovation. This, along with short-term thinking, combined to generate poor innovation performance in the GCC private sector, regardless of the indicator (percentage of gross domestic product allocated to research and development, numbers of engineers and scientists per capita, scientific papers published per capita, patents per capita, and so on).
In tandem with these developments, GCC governments have also been gradually addressing the power asymmetry between GCC employers and migrant workers. Policies include the ability of the latter to change sponsors unilaterally and with minimal notice, and in the case of Bahrain, workers are even able to self-sponsor. Saudi Arabia and the UAE offer talented migrant workers the opportunity to apply for permanent residency, while the latter has opened the path to naturalized citizenship, both of which make it easier for a migrant worker to bring their family with them and to plan a long-term future. As a result, the corporate Janissary system is slowly becoming untenable.
What Will Follow Corporate Janissaries?
In the wake of COVID-19, hiring corporate Janissaries has become harder in 2021. The outlook for oil prices is grim, accentuating the need for a new organizational setup that delivers innovation. GCC governments continue to make it administratively and financially more difficult to hire migrant workers, with the scope of nationalization policies continually expanding. International travel has become inconvenient at best and literally impossible in many situations.
As a result, GCC family companies seeking to grow and innovate must start hiring citizens, and giving them important positions. The competitive landscape means that the traditional option of a small business featuring only family members is becoming decreasing viable. Companies have to work out how to hire compatriots from outside the family circle and create an environment of mutual trust.
Fortunately, GCC family businesses do not need to make any earth-shattering discoveries in corporate governance. Companies in advanced economies have readymade blueprints based on five centuries of gradual advancement in the science of business administration. Naturally, part of the traditional affinity for employing kinspeople is due to weaknesses in the legal system, but GCC governments have been aggressively reforming commercial and labor laws to support the emergence of Western-style corporate entities.
What the family businesses do need to work on without government support is their culture. They need to let go of the patriarchal mindset that sees the business managed as an extension of the household, where authority ultimately resides in one person. The government is not responsible for—nor is it capable of—explaining to businesses why it is important to have sound oversight in business, why there need to be checks and balances, why flat hierarchies can engender teamwork, why employee performance improves when management behaves in a transparent manner, and so on. These are lessons that family businesses need to work out for themselves to break out of the cycle of low productivity and growth that they have been locked in for decades.
Ultimately, these transformations will be positive. The Janissary systems—both the political/military variant and the corporate one—are primitive and exploitative. They are better than the family and friends model of running an organization, but worse than virtually every alternative that has evolved over the last three centuries and since the start of the industrial revolution. GCC businesses must heed the words of the American architect Buckminster Fuller: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”
Omar Al-Ubaydli is an affiliated professor of economics at George Mason University and an affiliated senior research fellow at the Mercatus Center. He has published numerous research articles on political economy, including on the economics of the Middle East. On Twitter: @omareconomics.Read More
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