The rise of the Gulf

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: the Gulf countries need labour. Thanks to a liberal attitude to guest workers, in the UAE, for instance, over 90% of the private labour force is made up of foreigners. Some of the follies these Indians, Bangladeshis, Chinese and Filipinos build will not earn much return, but at least they help spread the wealth around. And now that American spending is faltering, a splurge is welcome. As Adam Smith said, outlays on “trinkets of frivolous utility” are

what “keeps in continual motion the industry of mankind.”

Still, the Gulf’s splurge might be better spent if governments were doing even less of the splurging. Despite tentative reforms, too much money remains in state hands. The Saudis have become friendlier to business, taking steps to liberalise the financial system, airlines and telecommunications. But the government is still too fond of its grandiose projects and too slow to get unglamorous things right. It takes an age, for example, to enforce a contract in the country’s courts.

By the same token, it would help if local currencies were allowed to strengthen. Currency reform is not just a way to constrain inflation, but also a means of redistributing spending. At present, the petrodollars are converted into local money at a fixed rate and doled out as governments see fit. With stronger local currencies the state would get fewer dirhams, dinars or riyals for every petrodollar. But Gulf residents would be able to buy more with their money, and guest workers could send more rupees home to families in Kerala.

There is another way to transfer economic initiative from governments to people. At present the Gulf states buy social peace by doling out generous benefits and subsidies, such as cheap housing and medical care, expanding the public payroll and forcing private companies to hire locals in the name of Omanisation or Saudi-isation. Too many nationals get a government pay cheque for a meaningless job, or owe their jobs in private firms to a hiring quota. They pretend to work and have neither the time nor the incentive to start businesses or acquire skills.