Special Report: Middle East - Dubai's race to the top

The dizzying pace of development is part of the ruling family's strategy to transform Dubai into a world-class hub by 2015.

by Morice Mendoza
Last Updated: 23 Jul 2013

From the moment that Sheikh Rashid Al-Maktoum, ruler of Dubai, gave the order in 1959 to modernise the Creek, which had functioned as a trading port since the 1830s, the small desert sheikhdom, perched on the eastern coast of the Arabian Peninsular, has been running at breakneck speed to become one of the world's biggest commercial hubs. Although Dubai struck oil in the 1960s, it has never had as much as some of its UEA neighbours and it has not relied on oil money to sustain its economy: its dependence on oil revenues has declined from 46% of GDP in 1975 to only 7.1% in 2004.

In 1959, Sheikh Rashid borrowed money from Kuwait to help finance the modernisation of the Creek, from which local traders had peddled pearls, gold and, more latterly, grey goods to markets in India, Pakistan and Iran. Sheikh Rashid took an enormous risk: the entire cost of the port's development was several times bigger than Dubai's annual GDP at that time, and, as in recent times, sceptics did not believe the project would work. But with the help of an import tax, the loan from Kuwait was repaid earlier than expected and the newly dredged port increased trade by 20% in the first year.

Dubai International Airport, built in 1960, handled 2.8 million passengers in 1980, a figure that had increased to 25 million by 2005. Sheikh Rashid's son and the present Ruler, Sheikh Mohammed bin Rashid al-Maktoum, has launched plans for a new project, the Dubai World Central International Airport, which will be 10 times larger than the current airport and is expected to handle 60 million passengers by 2010. It will also include a logistics hub, residential and commercial areas, a golf resort and a business park.

In the past few decades Dubai has changed beyond all recognition. Anyone living there in the 1970s would have seen empty desert and the beginnings of an expatriate community living in the then scarce luxury hotels. So scarce were they at this time that many business visitors had to sleep in the lobby or share rooms in the newly built InterContinental. By 2005, Dubai had 300 hotels with 29,834 rooms; 20,000 more rooms are planned by 2010, not including the 50 hotels that will be added as part of the $12 billion investment in Dubailand (an entertainment and leisure family resort).

The dizzying pace of development is a deliberate part of the ruling family's strategy to transform Dubai into a world-class hub. The Singapore model, which it most closely resembles, offers Dubai a constant reminder that it faces stiff global competition. New upstarts such as Cape Verde consciously ape the Dubai model of development, offering tax privileges in free zones to lure companies. After two decades of rapid development, Dubai has established itself as one of the world's top places for businesses to locate and for tourists to visit, and it has done so by being brash. The superlatives abound in Dubai - from the Burj Dubai, which at more than 800 metres when it is completed is destined to be the tallest building in the world, to the astonishing man-made luxury island resorts, which will accommodate thousands.

It has also made sure that it offers the best service facilities to support businesses. In the 1970s Dubai increased its capacity to handle shipping. First, Port Rashid was developed and then, a decade later, the Jebel Ali port, which became the largest man-made harbour in the world. The trade figures reveal how successful these high-risk investments have been: in 1975, imports were worth $1.93 million, exports $2.45 million and re-exports $1.52 million; by 2004, imports had increased to $40.6 billion, exports had gone up to $2.6 billion and re-exports to $15.5 billion. In 2004, many goods were brought in from China, India, Japan, the US and Germany, and then re-exported to India, Iran, Iraq, Switzerland and Pakistan.

Most critically of all, in the free zones companies do not have to set up joint ventures with locals (they have 100% ownership), they pay no corporate taxes or income taxes for 50 years and can repatriate all their profits, and are given excellent concierge services to facilitate their business; they are also free from some legal restrictions imposed outside these zones - the internet is not censored as it is elsewhere in the state. In 2005, the UAE attracted $12 billion in foreign direct investment (largely in real estate and services), making it the biggest recipient in the Middle Eastern and North African region. Much of this came into Dubai. According to Sheikha Lubna Khalid al Qasimi, minister of the economy for the UAE, that figure rose to $16 billion last year.

With its man-made luxury beach resorts, indoor skiing slope and the world's biggest shopping malls, it is easy to see why Dubai is compared to Las Vegas. It offers everything from sun and sand to skiing and extreme sports for the millions of tourists who flock there every year. Unusually for the Middle East, visitors can drink alcohol in hotel bars and women can wear bikinis on the beach. Unlike Vegas, however, Dubai is unlikely ever to go so far as to tolerate gambling, which offends Islamic sensibilities even more than alcohol.

To understand what is driving the seemingly unstoppable Dubai model of development, a more instructive comparison is with Singapore. A dominant figure - Lee Kuan Yew - set the vision for creating a world-leading commercial hub. Both aimed to create major financial centres with a high-quality infrastructure to attract foreign firms, and in both cases there was a recognition that their services had to be indispensable to major international firms. But there is an important difference: Lee Kuan Yew controlled change from the top down; Sheikh Mohammed has driven the unrelenting pace in a very different way. He makes sure that there is money to kick-start high-risk ventures, but then leaves the rest to market forces.

This was the model applied to the government-owned Emirates Airlines, now one of the most successful airlines in the world. Dubai provided an initial investment of $10 million in 1985 to get the company off the ground, but since then has let it operate independently without support or subsidy. In 2006, the airline served 83 destinations in 57 countries, carrying 14.5 million passengers and 1 million tonnes of freight. After 18 consecutive profitable years, the Emirates Group reported a net profit of $674 million for the airline and $762 million for the group.

The Dubai model is neither top-down like Singapore nor is it bottom-up as in the Silicon Valley, where growth came from a mixture of entrepreneurs and innovators spurred by demand from the US military. The Dubai model operates in the middle area: the state acts as a catalyst, supporting and developing new assets that are then turned over to private management, says Dr Jeffrey Sampler of the Said Business School in Oxford and co-author of Sand to Silicon (2007).

Dubai's success seems to go against the conventional wisdom. During the past few decades, observers have wondered whether it can cope with the enormous pent-up demand for services and tourism that it has unleashed. But rather than slow down and take stock, the Dubai model calls for more change. Indeed, in a debate on NBC in May, Abdulatif Al Sayegh, CEO of Arab Media Group, said: "Whatever you see today in Dubai is 5% or 10% of where we want to go."

The UAE's Khalid al Qasimi took part in the same debate. She described Dubai's vision thus: "The vision is to be a global city by 2015. Most of this is dependent on the flow of people, investments and growth. The position of Dubai, being right in the middle between East and West and as a trade route from the old times, makes it very attractive. So the more it gets built, the more it gets developed, you find out that there's more demand coming in."

The popularity of the free zones often runs ahead of the supply of buildings to house them. Salah Eldin Eltayeb Farah, corporate media relations and communications executive for the Dubai Airport Free Zone Authority (DAFZA), says a "long queue of 400 companies is waiting to come into the zone", mostly multinationals in the aviation, logistics, cargo, IT, jewellery and general trade industries. Although the buildings to accommodate the new demand "had not yet been built, 75% of the space has already been booked". Airbus, he says, wants to build its own plot for its operations, while others prefer to move into pre-built facilities.

Derek Morrison, regional general manager of IT software services firm Cognos, agrees that the authorities make the process of setting up in Dubai easy. He uses his office in Dubai Internet City (DIC) as a base for the firm's sales and marketing operations in the Gulf region. "They allowed us to rapidly build our business in the Middle East. They facilitated our office space, our internet connections, our phone lines." In addition to the many agreeable factors about living and working in Dubai, Morrison says that the "key for me is that the government allows business to flourish".

Anyone who visits Dubai will realise immediately that some of the infrastructure lags behind the creation of hotels, shopping malls, theme parks and free zones. The engineering excellence is not in doubt, but buildings go up before a new road or local shops have been established. It is impossible to drive across the main arterial route running east to west through Dubai city because the government failed to build enough slip roads or intersections. How then can Dubai cope with the expected rise to 8.5 million visitors a year by 2010? Dubai Metro, an ambitious overhead light railway, due to be completed in 2009, will reduce road congestion by carrying an expected 1.2 million passengers a day. But it is debatable whether Dubai can bring all its infrastructure up to speed if the city continues to develop at breakneck speed.

But it is clear the Dubai machine will not slow down. "Their view is that they will make mistakes on the way," says Sampler. "That is inevitable given the pace at which they are moving, but they believe they will get it right 80% of the time. They will run as fast as they can and when they fall to the ground, they will get up immediately and continue running."

The other big challenge Dubai faces is similar to Singapore's. Both cities need to create a highly trained force of local workers to ensure that they are capable of creating first-class research and innovation. Dubai Knowledge Village, launched by the government to cater for universities and training organisations, is already filled to capacity with 15 universities and 150 related companies, and Dubai Healthcare City has at its centre the Harvard Medical School Dubai. Although the creation of knowledge and the training of locals is starting to take place, Dubai will remain highly dependent on foreign workers for many years to come. Currently, 80% percent of the workforce consists of migrant labourers from south Asia and skilled workers from across the world.

Being so dependent on foreign workers and FDI makes Dubai vulnerable. Dr Paola Subacchi, head of the international economics programme at Chatham House, agrees. "It will take time to train the local people, it starts with primary school education. Meanwhile, Dubai depends on the expat community for skilled labour. At the moment, it's very safe and very pleasant. But you only need to look at Hong Kong to see how things can suddenly change. There, lots of people are leaving because of the problems of pollution."

Justin Doo, regional director, Middle East and Africa, of Trend Micro, a US IT security software company, has been based in Dubai since 2002. "Desert Storm had an impact on business and people left. The US and allied invasion of Iraq in 2003 also had an effect, but not as much. Business was not affected, there was much more confidence in Dubai. Business carried on. People know it is a high-risk environment, but the returns are also very high."

The rising tension between Iran and the US, however, creates serious risks for Dubai, given that it is only 12 miles from Iran across the Straits of Hormuz, putting its reputation as a safe haven at risk. But Islamic extremists are perhaps less likely to launch an attack on Dubai, given the fact that it has been used by terrorists to launder money. John Cassara, a former US customs agent and author of Hide and Seek (2006) a book on the financing of terrorism, recalls that as far as illicit trade was concerned "all roads led to Dubai". He even lobbied the US government to open an office there to monitor the flow of money laundering, fraud, smuggling, sanction-busting, quota violations, drugs and child pornography.

Al Qaeda used Dubai to finance some of its activities, including, it later transpired, the attack on the Twin Towers in New York. It used the untraceable 'hawala' money transfer system to send millions of dollars to Dubai, where it was converted into gold bullion, which is exempt from international reporting requirements. Following 9/11, the US set up an office in Dubai and the local authorities created "excellent financial intelligence and compliance programmes" to deal with the illicit trade on its home turf, says Cassara. However, there has been a worrying lack of enforcement.

Although the risk of terrorism might appear low, the state's increased tolerance of alcohol and un-Islamic dress, along with the influx of Western visitors every year, could spur an attack eventually. If this happened, some people believe that there could be a serious exodus of people and capital. Dr Christopher Davidson of Durham University says that FDI is "very elastic. It can easily move somewhere else." Many of the more recent investors in real estate and business in Dubai are more risk-averse than their predecessors, says Davidson, and more likely to take flight at the first signs of trouble.

Dubai has other challenges too. The large migrant workforce from south Asia is calling for improved working conditions. Eventually, Dubai's government may have to take more notice of criticism from organisations such as the Human Rights Watch. Equally, Dubai's rapid development of man-made islands and enormous towers presents an environmental challenge of equally gigantic proportions.

The authorities are responding to criticism with their own assessment of the risks. However, the amount of energy that will be required to keep the air conditioning going to sustain Dubai Inc in 2010 and beyond might mean its carbon footprint is one of its less welcome superlatives.

The teflon-coated tower of the Burj Al Arab hotel, shaped like a billowing spinnaker sail, soars above the Arabian Gulf

SETTING UP IN A FREE ZONE

- A Free Zone establishment (FZE) or company (FZCO) is registered by the Free Zone authorities

- The company or individual must have capital of at least AED1 million ($272,000)

- An FZE needs only one shareholder and is an independent legal entity

- An FZCO may be formed with between two to five founders (individuals or a company)

- A decision on whether the application has succeeded will be given in 30 days

- Incentives include 100% foreign ownership and full control; exemption from all taxes and duties levied on profits or production; no restrictions on profit transfer or capital repatriation; no customs duties; exemption from corporate, withholdings and inheritance taxes; no personal income tax

DUBAI'S GDP BY SECTOR (DH BN)

2000 2001 2002 2003 2004

Non-financial 51.7 54.2 67.9 83.2 94.9
sector
Financial 6.2 7.5 7.9 9.3 10.5
sector
Government 5.7 5.9 6.6 7.3 7.6
services
Total 63.5 67.6 82.5 99.8 113.0

Source: Dubai Chamber of Commerce

DUBAI HUMANITARIAN CITY

One of Dubai's latest initiatives is to create a regional hub for humanitarian organisations. The Dubai Humanitarian City (DHC), an independent free zone authority set up in October 2005 in Jebel Ali, has already registered more than 55 organisations and commercial companies.

Rolando Tomasini, INSEAD's humanitarian research group program manager, says it will create a centre from which humanitarian organisations can operate and network. "The concept of the DHC provides a platform for humanitarians to work closely in one compound. In times of emergency, this could be useful to augment the exchange of information among those who share facilities on a daily basis."

Its location is useful too, he says. "It provides a great mid-way point to the field. it's common to see field workers on short visits in Dubai to update their colleagues on what is happening on the ground."

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