Having already imposed price controls on the rental market, the UAE government is reportedly now setting maximum prices for food products, such as eggs, rice, chicken and even bottled water.
This may appear to some to be a reasonably good idea to ease the pressure on residents. However, as history has shown, when governments force people to sell products for a price that is at or below their natural market level, it creates a shortage: it will increase demand whilst simultaneously reduce the current and future supply of the product.
It will increase demand because by ensuring the price is kept artificially low, people will be encouraged to buy more than they might otherwise — in other words, the price system is no longer ‘rationing’ the product; this, in turn, decreases the supply in the shops because if more is bought, the shelves will empty more quickly. At the same time, importers and manufacturers are discouraged from importing or producing more of the product as their profit margins are reduced — due both to their inability to get the market price for their product but also because the cost of inputs, such as labour, transport, and raw materials, are not price fixed and will continue to rise (which also , in turn, encourages hording of raw materials).
The Omani government is also considering price controls on food. And, last week, it was reported that the Kuwaiti government could start imprisoning people for up to three years if they increase the price without justification (whatever that means) of any of 367 identified food products.
29 comments ↓
I assume inflation levels are going through the roof in the Gulf, but there are smarter ways to battle inflation, and they also should of been on the ball with this a long time ago.
When did the problem first arise compared to when they started counter measures. Do the GCC central banks try to keep inflation under control at all?
The measures they are bringing in (ceiling prices/freezing prices) are counter productive.
Also with the amount of wealth flowing through the region, it is ridiculous to think that the cost of living is not going to eventually increase, that is just basic economics.
Part of the issue is that the Gulf currencies are pegged to the US dollar which forces them to follow US monetary policy at a time when it probably isn’t in their best interests to do so.
There was similar concern here in Saudi where prices on basic goods like milk and bread went up and I believe the government stepped in.
Do you think the Gulf states may move away from the US dollar?
Kuwait has already dropped it and, I think, UAE has looked at it. They would probably move to a basket of currencies rather than staying pegged to the US dollar.
There have been numerous articles in the UAE press calling for a move similar to Kuwait’s. This clearly means there are people inside the govt who want to do something similar.
This is yet more evidence that the Dubai “economic miracle” is just smoke and mirrors. It’s hard to believe there are still people who think price controls is the way to deal with inflation.
THe UAE has some of the highest forex reserves in the world. It used this to pump prime an economy based on tourism and “financial” hub, and more recently a cultural hub. Dubai’s “great leap forward”
For a command economy they have tried to develop at a very fast rate, inviting the problem that they have now: inflation. It has been exacerbated by their monetary policy and the devaluing of the US currency.
One may ask why have they fallen into the very predictable problems that face them? It is in the end a political problem rather than an economic one. Nobody has the authority to defy the ruler and challenge his policies, although many people would realize the dangers.
In the end for the UAE it is their system of governance that has been the problem.
I think this may help them deal with the problems that now face them
I think there are elements within the GCC that do not want the members to unpeg their currencies until they agree on a unified Gulf Dinar which will not be pegged to the US dollar, I think they were actually looking at the Euro or a basket of currencies for that. But their goal of having a Gulf Dinar by 2010 is a fantasy.
I assumed the Emirates of all the countries in the Gulf is working towards becoming a proper market economy.
I think the UAE is not so much a Command Economy. More like a series of Corporate fiefs. I say this because the Sheikhs and their hangers on are the movers and shakers of capitalism in the country, rather than steely eyed bureaucrats with a grudge against business.
That’s my uninformed opinion anyhow.
@ Baybers: “It is in the end a political problem rather than an economic one.”
That may be, per se, but the problem can only be solved economically. Looking at the UAE’s central bank data, it’s no surprise that inflation has grown so quickly (hitting double digits back in 2005, per The Economist). The annual growth rate for M2 has been in double digits since at least 2001, and since 2002 for M3, peaking in 2005 (33.78% and 36.57%, respectively). I doubt any economy could hold off inflation with the printing presses running that quickly.
Those printing presses are the source of the evil in the first place, so relying on them or their owners to solve the situation is particularly farcical.
Government counterfeiting. Could there exist anything worse?
JDsg
Yes the UAE is growing at a fast and unsustainable rate, but this is not due to any endogenous enterprise, rather it is the result of massive government investment, mostly in real estate and mega-projects.
It is something that is almost entirely in the government’s control.
Uh, “endogenous” means something that is caused by factors inside the system (in this case, the economy). Last I knew, the government of any country is “inside” the system.
Yes, I do realize that the UAE government has a lot of control over the rate of inflation due to the fact that they’ve spent massively on infrastructure projects, which, no doubt, has greatly amplified the money supply through the spending multiplier effect. However, had the UAE’s central bank been on the ball, it would have taken steps through any of the various monetary policy tools at its disposal to limit the growth of the money supply so that the country’s inflation rate wouldn’t have grown so quickly in the first place. In the meantime, the UAE’s got a major economic problem that can and has to be solved through traditional economic solutions (painful ones at that). You may very well be right that the UAE’s system of governance is the problem. If so, and it isn’t fixed, then the near-hyperinflation won’t go away anytime soon, will it? Or they’ll adapt, swallow the bitter pill and get their inflation rate back on track. Which, according to The Economist, is estimated to happen around 2010, insha’allah.
BTW, you guys do realize that I teach Economics, don’t you?
I wonder what would happen if shock therapy was applied to the UAE?
JDSg how many tools does the UAE have to control inflation when their currency is pegged to the US dollar? That’s the cause of half their problems. They have oil prices going gang busters so their economies are booming yet they are being forced to swallow a poison pill thanks to the US economy going into recession and the fed slashing interest rates to stimulate growth.
They need to float their currencies, start privatising and slash government spending on all those crazy projects like replicating Lourdes or building ugly tacky hotels.
They have all the monetary policy tools that any other central bank has at its disposal. A currency peg is not going to affect the size of the UAE’s money supply or their fiscal policy decisions. Brunei and Singapore have their currencies pegged to each other, yet Singapore’s inflation rate (currently at a 25-year high) is not expected to have any significant effect on the Brunei economy. You’re overstating the case with respect to exchange rates. Now if the UAE wanted to stop using the peg to the dollar and either float the dirham or tie it to some other peg, such as the Euro or a basket of currencies (like China’s done), that’d be fine with me too.
This article may be of interest to the readers here.
As JDsg will tell you inflation is all about too much money chasing too few goods. I seriously doubt that pegging to the Eruo will change the fundamentals all that much. Instead of having too many dollars sloshing about it will be too many Euros sloshing about.
Shock therapy is not a good idea either. First it dislocates far too many people. Dislocated societies become restive and force anti-democratic measures from the Government. An angry and disposed citizenry would be a perfect breeding ground for radical agitators of every stripe. The last thing any government in the gulf region is more subversive actors trying to overthrow it.
Second shock therapy widens income disparities. A few people get much richer while most people get much poorer. Middle Class prosperity evaporates and the poor multiply. The country as whole be comes less stable and less wealthy.
There is a reason why South America has moved to the left in the Bush II era. It is blow-back from the Chicago School “shock therapy” of Regan and Bush I. The gutting of the civic arena and the privatizing of damn near everything created the backlash know as Hugo Chavez.
Not knowing all the specifics of Dubai’s infrastructure program (or is it a progrum?) I can not speak to how much of it is sound and how many lovely white elephants are being purchased. I can just see how badly things go when nations do not invest in critical infrastructure creation and repair. Do the words Katrina and New Orleans Louisiana ring a bell?
From a policy prospective it might be better if the powers that be subsidized those 350 items or had a targeted aid program to help the less fortunate. Hard to say how the government could ease the pain while attacking the fundamentals. Hard to say what they could do with all that oil money sloshing about in the region. Inflation might be a given, systemic issue that is beyond the control of even the most wise of advisors and technocrats.
One thing for sure, this is as much a political issue as an economic one. Political decisions created the present situation and political decisions will put an end to it.
James @ #20
A subsidy isn’t going to help. It will lead to more inflationary pressure.
JDSG @ #18
Their central bank has to follow the US Fed. So as money supply increases in the US, it has to increase in UAE too as a condition of maintaining the peg.
The government should be controlling prices to stop people overcharging for goods and taking advantage of working people. The problem with the UAE government is that their models were wrong not that there is anything wrong with managing economies per se.
Their central bank has to follow the US Fed.
To a degree.
So as money supply increases in the US, it has to increase in UAE too as a condition of maintaining the peg.
Most countries’ money supplies normally increase to begin with. The question is, how much should the pegged currency’s money supply increase with respect to the base currency. 1:1 would be nice if you could swing it, but that’s not what’s happened with the UAE. If you compare the US vs. UAE with respect to M2, with the year 2000 as the base year (2000 = 100; the year 2000 being how far back the UAE’s website goes), the US’s M2 has increased to 142.95, the UAE’s to 282.11, almost exactly double. Obviously, there’s a huge differential between the two country’s monetary growth rates.
Personally, I’m a strong believer in the Quantity Theory of Money, or, as James put it, “too much money chasing too few goods.”
JDSG @ 23
At a very simple level, the Quantity Theory makes sense. The supply of money obviously affects the monetary unit. The problem is that there isn’t a known or constant ratio or relationship between the quantity of money and price, so therefore it can’t be managed or controlled.
…there isn’t a known or constant ratio or relationship between the quantity of money and price…
Of course not. The quantity theory of money is a strong determinant in explaining inflation, but it’s certainly not the only determinant. A lot of countries are going through cost-push inflation right now, with several important commodities (such as oil, gold and wheat) at record highs. Likewise, one of my first thoughts about the UAE’s inflation was that it might be due to demand-pull inflation, that perhaps the population had grown significantly (e.g., through expatriate immigration) to cause prices to rise. (After looking at the data, I decided that demand-pull inflation was not the primary cause.)
…so therefore it can’t be managed or controlled.
No economist expects a perfect correlation between any economic cause and effect, including money supply and inflation. There’s a reason why economics is known as “the dismal science.” But that doesn’t mean that central banks and legislatures can’t work together to keep inflation at a reasonable level (usually defined as 2-3%). In that regard inflation can be and is managed and controlled, and the proof is in the low inflationary era of (roughly) 1985-2005.
‘Political decisions created the present situation and political decisions will put an end to it.’ - James
Is there really a need to say any more?
At least in the UAE, the salaries more or less keep up with the rising costs of food. Here in Jordan, now the MOST EXPENSIVE country in the Middle East, the base salaries for most Uni graduates have not increased in ten years. We are talking a yearly salary of around $6,000 US for someone specialized in his field.
Each trip to the supermarket results in disappointment and disbelief.
UmmFarouq, is there much unemployment in Jordan?
Unemployment is rampant. This is why an agricultural engineer was our building super, monthly income less than $200, and why the majority of taxi drivers are engineers or computer technicians, or why those teachers who are taught to deal with special-needs children are the ones ringing up my groceries in the check-out line. It is truly getting worse by the day.
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