All your eggs in a few baskets

Another sector in which Dubai specializes is also hit hard by the global downturn: shipping. Global international trade is down.

I don't have a way of knowing whether it has hit the transshipment business in Dubai --stop rss feed, there's this* --, but remember that Dubai has worldwide holdings in Dubai Ports World.

*Quote:

Dubai's status as a key global sea-air hub has come under threat from falling air freight rates. Declining production in China and overcapacity at airlines — combined with low fuel prices — has made the all-air option more attractive to shippers.

"It looks as if Dubai is going down rapidly," said Tobias Siegl, MD of ECS's Dubai subsidiary, Globe Air Cargo.

"Air freight rates are cheaper than sea-air rates, which heavily affects the whole idea of the Middle East as a transit point.

"There is a rumour that Dubai may be on the financial edge. Nobody is willing to tell you anything in Dubai these days. Everyone is bugging you for cheaper prices, and carriers are offering rates just covering their costs."

Cutting rates in a transhipment market cannot stimulate demand if the volumes have dried up, he pointed out.

China is reducing production, so the incoming loads are simply not there any more. People are just trying to grab loads from others."

Citi mending fences with Dubai?

That's the way the Financial Times characterizes Citigroup's $8B loan to Dubai:

Officials said the $8bn (€5.9bn, £5.2bn) figure relates to existing financing efforts over the past year and does not refer to new financing as the emirate seeks to navigate its way through troubled credit markets.

The Citi announcement, an apparent attempt to rebuild bridges with the Dubai government, also follows media reports last month that suggested the bank was seeking to sell on at a discount some of its exposure to Dubai debt.

“This appears to be a historical account of what has already been done,”said one banker of Monday’s statement.

Dubai officials remain confident that they will be able to tap more financing from institutions such as Citi over the next year as outstanding debt starts to mature.

Dubai’s biggest ticket financing in the past few months has been the $6bn syndicated loan to Investment Corporation of Dubai, the state holding company, to which Citi is said to have contributed $500m.

My emphasis. Oh, so the announcement was about loans Citi had made to Dubai over the "past year" -- contrary to the impression I got from reading the Gulf News. A new loan would be a strong expression of confidence in Dubai's ability to repay in the current environment. An announcement about past lending is not so strong a signal.

Iran relishes Dubai's "paper sand"

PRESS TV, Iran:

The current financial crisis which has resulted in scarce credit and slumping oil prices has forced international financiers to dump assets in Dubai city, Bloomberg reported.

"Dubai is more precarious than it has ever been,” said Christopher Davidson, a professor of Middle Eastern affairs at Durham University.

"If the property industry collapses in Dubai, it will be finished. Dubai's relative autonomy will come to an abrupt end," added Davidson, the author of "Dubai: The Vulnerability of Success.

He added that Dubai's push into luxury property developments was a mere diversification on "paper sand".

On Saturday The New York Times reviewed of his book, Dubai: The Vulnerability of Success. An extract from the review:

Mr. Davidson further contends that unstable neighbors threaten Dubai’s success, but here he may have matters reversed. When Egypt and Iran stifle their entrepreneurs, many of them find a wide berth in Dubai. When Saudi Arabia imposes cultural restrictions on its population, Dubai offers a place to drink and let loose. When India and Pakistan have trouble creating jobs for their large populations, Dubai absorbs labor migrants. When Iraq or Lebanon descends into war, Dubai profits from rebuilding them.

In short, until a vast arc of countries from East Africa to Southeast Asia changes substantially, Dubai will remain poised to benefit by providing a relatively open, secure, low-tax, business-friendly alternative.

I've read Davidson's book and the reviewer is on to something here. Indeed, all these points about the advantages Dubai gets from its neighbors are made by Davidson. With respect to Iran, these advantages trace back many years, and Davidson covers this history well. And while the subtitle, "the vulnerability of success", sounds prescient Davidson did not see the vulnerabilities in the sense of the present problem a leveraged system in an environment of a systemic breakdown in willingness to lend.

The NYT review sees a silver lining in the financial crisis:

It was also written before the credit crisis and global contraction, and he makes no mention of Dubai’s economic vulnerabilities. In fact, the world’s searing financial debacle could turn out to be salutary for an overleveraged Dubai, reining in local inflation as well as an insane real estate market.

Whatever the short-term pain, the U.A.E. is awash in liquidity, and Dubai’s hefty investments in infrastructure appear likely to persist and to yield future dividends. Above all, accumulated expertise should enable Dubai to continue aggressive pursuit of global market share across its service industries. That growing prowess abroad, no less than pathologies at home, is a central story about Dubai that has been missed amid the glitz.

Of course in the quote at the beginning of this post, Davidson could still be right in his recent comments quoted in Bloomberg that "If the property industry collapses in Dubai, it will be finished. Dubai's relative autonomy [i.e., from Abu Dhabi] will come to an abrupt end." For example, there's the rumor that Abu Dhabi wants an interest in Emirates Air "as the price of a multi-billion pound cash injection" to Dubai. The UAE stock markets have been closed for the holidays. Will an announcement come after the markets reopen?

Lyrics | Harold Arlen lyrics - It's Only A Paper Moon lyrics

Who said it?

"Ten years from now the price of oil will be below $100/barrel."

Emirates Economist - September 2, 2005

I'm a little ahead of schedule.

But, seriously, my prediction had to do with the oil supply elasticity, and with energy supply elasticity in general keeping a lid on prices in the long run. I wasn't making a prediction about where prices would be between 2005 and 2015. Since my prediction in 2005 oil prices have rocketed up and rocketed down.

Nevermind

I've not quite figured out the dynamics, but it's pretty common in the UAE for one body to come with a new decision or rule, and then for a sheik to announce at the last moment that no we won't be doing that. Latest example from the official news agency:

President H.H. Sheikh Khalifa bin Zayed Al Nahyan today deferred until further notice enforcement of the ministerial resolution no 535 for 2008 on ban of registration of light vehicles older than 20 years.

The resolution was scheduled to go into force as of Monday, 1st December 2008.

How about this rule?: No driver's licence for 100 categories of UAE workers. I'm predicting it will meet the same fate.

What about unemployment?

The American radio program, Morning Edition, wonders:

With some projects facing delays or even cancellation because of the current credit crunch, new questions are being raised. Are Gulf states prepared, for instance, to deal with mass layoffs and huge numbers of unemployed expatriate workers?
...
Analyst Mustapha Alani at the Gulf Research Center says he doesn't think people in the oil-producing states of the the Gulf Cooperation Council, or GCC, are prepared for a sharp downturn in development activity — neither the developers, the investors nor the migrant workers who could be hit first and hardest.

"We're talking about 6 million Indian workers employed in the GCC," Alani says. "Possibly 50 percent of this workforce — they're going to lose their jobs in the region. And either they have to stay as illegal immigrants or they have to go back to their country to seek employment."
...
Many economists argue that Gulf states have the cash and the incentive to soften the regional impact of the financial crisis, and they doubt that governments here would allow the streets to be flooded with unemployed South Asians if there is a sharp downturn.

But that raises another troubling question: Is Pakistan, already struggling with political unrest and terrorist attacks, ready to absorb millions of unemployed young men back into its population?

Listen or read it all.

From the UAE's point of view, the problem may not be as big as it seems; how much of any reduction in force would be achieved by simply letting contracts expire while slowing the stream of expat laborers into the country?

Laborers come to the UAE on a fixed term contract. I presume their expectation is that the contract is good for the full term. Whether they could enforce the contract is another matter. But it would not be good for the UAE's reputation to abrogate contracts.

It's worth noting the irony here: These workers are better off in the UAE, than back home. They would prefer to stay here. Yet the UAE takes criticism for the low pay and poor working conditions they receive.

The same is true in the US for the low wage workers (legal and otherwise) who come to the US, primarily from Mexico and southward. They are better off in the US even though they are doing jobs Americans will not do. The difference is they are not under contract, and as their jobs go away or pay falls, they are going back to their home countries voluntarily.

Does Wall Street's bust threaten Dubai's boom?

TIME:

Dubai and its real estate market are vulnerable to an international economic downturn, especially compared with many of its Gulf neighbors. As the region's premier business, transportation and tourism hub, it is by definition more entwined with the global economy. And in tight times, Dubai lacks the windfall oil profits that have enabled sister emirate Abu Dhabi, for example, to amass a financial cushion in sovereign wealth funds totaling hundreds of billions of dollars.

But Dubai's biggest risk is its daring reliance on debt to drive its breathtaking building boom. Last week, Moody's estimated that in 2006, the most recent year for figures, Dubai's government and public-sector company debt was at least $47 billion, a staggering 103% of GDP.
...
Even before the global crunch, banks in the United Arab Emirates (UAE) were being hit this year by an outrunning stampede of billions of UAE dirhams — so-called hot money that one report valued at $55 billion — led by speculators giving up on hopes that the country would de-peg its currency from the U.S. dollar.
...
An underlying reason for the relative lack of panic so far is that Dubai real estate remains a financial haven for wealthy individuals from riskier nearby countries like Iran and Pakistan.
...
In the event of a systemic threat, Dubai can probably rely on super-rich Abu Dhabi for a bailout.

Sometimes bailouts are done out of pity, such as for flood victims. Even if those victims willfully chose to live in a flood plain and did so because they knew they'd be bailed out since those around them would take pity on them.

My thinking is it wouldn't be pity that would motivate a bailout of Dubai. And if it is not pity, then it would have to be self interest. The question then is, why would it be in Abu Dhabi's self interest to bailout its rival? The answer may be that it would gain some de facto control over Dubai, Inc. Or it could be that it would do so to prevent another party -- e.g., Saudi Arabian investors -- from bailing out Dubai and gaining influence there. Or it could be to arrest the spread of an adverse financial contagion.

Irony watch: Fuel shortages in the oil-rich UAE

These shortages are caused by something like price controls: state-owned retail fuel companies that are not willing (and, perhaps, able) to meet market demand at the price they have set, but are also not willing increase price to stave off shortages.

Story 1

Employees at petrol stations in Fujairah and Ras Al Khaimah say the Special variety ran out days ago, insisting that they have not been informed when they could expect further supplies.

The shortages also affected Sharjah, Ajman and Umm Al Quwain, but the company does not have a presence in Dubai.

Story 2

Abu Dhabi: A diesel shortage affected many sectors in Abu Dhabi on Monday, with trucks stuck in massive queues waiting to refuel.

Households and restaurants suffered due to a lack of a supply of essential items. The transportation of labourers from worksites to their accommodation was also affected.

Diesel vehicles have had to queue at fuel stations in Mussaffah since Sunday morning, as the sale of diesel was stopped in Abu Dhabi City.
...
The huge difference in diesel prices between Abu Dhabi and Dubai has caused massive queues at Adnoc Distribution diesel pumps, where Dubai-registered vehicles queue up for cheaper diesel.

Most petrol and diesel consumed in the UAE is refined outside the country. Adnoc, owned by Abu Dhabi is not under pressure to be profitable. The Dubai-owned companies are, but have been reluctant to set prices above Adnoc's. This reluctance has broken as world prices for oil rose considerably in the last year.

Revenge and the rule of law

There's more to report on that study of cooperation, anti-social behavior and revenge. It's not news (it dates from March 2008), but it may be new to you as it was to me:

In countries like the USA, Switzerland and the UK, freeloaders accepted their punishment and became much more co-operative. But in countries based on more authoritarian and parochial social institutions such as Oman, Saudi Arabia, Greece and Russia, the freeloaders took revenge — retaliating against those who had punished them.

Co-operation for the common good plummeted as a result.

In societies where the modern ethic of co-operation with unrelated strangers is less familiar and the rule of law is perceived to be weak, revenge is more common and co-operation suffers, the study found.
...
“Our results correlate with other survey data in particular measures of social norms of civic co-operation and rule of law in these same societies. The findings suggest that in societies where public co-operation is ingrained and people trust their law enforcement institutions, revenge is generally shunned. But in societies where the modern ethic of co-operation with unrelated strangers is less familiar and the rule of law is weak, revenge is more common."

That's from a University of Nottingham press release. The paper is Antisocial Punishment Across Societies by Benedikt Herrmann, Christian Thöni, and Simon Gächter.

Sounds rather like a harsh excessively indictment, and western-centric.

I operate from the premise that all people are the same, and it is cultures that are different. That is, the primary reason for differences in behavior is the culture in which one is embedded. But cultures are not just arbitrarily different. They evolve and are locally adapted. I believe they locally adapt based on surrounding conditions and move in the direction of better adaption but that this process is slow and imperfect.

A question is, was it ever a good cultural adaptation to take revenge for being punished for noncooperative behavior?

The Curse of the Remittances

Truth or fiction?

Some in the UAE consider it a problem that foreign workers send money home instead of spending it in the UAE. I don't. But what about what remittances do to the receiving country's economy? Is it all good news?

From Foreign Policy :

According to a new study by the International Monetary Fund (IMF), remittances may actually encourage government corruption and ineffectiveness. In an analysis of 111 countries between 1990 and 2000, researchers found that high levels of remittances often lead to greater corruption and irresponsible economic policies. In other words, officials in remittance-rich countries are often let off the hook for failing to provide basic services, freeing them to divert resources for their own purposes. “[T]here’s less of an incentive for citizens to demand reforms” when remittances are high, explains Ralph Chami, a division chief at the IMF Institute and a coauthor of the report. And because the government assumes citizens with help from abroad will turn to the private sector for essential services such as healthcare and education, leaders face little pressure to change. “The government says, ‘I know you’re getting money; what’s my incentive to fix [the] situation?’” says Chami.

Here's a link to the paper (PDF).

Economists often argue that exporting workers and receiving their remittances (sent to their families) is just another form of exports. Putting these two arguments together, are we to conclude that exports take governments off the hook and lead to greater corruption and irresponsible government projects? Of course not.

I suspect that exporting labor is often the result of bad government policy. People leave because of government failure: the economy is over regulated, excessively managed (and, hence, mismanaged), or -- at the other extreme -- does not provide basic infrastructure like roads. But in such an environment remittances may serve as a safety valve that takes the pressure off fundamental reform.

We don't have to just look for present day examples like Bangladesh or the Philippines. The Irish diaspora might also be an example. Ireland of course is also a shining example of what can happen when market reforms are instituted.

Cement in Oman

Arabian Business:

Oman said on Saturday [March 15] it was considering reducing import duty on building materials in an effort to put a cap on rising inflation in the construction sector.

"We are revising the import duty on building materials to help reduce the cost of cement, steel and wood," Chamber of Commerce and Industry Chairman Khalil Al-Khonji told reporters.
...
Oman had restricted the import of cement two years ago to support the sale of local firms Oman Cement Company and Raysut Cement Company, but the move caused shortage in the market.

Said Al-Barwany, chairman of Al-Barwany Construction, told newswire Reuters Oman needed an extra 20,000 tonnes per day of cement to help reduce the shortage.
The price of cement has doubled in the past year, according to Baljit Singh, a building materials trader.

"A 50-kilogram bag of cement rose from 2.4 rials ($6.24) last Sunday to 3.6 rials today; it is too much. This time last year, it was only 1.3 rials per bag," Singh said.

Meanwhile, Oman Cement is in discussions with the government on plans to raise the price of cement to offset the soaring price of imported clinker, which is used to make cement, Chief Executive Jamal Al-Hooti told Reuters last week.

Muscaticonfidential points to evidence that this is a black market in cement. According to the Oman Tribune,

Two Asians were caught red-handed while selling cement at exorbitant price in the Wilayat of Ibri on Tuesday [March 24].

The two expatriates were selling cement at the rate of RO2.900 per bag.

The arrest was made as part of a campaign run by the Ministry of Commerce and Industry against people manipulating prices.
...
In spite of the Ministry of Commerce and Industry’s continued inspections to check illegal trade practices and the arrests being made by the police, in addition to the authorities’ warning of stringent action against the violators, some traders and their aides have been ignoring the warnings and were selling cement at high prices.

Trade Arabia adds,

Oman Cement Company, the country's largest cement firm by market value, said it is in talks with its government owner about raising prices or possibly face a fall in profit this year.

'If we don't increase cement prices by 1 to 2 rials per tonne, profit might come down in 2008,' Oman Cement chief executive officer Jamal Al Hooti said in an interview in Muscat on Wednesday [March 12].

Black market opportunities for profit exist when buyers cannot fulfill their planned purchases at the official price. In other words, there is a shortage, a gap between the quantity buyers would like to purchase at the official price and the quantity sellers are willing to produce. Frustrated buyers are willing to buy (a smaller amount) at a price above the official price, sometimes much more. The "Asians" had a profit opportunity if they could acquire cement at the official price and resell it at a higher price.

A natural question is how the black marketers came into possession of the cement in the first place. The most innocent possibility is that they were able to purchase it without any favoritism from the original seller be it from a producer or an importer. Otherwise, there is some corruption involved beyond the violation of selling above the official price.

Import duties do not create shortages. They reduce imports, and drive up the domestic price. Shortages are created by price ceilings -- the official price above which it is illegal to sell. These prevent price from rising to bring the quantity demanded into balance with the quantity supplied.

The additional complication in the Omani cement market is that the major domestic producers are government owned. Yet the government-owned cement producers have to obtain permission from the government to raise the price. What they can do, as is evident from the fact of a shortage, is restrict quantity; they are not obligated to satisfy demand for cement at the official price. If their objective is to maximize profit, or to meet a target level of profit, then an increase in the price of an input (in this case clinker) will decrease the amount they are willing to produce at a given cement price.

Reducing the import duty would reduce the shortage. So would raising the official price for cement.

Speaking of cement, is this the headline you'd give this story?:

Growth in cement imports plummets

Growth in cement imports into Dubai slumped 60% last year, state-owned conglomerate Dubai World said on Sunday, without giving a reason for the drop.

Dubai World said cement imports shot up 73.6% to 2.960 million tonnes in 2007, but the growth fell well short of the 184% increase in imports seen in 2006.

My point is, 73.6% growth is enormous growth by any measure.

And finally, on the cement front, the UAE has eliminated the duty on cement and rebar to ease inflation.

Divorce

It's said that 46% of marriages in the UAE end in divorce. I'm not confident in that number. Like many numbers thrown around in the UAE it's not clear what the statistical foundation is, or even what it is purporting to measure.

According to Justin Wolfers, for first marriages of US women married 1985 to 1989, 33.4% of these ended before the 15th anniversary. And some marriages end because of death not divorce.

More:

the divorce rate in the United States is currently at its lowest level in twenty-five years, and has fallen nearly every year since 1979. The number of divorces per thousand marriages has now fallen by 27 percent since the peak in 1979. The latest data suggest that the divorce rate for 2007 will be even lower still. And our own analysis of the stability of marriages suggests that those married in the 1990’s appear to be less likely to divorce than those married in the 1980’s, who in turn are less likely to divorce than those married in the 1970’s. As such, the divorce rate seems likely to continue to decline for some time yet.

Surprised that the divorce rate in the US is lower than the UAE? I don't doubt that the divorce rate in the UAE is high, but there's no way to determine whether is that high, short of having better data on the UAE. Poor data invites theoretical speculation. Is the divorce rate in the UAE high because it's affordable? Because the matching process is poor? Because families interfere?

One take away from this comparison is that the US isn't as morally inferior to the UAE as it might appear. But do note that falling divorce rates in the US are attributed to falling marriage rates, and marriage at a later age. Those most likely to divorce have become less likely to marry. And there are more couples enjoying the benefits of marriage before marriage - whether or not they ever marry.

Israeli migrant labor policy

IRIN - UN Office for the Coordination of Humanitarian Affairs

We were told by Yilmazlar [a Turkish manpower agency that supplies construction workers to a number of companies in Israel] that we could make up to $1,400 a month and more with overtime if we worked in Israel," he told IRIN.

"Yilmazlar assured us we would be well treated and be housed in good accommodation. However, when I arrived, my dream turned into a nightmare."

Yelmaz was sharing a room with eight others - furnished with bunk beds - that was so small that there was no space for their suitcases. They were fed a monotonous diet of rice and lentils and there were only three toilets with no running water for 130 workers.

"The conditions of the toilets were so disgusting, they were not fit even for an animal," said Yelmaz.

"We were forbidden from using mobile phones on pain of confiscation and fines and were forced to work an average of 11 hours a day, without being paid overtime. And in our half-hour lunch break we were expected to go home, eat and return to the construction site.

"In addition to our passports being taken away [by the employer], we needed special permission to leave the premises after work and on our day off. If people left without permission, they were fined and threatened with deportation by the management."

The final straw came when Yelmaz found out that he and the other workers would only receive their first payment after three months. He and a friend, 41-year-old father-of-three Hikmat Tekin, decided to challenge their boss.

"We were told by the management that if we didn't like it, we would be deported without payment and barred from employment elsewhere in Israel,"
Tekin said.

As he began his battle against his employer, Yelmaz became aware of the strict Israeli visa regulations governing conditions for migrant workers.

"The issuance of these visas is subject to the workers staying with the same employer stated on the visa and if this condition is broken then the migrant worker is deemed illegal and liable for deportation,” said Sigal Rosen, spokeswoman for Israeli human rights organisation Hotline for Migrant Workers.

There are two ironies:

1) These government policies and business practices towards migrant workers are just like those used in Arab Gulf countries. Israel and Arab Gulf states behave the same way towards migrant workers.

2) In the Arab Gulf workers Yelmaz might not be welcome at all. Since Saddam's invasion of Kuwait - and the support Saddam received from migrant Arab Muslims working in the Gulf - Arab Gulf countries have switched to a greater reliance are workers less likely to make political trouble. More generally, there is the view that Asian Muslims are less politically troublesome than Arab Muslims. Yelmaz is Turkish - not Arab - but he might also not be welcome here for similar reasons.

The puzzle continues

How can a country as rich as the UAE turn away citizens from higher education on the basis of lack of funds? It promises free education to all citizens, but doesn't fund it:

"When the oil was priced at $8 a barrel the government had been offering generous incentives to students, now when the oil almost reached $100 a barrel, students are denied admissions due to shortage of funds. How come this happens in the UAE which is considered one of the richest countries in the world?" asked Ali Majid Al Matroushi, an FNC [Federal National Council] member from Ajman.
...
Shaikh Nahyan Bin Mubarak Al Nahyan, Minister of Higher Education and Scientific Research, admitted that the shortage of funds "forced us to turn down admissions of 5,000 students this year and the number will be even bigger next year, when the Higher Colleges of Technology will be forced to reduce the number of seats from 16,000 to 14,000."

Shaikh Nahyan warned if no action is taken, the situation is going to get worse and the country will suffer a severe shortage of human resources that will adversely affect the economic development. He urged the private and the public sectors and businessmen to join hands to resolve this problem.

There is a parallel issue with the quality of government provided primary and secondary education. It's not up to snuff.

I'm not arguing that education is best funded and provided by government. But I am arguing that promises should be kept. And I am also suggesting that citizens should share in the oil wealth of the country.

When can welfare benefits and immigration be separated?

Demographic imbalance continues to be a sensitive issue in the GCC:

"This region will not remain Arab-Islamic in the presence of millions of Asians here. I do not exaggerate when I say that we will soon see a Gulf minister or Member of Parliament from the Indian subcontinent," [Bahrain's Labour minister Majeed Al Alawi] said in an interview published on Sunday in Asharq Al Aswat newspaper.

Al Alawi lashed out at the lazy character of Gulf nationals that has made them almost fully dependent on imported labour even for the simplest tasks and blasted the Gulf business community for their uncontrollable greed, claiming that they were driven "only by financial interests and without any regard for the formidable damage caused by foreign workers."

The minister, a leading opposition figure who was given the labour portfolio in 2002, has now failed twice to have the GCC leaders endorse a proposal for a residency cap to limit the growing influence of the expatriate communities.

I would not describe Gulf nationals as having a "lazy character." I would say that they respond to incentives, and that in many countries in the Gulf nationals benefit from the welfare state that the oil revenues of those countries can support.

By contrast, the ex pats in the GCC have a reputation for working hard. But that is because their income is tied to their productivity; they do not receive the benefits of the welfare state. Arguably - because the GCC is so dependent on foreign labor - it has the most open immigration policy in the world. The economist Milton Friedman argued that open immigration was incompatible with a welfare state. Here's what Lant Pritchett had to say about that in an interview with Reason:

Reason: Milton Friedman has pointed out that open borders are incompatible with the welfare state.

Pritchett: I would have thought Milton Friedman would have taken that as an argument for open borders.

The free mobility of labor is incompatible with the welfare state if every person who is physically present in a location to perform an economic service automatically comes into the same set of welfare benefits as a local. That needn’t be the case.

This is what liberal democracies find hard. But it’s not impossible. You have to confront the injustice of the world and say this person is better off even without the welfare benefits, and this process is good for the world.

Reason: You then create a division between first- and second-class citizens. Isn’t that worrisome?

Pritchett: The world now is divided into first-class citizens of the world and fifth-class citizens of the world. The idea that we wouldn’t help a peasant trying to eke out a living on a side of a mountain in Nepal by letting him work in the United States, just because we have to, if he comes to the United States, endow him with all the rights of U.S. citizens—I think that moral calculus is backward.

So the first answer is: Milton Friedman is wrong. It’s not incompatible with a welfare state; it’s incompatible with a welfare state that doesn’t differentiate between people within its territory. Singapore manages to maintain an enormously high level of benefits for its citizens with massive mobility. Kuwait has one of the highest immigrant populations in the world, and you can’t ask for a more cradle-to-grave welfare state than what Kuwait gives its citizens. So it’s obviously possible to maintain whatever level of welfare state you want and have whatever level of labor mobility you want, as long as you’re willing to separate the issues.

In the GCC it has been politically feasible to admit immigrants and deny them welfare benefits. Would it be politically feasible in the U.S. to separate immigration from access to welfare benefits? Not all Americans would agree, but I suspect the majority believe that if someone is admitted to the country then they should have access to most if not all of the public benefits that citizens enjoy. At the same time Americans do not support open immigration. Thus, most Americans - although they may not recognize it - leave most would-be immigrants worse off than if they could accept second-class residency.

Thanks to freeexchange for the link.

Update - Arabian Business: "Al Aswat warned that the presence of foreign workers in the Gulf was a greater threat to the region than the fallout of a nuclear bomb or an Israeli attack."

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.
...
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.
...
[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.
...
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.