Why it is difficult to fight inflation in GCC economies?

There is a well-known macroeconomic response to this question. Since GCC national currencies are fixed to the US dollar (except Kuwait?) and therefore monetary policies are unable to effectively deal with rising and persistent inflation; as a result only the real economy adjusts in terms of higher prices.

There are also two less-known microeconomic reasons that seem to answer the current inflation episode in GCC quite well. First, there is a widespread incentive problem. Still today (and for several years to come) GCC governments do not need to rely on tax revenues to finance their expenditures. Naturally these governments have little incentive to protect public interests. There is also a reverse causality. The citizens have little or no incentive to push their governments to fight inflation, not because of the constitutional monarchy, but because of how easily they buy social peace (e.g. cheap housing and medical care, free education, generous child subsidy, easy employment opportunities, and many more). May be the Gulf citizens deserve these benefits as part of their oil share, but surely these generous benefits have helped to downplay their concern over inflation.

Second, disutility from exerting (additional) efforts. More monetary flexibility to fight inflation involves collecting timely data, conducting more research, and importantly reading more literature. Thus far the Federal Reserve has been doing all these work for Gulf central banks; depegging from the dollar means shift of the academic burden from the West to Middle East. Of course, GCC states could hire (and is hiring) additional skilled workers to do most of the work, but at the end timely monetary policy implementation would also require greater commitment from the native decision-makers. Certainly GCC central banks are not used to serious work and making the commitment to embrace flexible monetary policy is more of a disutility from work rather than a necessary step to curb inflation.

The Economist once said it right: as the Indians and Chinese work harder, the Gulf gets richer. The windfall oil revenue has brought a honeymoon effect for the region and it is against human nature to think about serious stuffs during the honeymoon period.

2 Responses to "Why it is difficult to fight inflation in GCC economies?"

  1. Guest   July 1, 2008 at 10:52 am

    Easy employment opportunities? Perhaps that was the case for public sector work years ago, but I hear recent graduates take years to find a job now – even in the public sector. Currently, the private sector still largely demands manual labor or a skill set the graduates don’t possess. Moreover, the pay package in the private sector isn’t as cushy as those sinecures in the public sector.

  2. SBasher   July 2, 2008 at 1:00 am

    Of the six Gulf states, unemployment among young Saudi is quite acute (between 15-30 per cent). But that partly due to their higher reservation wage (and therefore voluntary unemployment) and lower skill level than that of what demanded by the private sector. In Saudi (and to some extent in other Gulf states) the fresh graduates very often demand managerial level job, as put very nicely by Saudi Prince Alwaleed bin Talal, "they imagined that it would be a society of all chiefs and no Indians".The public sectors have their limits, to accomodate employments for their citizens in the public sector, Gulf governments (a decree was recently passed in Qatar) are promoting to replace lower-skill expartiate positions with their local counterparts. And forcing private companies to hire locals in the name of Omanisation or Saudiisation (an implicit 20% quota for the locals in the private sector). If a local is really solid, getting an employment is as easy as buying a movie ticket. To me, unemployment among the locals is partly ‘cosmatic’ due to their unreasonable higher reservation wage that is not supported with commensurate skill. The private sector can easily hire more skilled expartiates with lower wage; for example: "myself" :-)