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Labor market policies and FDI policy liberalization do not exhibit thesame pattern across GCC countries. For instance, according to datafrom the Fraser Institute, FDI policy liberalization tends to go hand inhand with labor market deregulation in Bahrain and Oman. This is notnecessarily the case for UAE, however. This paper develops a politicaleconomy model based on a common agency model of lobbying(Grossman and Helpman, 1994) and addresses these policy developmentsin GCC countries. It analyzes the setting of a reform towardsderegulating labor markets (ease of hiring and firing rules) as apolitical compromise pressured by the political influence of amultinational firm and national citizens. Adapting the commonagency model of lobbying to an autocratic setting, we show that groups’influence is not distortive for a specific number of national citizens. Our political economy framework also suggests that the sponsorshipsystem and its amendment helps explain the different patterns ofregulation across GCC countries.
