Foreign Labor and Dutch Disease: Evidence from GCC economies

This study provides evidence that foreign workers in the Gulf Cooperation Council (GCC) economies and oil prices are part of a self-stabilizing cycle. We develop a Dutch disease model to illustrate that international migration can mitigate exposure to resource windfalls by limiting the contraction of the non-energy tradable sector. This effect holds even when accounting for remittance outflows. Estimating a structural VAR model, we show that when oil and gas prices increase by nearly one-third, 460,000 immigrants are drawn to the GCC over the next five years. By alleviating upward pressure on labor costs, these migration inflows help sustain the non-energy tradable sector and support economic resilience to energy market volatility. This identified mechanism becomes increasingly crucial as evolving energy market conditions and domestic transitions compound vulnerability to external shocks. In response to a permanent inflow of one migrant per 1,000 inhabitants, which is equivalent to 58,000 migrants arriving annually in the region, per capita non-energy GDP grows by US$91 in the long run.