Headline: MoE, MoF sing different tunes: Gulf Today

Quote:

CONSUMER Protection Society expert Hassan Marae Al Kathiri has rejected justifications of the dairy and juice producers' group over hike of prices by 08- 12 per cent.
...

Kathiri lauded the attitude taken by the Ministry of Economy against the price-hike, indicating that he supports subsidy of the local industry by the government, indicating that such groups should assist them to solve their problems and remove impediments in their way in order to serve consumer and not to raise prices in unjustified manner.

"Any firm which thinks of price-hike should first contact the competent authorities," he added, indicating that "the consumers and the competent authorities do not accept sudden price-hike and surfacing of lobbying that monopolise some commodities."
...
Meanwhile, sources of Ministry of Finance and Industry, considered hike of milk prices as a commercial issue that the ministry has nothing to do with it. But the Ministry of Economy warned about the monopoly alliance to raise products of the dairy companies, indicating "It is a clear violation of the consumer protection law."
...
Mohammed Mousa Al Jassim, head of the consumer protection society called for cancelling all the trade agencies which monopolise food items nationwide, adding that the trade agencies bear the names of UAE nationals, but actually wielded by foreigners.

Price ceilings and product quality

A day after saying the UAE Dairy and Juices Association was not involved in the recent decision of producers to hike prices, its general manager is now saying that if the Ministry of the Economy bans the price increases then quality will suffer:

The Ministry of Economy's decision to restrict price increases for diary products will force firms to compromise on quality in order to reduce costs, the Chairman of the UAE Dairy and Juices Association has warned.

Dr Ahmad Al Tijani said the ministry can stabilise prices by subsidising dairy products instead of prohibiting a price increase.

Economic theory tells us that government imposed price ceilings have different effects depending on whether the market is monopolized or competitive.

Consider first the case where quality cannot be varied, only quantity. (Alternatively, think of this as the case where the government monitors quality and sets the price ceiling accordingly.) In this case, an increase in costs will push up the competitive market price. If the government freezes price, then producers will cut production and a shortage arises. Monopoly prices also increase when costs increase. A price freeze, however, will in this case actually cause the monopolist to choose to expand output for a cost increase that is not too large.

If quality can be varied and the government does not monitor quality, then market forces can pretty much undo the effect a price ceiling; this is true whether markets are competitive or monopolized. I say "pretty much undo" because exact undoing can only be achieved when the one "quality" of the product that is not monitored is the size of the package. If size of the package is still monitored then firms respond to price ceilings by changing other characteristics of the product and the effect of the ceiling is not completely undone.

Cartels are one means of monopolizing a market. In a price-fixing cartel members agree on price. The agreed upon price acts like a price floor and creates excess supply. Members of the cartel then compete with each other for sales by increasing quality. In general, consumers view the quality to be too high in the sense that the premium in quality over the competitive level is not justified by the price hike.

The bottomline? If a trade association organizes itself as a cartel, then a cost increase together with a government imposed price freeze will have the following result. The cost increases will cause each of the producers to reduce quantity. Excess supply will shrink or disappear, dissipating the excessive competition in quality. Quality will fall towards the competitive level; that is, a desirable fall in quality.

Reuters reports:

DUBAI, March 26 (Reuters) - Privately held Dubai developer Damac Properties called on Monday for the Dubai government to help curb soaring construction costs by easing restrictions on foreign contractors and encourage more competition.

Construction costs in Dubai, the Gulf's international commercial hub, have doubled in the last four years as demand for building materials has outpaced supply and contracting costs have risen, Damac Chairman Hussain Sajwani said.

"There is a lot the government can do about this," Sajwani told the Reuters Middle East Investment Summit on Monday. It could cut the time it takes contractors to get a licence, which runs as much as a year, and encourage more foreign contractors to work in the emirate, he added.
...
Gulf Arab governments have been investing windfall oil revenues in developing tourism and infrastructure projects across the Gulf, driving demand for everything from cranes to cement.

... Sajwani said the government must ease restrictions on foreign contractors, or construction costs would continue to rise 15-25 percent annually during the next several years.
...
"Instead of a 25 percent margin, contractors' margins could go back to 10 percent if this [entry of new construction firms] happens," Sajwani said. "The government should encourage the world's contractors to come to Dubai."

Relaxation of government-created barriers to entry in other products -- from juice to nuts -- would curb the demand-driven inflation the UAE is experiencing. With fewer restrictions on entry of new competitors windfall profits prices would more quickly evaporate as prices returned to normal.

Dairy and juice firms warned over pricing plans :: Gulf News

Gulf News reports:

Abu Dhabi: The Ministry of Economy yesterday warned major dairy and fruit juice companies that unless they retract their price hike demands they will face tough action. "Legal action will be taken against companies which fail to abide by the current prices in accordance with article 18 of the Federal Consumer Protection Law No 24/2006," a statement issued by the Consumer Protection Department said.

The move came after a number of major dairy and fruit juice companies have demanded price increases of up to 33 per cent from next month. The statement dismissed the monopolistic practices as "harmful to consumers and the national economy" and said monopoly was ensured through lobbying and implicit agreements among dairy and juice products companies.

The statement named six companies, which illegally sought to hike prices: Al Marai Company, Al Ain Dairy Company, Al Rawabi Dairy, Mohamed Abdullah Al Othman Trading Corporation and Gulf Dairy and Safa Company.
...
Dr Ahmad Al Tijani, general manager for the Al Rawabi Dairy Company and chairman of the UAE Dairy and Juices Association, said the association did not take a decision to increase the prices. "It was a decision taken by individual companies but not at the association's level," he said.

It is good to see the government intervene in monopolistic practices. While the decision to increase prices was not an association decision, I do have a concern that the individual companies became accustomed to pricing agreements because of their experience in the association.

UAE strives to rationalise water consumption patterns

Gulf News has the story:

The UAE, which has one of the highest per capita rates of water consumption in the world, is seeking to rationalise its consumption patterns according to Mohammad Saeed Al Kindy, minister of environment and water.

The country's increase in water consumption is largely the result of massive urban development and the unprecedented population growth rates.

In addition, scarce rainfall which does not exceed 115 million litres per annum, and the absence of permanent surface water add to the problem.

In addition, groundwater is being overexploited.

The UAE is a rich country and high per capita rates of water consumption go along with larger incomes. But they also go along with prices for water which are below cost. The economist recommends raising the price -- substantially. And installing water meters where necessary in order to measure usage and bill for it.

Much of the water usage goes to greening the desert environment. And much of that is done by the state. Will this use also be rationalized?

Green Community leaseholders in dispute with the developer

Gulf News

More than 300 concerned Green Community residents met last week to discuss the fee hike, which will rise as much as 300 per cent for the owners of these [long-term] leasehold units within Dubai Investments Park. Fees for an owner of a three-bedroom apartment, for example, will rise from Dh10,800 to Dh30,000 this year. "People are angry and upset and wanting answers," one resident said over what has turned into a four-month ordeal. "If we get answers and the truth, we will pay it. We want our community to be number one, but we want to be paying for something that is justified."

A statement by Property Investments to Gulf News said the management fees have in the past been subsidised. "In 2005 and 2006, Properties Investment collected back from its tenants only 38 per cent and 39 per cent, respectively, of the actual costs that it incurred in maintaining and managing Green Community. For 2007, the Company is seeking to collect 76 per cent of anticipated cost, still not the 100 per cent recovery that it is contractually entitled to demand."
...
The latest skirmish follows an effort by residents to have Properties Investments provide audited annual expenses at the end of each year and also a detailed budget of the next year's expenses. Both are guaranteed in the lease contract and were not shown in the last three years, residents say. Property Investments, meanwhile, said they have "disclosed to tenants through various means full management accounts for the three years in question."

I was going provide an analysis, but this comment attached to the online version of the article says it all:

Management fees are a common concept in planned unit developments (PUDs). It also very common for the owners or tenants to select a management committe who appoints the maintenance company. The residents have the right to ask why and decide for themselves the choice of management company and the services. Normally the selection of maintenance company is done by management through a bidding process. If these rules are not set right from day one, the success of the real estate ownership and assets can be put at stake. It is the owners and tenants that should be primarily protected for the real estate ownership model to be successful.
A. Ghaffar
Robbinsville,USA

In other words, if other leaseholds selling in Dubai suffer the same flaw, buyers should beware. Ultimately it is Dubai's interest to make sure leaseholders are protected in order to maintain confidence in the real estate market. Heard the expression "die Katze im Sack kaufen"? Don't buy it. It applies a fortiori to label owners meetings "illegal gatherings" and accuse organizers of engaging in "criminal activity." Is it defamation to say "I don't trust your books"?

UPDATE. Found at 10:15 pm: Properties Investment responds to questions by Gulf News on Green Community service charge increase. Choice quote:

the self-styled “Democratically Elected Green Community Residents Committee” that has put itself forward for the role seems intent on conducting itself with disregard to the law and culture of the country in which we live.

UPDATE (see CORRECTION below): Property Investments is a UK-based company. See, Who Needs Civil Society when Profits are to be Made?:

One might argue superficially that the clash between residents trying to organize and protest and the profit interests of the company can be seen as a cultural clash between mostly “western” residents with a sense of civil society (that does not exist in the UAE) and Arabian authoritarian corporate culture. The only problem with that scenario is that the company at hand, Property Investments, Ltd., is a UK based corporation!

So there you have it. The company is accusing the leaseholders of not conforming to the culture of the country where they have chosen to live. But the company itself is UK based. It sounds as if it is the company that is abusing the culture of the country for its own profit.

CORRECTION: I'll let my words stand above as an object lesson, but the Green Community website has this to say about the developers,

Green Community is a quality development by Properties Investment LLC, a joint venture company between Union Properties PJSC and Dubai Investments PJSC. Dubai Investments PJSC was founded in 1995 with the aim of promoting business opportunities, principally in the UAE. ... Established in 1987, Union Properties was floated as a public company in 1993.

Here's what Union Properties has to say about itself. It in turn is part of Emirates Bank Group; that group includes Emirates Bank which is celebrating its 30th Annniversary:

Thirty years ago the late HH Sheikh Rashed bin Saeed Al Maktoum issued a decree establishing the Union Bank of the Middle East. And when later the Government of Dubai decided to consolidate its banking sector by merging Union Bank of the Middle East, then Dubai Bank LTD and Emirates National Bank which later become known as Emirates Bank. Since then it has been a non stop drive from one success story to the next. In 1991 the take over of Middle East Bank helped propel Emirates Bank to widen its scope by becoming a leader in the retail banking sector.

Sharjah bans men working in women's lingerie :: Gulf News

Quote:

Men are not allowed to sell lingerie in Sharjah and shops have been advised that only women should be hired for this sales position, the Sharjah Economic Development Department said. It has already shut down 10 shops for flouting the rule.
...
The ruling follows similar laws in Saudi Arabia and Kuwait. The Kingdom's labour ministry had said earlier that it will help create jobs for women.
...
Al Mahmoud added that the rule must be strictly adhered to, because it is a matter of morals which should be followed in our traditional society. "We will put an awareness plan into action and will intensify the campaign against male employees from selling women's garments," he said.

[GN supplies this image.]

The sands are shifting on the matter of morals. Traditionally, women could not work in shops. Women in Saudi Arabia had to fight for the right to buy lingerie from saleswomen -- the moral police barred women from working in shops.

It is not clear whether women were barred from working in shops in the UAE. If they were not, then the inference an economist would make is that shoppers either preferred to be served by men (unlikely) or that they were not willing to pay the higher prices shops would have to charge to cover the higher wages women receive.

I observe that in Dubai there are lingerie shops that where the sales staff is 100% female and others where it is 100% male. Customers have a choice between them. In the US, I don't think I've ever seen a male salesperson selling lingerie to women. It would be considered rather kinky.

Shedding light on the Gulf's middle class :: McKinsey Quarterly

Zogby has done a poll of middle class nationals in three GCC states: Saudi Arabia, Bahrain and the UAE. Here's the whole thing.

Some excerpts:

In each of the states we surveyed, about two-thirds of the respondents described themselves as members of the middle class. Experi-ence shows that self-selection tends to inflate its size, since many people in the upper and lower tiers are prone to say that they are middle class. Indeed, the salary range of those so describing themselves covers a wide range: from 5,000 dirham (about $1,350) to 30,000 dirham a month in the UAE, for example, with the mean in the range of 10,000 dirham to 20,000 dirham.
...
They were remarkably forthcoming, and their answers enabled us to start defining the characteristics of the region’s social classes. Whether employed in the public or private sectors, those who described themselves as middle class were largely salaried employees. Except for people in the military, most would fit the Western description of white-collar workers: professionals, teachers, health care and office workers, and salespeople, for example.
...
Looking to the future, the middle class in each state shows confidence, but Saudis are nearly twice as likely as Bahrainis or Emiratis to expect that they will be better off in the next four years. Indeed, respondents in Bahrain and the UAE express a much higher degree of uncertainty across social classes: for instance, 61 percent and 34 percent of middle-class respondents in the UAE and Bahrain, respectively, say that they aren’t sure if they will be better off four years from now (Exhibit 3).

She loves me, she loves me not, she loves me, she loves me not

That would be one way to find out.

The sage Undercover Economist gives helpful advice to the loveworn.

Undercover Economist predicts she does not love you -- that's because he assumes it's likely she can read you like a book. But by using his technique you may be able to save a friendship.

Something is happening at UAE community blog

A community is forming.

Take a look at these two posts and the thoughtful comments on them:

1. My hopeless vision. Some quotes:

Today's Dubai has become an inverted mirror-image. We seek everything new. We forget our roots. We embrace things we don't understand just because others are. We are extremely competitive, especially when it doesn't matter. We don't care. We would rather die than be caught outdoors instead of in-malls.
...
I relate to this post so much, I am constantly home sick in my own country. We have changed and "developed" so fast.
...
In the US, I used to live near a mosque where many muslims from many parts of the world come to pray and socialize in. I used to have friends from different nationalities and the same goes for my wife. I saw there Muslims who are proud to be muslims and they communicate with others as muslims. Unlike here in UAE, we are becoming like native indians in America. I'm really homesick.

2. Dr Al Suwaidi interview. A sampling of the comments:

These are things that are said among the elite in the UAE, but I have never seen published. Kudos to him and the ECSSR.
...
I sympathize with people feeling the loss of their culture. I don't think nationalism is a good answer, though. Much better are targeted initiatives to foster the missing culture in ways that affect the cultural ocean we swim in, combined with an educational system that teaches people how to think for themselves and perceive what is of value. Then people won't be caught as helplessly when meaning dissipates. They can look around them and chart a course to things of value, some of which will surely involve continuity with their grand-parents, old culture, ecology, and mother tongue.
...
Foreigners need to understand that Emiratis have had to adjust with enormous cultural and social change over the space of a couple generations, often unwillingly so. It's a society in constant transition and the focus is inevitably shifting toward attempting to safeguard their identity.

See also these two hard-hitting posts, Oh my, another traffic jam! and Life's a beach.

Delightfully tacky yet unrefined

Quote:

The opening of Hooters in Israel is part of the chain's global expansion. Privately held Hooters said it planned to open 17 restaurants in Colombia, Dubai, Guam, New Zealand and India in the next two years.

Which of these is not like the others? Dubai. It's not a country, it's a concept. Hooters would fit right in.

Thanks to Fahad for the tip.

UPDATE: See his thoughtful post at Mahmood's Den.

What we are reading: March 21st 2007

>> Tribalism 'an obstacle to real democracy in UAE'; Who are we, that's the question

Dr Al Suwaidi - who is also the political adviser to General Shaikh Mohammad Bin Zayed Al Nahyan, Abu Dhabi Crown Prince and Deputy Supreme Commander of the UAE Armed Forces - said if the election process is to be expanded, "it will perhaps become even more tribal and will take the UAE back at least 50 years."

Tribalism hinders the growth of a civic society, he said, adding that "in the UAE, there are no real civic society organisations. For example, where is the Human Rights Society? It has done nothing since its creation last year. It is just a name, a banner."

The media is in a similar sorry state, said Dr Al Suwaidi. "We have to ask if we really have an Emirati media or just some kind of media in the emirates. It [the media] suffers from self censorship. Everybody talks about the freedom of expression but they never exercise it."

>> Banks warned against giving big unsecured loans

Dubai: The Chief of Dubai Police has warned five banks they will be named and shamed if they do not stop giving loans without guarantees and through big enticements, as many people have got into trouble for failing to pay off their debts.
...
...55.6 per cent of youngsters in jail were involved in bounced cheque cases, 40.3 per cent of them were university graduates, while 41.6 per cent of them were jailed for failing to pay back personal loans which they took for various reasons such as to get married, buy a car, or to buy shares. More than 60 per cent of them had been jailed for the first time and did not previously have a criminal record.

Dr Murad said personal loans in the UAE amounted to Dh160 billion last year, while loans increased by 63.9 per cent from 2005 to 2006.

End the juice and dairy cartel

The UAE Dairy and Juice Association has long used its influence (wasta) to cartelize the market. As a result, prices are higher than they otherwise would be.

At the latest meeting of the cartel they decided to raise prices. The Khaleej Times reports:

ABU DHABI — Prices of canned or fresh juices, milk, yogurt and other dairy products will be hiked by up to 28 per cent this summer.

The new prices will come into effect on April 17 [hmmm - not the summer, but it might feel like it]. A number of dairy companies have started informing supermarkets and groceries about their decision.
...
“The cost of production as well as distribution has been rising steadily over the past few years and we tried our best to curb it as much as we could,” said a trader dealing in dairy products, justifying the move. He added that since dairy producers’ objective is to provide high quality products to their customers, they have no option but to increase the prices.

Price increases themselves are not evidence of a cartel because prices will rise in a competitive market when costs of production increase. The evidence that there is a cartel attempting to control prices is the agreement on timing of the increases and on the uniformity of the prices increases for particular products. Yes, in competitive market you'd expect prices to increase at about the same time and for prices to resettle at a new uniform rate, but not in such an orderly fashion and certainly not by prior agreement.

It is another question whether the cartel is successful. As indicated in the link in the opening paragraph above, it has been successful in the past perhaps because its influence with the authorities has enabled it to control entry and discipline signatories to the association's price agreements.

In the last year the association has had difficulty enforcing agreements to increase prices both because individual members of the association did not want to abide by the agreement, and because ministries of the government actively opposed the price increases and/or withdrew their role in enforcing the agreements of the cartel.

It is not clear how the Ministry of the Economy will react to this latest agreement. The ministry rules on price increases in a large number of areas and recently has allowed price increases if it sees costs have increased. The more efficient way of making sure that prices are "justified" is to focus the ministry's efforts on creating competitive markets -- by eliminating government regulations which support cartels, exclusive dealerships and otherwise restrict entry of new firms, and by introducing a competitions policy that makes price agreements illegal.

Landlords find new ways to get around Abu Dhabi rent cap rule :: Gulf News

Quote:

Residents interviewed said they are not issued with tenancy contracts and so they cannot complain to the Rent Committee over illegal increases.
...
A. Abdul Qudoos, another resident, said people who have shared accommodation but have not signed contracts have no legal rights and have no where to complain to.

Abdul Qudoos said one of the many ploys employed by middlemen is to ask the tenant to vacate the flat because the contract is not renewable or the building is to be refurbished or demolished.

Another trick, he added, is that the landlord wants the building for his personal use. "After vacating all existing tenants, the landlords will rent these flats out to new tenants with a 50-100 per cent rent increase."
...
Our landlord has kept a notice near the lift announcing that the rent has been increased by 10%, and if anybody has objections, they have to vacate within seven days. All maintenance expenses should also be borne by the tenants.
R. Sabu
Abu Dhabi,UAE
...
I am living in a Bur Dubai apartment for the last seven years and the building always had parking facilities on a first come first basis. Last week, all the tenants received notice that they have to pay Dh 5,000 per year for reserved parking and it will no longer be on a first come first basis. This is very disappointing coming from such a reputed landlord.
Pete
Dubai,UAE

Holding rents below equilibrium levels creates a shortage. Landlords know there is a line of eager renters who have not been able to find accomodation. Thus they can shift costs to renters, charge for services previously provided without charge, and skimp on maintenance without fear of losing tenants. And find ways of harassing tenants to leave.

None of this would occur were rents free to adjust to their new equilibrium level.

If Abu Dhabi has become too expensive to live in then in a free market the adjustment takes place this way: Workers begin to leave pushing up salaries until a new equilibrium is established.

Price ceilings on healthy foods suggested

The Gulf News reports:

Healthy foods such as fruits and vegetables may soon be cheaper due to government efforts to control rising obesity in the society, experts said.

In the UAE, modifications to the Diet and Physical Activity Strategy (DIPAS) for Gulf countries include selling fruits and vegetables and other health foods at lower prices, and involving various government agencies and ministries.

Dr Huda Al Suwaidi, consultant in family medicine at the Health Ministry, told Gulf News that the initiative was important as unhealthy diet and lifestyle gave rise to many health problems in the region, including diabetes and cardiovascular disease.

She said the government would first seek voluntary participation from supermarkets.

"We might even get the Ministry of Finance to come up with legislation that would control the prices of vegetables and fruits, because it will be a way of getting people to eat more healthy food," she said.

She said the Health Ministry would lend its name in promoting supermarkets and cooperatives that take up the initiative voluntarily, as an incentive.

Introducing a price ceiling to lower the price of healthy foods would give consumers the incentive to seek to consume more healthy food, but it will also give suppliers less incentive to provide healthy foods. Consumers will end up consuming less, not more healthy food -- exactly the opposite of the good intentions of the Health Ministry.

If the ministry wants to spur consumption of healthy food it needs to either convince consumers to buy more at given prices, or subsidize healthy food in the marketplace.

The Gulf News article continues:

A Diet and Physical Activity Strategy also calls on the UAE to conduct a survey on social, demographical, economic and psychological factors influencing health in the UAE, which will be part of a global WHO and UN survey.

The survey could begin by the end of the year and will collect information on all age groups in the population, including their body mass index, blood sugar levels and cholesterol levels, as well as lifestyle.

About 70 per cent of men above 30 in the UAE are overweight and 30 per cent obese, while 78 per cent of women in the same age group are overweight and 50 per cent obese, according to 2005 WHO statistics. More than 20 per cent of schoolchildren aged 12 to 16 in the UAE are overweight, while 12 per cent are already obese.

Let's be honest and say what the article does not say directly. The population described here is not the UAE population, but the 20 percent who are nationals. A commenter at UAE community blog has marshalled the statistics and made this point very well. See also this excellent comment.

Because the government also provides health care to nationals it may well be that the government will save money by subsidizing health foods. Except of course that it would subsidizing healthy foods for the entire population of the UAE. Perhaps the government should stop subsidizing bad health habits -- which is what free health care does. Turn the savings over to nationals as a lump sum and let them decide what is in their best interest. It may be that it is in their best interest to take care of themselves.

The timing of the Dr Al Suwaidi's remarks are ironic given the recent announcement of an expansion in our unhealthy eating options in the UAE. On Thursday we learned a Krispy Kreme outlet opens tomorrow :

US doughnut and coffee chain Krispy Kreme will open its first UAE outlet in the Deira City Centre shopping mall tomorrow, the first of seven stores planned for the country this year. The North-Carolina-based food company, which is listed on the New York Stock Exchange, aims to roll out 100 stores throughout the Middle East in the next five years.

Unfamiliar with Krispy Kreme? -- here's some background. Nothing works like the profit motive.

The 52g original Krispy Kreme donut provides 10g of sugar and 200 calories (100 from fat). (For more on nutrition go here.)

Mmmm, donuts. If there is a Donuts Anonymous, I need to join.

Small investors pinched - by Emaar or by themselves?

Quote (my emphasis):

With many investors owing interest on their loans taken out to buy Emaar's shares, a rewarding cash dividend was their only hope. "About 20 to 60 per cent of any given portfolio is composed of Emaar, and the shares are mostly purchased through bank financing; hence this will result in pressuring the share price in the short term, as some investors might seek partial liquidation to settle the banks' dues,” said Nabil Farhat, managing director of Al Fajr Securities.
...
The property firm's annual general meeting descended into chaos after chairman Mohammad Al Abbar told shareholders they would only receive 20 per cent of the share’s par value of Dh1 as dividend for 2006, down from a cash dividend of 40 fils a share in 2005.
...
Al Abbar said the company thinks it is more important to invest in the long-term future of the company. "I criticise most of the companies in other Arab countries, because they only work for today," he said, adding that Emaar needs to have adequate capital to seize opportunities in countries such as India.

Matein Khalid provides an excellent take on the GCC stock markets.

Let's talk about...

... a little less conversation.

At a crowded restaurant why is talk cheap? David Friedman wants to know.

I've wondered the same thing.

A little less conversation
Come on baby I'm tired of talking
Grab your coat and let's start walking
Come on, come on Come on, come on Come on, come on
Don't procrastinate, don't articulate

Surge of demolitions in Abu Dhabi

A commenter (Macthompson) wondered, "Do you have a mathematical model to share with your readers which can explain the business model behind decisions to knock down thirty year old buildings housing rent-capped tenants?"

Here's the story he's referring to: New law triggers demolition surge. Key extract:

[A] source at the municipality explained that many of these buildings do not need maintenance. "The problem is that since the rent cap law was issued, we receive many claims for general maintenance work, a permit that entitles the landlord to evacuate the building, hence avoiding the three-year term for leases... and offering the property without the seven per cent cap restriction," he said.

"The average number of monthly demolition applications was 5 to 10 [buildings] before, but in recent months it surged to 15, especially after the introduction of the new law," the source added. With an extreme shortage of affordable housing in the short-term, increasing the number of demolitions adds to an already compromising situation for residents. However, contractors insist the mechanism is based on a free market approach.

"Any landlord can put in a request ... if he has no financial commitment to the Shaikh Khalifa [rent control] Committee and given that he successfully evacuates the building from existing tenants," explained Mohammad Hussain, deputy general manager of Al Mansouri Contracting Company.

There's the answer to the question: if you own a rent controlled apartment you are allowed to demolish the building and replace it with a building that is not rent controlled. The difference in rents may be sufficient to induce owners to choose demolition and replacement. Based on the numbers above, it appears that this has increased the rate of demolition by about 100 percent over the rate prior to rent control. (It's not clear from the article, but it appears that "demolitions" includes knocking down buildings and substantial renovations short on knockdown.)

Why has government not controlled the rent on new apartments? Because it realizes that no new construction will be occur unless rents rise to a level adequate to yield a market rate of return on investment. And we know new construction is desirable because we know the demand for housing has grown.

Why has the government allowed knockdown-and-replacement? Perhaps because it realizes that one alternative to knockdown is for the owner is to stop maintaining his building.

(The story reveals that another way around the rent control is permitted: obtain a permit for general maintenance, and evict the tenants.)

A note to end on:

Rent control appears to be the most efficient technique presently known to destroy a city--except for bombing.

-Swedish economist Assar Lindbeck

Were those 2005 pay raises implemented?

Flashback to April 2005:

Big salary increase for federal employees

The salary increase for UAE nationals and expatriates announced by President His Highness Shaikh Khalifa Bin Zayed Al Nahyan yesterday was unanimously welcomed by residents.
...
Effective May 1, UAE nationals working in federal government institutions will receive a 25 per cent increase on their basic salary, and non-UAE nationals a 15 per cent rise.I am hearing anecdotal reports these were never implemented for nationals or nonnationals.

Echoing these informal reports are reports in the news such as, Doctors resent delay in pay rise and a report that until just recently police salaries had been static for a number of years.

My question is: Were the announced salary increases of April 2005 ever enacted?

Noted

*Miserable week as Dh18b wiped off UAE stocks

*Halliburton plans to hire 13,000 workers amid move to Dubai

*Most Saudi terror suspects disown deviant thoughts

*Bahrain: Trouble brewing over stage show

*Jebel Hafeet Mountain Road - greatest driving road in the world

Secret Dubai wins major blogging award

It's all here.

My congratulations to Secret Dubai.

Whoever doesn't understand Macro raise your hand

Mahalanobis: "Me: do any economists understand macroeconomics?"

Who said it?

I believe it was George Stigler who said, "I don't know a thing about macroeconomics and I thank God for it every day."

Those are my sentiments.

Is this your economy? :: Gulf News

Gulf News bravely reports:

breakneck growth, expanding wealth and "lagging" internal auditing controls make them prone to factors which brought down Enron and Barings Bank.
...
"There is general consent that fraud is acceptable and it's okay to pay commission on every deal. It's part of doing business here and is a mindset we must change."
...
A culture or regime that does not tolerate mistakes is very dangerous.

The environment that's being described?: Dubai.

There's another factor that's not mentioned. Banks' nonperforming loans are routinely covered. That only encourages banks to make more risky loans. That's a disaster in the making.

State enterprise in Iraq :: Financial Times

Interesting report on the ups and downs of getting the large industrial zones in Iraq working again. The story in the Financial Times is available here from the Gulf News.

New Sri Lankan law to affect migrant workers :: Khaleej Times

Khaleej Times opens its story with this paragraph (my emphasis):

Sri Lanka’s new legislation restricting mothers with children below five years from taking up low-end jobs overseas, will adversely affect migrant workers in the UAE where a large number of Sri Lankan women are employed as housemaids and in garment factories.

Then it further reports:

Sri Lankan Ambassador to the UAE Nabawi Junaid said the legislation approved by the cabinet early this month and to be enforced soon will restrict the number of women, particularly mothers of young children, from seeking overseas employment.
...
Further, he noted that “The new legislation is undoubtedly in the interest of mothers with little children and will eliminate the social problems facing the Sri Lankan society with large numbers of women taking low-end jobs as domestic maids and tailors in garment factories in the Middle East compelled to leave their children in the custody of husbands, parents or relatives.”

Statistics released by the Sri Lankan government show that children of many mothers who take up overseas jobs to support their families have in fact become helpless and vulnerable to abuses, and suffer from malnutrition and lack of proper healthcare.

How could the introduction of the legislation adversely affect workers who are already in the UAE (as claimed in the first paragraph of the KT)? It can't. It can only benefit them by constricting the supply of labor inflow and thereby driving up wages or improving working conditions (at the end of your contract in the UAE can negotiate better terms for staying).

Will the law benefit the women and families whom the government of Sri Lanka will now compel to stay home? What is driving the women to leave their children is the lack of economic opportunity in Sri Lanka. The opportunities in the Middle East are not compelling them to leave. What the government is suggesting is that the families are consistently underestimating the cost of leaving in terms of the consequences for children. That's an empirical question that has not been answered. Indeed, the government may have the cause and effect reversed -- in which case the children will be made worse off.

There are other possible unintended consequences of the legislation which would be adverse. First, fertility may increase, not decrease. Second, there will develop a black market -- women will still want to take up positions overseas but they have to do so out of sight of the government, including the protections provided by the Sri Lankan consulates. As a result, they will be more vulnerable to unscrupulous recruiters and employers.

Dear Halliburton, Why Dubai? :: Houston Chronicle

The Houston Chronicle:

Texas is the can-do state. But there's no denying that Dubai has become the can-do sheikdom and a potent rival to Houston's supremacy as the center of the oil business.
The move of Halliburton's corporate base from Houston to Dubai is a stark example of the industry's shift in power from North America. The company is moving closer to the oil fields of the Middle East and Africa and its big national oil firms that control financing, exploration and production.

"The business is changing," said Amy Myers Jaffe, a fellow for energy studies at the James A. Baker III Institute for Public Policy at Rice University. "Will Houston remain the center of the energy business? I don't know."

Dubai's leaders decided decades ago to invest their limited oil revenues into building roads, airports and research parks to transform the city-state into a regional business hub. The strategy has been a runaway success, leading hundreds of international companies to relocate. [Aside: Don't forget the huge Jebel Ali port that came earlier than these other projects.]
...
By moving to Dubai, Halliburton's senior management is following the lead of Vinson & Elkins, a Houston-based international firm that opened an office in the city more than three years ago after considering a number of locales in the region.

The firm wanted a Dubai base from which to pursue energy-related projects, said Jeffrey Eldredge, who helped open the office.

"Nobody lives in compounds, people feel safe here," said Eldredge. "What's happening here is pretty stunning. Many of our clients are setting up regional headquarters in Dubai, and their lawyers and financial types are going to the region, so it's convenient to be there and we need to be there."

The Islam practiced in Dubai is generally tolerant and open to outsiders, and there are few restrictions on social behavior, which has made the city a magnet for young professionals from other Arab countries who want to pursue their careers without having to live by a strict Islamic code.

Women, whose choices are extremely limited in other parts of the Arab world, work in a wide variety of fields in Dubai. While many women wear traditional Muslim head scarves and head coverings, a large number also dress Western-style.
...
But it is not only a luxurious lifestyle that has drawn hundreds of businesses, including large media companies and computer software giants. It also is the low taxes, the inexpensive labor costs, and the fact that the tensions roiling much of the Middle East are absent.

The city also offers state-of-the-art communications and transportation links close to the major Persian Gulf oil fields, but largely without the religious and political strife associated with the region.

And the political risk is small.

Headline: Demand for domestic workers from Philippines has dropped

Actually, it's not that UAE demand for workers from the Phillipines that has changed. It's that the wage has been increased causing employers to reduce quantity of Filipinas they wish to employ.

Indeed, as reported in Gulf News (with my emphasis):

Manal from Al Dawli labour agency in Sharjah said since the decision was taken [by the government of the Philippines]to double domestic helpers' salaries there has been a decline in the number of requests of housemaids from the Philippines.

"Actually there have been no applications at all for Filipina housemaids since the government there decided to double the minimum salary for domestic helpers working abroad," she said.

An official from Ajman Naturalisation and Residency Department said since the enforcement of the rule, there have been no new applications. "We have only the old applications but no new one," he said. According to the new law enforced by Manila government domestic helpers with an old contract will have the same salary till it is renewed.
...
She [Manal] said her agency had decided to recruit domestic helpers from other nationalities such as Indonesian, Ethiopian and Sri Lankan.

Marina from a recruitment agency in Dubai said: "It is surprising to see that many people here have stopped completely looking for domestic helpers from the Philippines," she said.

Perfectly elastic demand? Perhaps. Perfect substitutes? Perhaps. International labor market? For sure. Welcome to the UAE labor market. It's not at all surprising that if the Phillipines government does not allow Filipinas to enter contracts at less than double the going wage there will be no job offers for Filipinas.

And what about those Filipinas already working here in the low-wage sector? As quoted above, "According to the new law enforced by Manila government domestic helpers with an old contract will have the same salary till it is renewed." Expect a hue and cry as many of those workers are terminated rather than renewed.

Life as a low-wage worker in the UAE

Secret Dubai has gathered together several recent news stories on life for low-wage workers in the UAE. I particularly recommend the first three on housing, and the last about the company that vanquished inflation - by not giving a pay raise in 18 years. The housing stories show how economizing on housing happens whomever foots the bill.

Interesting cover story

Go magazine, Feb 2007:

MEDICAL TOURISM
SEND US YOUR WEAK
...
OPERATIONS
The intricacies of batch processing

I wonder how many nose jobs constitutes a batch?

Pol Pot and Saddam :: The Times

William Shawcross writes:

That long view seems to me to be the one that has to be applied to Iraq. I still believe the overthrow of Saddam Hussein was the correct thing to do — and it was something only the United States could have done. For all the horrors that extremist Sunnis and Shias are inflicting on each other today, the US rid the world of the Pol Pot of the Middle East. So long as the vile Saddam family regime remained in power there was no hope of progress in the region. There is still hope — if we do not abandon the Iraqi people.
...
The consequences of an American defeat in Iraq would be even worse than in IndoChina. As the al-Qaeda leader in Iraq, Musab al-Zarqawi, said before he was killed by a US air strike: “The shedding of Muslim blood is allowed in order to disrupt the greater evil of disrupting jihad.”

If Iraq collapses, such nihilist killing will spread far wider. As in Cambodia, bloody mass murder is the only alternative to what the US-led coalition is trying to achieve. Thanks to the sacrifice of young American and British soldiers, and to the courage of millions of ordinary Iraqis, the country can still have a better future — if we remain committed. Remember 1975.

Link via Cardinalpark at TigerHawk.

Who's to blame for paternalism?

Your culture may vary.

The case for infinite visas in the US case

Here it is.

Why not beat the US to the punch and adopt an infinite visa policy in the UAE for high-tech businesses?

What would be the objections?

Dubai: on the one hand and on the other :: Brad Setzer's Web Log

Some quotes (emphasis is mine):

The Gulf is not just flush with money – it is now filled with the bustle of loads of new activity.

I don’t buy all the hype coming out of the Gulf though: the arguments about diversification seem a bit overdone. The Gulf has diversified from pumping oil to pumping oil, refining more of the oil locally and using more of the region's gas to support a petrochemical business. All that makes a lot of sense, but it is still derivative of the core hydrocarbon business. And I am not sure that spending oil dollars on construction is real diversification. If the oil money dries up, so does the construction.

The common argument that the current boom in the Gulf is different than past booms because it isn't just based on a surge in government spending also strikes me as somewhat over-stated.
...
Moreover, massively negative real interest rates (Dubai's inflation is around 20%-- per Serhan Cevik of Morgan Stanley -- while nominal interest rates are around 5% due to the dollar peg) encourage lots of private investment. Some of that may not yield a positive economic return once financial conditions return to normal.

On the other hand, I am not so sure that diversification is quite as necessary as is often argued. It kind of depends if oil is going to stay around $60 or fall back to $20. If oil is around $60, some Gulf states have enough oil and gas relative to their native population that they really don’t need to diversify – not for a long time.

Setzer quotes Roach (my emphasis):

Based on industry sources, 26.8 million square feet of office space is expected to come on line in Dubai in 2007, alone -- more than six times the peak rate of completions in Pudong in 1999 and nearly equal to the total stock of 30 million square feet of office space in downtown Minneapolis. Based on current projections, another 42 million square feet should come on line in Dubai in 2008 -- the equivalent of adding the office space of a downtown San Francisco. There is one obvious and critically important difference between these two urban development projects: Pudong has an indigenous support base of 1.3 billion Chinese citizens. Dubai’s current population is 1.3 million. Throw in the entire native population of the UAE and the support base is still only around 4 million domestic citizens. That's right, a region with less than 0.5% the population of China is out-building the biggest construction boom in modern Chinese history.

Actually, the number of domestic citizens is around 2 million. The total population is 4 to 5 million. The difference between China and the UAE is that the UAE - seemingly - is prepared to admit as many people as are required to fill the buildings.

Thanks to Newmark's Door for the link.

Oxymoron?

Privatization of the Kibbutz.

Unemployment in the UAE

As reported in Gulf News, according to Frederic Sicre, executive director of Abraaj Capital,

"The GCC countries need to create 100 million jobs up to the year 2020 to sustain the current rate of unemployment of 15 per cent.

"Such rates have never been achieved before by any country."

Such definitions of unemployment have never been used to measure unemployment.

The fifteen percent includes those who are not actively looking for work because the wage is below the wage they are willing to accept. That group is not unemployed, they prefer not to work at the prevailing market wage. And the 15% also includes those who would not be looking for work except that the government pays more than it needs to to fill its requirements. The government could solve that part of the unemployment "problem" by reducing the wages it pays.

The evidence is right there in other news articles from the same day (today):

* Skills shortage threatens to stall oil and gas boom
* 25pc salary increase for UAE University national professors

That is, (1) there are jobs that are going begging and (2) the government pays more than market. Thus, natural questions to ask are: why don't young GCC residents train for work in the oil and gas sector, and should we be surprised that there are queues that form for government jobs (which distorts the unemployment numbers).

Economists refuse to stay within the lines: The causes of autism

Not long ago there was a car commercial showing a kindergarten classroom with the teacher saying "stay within the lines" as the children filled in their coloring sheets and staying within the lines. Except who was expressing his creativity and imagination. That was the truly productive one.

Economists - as much as they are accused of making accountants look alive by comparison - tend not to stay within the lines. Economics is an imperial social science and its practioners think they can apply its tools just about anywhere.

The latest example is found on the front page of Friday's Wall Street Journal ($ req.):

Prof. Waldman's willingness to hazard an opinion on a delicate matter of science reflects the growing ambition of economists -- and also their growing hubris, in the view of critics. Academic economists are increasingly venturing beyond their traditional stomping ground, a wanderlust that has produced some powerful results but also has raised concerns about whether they're sometimes going too far.

Ami Klin, director of the autism program at the Yale Child Study Center, says Prof. Waldman needlessly wounded families by advertising an unpublished paper that lacks support from clinical studies of actual children. "Whenever there is a fad in autism, what people unfortunately fail to see is how parents suffer," says Dr. Klin. "The moment you start to use economics to study the cause of autism, I think you've crossed a boundary."

Prof. Waldman, who thinks television restriction may have helped rescue his own son from autism, says many noneconomists don't understand the methods he used. His paper recommends that parents keep young children away from television until more rigorous studies can be done. "I've gotten a lot of nasty emails," he says. "But if people aren't following up on this, it's a crime."

Such debates are likely to grow as economists delve into issues in education, politics, history and even epidemiology. Prof. Waldman's use of precipitation illustrates one of the tools that has emboldened them: the instrumental variable, a statistical method that, by introducing some random or natural influence, helps economists sort out questions of cause and effect. Using the technique, they can create "natural experiments" that seek to approximate the rigor of randomized trials -- the traditional gold standard of medical research.
...
But as enthusiasm for the approach has grown, so too have questions. One concern: When economists use one variable as a proxy for another -- rainfall patterns instead of TV viewing, for example -- it's not always clear what the results actually measure. Also, the experiments on their own offer little insight into why one thing affects another.

"There's a saying that ignorance is bliss," says James Heckman, an economics professor at the University of Chicago who won a Nobel Prize in 2000 for his work on statistical methods. "I think that characterizes a lot of the enthusiasm for these instruments." Says MIT economist Jerry Hausman, "If your instruments aren't perfect, you could go seriously wrong."
...
In principle, the best way to figure out whether television triggers autism would be to do what medical researchers do: randomly select a group of susceptible babies at birth to refrain from television, then compare their autism rate to a similar control group that watched normal amounts of TV. If the abstaining group proved less likely to develop autism, that would point to TV as a culprit.

Economists usually have neither the money nor the access to children needed to perform that kind of experiment. More broadly, randomized trials seldom lend themselves to studying economic questions, particularly the more traditional ones. It would be unfair to randomly subject some people to a higher tax rate just to see how it affects their spending.

Instead, economists look for instruments -- natural forces or government policies that do the random selection for them.
...
Prof. Waldman and his colleagues had such studies in mind when they approached autism and TV. By putting together weather data and government time-use studies, they found that children tended to spend more time in front of the television when it rained or snowed. Precipitation became the group's instrumental variable, because it randomly selected some children to watch more TV than others.

Waldman et al. available here (pdf).

Thanks to Steven Levitt for the pointer. Levitt wonders:

As an aside, isn’t it strange that we live in a world where I’m puzzled as to why the WSJ won’t give away their product for free? In general, it doesn’t seem like a good idea to give your product away if you are a company, but given that most newspapers do, why doesn’t the WSJ?

Indian Marriage Market :: Freexhange/economist.com

Quote:

Given the growing scarcity of women, how can the parents of boys continue to demand such high fees? I would suspect that the practice will, in fact, abate eventually, but probably not soon enough to prevent millions more girls being aborted. The other interesting economic fact to emerge from the article is that it is actually rich families who are most likely to do this.... This makes sense; in a poor country, ultrasounds are a luxury.

There are some things that economists cannot explain.

In the UAE the tradition amongst nationals is that men pay the dowry. Families demand very high dowries, so high that there is a spinster problem - a high proportion of women who never marry. The men can take foreign brides, and many do. As they say, de gustabus non disputandum. But I'm still puzzled.

Attack Assignments in Terror Organizations and The Productivity of Suicide Bombers :: NBER

More evidence that economists think about everything. Or, as Craig says at Newmark's Door, more evidence that "economics no boundaries."

More able suicide bomber are assigned to the most important targets. This according to empirical work by economists Efraim Benmelech and Claude Berrebi.