I recently took my first trip to the Middle East, and have a few observations. Please consider the following post to be highly speculative, based on a limited understanding of the region.
As soon as I boarded the Qatar Airways flight from LAX, I noticed the diversity of the cabin crew, which included blond Europeans, East Asians, Africans and Middle Easterners. One thing they had in common is that they were all young, attractive women. Then I recalled reading that nearly 95% of the Qatar workforce is foreign workers. On the second leg (from Doha to Abu Dhabi) I sat near a bunch of young German men who looked like they might be engineers. A fast growing economy like the UAE presumably needs a lot of foreign technical expertise, and thus it’s no surprise that foreign labor plays such a big role in the Gulf region.
A US airline must recruit its staff from the US labor market. The Gulf states can recruit their airline personal from the entire world. Because so much of the world is poorly governed, there are millions of highly talented people stuck in countries with very low wages. Qatar can recruit smart, hard working and attractive cabin crew from Nigeria, Ukraine, Vietnam and Egypt, all places with low average incomes.
When New York City builds infrastructure, they must deal with inept US companies, inefficient labor unions and a corrupt and over-regulated political process. When Abu Dhabi builds infrastructure that can have the best German, Chinese and South Korean builders compete for the contract, using cheap South Asian labor to do most of the heavy lifting.
To readers involved in international business, none of this is surprising. But it got me thinking about the so-called “resource curse”, which actually represents two distinct issues. One type of resource curse occurs when a natural resource boom appreciates the real exchange rate, making other firms less competitive. This is called the Dutch Disease. A second problem occurs when reliance on natural resources causes governments to become less efficient and/or more corrupt. This problem is associated with places like Nigeria and Venezuela.
I had always assumed that a natural resource boom either made the remaining parts of an economy less efficient, or at best had no major impact in either direction (as in Norway.) It seems to me, however, that oil and gas have made even the non-oil and gas parts of Gulf economies much more efficient than in most other similar countries. If so, how should we think about that outcome?
Let’s assume that the most efficient economic system is a free market, perhaps with some regulations to deal with things like monopoly and externalities. In that case, why are even relatively successful economies such as the US so full of inefficient rules and regulations? One answer is that special interest groups often oppose free markets. US born flight attendants don’t wish to compete with flight attendants from low income countries, and hence the US refuses to allow Qatar Airways to serve domestic US routes. US construction companies and workers don’t wish to compete with international firms using German engineers and Pakistani laborers, so we end up with far inferior subways systems.
So how were the Gulf countries largely able to avoid these burdensome restrictions that reduce efficiency? Recall that prior to the discovery of oil, these nations had very small populations that engaged in traditional lifestyles. There was no large urban proletariat clamoring for protection against cheap foreign labor. The oil wealth allowed these governments (mostly monarchies) to essentially buy off the support of the native born population. Openness to international trade and investment led to greater economic efficiency, which led to ever higher living standards.
It’s only natural to view the economic success of this region as being almost entirely due to its oil wealth, and that used to be my view as well. But I no longer think that’s true, or at least it’s not true in the sense that people assume it to be true. In some respects, the most impressive parts of the Gulf economies are their non-oil sectors.
As an analogy, if you explain to an average person that Switzerland is much richer than other European countries, they’ll immediately reach for some sort of explanation that they can visualize. “It must be those mysterious Swiss banks, with all of their secret bank accounts.” While Switzerland has some successful banks, that industry plays only a minor role in Switzerland’s overall success, which is based on very high productivity in a wide range of industries. Similarly, if you mention to people how rich Singapore is, they immediately gravitate toward explanations such as the role of wealthy Chinese and Indian migrants. People have trouble understanding how various small nations might simply have much more productive people than their neighbors. Do the Swiss and Singaporeans work harder than other people?
Let me try to anticipate some objections to this view. You might argue that Qatar Airways isn’t more efficient than American Airlines, they simply pay their flight attendants lower wages. But those lower wages presumably reflect the fact that flight attendants from poor nations have a lower opportunity cost of labor in their home country. So it really is more efficient to use a talented person from Nigeria or Ukraine than to use an equally talented person from Bavaria or Illinois. From a global utilitarian perspective, the Gulf states are “doing the right thing” by bringing in foreign labor, and it’s also the most profitable approach.
A second objection is that there are reports of foreign workers being badly mistreated in the Gulf region. This problem also occurs in other parts of the world (such as nannies working in Hong Kong), but it seems to be especially widespread in the Gulf.
I won’t deny that the abuse of foreign workers makes the Gulf model less impressive than otherwise. But I would deny that this problem completely overturns the case for globalization. Any American or European nationalists looking down their noses at working conditions in the Gulf need to consider the deeper structural factors that lead to these abuses. The root cause is the dramatic mismatch between the poverty of one part of the world and the affluence of another part of the world. As long as those disparities exist, there will be some appalling situations whenever the two worlds come into contact.
An American or a European might smugly assume that we don’t have the bad working conditions that they’ve read about in the Gulf. But why is that? Isn’t that largely because we’ve built barriers to stop tens of millions of desperately poor people from reaching our countries? For every story of a Filipino worker being abused in the Gulf, there are a dozen stories of migrants being robbed, raped or drowned while attempting to reach the US or Europe. These tragedies exist because desperately poor people are willing to put up with things that most of us cannot even imagine, in order to have a shot at a better life.
From this perspective, the Gulf is not so different from the US or Europe. It has a system with some strong positives and also some serious negatives. The difference is that the negatives occur right within their economies, whereas the equivalent problems created by our wealth occur out of sight of American and European residents.
Fortunately, the international flow of goods, investment, and labor is not a zero sum game. The Gulf region is growing rapidly, and despite the very real abuses that occur on occasion, the net effect is to provide new opportunities to people from all over the world, especially South Asia.
There are very few economic systems that are as efficient as Singapore or Switzerland. Presumably, that’s because the public choice hurdles are simply too formidable for most governments to overcome. If I am correct, then instead of viewing oil as the sole source of the Gulf’s economic success, it might be more accurate to view oil as the currency that Gulf governments used to buy a relatively efficient economic model for their non-oil sectors.
I used to believe that Norway was unique—an oil-rich country with an equally high quality non-oil sector. Now I wonder if the Gulf states are not becoming successful in much the same way. I hope so, as the world needs more highly successful models to emulate. One success story can be written off as a fluke—it’s much harder to brush aside success in a half dozen countries. How long will the Iraqi people accept the incompetence of their current regime?
Prior to the trip, I’d read many articles on the boom in the Gulf, such as this Bloomberg piece:
Demand for Dubai property is booming as the government’s handling of the pandemic and its liberal visa policies attract more foreigners. The luxury end of the market is also benefiting from an influx of investors such as Russians seeking to shield their assets, crypto millionaires, and rich Indians setting up second homes.
“The global super rich continue zero in on Dubai, with the city’s lifestyle and relatively affordable luxury homes being the top pull factors,” said Faisal Durrani, head of Middle East research at Knight Frank. “There is also an element of a pooling of global wealth in Dubai, which is helping push the emirate to a state of critical mass, which itself has become a new magnet for the global elite.”
But it wasn’t until I visited Abu Dhabi that I finally understood what’s going on in this region. Places like Abu Dhabi are surprisingly similar to the US, but much easier to get into. Why wouldn’t they be booming? I also encountered many “Middle Eastern-looking” people in the Gulf who did not speak Arabic but did speak English, as they come from places like South Asia. They complain that they can’t get visas for America but tell me it’s easy to get visas for the Gulf. It’s like a new America is being created because the real America (wrongly) thinks it’s full.
Land use is another area where this region may have advantages. Even in the US, NIMBYism is a bigger problem in areas with attractive countryside (Coastal California and the Northeast) than in places like Texas and Arizona. Internationally, it’s probably easier to build a giant new airport in a Middle Eastern desert region than it is to add even one runway to Heathrow. Thus the Arabian peninsula is a sort of blank slate where ambitious governments can add people and infrastructure according to the whims of their planners. And South Asia has plenty of people to add to the mix.
Will Arabia become the new America?
PS. When I refer to the Gulf region I am mostly thinking about the UAE, Qatar, Kuwait, Saudi Arabia, Oman and Bahrain. On this trip, I visited the UAE (specifically Abu Dhabi), Oman and Qatar. Iraq and Iran are very different places.
PPS. Janan Ganesh’s columns are almost always insightful, and this recent piece on Dubai is no exception.
READER COMMENTS
Bobster
Feb 10 2024 at 1:28pm
I had the same thoughts about Dubai.
It’s very nice if a bit boring.
They have tons of infrastructure, even *gasp* plentiful highways that make it very easy to get around.
They don’t struggle with water shortages like California because they just build desalination plants.
Scott Sumner
Feb 10 2024 at 1:48pm
California doesn’t need desalination plants, they simply need to stop subsidizing water use in rural areas.
David Henderson
Feb 10 2024 at 2:40pm
Or simply allow the farmers to “farm” water.
Bobster
Feb 10 2024 at 4:12pm
Or build more reservoirs which voters already approved
There are many things they can do, but they’re going with a very expensive mandated conservation regime
Dylan
Feb 10 2024 at 2:27pm
My first time on Qatar Air the attractiveness of the FAs was so noticeable that my wife commented on it first. But, it is more than just physical attractiveness, they all seem to be highly intelligent and speak multiple languages.
However, I think it would be a mistake to attribute this to an openness to foreign workers more than a more open willingness to discriminate based on looks in hiring decisions. Additionally, at least as of a few years ago, Qatar required FAs to be single and get permission before they would be allowed to marry.
https://www.smithsonianmag.com/smart-news/china-and-qatars-flight-attendant-requirements-mirror-those-1960s-us-180949343/
David Henderson
Feb 11 2024 at 5:01pm
Interesting. So at least on some dimensions, they have more freedom of association than we Americans have.
Aaron McGorthy
Feb 11 2024 at 10:57pm
Flight attendants at Qatar Airways are facing numerous restrictions. Many from Western countries opt to leave as soon as they secure a job with either Emirates or Etihad due to their inability to tolerate these restrictions, such as curfews before flights, segregation from the opposite gender, and the requirement to seek permission to travel outside of Qatar. As a result, most Qatar Airways cabin crew members hail from India, the Philippines, Korea, and Thailand. This situation illustrates that not everything that glitters is gold.
Jose Pablo
Feb 16 2024 at 7:09pm
This situation illustrates that not everything that glitters is gold.
“Everything” that allows people to move from a “worse” situation to a “better” situation is gold.
Whether the “better” situation is or isn’t the “best” situation is irrelevant.
Any restriction that Qatar FA know and are willing to accept, and that they can stop accepting and move ahead at any time of their choice, is glittering gold.
Compare that with the restrictions placed on you by your government. Restrictions that you never explicitly accepted and that you can’t stop accepting.
steve
Feb 10 2024 at 4:17pm
Strikes me more as this being the success of the enlightened despot. We know that form of government can be very efficient and progress rapidly. However, it fails when the next despot isn’t so enlightened. They need talent from outside their country since they haven’t been able to develop their own. Also, I was in Saudi Arabia for a year and was offered a nice job at a salary that would have been hard to matching the US if I wanted to come back. They were pretty open about having pay scales based upon your nation of origin. I guess that is kind of American. When I lived in Texas for a short while people kept advising me to get a wetback to do stuff since it was a lot cheaper.
Steve
Scott Sumner
Feb 10 2024 at 9:13pm
Steve, You said: “Strikes me more as this being the success of the enlightened despot.”
Yes, but the interesting question is why a despot of an oil rich country might be more enlightened than the despot of another country in the region that is much poorer. That’s the issue I was trying to address here.
Lizard Man
Feb 10 2024 at 9:42pm
Could the threat of war be playing some role? I thought that one of the reasons that Lee Kuan Yew was so successful was that Singapore was a small nation surrounded by much larger and hostile neighbors, and so for the country to survive (and the country’s elite to maintain their status) their best option was to maximize national power, not their own power within the nation. Maybe something similar is going on with wealthy Gulf Arab states.
Scott Sumner
Feb 11 2024 at 1:43pm
Good point.
Jim Glass
Feb 11 2024 at 1:55am
Here’s a video take on the UAE that largely agrees with you, adding that it has unique geographic advantages, and is attracting businesses to build itself up as a future major business hub by collecting near no taxes — no corporate tax, no income tax, no sales tax. That’s a pretty big advantage in attracting businesses, fueled by oil revenue. Not an economic policy most states can try.
OTOH, there are Arab states and Arab states, regimes and history make a difference…
Here’s a good look at Saudi Arabia and how it got to where it is now, a whole ‘nother story — recommended if only to understand the warfare going on in that part of the world today.
The “traditional lifestyles” of the people were brutal, fanatic even, many still are now, which is a big problem. Of 4 million Saudis in the “workforce” 600,000 are in the private sector, the rest are basically “civil servants” — I’m not sure that buying off 85% of the native working population to keep them from toppling an absolutist regime is a model of economic efficiency. And yes, 90+% of actual workers come from abroad, but because all of your own population is on the dole, is that good? The Saudis are trying to do a UAE with their “2030” project, but are getting a rep for big waste throwing massive amounts a giga-projects, consuming 20% of oil production at home, buying tremendous amounts of military equipment from the USA — though that may not be all waste, considering they are surrounded by militant enemies trying to destroy the regime, with almost as many internally…
It’s not the UAE. Point is, big differences between Gulf states.
Scott Sumner
Feb 11 2024 at 1:43pm
I agree that the UAE/Qatar model seems better than the Saudi model.
Brian Meegan
Feb 11 2024 at 10:31am
How could Arabia be a new America, when the region is full of monarchies that oppose democracy and freedom?
John Wee
Feb 11 2024 at 10:37am
The arguments about terrible working conditions may have some merit for the Gulf States. But here in Singapore, the foreign workers are paid a decent wage, enjoy acceptable working conditions, and get to live in a paradise country. So, it would seem that there isn’t a downside for them. Hence, the high popularity of Singapore with them as a workplace.
David Henderson
Feb 11 2024 at 5:02pm
Excellent post, Scott.
Robert Olson
Feb 12 2024 at 4:05am
Excellent insight. US civil engineer living in Bahrain now. I’ve been to all the countries you mentioned within the past year. Seeing all the infrastructure going up in months instead of years makes me recall the Thomas Friedman book from about a decade ago, “that used to be us.” There is a real sense of excitement in all the big plans for the future and can’t help wonder if kids in Gulf state schools feel a real optimism for their future prospects being part of the development vision that has captured so much attention worldwide. With KSA now seriously in the game shouldn’t see a slowdown anytime soon.
Phil H
Feb 12 2024 at 4:07am
Presumably the test will come if the bottom drops out of the oil market following extensive solarisation. In many ways it’s easy to be a good place when the money’s flowing; the test of a country comes during a recession.
But yes, in general the UAE does seem to be a pretty awesome place.
Ron Adam
Feb 12 2024 at 5:11am
I worked and lived in Saudi Arabia for over 8 years four decades ago, and have recently visited there for some months. There’s been massive change! The new, younger leadership has opened the country in many ways. Saudi women can drive and many now work, in stores, at the airports, and in malls. One Uber driver told me that “two income families” are now the norm among younger families. Before, you could visit for religious travel or for business. Now the country is open for most, with visas at entry with no questions about religion. Another young driver told me “the Crown Prince is our guy”, opening the country to jobs other than the state or the oil industry. Sure, they are throwing massive money on projects, some of which won’t pan out, but the majority of the country is young, and I think many of those projects will be successful. They have introduced alcohol, initially for diplomats, but I think, like Qatar, soon for tourist and resident non-Muslim workers. My guess: Saudi Arabia will eventually surpass Dubai, Abu Dhabi and Qatar as the center of business and travel in the Middle East. It’s a hospitable, dynamic country; not perfect by any means, but fast changing and well worth a visit.
Curt
Feb 12 2024 at 8:44am
Except for the fact that you cannot become a citizen of any of these countries as a foreigner.
Part of the “dream” of moving to the west is obtaining citizenship for both you and your children. This is not possible in the UAE or Qatar etc.
Foreigners in the middle east are temporary and disposable, in the west you can become a local.
Eric
Feb 16 2024 at 11:45am
I live in Qatar, so I can’t speak for other countries. The issue here is that there is tremendous revenue from the largest natural gas reserves in the world and a very small (just over 300,000) population of Qataris among whom to divide the proceeds. They can afford an incredibly inefficient welfare state and use what’s left over to buy world class infrastructure produced as efficiently as possible. Qataris are guaranteed government jobs at above market salaries, receive free university education anywhere in the world, and receive free and/or subsidized and interest free accommodation. When you can afford to give every citizen those things and don’t give immigrants any path to citizenship (I have students here who are 3rd generation Palestinian or Lebanese), people will be more open to immigration and competition in non-government sectors. It helps that Qatar is not fiscally responsible for any of these people once they retire.
CL
Feb 17 2024 at 8:40pm
Having relatives that are Saudi Nationals, dual citizens as well as KSA Nationals that have never lived outside of that country, let me enlighten a little. You are comparing apples to oranges. Foreign workers that come to the KSA, do not have the same opportunities or rights as those in the USA. They cannot become citizens and do not have the benefits of citizens. Their Visas are held by their employers. They are not free to come and go as they please. Permission to leave the country must be granted by their employer. Foreign employees are not allowed to hold upper- level management positions. Those are reserved for Saudis. Workers are restricted as to where they may live, and many are not permitted to reside amongst Saudis. The KSA is extremely protective of it’s borders, it’s citizenry and who may enter the country and for what reason. There is no immigrantion process as we know it in the US. Only a Saudi born of a Saudi National family is a citizen and has rights. The KSA is a socialist country with plenty of wealth to distribute to all citizens. Saudis value work- life balance and family. Since approximately 1940, foreign workers have been imported to infuse knowledge and to perform labor to achieve economic goals. I would assume that the other similarly situated Arabic countries are more similar than not. I do agree with you that the Arabic nations use foreign labor to their advantage to achieve their goals. Unlike you, I believe that the KSA very strategicly protects it’s border and citizenry, shielding them from many of the perils that plague the US now and will continue to well into the future.
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