Tuesday, May 4, 2010

Impressions of Dubai: Lessons for the NEM

I’m back after spending close to a week in Dubai and an interesting trip it was. The United Arab Emirates (of which Dubai is a part) has one of the highest per capita incomes in the world – ranked third in real terms after Qatar and Luxembourg in 2007 according to the latest Penn World Tables (Malaysia is ranked 53rd by comparison).

Dubai has an interesting economy and its development perhaps holds some lessons for Malaysia, never mind their recent debt crisis (stemming largely from an overheated property sector). You would think that a gulf nation like Dubai would be awash in oil, but oil revenues now comprise less than 10% of the economy. They’ve managed to nicely avoid being infected with Dutch disease and the economy has maintained its high income despite the lack of any other significant natural resources.


How was this done? Largely by going the services route – Dubai is intent on being the financial centre for the Gulf, as well as a prime tourist and shopping destination. Duties and taxes on goods is virtually nonexistent as is individual and corporate income tax, which is a strong draw for expatriates and multinationals. Dubai is also a centre for trade in the region, even if it produces next to nothing on its own.

This focus on non-tradables means labour incomes, being restricted to competition within the emirate, are continuously bid up – I read about low to mid-level executives earning at least AED10k a month (or about MYR9,000).

The flip-side to high labour incomes can also be seen – Dubai is an expensive city when you are talking about anything other than tangible goods. A smallish apartment costs around AED70k a year to rent (the hotel room I stayed was rated at AED2500 a night), transportation costs an arm and a leg, and it’s clear that a lot of that high labour income is being eaten up by higher (much higher) costs. No doubt “things” are cheap relative to labour income – from walking around some of Dubai’s many shopping malls, there’s little to choose from in terms of prices between Dubai and Kuala Lumpur. But in terms of other costs – housing, transportation, even fast food – Dubai has all the hallmarks of the Balassa-Samuelson effect.


That’s one of my main concerns with the New Economic Model and high-income status for Malaysia in that higher labour income necessarily means higher costs in everything except material goods. Which means if we’re not careful, we’ll still be dealing with the same issues of inequality and relative poverty as we have now, except your roti canai and nasi lemak will cost double what it does today.

Before I leave this topic, one last observation – Dubai’s fortunes are being built on the backs of immigrants. If it weren’t for the signage and the scorching desert heat, it’s pretty hard to tell you’re in the Middle East. English is the lingua franca and most people I met and spoke to were from as near as Kuwait and as far afield as the Philippines – 85% of the population come from somewhere else. I’m told that “locals” are slow and complacent – sound familiar?

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