Labour migration to the Gulf Cooperation Council (GCC) countries has been occurring forseveral decades. Most of the GCC countries regulate this process through the Kafala System, alegal regime through which individuals and companies can sponsor foreigners with whom theyhave concluded an employment contract. But why do these countries bring millions of foreignersto their lands and what rights does the Kafala System guarantee them? Are there any negativeeconomic and political consequences that result from the way that the Kafala System has beenconceived in the GCC countries? If so, how can this system be reformed so that it produces moredesirable economic and political outcomes? This thesis explores these questions in the contextof the Kafala System in Saudi Arabia. It uses a New Institutional Economics (NIE) approach tounderstand the political, economic, and historical context within which the Kafala System arose,positing that the design of the system reflects a desire to promote economic growth and improvepolitical stability while remaining rooted in the Islamic identity of Saudi Arabia. It further showsthat for a long time, the Kafala System was successful in furthering these objectives. However, ithas lately become prone to producing suboptimal outcomes. Foreign direct investment in SaudiArabia has gone down, remittance outflows as a percentage of GDP have increased, skilled andhighly skilled workers are leaving the kingdom, and even Saudi Arabia’s political stability has beenreduced. Given all of these problems, the thesis uses Path Dependence (PD) theory to argue thatthe only reason that the Kafala System continues to be in place is that it has become a path-­‐dependent institution that is resistant to change. This took place in three steps: (1) the initial setof choices that created the Kafala System were informed by important economic and politicalconsiderations as well as an affirmation of the Kingdom’s commitment to tie all legal institutionsto an Islamic source, (2) the Kafala System successfully helped Saudi Arabia achieve rapideconomic growth and increased political stability, outcomes which served as a positive feedbackeffect, and (3) the continued use of the Kafala System has increased switching costs because oflearning effects, coordination effects, and adaptive expectations. The thesis then argues that inorder to successfully reform this system, it is important in the first instance to justify proposedchanges in light of Islamic teachings, since this will improve how receptive Saudi society is tothem. At the same time, it is also necessary to show that changes in the international investmentclimate and the transition to a global information economy constitute a ‘critical juncture’ duringwhich the problem of switching costs can be overcome and far-­‐reaching reforms can besuccessful. Of course, it goes without saying that reforms that increase protections for the rightsof workers would also align Saudi Arabia’s domestic law with its international treaty obligations.