Is Arabia the New America?
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.