Weak dollar impacts Dubai's construction boom

Speaking of Dubai: it was inevitable that, sooner or later, this would become an issue:

In the four years that it has taken laborers to climb more than 150 floors over Dubai's congested freeways and skyline, the U.S. dollar has fallen with equal steadiness. Its decline has helped trigger unprecedented wage strikes and a rock-throwing protest this fall by the foreign construction workers, who are paid in local currencies pegged to the dollar.

For the Arab builders and business leaders rushing to convert the temporary boon of Dubai's oil reserves into lasting prosperity, U.S. policymakers and consumers have committed one of the few unforgivable sins in this desert boom town: They've slowed the building down.

The currency of the United Arab Emirates is fixed to that of the USA's at an exchange rate of 3.67 dirhams to the dollar. Thus, as the dollar loses value, so does the dirham.

A weak dollar has some economic benefits here in the United States: American goods become cheaper on foreign markets, and the United States becomes an attractive travel destination for foreigners (for shopping as much as vacationing); in both cases, the influx of foreign spending stimulates the domestic economy. For countries such as the UAE who have pegged their currency to the dollar, however, the economic dynamics can obviously be much different. Especially since that dollar-pegged currency pays for everything the Emirates import: cars, construction materials, food, and labor:

To build and tend their kingdom, the Emirates' 800,000 citizens imported millions of foreign workers, including 700,000 construction workers. Nearly one in five people in the kingdom is a construction worker; most are from India.

(Note to the Washington Post: the UAE is not a "kingdom.")

As recently as last month, some construction workers on the Burj Dubai and other projects made the equivalent of as little as $109 a month. Back home in India, where the dollar has fallen 14 percent against the rupee in the past 18 months, remittances that workers here sent to their families steadily lost value.

The result? Labor strikes and higher wages for workers, both of which profoundly affect profit margins. The cost of doing business has increased, the building boom in Dubai (as well as those in neighboring Emirates such as Abu Dhabi or Sharjah) has experienced a slowdown, and the imported laborers have ended up being the ones hit the hardest:

The surge of oil profits and the fall of the dollar have brought record inflation to the Emirates. Workers say they pay twice as much for cooking gas, vegetables and the other bare necessities. K.V. Shamsudheen, an Indian businessman who runs a group aiding Indian laborers, said the financial crisis has caused a one-third increase in suicides among the workers since 2004.

Given the economic problems the United States is currently experiencing - the housing and credit crises created by the subprime mortgage meltdown, soaring trade deficits, and the propensity of the average American to saddle themselves with debt instead of actually saving and investing their money - it is likely that the dollar's decline will continue. Naturally, this is causing concern to nations whose currencies are pegged to the dollar. In the case of the United Arab Emirates, several remedial options are being discussed. One is the possible revaluation of the dirham relative to the dollar (for example, resetting the rate at 3 dirhams to the dollar instead of the current rate of 3 2/3). Another option is to eliminate the dirham-to-dollar peg altogether, as other Gulf nations such as Kuwait have done. So far, neither of these options have been exercised. But that could change as the dollar's decline continues to eat into Dubai's massive building boom.

(Countries such as Ecuador who have eliminated their local currencies in favor of the dollar, on the other hand, don't even have this option. They, and their economies, are simply along for the ride.)