Busting the myth of labour’s effect on the UAE economy

The phrase “UAE dependence on foreign labour” is a mainstay of any discussion about the UAE’s economy. It sounds self-evident, doesn’t it? I, however, refuse to believe an opinion that is stated as fact, regardless of how authoritative the statement might sound.

The implication is that if foreign labour were to leave the UAE then the economy of the UAE would be negatively impacted. This misses the point that the factors affecting an economy are many, and are dynamic. For example, the statement does not address how easy to it is to replace labour. But that is for another article.

In this article I will look at the relationship between foreign labour and the economy – which of these leads and which of them follows, and what this means to the UAE.

The baseline that we wish to look at is the UAE economy, and more importantly economic growth in percentage terms.

The period 2002 – 2012 is a complete economic cycle, with a boom starting in 2003, peaking in 2006 before turning into a bust, and then returning to normal.

What has this done to population growth?

We see that population growth lags economic growth by a year in the boom years, peaking in 2007 before dropping quickly to almost 0 per cent.

This tells us labour growth depends on the economy and not the other way around. The economy attracts foreign labour as it expands, and reverses the trend as it contracts.

What does that mean to the citizens and long-term residents of the UAE?

The GDP per capita behaves as you might expect, expanding in the boom years. However, after dropping 40 per cent in the aftermath of the global financial collapse, the UAE’s GDP per capita rebounds to 2004 levels!

What we have here is a self-correcting quality of life mechanism that the UAE labour policy brings to the economy.

As the economy in the UAE grows, the liberal foreign labour transfer policy allows for manpower to quickly ramp up and support this growth. More restrictive labour policies, which call for a long internal search, stifle economic growth by interrupting the supply of labour. This is especially perilous for the knowledge-based sectors of the economy.

The flip side is that in a contraction, or even a recession, the labour force self-corrects to stabilise GDP per capita. Foreign workers who have generated a higher-than-average savings rate during the economic expansionary cycle, and with the massive tax savings in a personal income tax-free country, have a cushion that they use during a contraction. Foreign labour remains incentivised to emigrate until the GDP per capita stabilises. Everybody is happy.

That is on the revenue side. On the expenses side, public services that have their budgets cut, a normal result of a contraction, will nevertheless be able to maintain their quality of service because of the reduced overall population.

This rebalancing of supply and demand continues in the private sector. Lower consumer demand is matched by lower supply. If there are a 100 dentists and people spend less on their dental needs, normally there is a problem. But if 40 of those dentists up and leave, then the remaining dentists will be able to maintain their businesses.

This symbiosis is one of the foundations of a sustainable quality of life available in the UAE.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com

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