29 November 2006

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Oil pouring in

Gulf money is pouring into Malta – and it’s not just in the aspiring internet village of Smartcity in Ricasoli. News of Istithmar’s 23% shareholding takeover in International Hotel Investments now brings the island of Malta closer to the reality of Dubai’s global ambitions.
Last week, Business Today reported on Istithmar’s EUR110 million investment in IHI, which will be used for hotel acquisitions. It’s just one of the many interests which Istithmar, which means “investment” in Arabic, specifically looks for in its role as the aggressive investment arm of the Dubai government, set up by Dubai ruler Sheikh Mohammad bin Rashed al-Maktoum. In short, Dubai is looking after its future in the face of dwindling oil reserves, deploying its massive liquidity in investments already worth USD2.5 billion such as the UK’s Standard Chartered bank, Time Warner, and Perella Weinberg Partners, the financial services firm. It has also acquired landmarks on New York’s Park Avenue, part of its strategy of focussing on property, consumer, industrial, and financial services. And apart from Dubai, more gulf money is expected to flow in Maltese real estate. Only recently, the site of the former Corinthia Mistra Village in Xemxija was earmarked for the latest mega-project of the Kuwaiti Al Saleh family, a real estate company which specialises in property across the Middle East and North Africa.
Such trophy assets are part of the strategy employed by oil-rich countries such as the UAE to make up for dwindling oil reserves. It’s a strategy to diversify the economy when oil dominates it, to create the necessary funds for the future and hopefully spread the wealth over generations. Such “future savings” accounts have traditionally existed in developing resource-rich countries, but often fell victim to raids by the ruling elites and politicians. But the UAE is different in this respect.
It would appear that oil-rich Gulf states have avoided the oil curse that is known as “Dutch Disease”, which is so called because of the problems encountered by the Netherlands after it found North Sea gas. The theory is that when a country strikes oil, the sudden influx of dollar revenues leads to a sharp appreciation of domestic currency, which often makes other non-oil sectors such as agriculture and manufacturing less competitive on world markets. It is a question of how dollar-denominated cash gets handled once it enters fragile economies.
This often leads to the domination of the economy by oil, and this dependence has critical after-effects especially in the face of future dwindling resources. We know of oil as having created entire cities and economies out of mere sand, such as Dubai and many other cities in the Persian Gulf. We also know of oil as the source of great inequalities in African countries where bad and corrupt governance often sees oil revenues flowing directly into politicians’ pockets.
This brings to mind the hopeful aspirations of even the Maltese, the popular claim often being that should the island strike oil, its citizens wouldn’t be taxed, given the great amount of revenue such a discovery would render to the government.
However, while countries like the UAE have indeed managed to escape the Dutch Disease by diversifying their economies, a study by Arvind Subramanian of the IMF had correctly argued that Gulf oil had rotted democratic institutions. The untaxed citizens – because the vast oil wealth may lead to lower or no taxation – become devoid of an incentive of keeping their leaders and rulers in check. The autocratic management of the national economy in countries such as the UAE, aided through the vast oil revenues, also means there is little need for consultation. Nowhere is this more evident than when, before the arrival of oil in Saudi Arabia, the ruling family consulted with the merchant classes when it needed tax revenue. Today that is no longer necessary. This often explains how even oil rich countries in Africa are traditionally characterised by bad governance, civil war, and corruption. Oil, in countries with fragile institutions, often tends to wreck those institutions into insignificance.
Jeffrey Sachs, the author of The End Of Poverty, recently remarked how evident the interventions in the Middle East by the US and the UK were related to oil. In an invitation to journalists to imagine the world 50 years from now, George W Bush, he said, “did not have in mind the future of science and technology, or a global population of nine billion, or the challenges of climate change and biodiversity. Instead, he wanted to know whether Islamic radicals would control the world’s oil.”
The control of oil remains one of the key concerns of dominant economies which depend on the supply of oil to keep them going, which is why the US was always concerned with Saddam Hussein not being as good a friend as he possibly was with other European companies.
And Sachs says that the challenge on global energy is not about clinching the last drop of oil but to invest into new technologies that can ensure lower costs, diverse supplies such as gasoline or solar power, possibly even nuclear, and reduced CO2 emissions. Instead today we see a military intervention that has cost billions of dollars, hundreds of thousands in deaths, and an increasingly unsafe world due to international terrorism when the answer to ensure more constant supplies of oil could have been much less bloodthirsty.
This disease, turned out not to be as Dutch as previously believed.

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