Dubai Model: Trade and Tourism in the UAE

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Table of Contents

Introduction
What is the Dubai Model?
Problems with the Dubai Model
Differences in State Run Capitalism
Counterfactual View on the Development of the U.A.E Economy
Conclusion
Reference List

Introduction

From September 2001 until September 2008, the United Arab Emirates has utilized its state-run capitalist economic model (i.e. the Dubai Model) as a means of developing itself into a trading and tourism hub. The U.A.E has enjoyed significant rewards in terms of increased trade, tourism and infrastructure development over the past decade as seen in its 1000% percent increase in tourism, 120% increase in infrastructure development and a tripling of its 2004 GDP from $124 billion to $360 by 2012 (with Dubai and Abu Dhabi reaping a majority of the reward). The primary critique of the Dubai model for growth and development is that it has focused on utilizing property development as a means of measuring the growth and success of the region instead of the development of other sectors of its economy.

However, the 2008 financial crisis and the resulting economic downturn led to the delay or cancellation of an estimated $364 billion worth of projects in the UAE, almost all of which were in construction (Hassan, 2012). Government intervention from the central bank in the form of financial stimulus (i.e. $100 billion in stimulus money) has been made available in order to counter the economic downturn and there are no major concerns about financing ongoing big projects (i.e. major construction and development projects such as the Narshada eco development project), however the increasing cost of borrowing due to lackluster global economic performance has had a negative impact on the creation of new construction and landscape development projects (ex: the World Islands) which has been one of major means of attracting international investors and businesses into the U.A.E (Hassan, 2012).

Taking such factors into consideration, should the U.A.E continue its focus on developing itself into a trading and tourism hub, or diversify into other potential ventures given the current state of the global economic environment which has resulted in lower instances of tourism? Choosing tourism and trading as one of the main factors behind successful development was actually not a result of local market forces as seen in the case of the Philippines, Malaysia and Thailand (i.e. the countries had beautiful natural locations that were prime areas for tourism and possessed a growing population base which was ideal for creating a more consumer oriented society), rather, it was a result of the plan advocated by Mohammed bin Rashid Al Maktoum, the current Prime Minister and Vice President of the United Arab Emirates who helped to establish the Dubai model.

Bains (2008) explains that Mohammed bin Rashid Al Maktoum had a vision so to speak of how the U.A.E could be like and sought to establish policies to make such a vision into reality. This vision involved transforming the Emirate into a region that was less dependent on oil wealth and one that brought in income through tourism and trade. As a result, given his position in the government, Al Maktoum helped to establish the necessary policies to help encourage the development of these particular sectors of the economy.

Unfortunately, this was done at the expense of forgoing the development of other sectors which would have given the U.A.E a better balanced local economy. The capital for development does exist within the region (as seen in the more than $100 billion allocated towards local economic stimulus by the central bank) towards either further development along its proposed path or a shift towards something entirely new. However, given the current state of the global economy and the increasing focus on Asia as a new hub for investment and growth in both trade and tourism, it is questionable whether the current economic orientation of the U.A.E is viable given competition from Asian markets which are larger and have better tourism and trade industries.

What is the Dubai Model?

The Dubai model focuses on the creation of a thriving local economy from almost nothing through the use of oil revenue as the primary means of encouraging growth and development in trade, tourism, and infrastructure development (UAE, 2010). Basically, the Dubai model operates under the premise that by creating the right conditions (i.e. no taxation, abundant capital and creating incentives for businesses to come to the region), the U.A.E can become a business hub that would attract foreign corporations and investments thus resulting in a better local economy (Economic Structure and Context: Key Sectors, 2012). The supposed end result of such an endeavor would transform the U.A.E into a popular destination for tourism and business which would enable the local economy to survive after the regions oil wealth has dried up.

In the case of the U.A.E, this has been accomplished by utilizing oil revenue as a means of creating conditions favorable to foreign investment, such as free trade zones, no corporate taxes (since the government derives its revenue from oil resources) and the creation of numerous ports to facilitate the import and export of goods. Significant investments into state owned construction firms also facilitated the development of increasing amounts of infrastructure projects which further bolstered the local economy (Economic Structure and Context: Key Sectors, 2012). The conditions within the U.A.E, especially in Dubai, resulted in more foreign workers and corporations looking for opportunities in the region which lead to the development of the U.A.E into a trading, tourism and I.T. hub for the region. While Dubai and other parts of the U.A.E enjoyed years of growth as a result of the Dubai model, the fact remains that such growth was created on a relatively unstable foundation.

Problems with the Dubai Model

One of the primary problems with the Dubai model is in its reliance on foreign workers and corporations in developing its private sector. There was little in the way of significant investments into technical expertise development. Foreign companies were initially enticed by the tax free zones that were created under the auspices of the Dubai model,however, the fact remained that there was little to no transfer of technical skills or expertise from these companies into the local population. This is due to the fact that 85 percent of the U.A.Es work force primarily consisted of foreign labor since the region has a relatively small local population compared to its size (less than 8 million) (UAE, 2010).

Not only that, the Bains (2008) study stated that this dependence on foreign corporations to bolster the U.A.Es growth is incredibly fragile given its reliance on the goodwill and confidence of foreign corporations and institutions regarding the potential the region holds for growth and development (Bains, 2008). Once such confidence disappears (i.e. confidence in the development of the U.A.E into a global financial center like Manhattan, Singapore or Hong Kong), there is little in the way of actual solid economic fundamentals in the form of a robust industrial, agricultural or even technical sector that would convince foreign corporations to stay.

Due to continued speculation in the property sector of the region, property prices in urban areas such as Abu Dhabi and Dubai have soared, which have made the cost of doing business that much more expensive. The banking sector of the U.A.E is among one of the most robust in the world since it is supported by the sovereign wealth management and income from the sale of oil. However, the fact remains that the speculative nature of property prices and the fact that the region did not truly have a significant industrial, agricultural, commercial or even technical base to justify its continued rapid infrastructure expansion which was based on foreign confidence in the region.

These factors created what was apparently an externally effective model (as seen in the increase in construction, tourism and trade) but were internally incredibly fragile (this was due to a lack of diversification into other potential sectors making it vulnerable to external market shocks). This was shown during the advent of the 2008 financial crisis and its repercussions on the U.A.E wherein $364 billion worth of construction projects (i.e. housing development and high rises) had been put on hold or cancelled. Extensive levels of capital flight occurred and foreign sentiment regarding the region evaporated quickly resulting in considerable economic stagnation which is all the more evident in Dubai.

Differences in State Run Capitalism

The Dubai model is actually a variant of State Capitalism, whereby the State takes an active role in directing investment in an otherwise normal capitalist system.. In the case of the Dubai model, the lack of taxation on foreign corporations and entities is balanced via the profits gained from the various state owned business ventures within the region wherein the construction industry is usually the most widely utilized.

The fatal flaw in the Dubai model, in comparison to the state capitalist model of China, is the fact that it does not focus enough on the development of local industrial sectors and instead focuses on enticing foreigners and foreign corporations to come into the country through tourism and no taxes. The problem with a strategy that lacks a sufficiently diverse improvement of fundamental economic sectors and instead focuses on three specific sectors (i.e. tourism, trade and construction), is that it creates a greater propensity for collapse (United Arab Emirates: Country Reports Recent Analysis, 2012).

In the case of China, when the 2008 financial crisis occurred, its tourism and construction sectors experienced significant financial losses. However, it was able to continue to absorb most of the damage due to its robust industrial sector which the government had invested in as well as its agricultural sector which is one of the largest in the world. China also has a relatively young and inexpensive workforce which makes it a prime destination for companies looking to save money through outsourcing. In comparison, it can be seen that the Dubai model simply focused too much on tourism, construction and trade which were vulnerable to external economic influences. The 2008 financial crisis revealed such vulnerabilities which showcases the need for greater diversification in the strategy that the local government is implementing in terms of improving the local economy.

Counterfactual View on the Development of the U.A.E Economy

Let us take the following potential scenario into consideration, if the 2008 financial crisis had not happened, would this have resulted in a more sustainable environment for the development of the U.A.E under the Dubai model? First is the fact that the Dubai model focuses on the development of the region into a tourism, business and trade hub which would make it less dependent on oil wealth as a means of supporting the local economy. If the 2008 financial crisis had not occurred, it can be argued that the U.A.E would have continued along its development path of tourism and trade.

The reason behind this is due to the finite nature of the regions oil reserves resulting in the need for alternative sources of economic development. However, under the examination of the article Dubais debt woes expose governance model (2010), it was shown that business development within the U.A.E focused primarily on construction, financial services, hospitality, transport and logistics since these were the only available routes to the region at the time. There was a distinct absence of a significant manufacturing presence within the region in terms of the factories and manufacturing centers that can be seen in countries such as China, India and Malaysia. One of the reasons behind the lack of significant centers of industrial manufacturing despite the presence of large amounts of capital towards their development is simply due to the fact that labor within the U.A.E is far too expensive (Dubais debt woes expose governance model, 2010).

Outsourcing of manufacturing and business process centers to countries within Asia has been one of the current trends in global economic development within the past 17 years. As seen in the examination of Mahdavi (2013), companies have been off shoring or outsourcing their production and processing facilities to China, India, the Philippines and Malaysia due to the cheaper labor sources within such countries. Despite the presence of Exclusive Economic Zones (EECs) and the general absence of significant levels of business taxation within the U.A.E, corporations still continue to focus on Asia as the destination of choice for business (Mahdavi, 2013). As a result, nearly 50% of all global trade crosses through the South China Sea from ports located in Singapore, Hong Kong, Taiwan, and China. While it may be true that the U.A.E has become a major port for shipping within the past 8 years, current trends in shipping consolidation is creating a significant threat towards this particular industry within the U.A.E.

The Hvidt (2011) study explains that another of the developing trends in supply chain management has been the consolidation of manufacturing and shipping methods wherein corporations are increasingly choosing ports near to where they manufacture their goods as the primary locations where goods are offloaded and transported to their intended locations for immediate sale due to reduced operational costs. What this means for the U.A.E is that despite the goal of the Dubai model to transform the region into a center for global trade, the lack of significant levels of local industrial manufacturing and current trends in shipping consolidation means that corporations are more likely to focus shipping operations in Asia since that is where their manufacturing centers are located as compared to the U.A.E. Combined with the continued outsourcing of business processing jobs to the Philippines where there is an estimated 435,000 business processing employees, it can be seen that the current trend in business development has been the reduction of costs through the outsourcing of labor (Hvidt, 2011).

Due to the nature of the region (arid with a distinct lack of farmable land), the U.A.E simply lacks the means of being a major agricultural center resulting in the current situation where nearly 95% of all its food resources are imported (United Arab Emirates: Country Reports Recent Analysis, 2012). This means that in terms of agricultural and industrial products, the U.A.E is heavily dependent on imports as seen in the case of its import oriented economy. Taking the various factors that have been mentioned in this section into consideration, it can be seen that even if the 2008 financial crisis had not occurred, the Dubai model simply did not advocate an effective enough means of enticing global businesses to operate within the U.A.E since it is far cheaper and easier to simply outsource to Asia. Combined with the lack of a sufficiently robust local industrial sector, manufacturing companies which make up the bulk of present day economic activity simply would not outsource to the U.A.E especially with a lack of talented and affordable employees.

Conclusion

Based on the data that was presented in this paper, it can be seen that the current focus of the U.A.E towards developing itself into a trading and tourism hub using the Dubai model is not applicable in todays current economy. The fact is that focusing too much on tourism, trade and construction while neglecting other sectors such as the development of a sufficiently robust industrial sector leaves a region vulnerable to external shocks as seen in the case of the 2008 financial crisis. Not only that, when taking into consideration the cyclical nature of global business where there are periods of economic highs and lows which significantly influence the rate of travel and investment, it is likely that during these low periods the local economy of the U.A.E would be devastated if it relied entirely on tourism, trade and construction as the main drivers of economic growth since it is these specific sectors that suffer the most during low periods in the global economy. The primary lesson learned from the 2008 financial crisis is that the Dubai model is simply not feasible in the long term since it is necessary to have a broader economic base that has multiple strong sectors that enable a country to absorb economic shocks.

Reference List

Bains, E. (2008). Brand Dubai loses its lustre. MEED: Middle East Economic Digest, 52(48), 42-43.

Dubais debt woes expose governance model. (2010). Strategic Comments, 16(2), 1-2.

Economic Structure and Context: Key Sectors. (2012). United Arab Emirates Country Monitor, 19-20.

Hassan Khan, M. (2012). Stability and Sustainability of UAE Macro-Economy. Defense Journal, 16(3), 109.

Hvidt, M. (2011). Economic and Institutional Reforms in the Arab Gulf Countries. Middle East Journal, 65(1), 85-102.

Mahdavi, P. (2013). Gender, labour and the law: the nexus of domestic work, human trafficking and the informal economy in the United Arab Emirates. Global Networks, 13(4), 425-440.

UAE. (2010). MEED: Middle East Economic Digest, 54(22), 29.

United Arab Emirates: Country Reports Recent Analysis. (2012). United Arab Emirates Country Monitor, 24-25.

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