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10 Questions…on Dubai’s Emergence for Tayyeb Shabbir
In
the past few years, Dubai has debuted an indoor ski resort – in the
middle of the desert, a string of manmade islands sticking out into
the Persian Gulf that collectively look like a palm tree from the
air, plans to build the largest building in the world, and most
recently, a bid for a 20 percent stake in the NASDAQ stock exchange.
In terms of breakneck economic growth, it may be at the center of
the world. So where did this boom time come from? Why now? And, why
to such bizarre extremes? Here, Associate Professor of Finance
Tayyeb Shabbir, an internationally recognized expert on emerging
economies, explains. [Full How does Dubai function – is it a city or a country or something else? Dubai is one of seven emirates, quasi-sovereign sheikdoms governed by the same bloodline, which are linked together as a federation known as the United Arab Emirates (UAE). The country came into being in 1971 when Britain pulled out of the region. It’s an incredibly rich region largely because of oil reserves – last year, UAE’s GDP was $182 billion with a per capita income of roughly $24,000, which is the 36th highest in the world versus the United States’ per capita of $45,000, which is the 10th highest. However, on a per citizen basis – only 12 percent of the UAE’s 4.6 million inhabitants are citizens; the rest being imported workers – each UAE citizen made approximately $364,436 last year! Also, in the last few years, UAE’s GDP growth rate has been more than 10 percent compared to 2.5 percent in the U.S. As a practical matter, each emirate operates very autonomously, and Dubai isn’t even the largest or richest one of them. That distinction goes to Abu Dhabi. However, Dubai’s economy is the most well diversified one and its policymakers are following a policy of relatively aggressive growth. Does all of Dubai’s wealth and financing stem from oil? It’s interesting, people often assume that Dubai’s activities are sitting on top of an oil barrel, but really, it’s more about chutzpah than oil. Only 10 percent of UAE’s vast oil reserves lie within Dubai’s borders. Almost all of the other reserves lie within Abu Dhabi’s borders, which is why it is the richest. So Dubai is really like the middle child who has scrapped its way into prominence. If Abu Dhabi is the richer emirate, why are we hearing so much about Dubai instead? Abu Dhabi actually tried to do a lot of things that Dubai is doing now back in the ’70s and early ’80s. But for the most part, it didn’t work, largely because the people of Abu Dhabi are Bedouins, living off the land, raising sheep and such. Dubai, on the other hand, has always been made up of a merchant class. So they understand markets better and have these entrepreneurial roots. The real turning point for Dubai came in 1996 when, unlike Abu Dhabi, they passed legislation allowing foreign citizens to own property in certain parts of Dubai. This is tremendously different than what Abu Dhabi attempted to do, and also explains why an oil-rich country like Saudi Arabia hasn’t risen to this level of prominence in terms of commerce and trade. Dubai has focused its efforts on being relatively tolerant of Western ideas and cultures and allowing foreign ownership of land. That was the biggest single step toward what we see today. Still, how has Dubai been able to grow so quickly? To be a fast-growing economy, you have to have a democratic, or at least an “enlightened” political structure, a good supply of skilled labor and education, and most importantly, financial capital and wherewithal. The political structure came from the entrepreneurial decision-makers at the head of the emirate, they’ve brought in a lot of the skilled labor from abroad, but the last one was the big one. The capital came from the vast amounts of oil wealth throughout the Middle East that previously had no outlet. It was like a vacuum where many of these incredibly rich people and entities were forced to invest in Western countries. It was natural to want to have some investments closer to home so when Dubai allowed foreign real estate ownership, it provided an outlet for all of this wealth. The investments flowed in from throughout the Middle East and East Asia, including some of Pakistan and India’s richest citizens. If oil isn’t the largest portion of its GDP, what sectors are the big ones for Dubai? The largest piece of the pie comes from tourism-related industries – 49 percent of their GDP – and explains why they’ve built themselves into a shopping hub with all of these other, perhaps novel attractions. But now, they’re also looking to become a strong financial center as well, which is why they put in the bid for the part-ownership of NASDAQ, for example. What are some of the more novel attractions Dubai has unveiled? There’s the indoor ski resort, which is in a mall, the 300 man-made islands that look like a map of the world from above, the Palm Islands that look like a palm tree jutting out into the Persian Gulf, a 68-story rotating skyscraper that even allows each story to rotate independently, a 220-guest suite luxury underwater hotel, and Burj-Dubai, which will be the tallest building in the world when it is completed in 2008. And it’s built so that they can add onto its height in case any competitors try to make an attempt to outdo it. Some of these things smack of being bizarre. Why has the emirate launched such outlandish projects? To some degree, it could be considered that they are doing the same thing that has plagued so many emerging countries from the United States during Manifest Destiny to Malaysia in the mid-’90s just prior to the Asian Financial Crisis of 1997. When you have enough food on your own table, then you start wondering how big your neighbors’ garage is and if they have better toys than you – the idea of nouveau riche. History has shown it’s a part of human nature to want more, for better or worse. On the other hand though, the push for bigger, better, and more novel could be considered savvy marketing on Dubai’s part. With so much of their GDP coming from tourism, they continue to want to make a compelling reason why people should visit Dubai and not the number of other places competing for those tourism dollars. These attractions can legitimize that attraction, even if it comes in the form of novelty. Is there any risk of a financial crisis in Dubai like the one that brought down Malaysia and other East Asian countries in the late-’90s? The amount of wealth in oil in the region, the foreseeable continued demand for oil worldwide with the emergence of global economies such as India and China, plus the ways that Dubai is beginning to build its financial backbone suggests they aren’t at the same risk as other recent emerging countries. In fact, a lot of their real estate investments are more secure than those in the United States because it’s not uncommon for people to come to closing with suitcases full of money and pay for the properties outright. There are very different dynamics, but things could still change. If oil prices dropped dramatically, back down to about $10 or $ 15 a barrel, or the geopolitical structure of the region changed because of terrorism or some other issue, then Dubai could still be at risk. But in general, it’s more secure than other emerging economies. You mentioned briefly that a lot of the skilled labor in Dubai comes from abroad. Are there any foreseeable implications from that fact? Just a few examples: 70 percent of the doctors and 80 percent of Dubai’s professors are from abroad. They have instituted a very relaxed immigration policy, which has helped get Dubai to where it is today, but they are reluctant to give these foreigners citizenship. That could have an impact down the road, because there still is not that indigenous well of skilled labor that I mentioned is critical for the success of an emerging economy. There’s also a dark side to Dubai relating to unskilled labor as well. Dubai’s “dark side”? All of this construction and growth demands laborers, most of whom have come from India, Pakistan, Bangladesh, and other Middle Eastern countries. There have been reports where Dubai employers have limited workers’ freedoms by doing things such as taking away passports. Essentially, making laborers indentured workers. There have also been concerns among human rights organizations of abuse of domestic workers, who are primarily single women emigrating from the Philippines. It’s not uncommon in places where there’s a booming tourist trade to see issues of human trafficking, meaning prostitution, as well. I’m not pointing these negatives out to suggest that the entire emergence of Dubai is flawed, only that with the good of growth and success, the emirate certainly has its work cut out to mitigate these negatives. Tayyeb Shabbir’s co-edited volume, Recent Financial Crises: Analysis, Challenges and Implications, was published in February 2007. |
