No, its Not Killing Your Elm Trees

Its long, I know, but some may find it interesting... some. I won't be offended if you don't.

Gentle Readers,

One can make the argument that the oil rich nations of the middle east, or any oil rich nation for that matter, are the mercantile or "rent" states of the 21st century. Today, however, oil has replaced the gold and silver that once flooded the markets of colonial Spain in the 16th and 17th centuries.

Simply put, any country that relies heavily on the extraction of a natural resource found within its sovereign territory for revenue is a Rent State. By definition, "countries that receive on a regular basis substantial amounts of external economic rent," are rentier. The massive funds procured by the sale of petroleum are essential to understanding the political economy of not only the UAE, but all oil rich states.

Within the UAE, there are seven emirates (or states) with a very weak federal government, but a strong sheik, the monarch with the final say on all things pertaining to the country. This monarch, the leader of Abu Dhabi (capital of the UAE) is also considered the leader of the country. In addition, Abu Dhabi is the only emirate that has oil within its territory. The capital uses this to its advantage to gain a political following on two levels. First, Abu Dhabi subsidizes the six other emirates with remittances creating subservient governments in each of these territories as they rely almost wholly on Abu Dhabi's sharing of oil revenue. Any leader who may oppose a decision made my the leaders in Abu Dhabi will be either cut off or immediately removed. Second, the oil remittances win over the support of the populous. The Sheiks provide schooling, housing, land, as well as a monthly stipend in exchange for political backing. One must note, however that these are only bestowed upon the approximately 800,000 Emirati citizens though the number of people in the country numbers 4,000,000. The Sheiks in the UAE have experienced very little resistance due to their calculated spending of oil money as is the case for many of the GCC (Gulf Cooperation Council - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) countries.

The rentier state policy is futile without first formulating an extensive international economic integration of oil remittances. As oil money floods the market, inflation naturally occurs no matter where it is spent; be it construction, tourism development, military, or education. Nothing, aside from keeping the money out of the market will curb inflation. This begs the question of how the GCC leaders are able to succeed in securing political support from their people while keeping inflation low, yet places like Venezuela are facing inflation rates of 20.4%. It is important to keep in mind the small population of the GCC nations, with the largest being Saudi Arabia, which some argue is on the brink of a population boom which would cripple their rent state policy. Their small population allows a massive amount of currency to flood the market to produce luxury goods while funneling an even more massive amount of curreny into foreign investments such as currency, foreign stock markets (The UAE, in the last month purchased 18% of Nasdaq's worth in addition to Nasdaq's entire 28% share of the British Stock Exchange), or luring international business to the region. This effectively keeps currency out of the domestic market and prevents inflation.

Venezuela, on the other hand has a population of 26,000,000. Hugo Chavez has flooded the domestic market with its own currency in order to buy political backing. While the people may need the schools, markets, hospitals, and police forces he has created, Chavez has failed to dully keep his own currency out of the domestic marketplace leading to massive inflation rates resulting in poverty. These effects are known as Dutch Disease, which simply put, blames high interest rates on the deindustrialization of a nation's economy and reliance on the extraction of natural resources to fund a nation's development.

The "cure" to Dutch disease is a two fold approach. As previously mentioned, it is vital that the inflation of real exchange rates must be slowed by draining the domestic market of currency and investing it elsewhere. In addition, the competitiveness of the industrial sector must be restored. Alternatively, a government can resort to protectionism as a last resort. This however creates its own problems as tariffs and subsidies could potentially amplify the effects of Dutch Disease by restricting foreign investment.

Well, I wanted to talk about how the UAE government shamelessly buys support from its citizens but for better or for worse, I got off on a less biased tangent. Oh well... I'm gonna go eat some muesli with berries...