Thursday, October 04, 2007

The UAE welfare state

Bloomberg:
All 800,000 Emirati citizens get free education and health care, and subsidized utilities. Emirati men can claim free land and no-interest loans to build homes. Other benefits include a $19,000 payment toward wedding costs.

The handouts, based on traditions of royal patronage dating back centuries to Bedouin society, now discourage citizens from working, academics say. Expatriates outnumber Emiratis and dominate fields such as banking, law and technology. The quandary for Sheikh Mohammed is how to reduce the culture of dependence without alienating his people.

``The relationship between work and income is broken,'' says Kenneth Wilson, Dubai-based director of the Economic and Policy Research Unit at Zayed University, a school for Emirati women that opened in 1998. ``That's unlikely to change until the government starts trying to give incentives to work in the private or corporate sector.''
The phrase "culture of dependency" bothers me. Suppose I inherited stock and could live very comfortably off of the dividends if I chose. Would you say I was dependent on the stock? And does it create an incentive for me to stop working? No; Bill Gates is still working plenty hard.

The UAE is a very rich country and it is only natural that the wealth owned by the government/rulers is shared with the citizens. Where economists begin to worry is when the size of the transfers creates adverse incentives. For example, suppose you get more from the government if you earn less. This cuts your incentive to work. Or suppose underpricing of utilities causes you to waste water and electricity -- there are more efficient ways to make transfers. Or suppose that government jobs are require little effort and pay much more than the private sector -- where's the incentive to choose the private sector rather than engaging in rent-seeking activities (wasta) to get a government job? Or suppose you are guaranteed a government job as long as you have any college degree -- where is the incentive to excel in college?

It's not the size of the transfers. It's their design.

The Bloomberg article goes on to suggest that the transfers buy political allegiance. If that is true then the trick to solving the Emiratization problem will be to reform the welfare system without cutting the benefits to most citizens.

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4 Comments:

Blogger Acad Ronin said...

Would it not make sense to convert the transfers into periodic payments to all Emiratis but untied to any job, and pari passu cutting employment in the Ministries?

2:12 AM  
Anonymous Pheras Hilal said...

It seems the region as a whole lacks some balanced fiscal policy: In the Gulf, governments are lavishly spending on their citizens, and eventually end up importing talents and human resources to serve the citizens and the country.

While in the Levant and North Africa, the equation is almost the opposite. Jobs are relatively more scarce and governments are actually living off of the population.

Pan-Arabists always wanted to establish some equilibrium between the three sub-regions in terms of economics and social welfare, but it seems that we won't ever reach this balanced equation. I'm not saying that rich countries have an obligation towards poorer countries; but I guess some help would be nice.

3:38 PM  
Anonymous online shopping said...

This will not work as a matter of fact, that's what I consider.

12:26 AM  
Anonymous Visit Abu Dhabi said...

The equation is almost the opposite. Jobs are relatively more scarce and governments are actually living off of the population.

1:15 PM  

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