I agree that rentier states are ineffective because they are parasitic and serve to divorce income from effort (i.e. you receive an income regardless of whether you are productive or not). However, I am not sure that Dubai is a rentier state to the same extent, say, as Saudi Arabia or pre-Revolution Iran. The reason is that in the classical rentier state, the government charges ‘rent’ to external parties as a substitute for taxation on natives. They then distribute part of the rents to their constituents in the form of social welfare programs and so forth.

In the case of Dubai, it is not the government that is charging the rent but rather it is individual natives who form partnerships with foreigners. The foreigners are engaged in trade within the emirate and the partner earns an income that is typically based on the profitability of the enterprise being undertaken or a flat fee. The risk to capital is incurred, usually, by the foreigner; whilst the local takes on the risk that comes from the fidiciury relationship he has entered into with the foreigner. If the foreigner operates dishonestly or fails whilst owing money, then the local partner will be required to accept responsibility for those debts.

I don’t believe that this sort of model falls prey to the usual shortcomings of the traditional rentier state because the ‘rent’ is not concentrated in the hands of a few (the state) but each and every local can form as many partnerships as he or she wishes with foreigners and thus earn as much ‘rent’ as they want. Secondly, the local partner shares in the risk of the enterprise rather than just charging the foreigner simple rent.

Obviously, this isn’t ideal and it has led to some pretty major social issues in the case of Dubai, but it seems to me to be better than the models adopted by the other oil-producing states which are, as you rightly point out, essentially rentier states.

Amir

So Dubai is going to change from an oil-based rentier state to a real estate-based rentier state? Big whoop. Rentier states are one of the Arab world’s biggest hindrances to modernization!

I’m not necessarily sure that the Dubai model is a bad thing. It is similar to the owner of a shopping centre leasing shops and taking a percentage of their profits as ‘rent’. Given Dubai’s geographic position and the success of its national carrier, Emirates Airlines, it also more or less assures that for the forseeable future it can continue to be a major trading hub and gateway. If a society is unable to make itself an IQ magnet, then maybe the next best thing is to make itself a magnet for traders and foreign capital? It has certainly benefited the Emirates and has, at least, broken whatever dependency may have formed on oil. As I recall, Dubai no longer counts oil as its primary source of income but rather it makes the majority of its GDP from trade.

The problems go back to issues of governance that were raised in the Islam and democracy piece. If there was a culture of transparency in awarding government posts, and selection based on merit, it would encourage better minds to migrate to Muslim lands.

Dubai is an interesting example, I don’t think that it will act as a IQ magnet. These places are generally created by accident, but also by attracting the right people, rather than spending up big. The bay area around san Francisco is a classic example, where a combination of great weather, a superb university led to people like steve jobs living there and staring up apple in the palo alto garage.

If dubai does not want to go down the route of the costa del sol. then they should alter their strategy.

However, it is possible that it could work in specific sectors — such as tertiary education — because the benefits to the ‘natives’ are far more visible and it doesn’t affect the local labour market as much as, say, allowing foreign software developers or engineers to work in the country does. A further benefit of trying to attract foreign (or diaspora) researchers and university lecturers is that a vibrant research atmosphere (particularly in the hard sciences, engineering, and so on) benefits the private sector (because the product of the research will sometimes be commercialised or used in other products/services) and also, by creating the image of the country as a centre of research in a particular discipline, it gives the country additional ’soft power’ in its dealings with the rest of the world.

Israel is a very good example. There are some specific areas, such as cryptography and security software, where Israel really leads most of the world. Although it is a relatively small country, their research output and quality is generally comparable with larger, older and less troubled countries elsewhere in the world. As a result of the vibrant local research community, a lot of major companies have set up labs and major centres in the country. IBM and Intel spring to mind.