Coping with the soaring cost of living

04 August 2006

The Gulf boom's dark side hit home in July with news that rents in Dubai Media City, Dubai Internet City and Knowledge Village will rise by 25 per cent in a single step. Hiking the operating expenses of much of Dubai's large and growing media industry ensures the news will spread that it is becoming increasingly expensive to live and work in the GCC. In Dubai, residential rents are rising by more than 10 per cent on average this year and further steep increases are expected in 2007. Some private schools, which non-nationals must use, are doubling their fees. Higher oil prices are feeding into costlier air fares and gasoline.

The perverse result is that most people in Dubai have suffered a fall in their real net disposable income in the past 12 months despite living in the world's fastest-growing region. A Western family comprising two adults and two children with total annual household income of less than $50,000 will be unable to save much, if anything.

This has stimulated a new chorus of complaints about Dubai's direction. There are warnings that companies will opt for cheaper locations.

My projection is that in five years it may be no cheaper to operate in parts of the GCC than it is in London, Paris, Sydney or San Francisco.

This is the consequence of seeking to create world-class cities in Arabia. If you want the best accountants, bankers, designers, lawyers and physicians, you will have to pay commensurate salaries. The experience elsewhere shows that the more people there are in a city with high earning power, the higher the cost of living for everyone. As Gulf cities attract growing numbers of skilled professionals, living in them will become more expensive.

People question the validity of a development strategy designed to attract high-income earners. But a single, successful investment banker will add more to gross domestic product (GDP), spend more locally and create more service jobs than 100 filing clerks who consume little and remit home all their savings.

The priority for Gulf governments is to build affordable and decent housing for low-income nationals and provide a way their own young people can acquire marketable skills and displace foreigners. For business, there is a narrower focus. Many Gulf companies depend upon cost advantages that will disappear by the start of next decade. If you are a service provider with a margin less than 30 per cent, your profits will be eliminated by higher salaries, increased rents and utility costs and, as certain as death, new charges to finance public services.

The challenge for Gulf business is on the revenue front. Glittering prizes will go to those able to charge customers at a level commensurate with their costs. That requires providing services as good as what is on offer in the world's advanced economies. To make it happen, the region needs a revolution in competence levels, productivity and technology from the back-office to the showroom.

The key agents for change are world-class companies seasoned by the demands of operating in the high-cost and regulated markets of the West. The good news is that a growing number are waking up to the opportunities presented by the GCC economy, which could be the world's sixth largest in 25 years.

Many established Gulf businesses will fail to reach the new standard. Some will call for the globalisation of Gulf markets to be halted or even reversed. Others will go bust. But the path to the future is increasingly clear. The prize is a vibrant, high-tech Gulf economy creating millions of rewarding and well-paid jobs in services and advanced manufacturing. The winners will be business leaders that bite the bullet and prepare today for the new world that is rising in the region with every dawn.

Back to Madrid.

Israel's war on Hezbollah has underlined that the Middle East needs a new multilateral peace summit involving all influential parties that will

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications