Central Bank turns tables on money changers

Yesterday's post was entitled Money changers throw out the dollar. Anticipating a revaluation, UAE money changers were not willing to buy dollars at the official rate.

The Central Bank is now saying the money changers must defy the law of gravity (r.e., the market forces of supply and demand), and obey the official rate. The Gulf News reports:

The UAE Central Bank on Monday directed money exchange houses to refund to their clients any differences arising from purchasing US dollars at rates outside the official band on the weekend.

The Central Bank has asked persons involved to approach its Dubai office with original invoices within a month. "The Central Bank will arrange with the money changers to send the difference amounts to their addresses," the statement said.
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Exchange firms widened the spread between the dollar's buying and selling prices to Dh3.35 and Dh3.685 respectively on December 1 and 2, compared to the rates prevailing on the previous day of Dh3.65 and Dh3.68 set by the commercial banks.
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[T]he central bank considered the move a clear violation of its regulations and warned exchange firms of severe penalties if it happens again.

There's no statement about what the severe penalties would be, or why -- given that the regulations were so clear -- there were no penalties this time.

What will happen when the money changers must choose between a regulatory penalty and the penalty of financial lost? They might simply close their exchange window.

Meanwhile, the two day summit of GCC leaders has concluded with no dollar announcement:

[T]he final communiqué, to be released later, will not make reference to the burning issue of the declining US dollar to which most Gulf currencies are pegged, official here have said.

UN charter and GCC labor rotation scheme

You might wonder why a country would want to limit the stay of "unskilled" guest workers who are doing a good job and have gained local knowledge that is valuable to their employers. I certainly have.

When economists see firms or households doing something odd we don't immediately discard our model of rational behavior. We look for constraints or incentives that are not immediately apparent to the observer. In the USA, for example, the answer often lies in government regulation or perverse incentives created by taxes.

The Gulf Coast Countries are considering a plan to limit the stay of unskilled guest workers. The Gulf News yesterday:

The 3+3 law proposes a residency cap of six years for unskilled labourers. If the law is passed, then unskilled workers will come to work in a GCC country with a three-year labour contract which can only be renewed once.
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However the law would only be applied separately to each country, which means that a labourer could continue to work in the GCC after completing six years but not in the same country.

The last paragraph explains why I've included "labor rotation scheme" in the title.

What rational explanation is there for this plan?

The explanation for this plan can be found a Gulf News article that appeared last month:

Bahraini Minister of Labour, Dr Majeed Al Alawi, told Gulf News ... the residency time ceiling proposed for foreign workers in the Gulf is meant to ensure that unskilled foreign manpower taking part in different development projects do not come to live here for long periods that might entitle them the rights of immigrant workers under the UN conventions.

So, once again, there is a straightforward explanation that comes from regulation -- in this case the UN conventions. The GCC rotation plan dodges the problem of the guest workers being classified as immigrants. Immigrants have rights under the UN conventions, particularly a route to citizenship.

There are other plausible explanations. One is that the longer workers stay the more likely they will be able to organize and achieve collective action -- strikes.

Demographic imbalance is often cited as a reason to limit the number of guest workers. The notion here is that the greater the proportion of the population that is foreign the more that local culture will erode. Limiting the stay would not address demographic imbalance. It would have some cultural effects. For example, consider the family that employs a foreign maid or nannie. They would not be able to keep her beyond six years.

The first article referenced above does also discuss a separate measure to limit the number of unskilled workers. The article states,

The growing number of expatriates in the region has become a matter of grave concern to local governments as unemployment levels have also risen proportionately.

It may be that in some of the poorer GCC countries nationals would take jobs in the unskilled sector. But not in the UAE.

70% pay raise for UAE federal employees

It was announced the other day that employees of the federal government would receive a 70% pay increase.

There's a problem. Pay increases this large, out of line with private sector wage increases, run entirely contrary to the government's expressed desire to see more Emiratis in the private sector. Very few are, and with good reason. Their time would be better spent hounding someone for a job in government. That's a waste from the social perspective. It's a waste because it's effort that just moves money from one pocket to another and produces nothing. It discourages Emiratis from becoming engaged with the private sector and the virtue of merit-based reward. And not least of all the country develops no institutions of its own to foster economic growth.

In short, the country is suffering the curse of resource abundance.

There are better ways to share the plenty of high oil prices with its citizens. Write them a check; unhitch payment from employment in the government sector. Make them owners of the oil that is currently owned by the government. Make it difficult to reverse course -- as happened in Saudi Arabia where so much of the oil revenue now goes to maintaining a large royal family.

Quote of the day

Greg Mankiw:

Given how overweight we Americans are compared with citizens of other countries, it is amazing that we live as long as we do. If we further standardized life expectancy by body-mass index, the U.S. lead in health outcomes would likely grow even larger.

Mankiw argues convincingly that it's not the fault of the US health care system that Americans are so unhealthy. See more here and here.

Mankiw points to this article in the Washington Post. An extract:

I was talking to Barry Nalebuff, a professor at Yale University and one the country's top game-theory economists. He has studied weight-loss incentives extensively. When I told him what my wife was paying me, he said: "It's not going to work. It's not big enough. Not even close." He had another idea: Take a picture of myself in a Speedo, and if I don't lose weight, he gets to hang the picture in my office. For extra motivation, he suggested I procure a similar picture of my wife, theorizing (correctly) that she wouldn't want my colleagues to see that much of her. "Then you'll really lose the weight," he said. He has done two nationally televised studies showing that this strategy works.

Nalebuff thinks the weight loss will happen only if there is something of importance being risked. When I told him that my wife might kill me under his proposed arrangement -- thereby defeating the purpose of me losing weight -- he suggested I enter into a contract in which I agree to pay him if I don't drop some pounds. "As much as people don't like to lose money, what they really don't like to lose is their own money," he said.

In fact, some of his Yale colleagues are in the final stages of launching a business based on this very concept.

Perhaps they could open a branch in the UAE. According to the Gulf News Treatment of diabetes is a big drain on national healthcare budget. Diabetes is caused by diet. Here's where healthcare policy comes in. When your government takes care of you if you don't take care of yourself, then incentives are screwed up. But it's very difficult for the government to refuse to take care of you, especially if it's a wealthy nation. Perhaps the UAE government should commit to giving a few billion dollars away to Darfur if it fails to stick to a policy of refusing to take care of people who don't take care of themselves.

Christians are coming back to Arabia

So says Chisea, a website providing "news, analysis, and documents on the Catholic Church." According to Chisea,

On May 31, the Holy See established diplomatic relations and exchanged ambassadors with the United Arab Emirates. Few noted the fact that the United Arab Emirates has the greatest Christian presence of any Islamic country.

And it is a new and growing presence. Exactly the opposite of what is happening in other regions in the Middle East like Iraq, Lebanon, the Holy Land, where Christian communities of very ancient origin actually face extinction.

The United Arab Emirates is a federation of seven emirates ... . Almost all of the citizens belong to the official religion, Islam.

But there are many more immigrants than citizens. Foreigners now make up more than 70 percent of the more than 4 million inhabitants, coming from other Arab countries, Pakistan, India, Bangladesh, the Philippines.

More than half of these foreign workers are Christians. Adding up the figures, Christians account for more than 35 percent of the population of the United Arab Emirates. Around a million of them are Catholic. And it's not only in the UAE – in Saudi Arabia, too, it is estimated that there are already about a million Catholics from the Philippines.

The article goes on to describe the worship especially amongst Filipino maids. One example is those who have fled their employers and are sheltered by the Filipino embassy. Another example is of maids who arrange their own services together because their jobs do not allow them to get a church.

Unlike Saudi Arabia, the UAE is good in giving freedom to foreigners to celebrate their religion. But Chisea points to issues that should be addressed. The first is that maids working for families have very little free time, and little freedom of movement both of which limit their freedom of worship - in particular, preventing them from obtaining the sacrament of communion.

The second is that workers in low-wage jobs are virtually indentured servants. This leaves them vulnerable to the capriciousness of their employer. As I have argued before, there would be far fewer stories of employer abuse in the UAE if workers had the freedom to change jobs. As it is, the bad behavior of a few spoils the reputation of the country and makes it more expensive for all employers to hire workers from abroad.

Rent controls: will they be softened?

Gulf News

Property analysts have cautiously welcomed proposals for a new rent cap scheme that would allow landlords to appeal for rents to be adjusted in line with market rates.

An official at the Real Estate Regulatory Agency (Rera) yesterday told Gulf News that landlords who feel the cap is keeping rents below market rates should be given the opportunity to hike prices above the restriction in line with a benchmark recommended by Rera.
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Cases have emerged in new shopping malls and commercial complexes where a developer will offer discounted rents during the first year of operation as an incentive to attract tenants to the development, she said. "Landlords who signed such tenancies cannot currently apply for any increase in rents to bring them in line with market rates," she said.

According to Rera, an index of rental prices will be formed to help the rental committee decide the outcome of rental disputes.

On the same date the Gulf News editors write

The logic behind the rent cap seems exemplary. Landlords in Dubai in many cases had been able to exploit conditions in which rapid demand was overwhelming supply, to the point where delaying the release of units promised even more money in the bank.

Naturally, those desperate for affordable accommodation were delighted by the cap's introduction, since we've all been hit in the pocket, whether it's for school fees, food or transport. The cost of living has become a source of considerable angst for households, and a factor also for businesses considering whether to locate here.

But controls are an imperfect approach, which is why reviewing the issue is timely. If units are not reaching the market because landlords are withholding them on grounds of inadequate return, then the situation is only aggravated by artificial intervention. That's the law of unintended consequences in action.

There's a contradiction in logic in the editorial - how can removing the rent control lead to an expansion in the number of units available if you've said in the first paragraph that the "exemplary" logic of the rent controls is that units were being withheld absent the controls?

What we know is that, prior to rent control, demand for housing grew very rapidly relative to supply and rents jumped up considerably as a result. And the trend of rapidly growing rents is likely to continue as it takes time for supply of housing to catch up to ongoing growth in housing demand. This is entirely consistent with a competitive (non-monopoly) market - which is one where no one supplier has an incentive to withhold product to drive up the market price for all.

Rather than rent control RERA should be asking whether there are elements of monopoly in the market, and attacking those directly. We have some evidence, though, that the market is relatively competitive because economic theory tells us that rent control will exacerbate shortages, and this appears to be exactly what has happened.

In short, rent control has had the opposite of the intended effect: fewer units are available, not more. The closer the controlled price is to the market, the faster rents will return to pre-existing levels because suppliers will be in a greater rush to bring units on line. (Footnote: Underlying land values are another matter. If they are increasing (and they may well be given the value of living in Dubai) this will be reflected in increased rents.)

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.

Spigot-like labor force

From Business Week

A North American economist at Merrill Lynch (MER), [David Rosenberg] is one of a number of economists who say the concerns about too few workers are vastly overblown. Rosenberg recently studied the issue and put out a report entitled Is There a Labor Shortage? If employers are having trouble filling jobs, "perhaps they're not looking hard enough," he says.

The issue may not be the number of workers, but rather the level of pay. Economists like Rosenberg argue that in a market economy, there's really no such thing as a true shortage. If you want more of something, you can pay more and have it. When employers say that there's a worker shortage, what they really mean is they can't get enough workers at the price they want to pay, the argument goes. "While it makes for nice cocktail conversation, the data aren't saying there is an acute labor shortage in this country," Rosenberg says.
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Rosenberg argues the simplest way to gauge whether there's a worker shortage is to look at the price of labor. According to the basic laws of economics, the tighter the supply of labor, the more it should cost. So if the economy were operating with full or near-full employment, we would be seeing an "explosion in labor compensation," he says.

The price of labor, however, is hardly surging....
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"Employers are very quick to raise the specter of a labor shortage, but often it's another way of saying they can't find the workers they want at the price they're paying," says Jared Bernstein, senior economist for the Economic Policy Institute, a left-leaning think tank in Washington. "They are unwilling to meet the price signal the market is sending, so they seek help in the form of a spigot like immigration."
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"I'm a trained economist," says Bernstein. "I can't sign on to the idea that there are jobs people won't do at any price."

Even more so than the US, the UAE has a spigot-like labor force (and a drain-like labor force!).

We hear claims that there are some jobs Emiratis simply will not do. But we don't really know that because wages have never risen to see whether there is a wage sufficient to draw them into those jobs. The spigot from abroad has remained open -- employers can easily obtain work visas and import laborers. Unemployment amongst Emiratis is not what economists would call unemployment; you are unemployed if you would take a job at the current wage but cannot find one.

We hear claims that western expats in the UAE are dissatisfied with their pay. But if they were in a meaningful sense they would be leaving in large numbers. They aren't. Wages have not climbed significantly because the wage being paid matches the alternatives foreign workers could get elsewhere.

We hear claims that there are shortages in critical areas like government teachers and nurses in government hospitals. But there is no shortage. Rather the government simply is not paying a market wage. (I hasten to add teacher and nurse "shortages" are chronic issues in the US as well. See here, for example.) It is in a perpetual position of replacing workers who move on as soon as they can find better pay and working conditions. Such as a job elsewhere in the region. Or even in the US.

The UAE labor force is spigot-like. But it is also drain-like as well.

Iran under pressure, self imposed, economically

From the Washington Post:

Rationing Fuels Discontent in Iran

A month after raising gasoline prices by 25 percent, the government began fuel rationing Wednesday, which sparked violence in Tehran. Angry Iranians smashed shop windows and set fire to a dozen gas stations.

With armed guards protecting gas stations Thursday, calm returned to the capital as motorists lined up to fill their tanks. But many were still seething. "Ahmadinejad promised paradise, but his government has made life hell for Iranians," Mohsen Nosrati said as he waited at a gas station in central Tehran.
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This month, about 60 economists wrote to Ahmadinejad blaming rising prices on his mismanagement and flawed economic policies.
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The international pressure has made it difficult to tackle one of the country's most significant economic problems -- gasoline subsidies that cost the government billions of dollars a year and encourage high demand. Iran is one of the world's biggest oil producers, but it does not have enough refineries, so it must import more than 50 percent of the gasoline consumed domestically. The rationing is part of a government attempt to reduce the $10 billion it spends each year to import fuel that is then sold at below cost to keep prices low.

The Iranian economy was mismanaged before Ahmadinejad came to power; he has only made it worse. International power (sanctions for Iran's nuclear program) have intensified the necessity of reform. While sanctions may have made reforms more difficult they also made them more likely.

The Iranian government has little trust among the populace. The people have learned that the most likely way in which the oil wealth of the country is shared with them is through price subsidies. Subsidies are wasteful of resources, but in the Iranian context (appropriate distrust of government) they make sense.

Folk economics and evolutionary psychology

Emory University economist, Paul H. Rubin, writing in the Washington Post:

Our primitive ancestors lived in a world that was essentially static; there was little societal or technological change from one generation to the next. This meant that our ancestors lived in a world that was zero sum -- if a particular gain happened to one group of humans, it came at the expense of another.

This is the world our minds evolved to understand. To this day, we often see the gain of some people and assume it has come at the expense of others. Economists have argued for more than two centuries that voluntary trade, whether domestic or international, is positive sum: it benefits both parties, or else the exchange wouldn't occur.
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A useful analogy is between speech and reading. All humans growing up in a normal environment learn to speak, but reading must be taught because it does not come naturally. Folk economic beliefs are like speech -- we get them without trying. A deeper understanding of economics is like reading -- it must be taught.

America's success in lowering its barriers to outsiders shows that we can and do learn. But like reading, we must teach each generation anew.

One of the things that struck me when I came to the Middle East five years ago was the degree of effort that goes toward influencing rewards. The belief is prevalent that rewards are not based on merit, that rewards can be influenced through negotiation and badgering, and that if someone else in an organization gets a reward it comes at someone else's expense. The view is that effort is best directed towards getting a bigger share of a fixed pie. It is not believed that the pie can be made larger.

If others are expending effort on influence and are seeing results, then you too must expend effort on influence as well. To some degree the presumption that influence matters is self-fulfilling -- those in authority too often take the short-sighted way out and bow to the pressure to use their influence to make exceptions. So exceptions become the rule. I have seen, though, that organizations here that can avoid the short-sighted approach out-perform their rivals in the marketplace. A reputation for awarding on merit is hard won, and hard to maintain, but it can pay.

One of my firm beliefs is that people are fundamentally the same, and that differences in the wealth of nations has much to do with differences in societies' institutions. In particular, Rubin's evolutionary psychology argument that all people are biological programmed to think zero sum is compelling. And, yes, every generation needs to be taught to read that the world is not that way. But that teaching won't stick if society is so pervaded with influence that merit doesn't pay.

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.

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.
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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.
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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.

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.
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“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.

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.

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

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.

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).

What price a free market? :: Gulf News opinion

Oh dear. Let's take this down, line by line.

What price a free market?

http://archive.gulfnews.com/opinion/columns/nation/10106962.html

02/25/2007 09:46 PM By Nicholas Coates, Associate Editor

Ever since the formation of the United Arab Emirates as a federation, the belief that it is a free market economy and a tax-free society has been perpetuated. The message spread abroad, enticing investors and industrialists to its shores. Because of the faith in a liberal economy, unhindered by intrusive bureaucracy or burdened by oppressive taxation, people found the various freedoms available and enjoyed a complete contrast to that experienced elsewhere. This only served to increase the popularity of the nation.

As you will see, he's setting us up with a phony straw man -- the free-market economy. It's not the belief in a free market that's made the UAE successful, but a faithfulness to limited and judicious intervention in markets. Not always according to my taste, but certainly better than many governments around the world.

As commerce progressed and the population increased, so did the burden upon the state's coffers for services which, in the past, were taken for granted as being funded by the government. But the government suddenly found itself in an invidious situation: an ever-increasing expenditure due to increasing population and escalating prices affecting everyone.

Not clear this is true on a per capita basis. As the economy has grown the costs of government services have grown, but so have the government/ruler revenues.

On the one hand a move could be made to allow private enterprise to take up responsibilities the government had shouldered in the past - water, electricity, health services and so on. But on the other hand, to ensure prices did not spiral out of control, intervention measures were needed to avoid widespread disenchantment. Yet to intervene in pricing structures would mean a contradiction of the principles of a free market economy, which may deter investors from establishing businesses in the UAE. It is a predicament that still faces the government at both federal and local level.

"Spiral out of control" is a common but silly expression. And what's the big deal of contradiction of principles of free market principles -- you've already done that by having government subsidized services. There's no "predicament." As far as the merits of privatizing services like electricity and water, we know that these are prone to evolving into monopoly market structures (particularly in a small market like the UAE) and such structures need some government regulation.

Private finance

On the issue of privatisation, the governments are moving towards bringing private finance into established services and utilities sectors through share flotations or seeking joint venture partnerships. Whether a complete privatisation or partial, as with a joint venture, it augurs well in such an economy and for those who advocate this system of governance. Where it can fail is for it to make the wealthy, wealthier, and those unable to afford participation in the benefits, less well off. For in allowing prices to find their own level - a belief held by all capitalists - that level, for one reason or another, frequently becomes one which can only be attained by a few.

When many economists talk of a free market economy, they overlook one simple fact. Namely, that there is no such thing. A completely free market is a theoretical form of market economy whereby transactions are made freely, based on an agreement of the price. There is no state intervention through taxation, subsidy or regulation.

Economists are well aware that any change in government regulation creates winners and losers. And we are well aware that economies without state intervention are nonexistent. So what's the point being made?

The term "free market" applies to an array of financial exchanges in commerce. Each exchange being a voluntary agreement between parties trading in goods or services. That is only the extent to which a free market exists, as there will always be government intervention through taxation, price controls and restrictions, possibly even preventing new competitors from entering a market. So a free market is used to describe a political or ideological viewpoint on policy and is not a recognised field within economics.

Consequently, the UAE does not practise a free market economy, nor could it ever do so, as it is likely the economy will become uncontrollable and everything affiliated to it, unmanageable. Instead, in an effort to curb excesses often experienced in certain sectors of the market, the government, federal or local, has found it necessary to intervene and restrict price increases deemed unreasonable.

He's made a presumption that without basis that a free market would become "uncontrollable" and "unmanageable." What does that even mean? On what evidence or logic? Economists believe (yes, I said believe) that markets are generally a good way to organize markets, but they also believe that there are limited circumstances where government intervention is necessary.

Most dramatic

Perhaps the most dramatic of these interventions was that of reining in the increases in house rents. Possibly the only weakness there was the directives were local, not federal, so losing an opportunity to standardise on a suitable law, or level, throughout the country.

Price controls are not a good idea. The Soviet Union and the destructive effects of rent control in New York City should be evidence enough that economists have the theory correct on this one.

There have been other, sometimes contentious, interventions to restrain traders from exploiting a buyers' market. In recent times, directives allowed merchants to ignore exclusive agency agreements on specific foodstuffs, so parallel imports can be obtained at hopefully lower prices. But without effective monitoring or control, it is difficult to determine if it was successful; certainly the public saw no noticeable difference. Of course, this circumvention is only a precursor to that eventuality as such agreements will be against the terms of the World Trade Organisation, of which the UAE is now a member.

The author does not see a plain fact - exclusive agency is created by the government. It's creation of monopoly by government. Economists have long argued that the UAE should end the practice.

With the cost of living in the UAE increasing exponentially, the government's temptation to interfere in even more areas of business is there. Not only will it seek ways to curb unnecessary increases, but to ensure a balanced budget, one that is not entirely reliant on an oil economy. In this regard, it is tempting to look to taxation as a way to boost revenue.

There are already some charges made upon the people, like customs duties or local tariffs on various services and alcohol, tobacco and petroleum products. But as yet there are no laws which allow for the collection of taxes, as is widely practised elsewhere.

There is talk of Value Added Tax being introduced to replace Customs Duty and, if done, it will have an immediate effect on the cost of living and to commerce in general. Not only will companies have to keep proper books of account, maybe for the first time ever, but also there will be personnel employed by the private sector as tax collectors for the government - something that is quite common in taxed societies.

The prospect of such inevitable dramatic changes in the economy, and therefore society, must be very intimidating for those officials concerned with maintaining the dynamic and attractive image of the UAE.

Theory tells us Customs Duty and VAT are equivalent. Equivalent.

Government employees to receive 20% pay increase :: Gulf News

Link to GN.

I presume the pay increase is for two reasons: (1) to compensate for inflation which is running in the double digits, and (2) to share the windfall of higher oil prices.

A problem created is that this makes it ever more difficult to attract nationals into the private sector where wages currently are not keeping up with inflation.

The wage increase is retroactive to the start of 2007. The practice of giving retroactive pay increases poses a further barrier to attracting nationals to the private sector -- the private sector does not follow this practice.

The government has said it is concerned that so few nationals work in the private sector. Suggestion to the government: Allocate more welfare benefits through direct cash grants to nationals rather than through paying greater-than-market rates for working in the government sector.

The value of an intact hymen :: Gulf News

I read this morning in Gulf News about the black market for hymen restoration in the UAE. The price is Dh10,000. It is illegal for an unmarried woman to have her hymen surgically restored, but not illegal for a married woman to do so. Why a married woman would want such surgery I couldn't tell you, but it does give cover for the clinics that offer these procedures.

Why an unmarried woman would want the procedure is easy to explain: this culture highly values virginity in a bride and uses an intact hymen as the test. Vaginal intercourse, however, is not the only way the hymens are broken. An unintended consequence of the high value of a hymen is that girls avoid sports and other exercise. The GN article makes it sound as if only girls who are not vaginal virgins would want the procedure -- false, of course.

Secret Dubai has also posted on the story. She is wrong, though, in concluding that hymen restoration will make the value of an intact hymen zero. It will, though, mean that girls who have been raped will no longer be unmarriageable. That is, as long as: their identities are not made public, they can afford the surgery, the authorities do not crack down on the black market, and mothers of the husband-to-be do not insist on an invasive inspection to determine whether there has been surgery.

There is a way, actually, that Secret Dubai could be right. That is if the ready availability of hymen restoration changes behavior and more women engage in premarital sex. Then having an intact hymen would prove very little about whether you were a virgin or not.

GN has a companion piece entitled, 'If cosmetic operation is to deceive someone it is a crime', which explains why hymen restoration is regarded as a religious crime.

What about breast augmentation (deception of fertility) or nose jobs (deception of beauty of future children)? These are legal in the UAE.