UAE hyperinflation is the cost of ultra-high GDP growth

Perhaps this is just the price of progress. In Dubai alone more than $100 billion worth of projects are under construction, and at least the same again is on the drawing board. Abu Dhabi has also announced more than $50 billion in mega projects, and the other emirates all have big plans in progress.

The problem is that so much is happening at once in the UAE, and that puts pressure on existing infrastructure and results in spiraling accommodation costs and endless traffic jams. Higher oil prices also do not help UAE inflation, and have jacked up the cost of transportation - which is low by world standards but still up 25% according to the You Gov/Gulf News survey.

Some of the surge in UAE costs is a bit of profiteering too. If you hold a supply monopoly in a booming economy it is tempting to raise prices to cash in. Landlords too have been quick to exploit strong demand for the limited housing stock.

Labour movement

But if the UAE was not such an open economy with free movement of labour, capital and goods and excellent transportation infrastructure then the situation would be much worse. It is amazing how well the ports have coped with the surge in building material imports, for example.

Similarly the labour supply is so flexible because the UAE has genuine freedom of movement of labour unlike the restrictions imposed in most advanced industrialized economies. Thus if the work is available more labour is recruited and imported on work visas, and this means that the inflation of salaries has been kept to a far more modest 7% as a consequence.

With the freedom to source labour from whatever is the cheapest and most reliable source, the UAE has a massive competitive advantage over many countries whose workers would by this stage in an economic boom be demanding higher wages, and therefore further stoking up inflation.

Open economy

Indeed, the marvel is that the UAE can support such a volume of construction work without far higher levels of inflation that would quickly choke the economic boom. This is strictly down to the remarkable dynamics of a free market economy and the strength of the existing infrastructure such as ports and airports.

In the future books will be written about the UAE's current economic boom, and the question most academics will want to answer is: how did they manage to handle so much growth in one go?

Yet clearly the high inflation levels and traffic jams are signs that even the open, free-wheeling, government-backed capitalism of the UAE has its limits in terms of economic expansion. Whether that will put a break on further investment plans looks unlikely, so inflation may continue for rather longer than many would like.