Why The Gulf States Need To Keep Building Big Dumb Mega Projects | Economics Explained

all right it's time to another few countries to the list of where I am not welcome this is the line a 170 kilometer long 500 meter high city in the desert proposed by the Saudi Arabian government as part of their neon project which supposedly will also include a port city and a futuristic mountain resort in addition to a selection of smaller projects in the same area the neon proposal is just the latest in a long line of very ambitious and expensive projects undertaken by this oil-rich region some of which have gone on to be Global icons of excess others which are eternally stuck in the middle of development and most that will never get off the drawing board there is a long list of far more qualified and far more humorous people that have commented on the problems of these projects and the cities that have been formed around them from a town planning and Architectural point of view but the countries have carried on with their Ambitions regardless so what is going on here why do these countries need to build such expensive and inefficient projects well you might have guessed that it's all economics the typical explanation is that these projects will attract tourists which will subsidize these countries economies is when their oil runs out or is no longer demanded at the same level it is today the UAE Qatar and Saudi Arabia have all doubled down on this idea spending billions on impressive projects and subsidizing Global Airlines to bring tourists into their cities even if it's just for a short stop over but will this work the Inconvenient Truth is probably not if anything all this lavish spending is just going to burn through their Royal wealth even faster bring them closer to the day where they won't have the income to support the lifestyle that their citizens have become accustomed to this obviously raises questions about alternative motives which center around unelected leaders building castles in the sand to stoke their own egos even if it comes at the expense of their nation's long-term Prosperity hopefully of course that doesn't happen but regardless these projects are still a fantastic economics case study to explore because to properly assess if they are a good idea or not we need to understand everything from the curse of oil wealth to taxation to currency exchange Dynamics all the way to the effectiveness of national project spending understanding the these economic decisions will not only help to explain the economies of Gulf countries and their impressive projects they will also help us to understand the economies of a lot of countries that are making headlines for similar issues so how bad will it be for these countries once their oil runs out or is no longer demanded do these Economic Development plans stand any chance of replacing this lost revenue and if not what is the real reason behind these projects and would there be some better Alternatives once we have done all of that we can put the economies of the United Arab Emirates Saudi Arabia and Qatar on the economics explained National leaderboard this episode of Economics explained was brought to you by Trends Trends is a business knowledge networking hub from HubSpot which gives you the opportunity to workshop and collaborate directly with some of the world's most successful entrepreneurs Executives and insiders Trends is for people looking to rapidly develop their career start a business or take a business that they already run to the next level I personally enjoyed the training from bigger content creators and more established Educators and have shared a lot of the tips and tricks with my own team to help improve our videos the best way to experience the value that Trends can add to your own goals is just to give it a try which you can do by taking advantage of the offer that the trends team was kind enough to extend to the viewers of this channel to start your seven-day trial go to trends.co economics explained that's trends.co economics explained to start your seven-day trial for just one dollar in 1959 the Netherlands discovered 2.7 trillion cubic meters of extractable natural gas in a field taking up most of the north of the small country this immediately made the nation a lot of money as fossil fuel companies moved in to start extracting profits from the fields the natural gas industry boomed and the value of the Dutch guilder rose substantially in International Exchange markets as other countries exchanged their money for gilders which they could then use to buy this natural gas this caused a problem for the Netherlands other Industries because now any Goods that they wanted to export would be more expensive for the countries they were selling it to because those goods would need to be paid for in the more valuable Dutch currency domestic Industries also struggled to sell their goods locally because the Dutch people could use their more valuable currency to import goods from countries with a less valuable currency this meant that the gas industry really became the only viable industry in the country which was inherently unstable for a lot of reasons not least of which is the fact that you don't really need that many people to extract natural gas so mass unemployment becomes a very real issue this sees what is called Dutch disease and I'm sure most of you have probably heard about it before we have mentioned it several times before on this channel when looking at resource-rich countries that have squandered their wealth currency value goes up industry competitiveness goes down and the country becomes dependent on exporting raw materials which has historically been an industry prone to corruption and mismanagement that's where most economists including ourselves in the past have left it but there's a little bit more to understand about Dutch disease which can directly help us to explain these fancy projects in the desert the explanation of currency appreciation is very neat and in the short to medium term as accurate as most people need it to be but if you think about this for too long you might start to see some problems the value of a currency is kind of like the value of a stock completely meaningless unless you consider the context of those values Microsoft shares traded around 240 dollars and Google Shares trade for a hundred dollars at the time of making this video but that does not mean that Microsoft is 2.4 times more valuable or profitable or anything relative to Google one US dollar buys 144 Japanese Yen but just because the Japanese currency is worth less does not mean that the country has more competitive exports likewise up until recently the British pound was worth more than the American dollar but English workers weren't inherently more expensive to employ eventually these things will equalize Dutch citizens enjoyed the value of their oil-backed guilders for a short while but the Slowdown of Industry meant that unemployment Rose and their salaries fell until they were back in line with International competitiveness the actual cause of Dutch disease is a little bit more interesting this will get very deep into some pretty high level economic theories but stick with me here and you'll probably walk away understanding more about global industry and trade than a lot of the top people making these decisions for big companies and entire countries Dutch disease is just a catchy title that the publication The Economist gave to ripe kazinski's theorem on the endowment effects of the factors of production on Goods outputs you can see why they needed a catchy title this theorem looks at the factors of production land labor and capital and assesses how a change in these factors will result in a change in the outputs produced by an economy every economy is bound by what is known as the production possibility Frontier this is a limit Beyond which an economy can simply not produce any more stuff because it has fully utilized all of the resources available to it in the most efficient way possible glutachromus therefore need to make decisions about what to produce and what not to produce because making something like a car is going to use up land labor and capital which can't then be used to make other products like let's say computers this is the foundation of opportunity costs everything an economy makes comes at the expense of making something else land and labor are pretty self-explanatory and capital is simply anything that can be used to produce something of value a factory full of industrial equipment is capital the computer I'm writing this video on right now is capital portfolio of financial assets is capital because it will produce value by paying dividends even cash is capital because it can be used to buy stuff that makes things now the trick here is that an economy is not normally going to run into production limits based on all of the factors of production at the same time for something like farming food an economy will run out of good land before it runs out of capital or Manpower and for something like Financial Services an economy will run out of skilled labor and capital before it runs out of land all of the biggest banks in the world combined could fit their facilities many times over on the average Australian cattle farm the production of some goods are bound by not enough Capital some are bound by not enough labor and others are bound by not enough land take an economy that is choosing either to produce consumer goods or oil if they direct their resources to producing more consumer goods they will have less resources left to produce oil and vice versa opportunity costs consumer goods are bound by labor and capital you need Manpower and factories to make these items efficiently oil production is mainly Bound By Land if you don't have oil in your soil you can deploy all of the infrastructure and Manpower you want and not producing oil normally these three factors of production will be shown to create a single production possible ability Frontier but remember an economy is not likely to run into these limits at the same time so we're going to assume that labor and capital are perfectly interchangeable for both of these products and draw a land limit separately if we follow the inside line these specific limitations create we get the production possibility Frontier again anything under this line is some combination of consumer goods and oil that the economy can produce and anything above the line is a combination that is beyond the capacity of this economy because it doesn't have enough capital and labor or enough land the economy finds an optimal Middle Ground where these two limitations intersect and they make some cars and they pump some oil from a few Fields fully utilizing land labor and capital but say this economy suddenly discovered another huge reserve of fossil fuels what that would look like on this chart is the land constraint shifting outwards because while the country hasn't added more hectares to its landmass the land that it does have has become more productive because it's full of oil we can now draw a new production possibility Frontier and you will notice that the intersection Point has shifted if we look look at the makeup of consumer products versus oil in the economy then obviously the amount of oil production has increased because there is more oil to extract but despite the economy actually growing wealthier overall the production of consumer goods has fallen but why did this happen this might come as a shock to some economists but just because something works on a market or ppf chart doesn't mean that it works in the real world and it's still very important to explain how this actually plays out in this example the oil industry draws in capital and labor that would have gone to producing consumer goods because an investor is going to make much more money from a 100 million dollar oil rig than they will from a 100 million toys Factory which is the capital and workers are going to make much more money working on a rig than they will working on a production line which is the labor right kaczynski's theorem therefore shows that natural resource wealth impacts the supply of other goods and services in the long term as well as the market demand for those goods and services in the short term due to currency fluctuations okay now you have a pretty Advanced understanding of what goes on when an economy shifts at industrial Focus so let's use this newfound knowledge to understand the decision making of the Gulf States Dutch disease is bad no matter what the root cause over dependence on a single industry even one that isn't inherently unsustainable causes lots of economic instability single industry economies become dependent on commodity prices and their prosperity ends up being determined by how much they can sell a barrel of oil for so diversification is the name of the game and there are two ways to achieve this increase capital or increase labor productivity if we look at oil rich countries that have gone on to become economic failures like Venezuela we often find that governments were attempted to use the oil revenues to immediately increase living standards for the people through generous indiscriminate welfare plans that might be very tempting especially if the country is very poor but it doesn't solve any of the underlying economic issues that come from natural resource wealth now of course you know I gotta talk about Norway of all the countries in the world Norway is the single best example of using natural resource wealth well before discovering oil their economy was quite small and mostly focused on fishing and light manufacturing but then they discovered oil their capital and labor restraints were pretty tight their population was decently educated but still very small and they didn't have infrastructure needed to compete with larger European powers in most fields of manufacturing or Services the oil Discovery expanded their land restraints which muscled out their traditional Industries so the challenge became growing the capital and labor constraints to compensate the easiest way to do this was to take the money they received from their state-owned oil company and the oil rights they sold and put it into a sovereign wealth fund today Norway has the largest Sovereign wealth Fund in the world with over 1.2 trillion dollars in assets under management which works out to about 250 000 per Norwegian citizen invested capital is still Capital it's not normally the kind of capital that most economists think of which is typically big machines in factories and container ports and that kind of stuff but it's still capital and it increases Norway's output by producing investment returns what's really genius is that this money then gets used to fund a host of Social Services Chief amongst which is educated better educated people contribute more to labor productivity so just like that Norway improved their capital and labor limitations today Norway still enjoys a lot of income from oil but they also produce income from their Sovereign wealth Fund in addition to a number of high-tech Industries like being the administrative Center of one of the biggest Merchant Marine fleets in the world but what worked in Norway would not work in the UAE the Gulf States do all have their own Sovereign wealth funds but they are not run the same way as Norway's They Don't Really fund social services and they're not very transparent with what they invest in or how they operate now I'm not going to pretend that we don't know the reason why these differences exist Norway and the Gulf States are all technically monarchies but Norway's keying is almost entirely ceremonial and they have a stable democratic government that is beholden to the will of the people the leaders of the Gulf States don't have these limitations so they can take more liberties with where they put the money from their Sovereign wealth funds we don't know the figures because these funds are not very transparent so they could very well be making fan fantastic returns but the public Investments do tend to be more flashy the neon project with its 170 kilometer long city is going to be funded through a development company wholly owned by Saudi Arabia's Sovereign wealth fund and it does have enough money to make this dream a reality if it went all in on the project but again someone has to ask why the renderings look very pretty but most estimates say that this project will cost almost a trillion dollars and provide no meaningful quality of life improvements over a traditional City that could be developed at a tenth of the cost this simple explanation is smooth brain dictator wants a Big Shiny Toy that to be honest is probably accurate but let's give them the benefit of the doubt here for a second could this make economic sense to give this a fair assessment let's go back to the production possibility Frontier the Gulf States have very small native populations and before selling oil they had very limited Capital too simultaneously their land was mostly inhospitable deserts so their production possibility Frontiers were very limited when they discovered oil on their land the value of that land grew tremendously because it was full of a highly in-demand source of energy but the problems of a small unskilled Workforce and limited capital resources remained most economies struggle with finding enough jobs for workers the Gulf States struggle to find enough workers to fill out all of the jobs that their economies can create the countries were able to get around these limitations by inviting foreign oil companies to provide their own capital and labor but those companies were only interested in doing this to produce oil so while their economy did grow it grew to be entirely dependent on this one resource fortunately the Gulf States received oil Revenue which is as we've learned just another form of capital unfortunately no matter how much the government invested into their nation's traditional Industries they were never going to be able to compete with oil production Dubai before oil was a port for non-industrial fishing and Saudi Arabia was largely made up of nomadic tribes with a tourist industry that relied almost exclusively on Muslim pilgrimages to Mecca the countries didn't have regular industries that they could grow out to compete with oil so they had to build them from scratch now since oil is so profitable there are not many modern industries that can realistically compete with it Norway's biggest industries outside of oil are now shipping tourism and administrative Services Finance is going to be a tough sell for the Gulf States which is still majority Muslim which means that their banks have limit rotations around charging or giving interest which is seen as usury according to the teachings of Islam they still have large local banks but with Islamic financing limitations they are going to find it very difficult to compete internationally with more traditional Banks they have invested heavily into shipping just instead of shipping cargo containers over the oceans they're shipping humans through the sky Emirates Qatar Airways and Etihad are some of the largest airlines in the world which is a great play for these economies for a lot of reasons Beyond The Prestige these Airlines bring their home countries they are an industry which doesn't require much labor or care about the quality of land these Airlines employ a majority of their Workforce from outside their home country which means that they are not tapping into a limited pool of workers from within the country itself these Airlines also assist with padding out the tourism industry no matter how much the Gulf States invest into their cities they are not going to be a tourist destination that competes with Western Europe North America or Asia Pacific the environment is too hot and outside of some very significant cultural centers there is not much for tourists to experience besides expensive hotels and shopping centers it appeals to some people but most tourists are looking for something a little bit more fulfilling on their travels but that's fine the tourism Boards of these countries know this this city is a glamorous enough to entertain people for a few days at most but that works well with their airlines that deposit tourists for stopovers on their way to their destination although the tourism board also knows that even millions of visitors on 24-hour layovers every year is not going to replace the oil industry but that's okay because tourists are not the primary target of these projects businesses are the UAE in particular has extended some pretty generous incentives to businesses to establish themselves in the country businesses bring workers and workers spend money in the local economy on everything from housing to snack food but tax incentives alone are not enough to attract the types of businesses that the Gulf States want to a region of the world that most people equate with instability and War even if that's not a totally fair assessment businesses need to see that they can make money first before low tax rates mean anything and that's where these Mega projects come in building something like the Palm German took the cooperation of hundreds of companies and millions of workers even once they're finished their international hotel chains property development companies law firms landscapers and everything in between required to keep these developments looking world class this creates an industry which just like oil is worth it for businesses to import their capital and labor into the country to take advantage of once big businesses get established smaller service businesses can form around them and very quickly the country can develop a vibrant business ecosystem where once there was only sand big projects and the promise of even bigger projects in the future is a very effective way to entice companies into setting up offices which will hopefully continue to operate long after the oil is gone we only need to look to places like Singapore and formerly Hong Kong to see that just being a good place to do business can be very lucrative once that critical mass of business activity is established the Emirates have a lot going for them those International Airlines and world-class airports means that business travelers from Europe America and Asia can all convene easily in a central and exciting location low tax rates are always going to be popular and then there is the issue of cheap labor the population of the UAE is just under 9.5 million which is an increase of about 9.5 million from when the country first discovered oil in the early 1950s before that the population of the Emirates was less than 200 000. today most people living and working in the country are expats a lot of those expats are the skilled workers that have come over to manage the companies taking advantage of the Gold Rush of oil and development but a majority are unskilled workers making very little money working in appalling conditions under circumstances that mean that they are effectively trapped there indefinitely as much as possible I try to stick to the cold-hearted macroeconomics so yeah maybe this source of cheap labor is a great way to get these projects done without spending a lot on workers that are treated humanely if the Gulf States are able to successfully transform themselves into the Singapore of the Middle East I am sure a lot of these workers will be quietly shipped back home and the golden Visage of Glitz and glamor will remain intact I only hope that enough people are made aware of this and care about it enough that it becomes a net negative for companies to set up operations in these countries because of the bad press it would bring them which will hopefully Force the countries to Outlaw this practice entirely unfortunately for now most people seem unaware or don't really care about it enough for it to be a big enough problem to affect meaningful change okay now it's time to put the UAE Saudi Arabia and Qatar on the economics explained National leaderboard starting as always with size the UAE has a GDP of 358 billion dollars giving it a 6 out of 10. Saudi Arabia has a GDP of 700 billion dollars giving it an 8 out of 10 and Qatar has a GDP of 146 billion dollars giving it a 5 out of 10. GDP per capita is decent in all of these countries thanks to the oil wealth and building Booms that they have been home to in recent decades decent but not excellent because a lot of that wealth has been statistically spread thin amongst large imported populations the UAE has a GDP per capita of 36 000 which gives it a 7 out of 10. Saudi Arabia has a GDP per capita of 23 000 which gives it a six out of ten and Qatar has a GDP per capita of 61 000 so it gets an 8 out of 10. stability and confidence is an interesting one with these countries the success of their plan to attract businesses is going to ride primarily on people believing they are a safe stable place to live and work but still being largely tied to the price of oil and being ruled by unelected monarchs means that the UAE and Qatar get a 5 out of 10 and additionally due to a host of international controversies Saudi Arabia gets a 4 out of 10. growth has not been as spectacular as you might expect these countries have had mostly stagnant GDP growth over the past decade despite huge stimulus measures and oil reserves Qatar and Saudi Arabia get a 3 out of 10 but the story is slightly more positive for the UAE which gets a 5 out of 10. finally industry obviously the oil industry in all these countries is huge tourism is a great little bonus and regular service businesses are making themselves at home but all of that still ultimately depends on the oil industry for now if these industries can become self-sufficient then these scores will improve drastically but for now all of these countries get a 6 out of 10. altogether that gives the UAE an average score of 5.8 Qatar gets an average score of 5.4 and Saudi Arabia are also gets an average score of 5.4 out of 10. now if anyone could recommend me an airline that flies to Europe without a stopover in the Gulf I would be greatly appreciative thanks for watching mate bye

Channel: Economics Explained

Views: 1,705,784

Keywords: economics, economics explained, saudi arabia, saudi arabia line city, neom city saudi arabia, neom the line, megaprojects, uae, qatar

Id: pnrAxfzHElo

Length: 22min 40sec (1360 seconds)

Published: Tue Oct 11 2022

Reddit Comments

[u/mirh]

Absolutely enlightening video.

You still cannot justify the kings, but finally you kinda comprehend why desperate autocrats move the inane ways they do.

But while I'm sure there could have been way better and farsighted ways to spend that buttload of money (even if it may mean compromising their absolute power), on the other hand I'm quite lost for what this "clearly superior" plan would entail. As noted, taking the norwegian path wasn't much doable, and it's not like the land is much welcoming anyway with basically half of the year having a practically inhabitable climate (domed cities don't look so pointless anymore then, lol).

Desert greening or something like desertec are the only things that I can "linearly" think would make sense.

Once big businesses get established, smaller service businesses can form around them, and very quickly the country can develop a vibrant business ecosystem where once there was only sand. Big projects and the promise of even bigger projects in the future is a very effective way to entice companies into setting up offices which will hopefully continue to operate long after the oil is gone.

Put it this way it seems almost genius, if bold.

Now, if anyone could recommend me an airline that flies to Europe without a stopover in the Gulf I would be greatly appreciative

https://en.wikipedia.org/wiki/Kangaroo_Route#Non-stop_flights ?

TIL they are australian.