It has been difficult this year to find topics on the economy or business to be positive about. For Eid Al Adha I feel that a more optimistic article is called for. So let us look to the future and to what might be.
One happy future is having oil prices to return to US$100+ and remain there. That would have an immense positive effect on the economy. But then that isn’t looking to the future. With, among many other factors, shale oil production costs dropping and Iran increasing output capacity, this isn’t an optimistic future. It is a fantasy.
I, however, believe that we can have an optimistic future without the need for massive oil price increases. I am not saying that it is an easy path but it is a realistic one. It consists of bringing together a host of solutions and interweaving them into a single integrated plan for the economy. You will recognise individual ideas that I have discussed in detail already. Now it’s time to put these pieces together into a plan.
How can our economy grow? Our population is too small to replace oil and related income with consumer spending. That basically leaves exports. In 2014, the UAE’s non-oil trade balance was a deficit of Dh564 billion – that is, we imported Dh564bn more than we exported, excluding oil. If we are spending more than we are earning then we are going in the wrong direction. How can we reverse this? There are two sides to this equation: decrease imports and increase exports.
I am a firm believer in free market capitalism, although I do believe there has to be some social responsibility applied either voluntarily by the private sector or enforced via regulation. Therefore trade barriers are not a desirable solution to the issue of decreasing imports. Free market capitalism is about having an even playing field.
This is where fiscal policy comes in. By taxing imported goods it puts the brakes on spending, as opposed to investing. The beautiful thing here is that a VAT on luxury goods has been announced and is in the works. The faster and higher that number, the better for the economy. Influential family groups owning agencies for luxury goods might be tempted to argue for a lower luxury tax but I have full faith that in the end they will reject such a self-centered position and instead adopt the patriotic decision of supporting the overall economy.
What about exports? Our most famous export after oil is tourism. Yes, a service can be an export. Which should remind us that although it might not be as famous but transport is a massive export. Think Etihad Airways and Emirates airline. So, what else can we export?
Extending the idea of service exports, capital flows is an excellent candidate. The DIFC has not hit its full potential in terms of the “International” part. The ADGM is in its early stages. How can they help the UAE economy? The knee-jerk reaction is to have sovereign wealth funds use their assets to support these institutions via outward investment. But what if we learn from Etihad and Emirates and decide to become a financial capital hub? What that means is that just like the airlines became experts in all the global destinations that were ignored by the incumbents, the DIFC and ADGM can develop the same type of strategy but with respect to financial capital flows. If we had the top sub-Saharan asset managers based here I promise you that the capital flows will be huge. No Trump intended. Then think about Eastern Europe, the Stans, the neglected parts of South-East Asia. That is a single idea.
The hub and spoke model can continue. The announced mergers of FGB-NBAD and IPIC-Mubadala will create the size of company that can have strong global reach. OK, IPIC and Mubadala already did, but together they are stronger. We have to start building regional expertise locally, and building assets, ie buying companies, regionally. The regional expertise attracts business and capital locally and the regional assets imports financial returns.
For all of this to happen we need to deregulate further. I have spoken about the Telecommunicaitons Regulatory Authority’s official ban on Skype and how this protects the telecom oligopoly while harming the consumer, the exact opposite of what a regulator usually does.
Recently I read about Uber and Careem being sanctioned for breaching regulations, as they should be. However, I was a little shocked that two of these regulations included a minimum price of their services and a maximum number of drivers per company. Increasing prices and decreasing service really is not the way to go.
And don’t get me started on security cheques. There is a personal bankruptcy law announced in the making, but although telling entrepreneurs and innovators that they no longer face jail time if their business venture fails is a good thing, replacing jail with personal bankruptcy as the risk of business failure is not an incentive for these entrepreneurs and innovators to invest in our economy. Let’s just ban banks from asking for personal guarantees for a corporate loan. Will this harm banks? Absolutely not. How is someone in jail going to pay a bank back?
I have no doubt that the intentions behind these decisions are sincere but clearly there is a disconnect between the analysis provided to the decision makers and economic reality.
The final piece of deregulation is the monopolies on agencies. Monopolies always hurt the economy, effectively levying a tax on the national economy that is paid to the monopolist instead of the government. Let’s just abolish them, after all with 40 years of a monopoly how much more can a decent person want?
Finally we come to the human resources part of this plan. There are two parts to this: expats and Emiratis. The rich expats have nothing to complain about. It is the majority of middle and low-income expats that need attention. As The Economist reported, the GCC does more on a per capita basis to decrease global income inequality than rich OECD countries by choosing to make it easy to enter to work but hard to get citizenship, as opposed to the more common stance adopted by the rest of the world of hard to enter to work but once done easier to get citizenship. Basically we employ far more foreigners per capita than rich OECD countries.
Our problem is not rights. It is the enforcement of rights. This myth that the government is responsible for the mistreatment of workers needs to be corrected so that we can continue to attract workers. The abuse is not by our government, it is by the private companies, especially construction companies. Funnily enough, Emiratis are rarely involved in the senior management of such companies. I would suggest that severe civil penalties on a corporate as well as personal level, against executives and the board, be levied for such abuses and that criminal penalties be considered. Or how about making the entire board and senior management of these companies spend a week in these camps for each company license renewal?
As for employment of Emiratis, I’ve been through this, so I will summarise. If you are a private company and you face challenges hiring Emiratis, don’t intentionally circumvent the law, don’t just complain about Emiratis. Find solutions. Innovate. Take some responsibility. Because an economy without full employment of Emiratis has no place in the UAE. And a private company that takes from its host nation without giving back, well, that’s called a parasite.
I firmly believe that the idea for a plan that I have outlined above would lead to a long-term sustainable economy. Will there be short-term pain as we continue to deleverage? Yes. Is this the best plan? Perhaps not. But if it isn’t, that just means there is a better plan out there and therefore more reason to be optimistic.