Economic production, usually measured using gross domestic product (GDP) or gross national product (GNP), is not the same as economic productivity. Production is creating goods and services. Productivity is what you do with goods and services. To gain insight into the difference let’s look at a simple example.
Continue readingTag Archives: Economy
Interest rates are a threat to equities
The UAE Dirham peg to the US Dollar means that UAE interest rates are driven by the US Fed, whose policies might not be optimal for the UAE’s economy.
Continue readingPredictions for UAE Business in 2018
My economic, business and financial predictions for 2018 and beyond. These are forward looking statements that should not be relied on to make decisions. Continue reading
US Fed rate rise signal to re-examine the dirham’s peg to the dollar?
The UAE’s fiscal and monetary policy needs are in direct opposition to those of the USA. The problem, however, is that since the UAE dirham is pegged to the US dollar, American monetary policy is in effect being imported into the UAE, to the detriment of our economy.
As a reminder, a country’s fiscal policy has to do with government expenditure – which stimulates the economy – and taxes, which rein in the economy. The US government looks like it has come to the conclusion that tax cuts would spur their economy. The US Federal Reserve, which just increased interest rates for the third time this year, has signalled that it would need to counter the expansionary fiscal policy of the US government by increasing interest rates. The Fed’s reasoning is that the US economy is doing well, but because of this any fiscal stimulus will therefore lead to inflation. Hence their conclusion that they will need to aggressively increase interest rates to keep prices in check.
Continue reading
EU's tax blacklist of UAE questionable
Earlier this year an ambassador from an EU country asked me if I invested in the EU. I informed him that I didn’t.
When he asked me why, I pointed out that the EU had treated two of their members, Greece and Britain, abhorrently, and had tried to punish both countries in ways that made no sense to me. I explained that if the EU could treat its own members in such a way then how could I trust the EU not to treat me similarly?
It seems like my analysis was prescient as last week the EU included the UAE in a so called blacklist of tax havens. As an investor and a businessman, let me explain how the EU mishandled this and what the impact might be.
In terms of handling the situation the EU was reported as only saying that the UAE was not participating in some information agreements. Interestingly, the EU never mentions whether the UAE is a signatory to these agreements. So it is not clear if the UAE is violating something it agreed to or if the EU is trying to unilaterally enforce rules on the UAE. This needs to be cleared up. It is ironic, if not hypocritical, for the EU to publicly accuse the UAE of opacity but for the EU not to similarly provide transparency to these public accusations. Publicly announcing that the UAE is on a so called blacklist and then sending a private letter to the UAE Government is, quite simply, unethical. It either all stays private or it all becomes public. Continue reading
Financial reality more important than predictions
About a year ago I wrote about the UAE as a financial center and in particular compared it to Singapore. The article states:
Let’s go back to Singapore with a GDP of $293 billion and population of 5.5 million versus our GDP of $371 billion and population of 9 million. So not only is their market cap four times larger than ours as a percentage of GDP, but their GDP per capita is about $53,000 versus our $41,000. [Data source: The World Bank]
In short, the statistics indicated at that time that Singapore was far more efficient as a financial center.
Let’s move to the present day, a year later. A Dubai International Financial Center (DIFC) report, compiled in partnership with Thomson Reuters, was recently released. The DIFC report studied the wealth and asset management opportunities in the Middle East, Africa and South Asia region (Menasa). I got to page six of this 50+ page report and found some statistics that contradicted my view of the world. I summarise them in the table below.
Your health depends on a balanced healthcare playing field
It is my opinion that one of the greatest moves to support free market capitalism in the UAE is the cancellation for Abu Dhabi Thiqa insurance beneficiaries of the 20% co-pay for treatment at private healthcare facilities. The 20% co-pay was introduced in June 2016 and at that time there was discussion on the effect on patients. There was also, however, a massive impact to the economy, but I felt that at that time the personal and social issues should take precedence over the economy. I think that now might be a good time to review that impact of that decision with respect to the economy and the positive effects of the cancellation of the decision.
Why is the co-pay issue important? As a first pass, clearly applying a 20% co-pay to private hospitals would incentivise beneficiaries to choose public hospitals. Money isn’t the only issue for a patient in determining which healthcare facility to visit but in the absence of specialisation issues it is clear that money becomes one of the predominant deciding factors.
The consequence, of course, is material negative impact on the finances of these private hospitals. The effect was quickly felt at three long-term healthcare centres in the Emirate of Abu Dhabi who quickly had their co-pay requirements waived in January 2017, and the quick government response allowed these institutions to continue providing important healthcare services.
The positive social impact is clear. But what is the positive economic impact? It is the strengthening of the healthcare sector, not because Thiqa is willing to pay for the full cost but because giving private institutions the same economic opportunities as public institutions allows them to not only thrive but to also take risks that only private companies take. Risks such as acquisitions that lead to consolidation in the health care sector and thereby a strengthening of the sector. Continue reading
Zombie companies can be harmful
The term “zombie company” has recently entered people’s lexicon as the phenomenon manifests itself in China. Yet this issue did not start with China, it is closely linked to the problems faced by Japan that started in the early 90’s, called Japan’s Lost Decade and sometimes the lost two decades, which arrested the development of their economy for at least a decade, even though the nation is known to be hard working and efficient. After all, Japan is the home of global super-companies such as Toyota and Sony so understanding how the economy stagnated could yield important lessons.
There are many closely related definitions for zombie companies but I will use one defined in the academic paper Zombie Lending and Depressed Restructuring in Japan published in the American Economic Review 2008. The definition that they give is:
A company with poor productivity and profitability that should have withdrawn from the market but continues to do business only thanks to support from creditors or the government.
Sound familiar? Continue reading
SWFs as endowments
Different sovereign wealth funds (SWFs) have different mandates. The largest are presumed to have a mandate similar to that of an endowment. The idea is that the state owns a large but fixed amount of a valuable commodity, usually oil, and that this oil is the property of not just the living citizens but also of all future citizens. Therefore, some of the income from today’s sale of the commodity needs to be saved for the future. So in effect the SWF is a future generation fund.
The question becomes, how much needs to be saved to make this all fair? Well, one way to define fair is that the government expenditure per citizen across all time should remain the same, adjusting for the time value of money. Another way to state this is that the purchasing power per capita remains constant. I think that most reasonable people would consider this fair. Continue reading
Real alternatives to the game of monopolies in the GCC
As the economy continues to be under contractionary pressure, it is high time we took an in-depth look at one of the major constraints to its growth. As we know, it is entrepreneurs building start-ups that form the foundation of any economy. However, as I have argued before, monopolies stifle entrepreneurship. The greater the number of monopolies, the greater the value destruction in the economy.
I have argued this many times. Now I’d like to show exactly how much all these monopolies, the agencies on electronics, restaurants, medicine, etc might cost the economy in dollar terms. You will be shocked.
Before we get to pricing let us understand the value of a commercial licence to operate a business. In a free market capitalism framework, the value is close to zero. For example, in the GCC, most businesses require a licence that costs a few thousand dirhams at most. If you pay much more than that then you are paying for a regulated activity or something exclusive. This insight allows us to understand the value of monopolies.