Tuesday, January 5, 2010

Dubai a city that South Asians can set on fire... or vice versa.

On the day of the opening of the Burj Dubai/Khalifa there were two human interest pieces in The National, an excellent Abu Dhabi newspaper. The stories are about two men named Mohammed Hassan of Pakistan and Bavaguthu Shetty of India. Both men came to the Emirates like many other South Asians to seek their fortunes. For many in South Asia the Persian Gulf is today what America was in the nineteenth century to immigrants from Europe, a relatively free place to strike out on your own and try to build a better life for yourself. If anything the magnetism of the Gulf today is greater than America’s a hundred years ago. The per capita GDP of the UAE is $44,600 per year vs. $2,900 in India and at purchasing power parity, in nominal exchange rate terms it’s more like $1,000. The disparities between America and Europe were never that stark.

This is a point that is not really well understood by many people who look at labor markets in the Gulf and South Asia, especially from an American perspective. To pay an Indian laborer in Dubai $5,000 a year in US dollars is the equivalent of paying him five times the per capita income in India or would be similar to paying an American $225,000 per year. Imagine there was a country where Americans with no education whatsoever could go and earn $225,000 a year tax free to wash dishes and fold clothes or work construction. Do you think people would go? Hell yes. Detroit and West Virginia would be completely empty. Would they feel exploited? No they would feel like the people paying them were suckers. You could do it for five years and come home a millionaire buy a bar and a pickup truck and spend the rest of your life fishing. This is the deal South Asians get when they go to work in the gulf, scaled of course for the cost of living in India.

And so many ambitious people from South Asia who don’t see great opportunities for themselves in India or Pakistan come to places like Dubai and Abu Dhabi. Sometimes they come on their own with a little money to start a business like the North Europeans who settled the American upper Midwest. This is how Mr. Shetty came and started a one room pharmacy in Abu Dhabi. Sometimes they come as manual labourers with little education but energy like the Irish or the Chinese who were put to work in the mines or on the rail gangs. Or like Mr. Hassan who came as a driver for an Emirati family. The one thing they can’t do is stay and become Emiratis. This is also hard for Americans to understand. Being an American is not an ethnicity, it is ascribing to a set of shared beliefs (and agreeing to global taxation.) This is the exception not the norm. Frenchmen, Indians, and Emiratis are born not made. But for most South Asians who come to the Gulf the deal they get is the best on offer so they take it.

As in America sometimes things work out for the best as is the case for Mr. Shetty. Mr. Shetty is in the newspaper today because he bought the entire 100th floor of the Burj as well as several other apartments as high as the 148th. He was an enterprising man and grew is one room pharmacy into a hospital, and the hospital into a chain of hospitals. From the chain of hospitals he moved up the value chain to pharmaceutical manufacturing and then diversified into retail and financial services. He has made the papers before having won various business awards and being considered a pillar of the business community.

Things did not turn out quite so well for Mr. Hassan. He got into an argument with the teenage sons of his employers. In the course of the argument the boys beat Mr. Hassan unconscious with a 2 by 4. Either they were really mad or maybe they thought they had killed him and needed to get rid of the evidence because they then doused him in gasoline and lit him on fire, killing him. He’s in the news because his killers, who were originally sentenced to a three years in prison, were released today after time served (one year.) This was because they worked out an arrangement whereby they would pay “blood money” to Mr. Hassan’s family back in Pakistan. Personally the fact that they were released after time served is only slightly more distasteful than the fact that their initial sentence was three years.

So what’s the difference between these two men? Just by reading the stories it looks like a lot. Shetty had an education, he came to the Emirates as a pharmacist. He had enough money with him to start a business a small one, but something. Hassan on the other hand was probably brought over by a company that recruited in domestic workers or cab drivers. Usually these companies keep your passport and so you can’t leave though Mr. Hassan could probably not have afforded his flight home even if he had his passport. He probably did not have a lot of say in who he worked for and certainly could not do much about how they treated him. Another difference is that one of them is a Muslim and the other a Hindu. If you’re an American you may not be able to tell by their names but you also can’t tell from their outcomes. Mr. Hassan was the Muslim, Mr. Shetty the Hindu.

Though they came with different assets they also faced many of the same hurdles. As mentioned, neither of them can ever acquire Emirati nationality, nor can they ever have permanent residency. Whatever the statute they will never have equal standing in a court of law in a case involving an Emirati. For that matter Emiratis don’t always have equal standing against each other which is why they largely avoid the courts. As non-Emiratis they can have very long term leases or freehold condos but they can never own land.

Indeed, though he has made millions in the Emirates Shetty cannot ever own more than 49% of his companies unless they are incorporated in a free zone. That may help explain why he diversified into manufacturing and re-export because the free zones are designed to encourage those businesses. For his major enterprises I am sure he has structured them in such a way as he retains most of the profits and any major changes to the management or disposition of assets require a supermajority that would give him a veto but he can never be totally secure that he owns what he owns. So in the sense that they have minimal legal recourse against Emiratis the thing that unites them is more important than the wealth that divides them.

Some of the best business advice I have received was also some of the simplest. “If you want to be a player, learn the game.” Sounds simple but you’d be surprised how few people do it. The difference between Mr. Hassan and Mr. Shetty is that Mr. Shetty knew the rules of the Dubai NRI game and prospered Mr. Hassan broke one of the cardinal rules and was murdered and his killers are free.

Mr. Shetty by law could only own 49% of his business so he was forced to take on a partner when he started his pharmacy. He probably found the most influential Emirati he could to own the other 51%. In the beginning it probably wasn’t a very influential Emirati. Shetty may have been able to keep more than 49% of the profits but he made sure that the Emirati got paid. That way if things went badly for him or an Emirati threatened him or refused to pay, he would go to his partner who would work out the problem with the other Emirati as equals.

The 49/51 rule is sort of like a protection racket because the courts don’t really function and for a non-Emirati attempting redress against an Emirati they are truly dangerous. It’s also a sort of welfare for Emiratis. They have majority ownership in all the businesses in the Emirates that are run by foreigners but play little role in the day to day business, they’re political muscle. This arrangement is very common. American consular officers in Dubai are trained in this because often when Emiratis are applying for visas and they have to describe their profession many of them cannot even list all of the businesses they are in because they are partners in so many.

Once Shetty was successful he was enriching his Emirati partner and the Emirati brags to his friends. Now more people want to be partners with Shetty. He starts new businesses, more partners. All of them take a piece of the action and the cost to any particular Emirati of threatening Mr. Shetty goes higher and higher because now they are taking on more and more people who are benefitting from Mr. Shetty’s success. When he gets interviewed he talks about how great the business environment is, how wonderful the ruler is, and it’s true. He’s doing better in Abu Dhabi than he would have ever done in Andhra Pradesh.

The whole time he keeps making the payments because he knows that when the payments stop so does his protection. Indeed, he lives on a knife edge. If someone decides that Shetty is taking too much or one of his partners decides that he really needs what Shetty has, Shetty will lose everything and be on a boat back to India. An Emirati friend once told me “We let them make twenty, thirty million then we take everything else.” That is probably an exaggeration but occasionally they do, because they can.

The legal system is a precarious thing in Dubai and most other Gulf States. It is not particularly good at settling disputes between Emiratis which is why they rely on relationships and reputation more than the courts. For unscrupulous Emiratis the courts are positively a weapon in conflicts with foreigners. This is why the 51/49 rule is a blessing inside a curse, it enables foreigners to co-opt Emiratis into intervening on their behalf. But it makes the foreigners permanently insecure. They are richer than they would be back home in India or Pakistan but they can never be totally safe. If any South Asian ever needs to be reminded of this every few months there is a story about someone like Mr. Hassan who argued with an Emirati, was beaten unconscious, lit on fire by men who walk the streets of Dubai today as free men as if it never happened.

I am using the extreme examples of Mr. Hassan and Mr. Shetty to make a point. The acute phase of the Dubai Crisis is in the hands of the Al Maktoum and the Al Nahyan. The strategic fate of Dubai is in the hands of a million people with names like Khan and Patel from Pakistan and India who run the businesses and rent the apartments and on who Dubai will rely on if it is to recover. When the most recent round of funding from Abu Dhabi runs out in April the Dubai government will go to the wall again. Maybe they’ll get more help from Sheikh Khalifa.

If they don’t they’ll have suffer the humiliation of handing over the Dubai Inc. crown jewels to their creditors. Faced with that prospect the option of expropriating the foreign owned and run businesses in Dubai is going to become an extremely tempting. The government of Dubai has already stood by while the shareholders of Damas were robbed blind by a powerful merchant family. How much would it bother them for Indian and Pakistani businessmen finance the retention of their honor and their assets?

On the other hand this is a golden opportunity to cement the role of Dubai as the business hub of the middle east. If they make a point of ensuring property rights and rule of law they’ll draw more investment in from South Asia and recover faster. But the cost to them may be bankruptcy and scandal. Can they resist? The Dubai Crisis remains a cliffhanger.


Anonymous said...

Good analysis of the current situation and one which is exactly the same in all of the other GCC countries, ie Oman,Qatar,Bahrain,Saudi + Kuwait.
I would add 1 more dimension: the expat to Emirati relation is not dissimilar as is the relation GCC National to Ruler.
There is an unwritten contract between Ruler and National: no income tax, free education,free health care, for-life Government job and in return a non-democratic ruling monarchy with opaque and total control of the State finances. And 'protection' from the foreigner by all these Agency laws, 51/49 rules etc as you so well described. The big question going into the next decade and first half this century: how long is this 'GCC model' sustainable?

Rob said...

Mr Shetty clearly has an appetite for risk, purchasing property in a highly ambitious real estate development, which wasn’t nearly built when he put down his millions (any currency) a “few years ago” – perhaps 2007 when the building went on sale. What’s more, anyone who’s offered a whole floor, the 100th no less, has got connections. (Anything with a nice number – mobile, licence plate garners a premium in the Gulf, as we know). His situation points to the power of foreign business owners.

I take your point that as a foreign business owner you’re never quite secure but you are really valuable to your local other half who probably has no interest in your business and wouldn’t know how to run it even if they wanted to, but is milking you for income. And you’re also probably part of a weighty business network defined by your country of origin, which boosts your leverage.

One interesting outcome of this balancing act of influence between foreign and local partners is the closed business culture it perpetuates, shrouding the finances of locally-based business. As a foreign manager/owner, why would you open up your books fully if you thought someone would get a good look at what you were up to and grab more? You wouldn’t. I also think this applies to local family businesses and their fear that their social betters may try to appropriate prime bits of their companies.

The development of transparency in the private sector has no chance while owner/managers, who may not have come from a reporting culture themselves, fear for their assets, control, profits etc. No certainty, no transparency. And listed entities where floats are small and in many cases founders remain majority owners, still feel entitled to retain this non-disclosure attitude.

Finally, thinking about Mr Hassan. [Thanks for your posts - they're really thought provoking.]
The issue with foreign workers way down the food chain from Mr Shetty is not necessarily what they are paid, but how they are treated. The argument that labourers, for instance, can earn more in Dubai then they can at home and have the benefits of purchasing power at home is well rehearsed and accepted if you assume they don’t want to buy anything while they’re here. But it’s the assumption that a lack of respect for their humanity is OK and is a quid pro quo for the great opportunity they’ve been given that is startling.

Anonymous said...

Concur totally with yr final sentence/conclusion.
The sad fact is though, that for every job opening (those at the bottom of the chain) there are 100's if not thousands of applicants from the Sub-Continent and Asia who are more than willing to take on the work for that $350 or $400 per month of hard labor, 6 days a week.
The GCC business model is totally dependent on this pool of 'cheap' labor while the Nationals get all the benefits and protection of their Government (read: Monarch).
The moment the low cost labor refuses to show up, the GCC is toast.

Q80 said...

The Lonesome Death Of Hattie Carroll

William Zanzinger killed poor Hattie Carroll
With a cane that he twirled around his diamond ring finger
At a Baltimore hotel society gath'rin'.
And the cops were called in and his weapon took from him
As they rode him in custody down to the station
And booked William Zanzinger for first-degree murder.
But you who philosophize disgrace and criticize all fears,
Take the rag away from your face.
Now ain't the time for your tears.

William Zanzinger, who at twenty-four years
Owns a tobacco farm of six hundred acres
With rich wealthy parents who provide and protect him
And high office relations in the politics of Maryland,
Reacted to his deed with a shrug of his shoulders
And swear words and sneering, and his tongue it was snarling,
In a matter of minutes on bail was out walking.
But you who philosophize disgrace and criticize all fears,
Take the rag away from your face.
Now ain't the time for your tears.

Hattie Carroll was a maid of the kitchen.
She was fifty-one years old and gave birth to ten children
Who carried the dishes and took out the garbage
And never sat once at the head of the table
And didn't even talk to the people at the table
Who just cleaned up all the food from the table
And emptied the ashtrays on a whole other level,
Got killed by a blow, lay slain by a cane
That sailed through the air and came down through the room,
Doomed and determined to destroy all the gentle.
And she never done nothing to William Zanzinger.
But you who philosophize disgrace and criticize all fears,
Take the rag away from your face.
Now ain't the time for your tears.

In the courtroom of honor, the judge pounded his gavel
To show that all's equal and that the courts are on the level
And that the strings in the books ain't pulled and persuaded
And that even the nobles get properly handled
Once that the cops have chased after and caught 'em
And that the ladder of law has no top and no bottom,
Stared at the person who killed for no reason
Who just happened to be feelin' that way without warnin'.
And he spoke through his cloak, most deep and distinguished,
And handed out strongly, for penalty and repentance,
William Zanzinger with a six-month sentence.
Oh, but you who philosophize disgrace and criticize all fears,
Bury the rag deep in your face
For now's the time for your tears.

Copyright ©1964; renewed 1992 Special Rider Music

Anonymous said...

We are just learning this morning that apparently someone has forgotten to tell the Japanese corporates about the inherent benefits of having this 51/49 structure. It turns out that they have a balance sheet hole of only USD5bn from work done on the Dubai metro that has gone unpaid and obviously nobody to lobby in their favor to collect on those bills. Instead, they will just stop construction (I guess they don’t have to look to far and drive only short distance away to Qatar, given their ambitious metro plans – apparently they still keep on reading the old Gulf News for their next investment ideas). Furthermore, I think many have presumed that Dubai GREs (Government Related Entities) have been paying their respective contractors, but in light of this, many should rework that equation yet again (in terms of risk profile), provided that Dubai Metro is under RTA, that is GRE owned. How much will the likes of Arabtec be able to collect on their AED4.5bn accounts receivables, which is only 2x the equity of the company?

Ken said...

Thanks a lot for your comments guys/girls. I'm not sure I agree with them all but I think the quality and thoughtfulness of them are excellent. Nothing better than having a Kuwaiti quote American folk music on a blog post about Indians in Dubai and be right on to ilustrate how connected the world is.

Anonymous said...

Correction: Shetty is from Udupi in Karnataka and not Andhra Pradesh!