From Camels to Land Rovers The Economy of Dubai

ECON 214Trade Policy Prof. Ann Velenchik Lela G. Jgerenaia November 27, 2012

*Title inspired by Sheikh Rashids quote Cover image source: Ruth Black, Camel on Jumeirah Beach in Dubai, UAE, photograph, Bigstock, uploaded 2 March, 2011, accessed 25 Nov. 2012. http://www.bigstockphoto.com/image-14339111/stock-photo-camel-onjumeirah-beach-in-dubai,-uae.

My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.1 - Sheikh Rashid Bin Saeed Al Maktoum of Dubai Introduction At the height of the oil boom, the ruler of Dubai and his advisors were well-aware of the need to replace the emirates rentier status with a diversified economy, which would sustain Dubai even after the last barrel of oil was pumped. From the early history of Dubai as a simple Persian Gulf coast settlement to the grand metropolis of present day, Dubais rulers have followed a strategy of facilitating trade and encouraging foreign investment. Following the discovery of oil, Dubais rulers embarked on a different course than many of its neighbors, and aggressively developed a diversified economy to ensure that future generations would not have to go back to riding camels. As one of the seven sheikhdoms of the United Arab Emirates (UAE) with only modest oil reserves, Dubai accounts for over 30% of the countrys GDP and is the main trade and financial center of the region.2 While another emirate, oil-rich Abu Dhabi contributes 60% of UAEs GDP. Dubai, which has managed to achieve and sustain a standard of living as high as OECD countries, is an example of success brought by innovative economic policy, which freed this emirate from the oil curse.3 This paper will examine how this small sheikdom was able to succeed in transforming itself into a diversified international business and tourism mecca in a few decades. Dubai Before Oil The area of modern-day Dubai has had a permanent settlement since the mid-18th century. In 1833, Dubai was established by The Al Bu Falasah dynasty of the Bani Yas tribe
1

Ron Gluckman, Stories about Dubai, and the UAE, Hong Kong of the Desert?, Ron Gluckman's Reporting Pages, accessed 18 Nov. 2012, http://www.gluckman.com/DubaiBiz.html. 2 Ilham Haouas and Raimundo Soto, Has the UAE Escaped the Oil Curse?, (Santiago: Marzo, 2012), 9. 3 Haouas and Soto, Has the UAE Escaped the Oil Curse?, 29.

ruling Abu Dhabi.4 The Maktoum family was the most important among those 800 Al Bu Falasah settlers and they became the rulers.5 Dubai initially emerged as a fishing and pearling settlement due to its lower Persian Gulf coast location. This area contained some of the largest and brightest pearls, which were in high demand amongst the wealthy in Britain, India and other areas of the world. Its strategic location also made it an excellent entrept, or trade center, along the Indian trade route. The British East India Company partnered with the local ruling family in order to further establish British presence in Dubai and protect it from encroachment from neighbors and other colonial powers who were infringing on the lucrative Indian trade route.6 By the early 19th century, Dubai was recognized as an independent entity from Abu Dhabi and signed its own trade treaty with Britain in 1835.7 Between 1890 and the early 1900s the Sheikh of Dubai undertook ambitious plans to turn Dubai into a free trade port. He abolished all customs and trade tax, and boat licensing fees, while also exempting foreigners from income tax. These new economic policies transformed Dubai into a thriving free port with more boats and ships than neighboring sheikdoms, Abu Dhabi and Sharjah.8 Soon Dubai experienced a population boom from Indian traders, Persian merchants, British expatriates and Arab dealers.9 The global recession of the 1930s and 1940s combined with the events leading up to WWII caused a global decrease in demand for Gulf pearls and trade declined. Around the same time, the Japanese had developed a method of culturing pearls which produced a superior product. These unfortunate events caused a severe economic depression in Dubai, which continued until oil was discovered in the 1960s.10

4 5

Syed Ali, Dubai: Gilded Cage, (London: New Heaven: Yale University Press, 2010), 15. DUBAI.com, Dubai, UAE History, Dubai Culture, accessed 20 Nov. 2012. http://www.dubai.com/v/history/. 6 Christopher M. Davidson, Dubai: The Vulnerabilities of Success, (New York: Columbia University Press, 2008), 17-18. 7 Davidson, Dubai, 18-19. 8 Davidson, Dubai, 68. 9 Davidson, Dubai, 71-91. 10 Davidson, Dubai, 30-31.

The Oil Boom and Economic Development The prospect of oil in Dubai was enormously revitalizing for the economy. In 1937 Dubai signed a 25 year concession with the Iraqi Petroleum Company, a British-based and government-backed enterprise. This deal was later renegotiated to significantly more favorable terms in 1945 by Sheik Rashid bin Said Al Maktoum, then crown prince of Dubai.11 In the early 1960s oil was discovered in Dubai and by 1965 commercial quantities of crude oil were being produced and exported. Oil production peaked in 1991 at 420,000 barrels per day with a reserve of over four billion barrels.12 Despite the economic windfall from the oil boom, Sheikh Rashid and his advisors realized that the reserves of oil were limited and once the oil was depleted, the money would be gone.13 The Sheikh and his advisors devised an economic policy to develop non-oil dependent revenue for the emirate. Oil revenues were used to develop Dubai Aluminum, Gulf Metal Foundry and other heavy industrial companies producing chemicals, plastics and gases. When other Gulf countries were investing abroad, the rulers of Dubai were investing in infrastructure to further strengthen its capabilities and reputation as a center for international trade.14 Port Jebal Ali, one of the largest ports in the world, was completed in 1979, and was soon running at full capacity.15 At the requests of prominent merchants, Dubai World Trade Center was built in 1979, the tallest building in the Middle East at the time. The transformation of Dubai into an

11 12

Davidson, Dubai, 27. Davidson, Dubai, 101. 13 STOCKTALK, Oil Sands resource, Alberta Canada, modified 2 Oct. 2006, accessed 20 Nov. 2012. http://www.stocktalk.no/Msg.asp?GroupID=13&Group=Utenlandske%2Baksjer%2B-%2BValuta%2B%2BR%25E5varer&TopicID=35326&Topic=Oil+Sands+resource%2C+Alberta+Canada&Keyword=OILSAND&Pos=All. 14 Davidson, Dubai, 106. 15 Stephen J. Ramos, Dubai Amplified : The Engineering of a Port Geography, (Farnham, Surrey, GBR: Ashgate Publishing Group, 2010), 111.

international trading center was facilitated by the construction of Dubai International Airport in 1960 and its expansion in 1998.16 In order to attract more foreign direct investment, Sheikh Rashid and his advisors came up with the innovative concept of free zones. Under UAE commercial law, companies must be at least 51% owned by a UAE national. Sheikh Rashid and his advisors created a special zone within Dubais emirate which technically was outside of UAE jurisdiction, and could be 100% foreign owned.17 In 1985, the free zone was built next to Port Jebal Ali in order to enable the use of facilities for export processing.18 By 2002, Jebal Ali Free Zone produced over $6 billion in foreign investments. The success of Jebal Ali Free Zone prompted Dubai authorities to create more free zones including Dubai Internet City and Dubai Media City, which house prestigious companies including Microsoft, Dell, CNN and BBC.19 Post-Oil Economic Diversification In an effort to further diversify the economy, the government attracted more foreign investment with the development of a luxury tourism industry, an upscale real estate market, and expansion of a growing financial sector.20 Marketing of the Dubai brand was also an

important strategy. Revenues from oil and industry were used to acquire and develop high value and high profile projects like the Arsenal Football Club stadium, the London Eye and Madame Tussauds waxworks center. Dubai International Capital, a leading financial institution, even made an attempt to purchase the Liverpool football club in 2006 and Manchester United football club in 2007.21

16 17

Davidson, Dubai, 108-111. Davidson, Dubai, 114-115. 18 Davidson, Dubai, 114-116. 19 Davidson, Dubai, 116-117. 20 Davidson, Dubai, 101-102. 21 Davidson, Dubai, 103.

The government of Dubai took specific measured steps, to turn their emirate into a top tourist and shopping destination. In 1985 Sheikh Mohammed authorized the creation of Emirates Airline, which was flying to 45 different international cities by the end of the 1990s.22 Dubai was transformed into a regional and international shopping destination. Goods hard to find or extremely expensive in the region, were easily accessible in the emirate. The Sheikh promoted shopping in Dubai in 1996: Were a little island of bargains in a sea of countries where nothing is available. The success of this campaign has resulted in tourism and travel accounting for 30% of Dubais GDP in 2010.23 In 2002 Sheikh Mohammad allowed non-UAE citizens to own property in Dubai, resulting in a boom in construction of luxury properties.24 These extravagant projects, shown in exhibit 1, include the Palm Islands and the World Islands, artificial archipelagos built off the Dubai shoreline. The Islands were covered with luxury estates which were sold primarily to wealthy foreigners. In 2006, Sheikh Mohammad passed the Dubai Property Law which allowed non-nationals to own real estate and receive residency visas from the newly created Lands Department, further increasing foreign demand for Dubai real estate.25 In order to expand the financial sector, a financial free zone in the model of the Jebel Ali Free Zone was created. The Dubai International Financial Center is the headquarters for corporate giants like KPMG, Merrill Lynch and Credit Suisse among others, as well as the emirates stock exchange.26 The successful development of the financial sector was apparent

22 23

Ali, Dubai: Gilded Cage, 21. Ali, Dubai: Gilded Cage, 43. 24 Ali, Dubai: Gilded Cage, 37. 25 Davidson, Dubai, 129-132. 26 Davidson, Dubai, 118-119.

when Dubai was recognized by the International Monetary Fund and World Bank as a financial hub in 2003.27 Table 1 shows that the economic success of Dubai was triggered by diversification. Dubais GDP has been growing at higher rates than any other emirate of the UAE. In Dubai, almost all economic sectors have fared better than those in other emirates. Retail and wholesale trade has been growing at much faster rates in Dubai, accounting for over 30% of its GDP in 2010.28 As demonstrated by table 2 annual GDP growth for Dubai and Abu Dhabi over the last decade has been increasing, where oil revenues remain unchanged for Dubai while increasing for Abu Dhabi. This shows how Dubai has succeeded in fostering economic growth, which is not dependent on oil revenue. However, economic prosperity of the emirate has not come without a cost. The economic boom caused a significant change in the demographics of Dubai. After the 1980s, Westerners from Europe and North America made up a significant portion of the expatriate population, working primarily in professional positions.29 Today, over 90% of the residents of Dubai are expatriates, who are made up of 202 different nationalities.30 The emphasis on economic development above all has resulted in underdevelopment of the local education system, and the subsequent lack of a native workforce with the skills and education to drive the complex engine of Dubais economy. This trend reinforces the necessity of hiring talented foreigners to keep the economy running.31

27 28

Dubai, UAE History. Haouas and Soto, Has the UAE Escaped the Oil Curse?, 30. 29 Ali, Dubai: Gilded Cage, 30. 30 Khaleej Times, 202 nationalities in labour market, modified 25 Aug. 2006, accessed 22 Nov. 2012. http://www.khaleejtimes.ae/DisplayArticleNew.asp?xfile=data/theuae/2006/August/theuae_August735.xml&section=theuae& col=. 31 Ali, Dubai: Gilded Cage, 30.

Conclusion Dubai started out as a small fishing and pearling settlement which developed into a thriving trade port. From its earliest days as a coastal trading port to the international trading hub of the present day, Dubais strategic location on the Gulf coast has situated it ideally for trade and commerce. However, the trigger for Dubais stunning transformation from regional trade enclave to international trade and financial hub was the ingenious utilization of oil revenues and the economic policy of the emirates authorities. From the mid-1960s to the early 1990s, Dubai profited greatly from its oil reserves. Armed with the foresight to look beyond the limited supply of this natural resource, the rulers of Dubai and their advisors developed a strategy for creating a non-oil dependent economy. Oil revenue was used to build up Dubais transportation and shipping infrastructure and industrial sectors, laying the groundwork for further economic development. Dubais rulers drafted and pursued new policies, sometimes at odds with UAE laws, to aggressively stimulate the growth of the tourism, real estate, financial and trade sectors.32 The end result is an emirate with a per capita income on par with most of the industrialized world, and impressive economic growth independent of oil-derived income.33

32 33

Haouas and Soto, Has the UAE Escaped the Oil Curse?, 36. Ali, Dubai: Gilded Cage, 6.

Exhibit 1
The Palm and The World Islands as seen from space

Source: Andre Kuipers, The Palm and The World islands in Dubai, photograph, captured 22 March, 2012, ESA/NASA, accessed 24 Nov. 2012. http://niceartlife.com/how-tiny-we-are/.

Table 1

Source: International Monetary Fund (IMF), United Arab Emirates, IMF Country Report No. 12/116, (Washington D.C.: IMF, 2012), 21.

Table 2

Source: Ilham Haouas and Raimundo Soto, Has the UAE Escaped the Oil Curse?, (Santiago: Marzo, 2012), 31.
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Bibliography
Ali, Syed. Dubai: Gilded Cage. London: New Heaven: Yale University Press, 2010. Black, Ruth. Camel on Jumeirah Beach in Dubai, UAE. Photograph. Bigstock. Uploaded 2 March, 2011. Accessed 25 Nov. 2012. http://www.bigstockphoto.com/image14339111/stock-photo-camel-on-jumeirah-beach-in-dubai,-uae. DUBAI.com. Dubai, UAE History. Dubai Culture. Accessed 20 Nov. 2012. http://www.dubai.com/v/history/. Davidson, Christopher M. Dubai: The Vulnerabilities of Success. New York: Columbia University Press, 2008. Gluckman, Ron. Stories about Dubai, and the UAE, Hong Kong of the Desert?. Ron Gluckman's Reporting Pages. Accessed 18 Nov. 2012. http://www.gluckman.com/DubaiBiz.html. Haouas, Ilham and Soto, Raimundo. Has the UAE Escaped the Oil Curse?. Santiago: Marzo, 2012. International Monetary Fund (IMF). United Arab Emirates. IMF Country Report No. 12/116. Washington D.C.: IMF, 2012. Khaleej Times. 202 nationalities in labour market. Modified 25 Aug. 2006. Accessed 22 Nov. 2012. http://www.khaleejtimes.ae/DisplayArticleNew.asp?xfile=data/theuae/2006/August/theua e_August735.xml&section=theuae&col=. Kuipers, Andre. The Palm and The World islands in Dubai. Photograph. ESA/NASA. Captured on 22 March, 2012. Accessed 24 Nov. 2012. http://niceartlife.com/how-tiny-we-are/. Ramos, Stephen J. Dubai Amplified : The Engineering of a Port Geography. Farnham, Surrey, GBR: Ashgate Publishing Group, 2010. STOCKTALK. Oil Sands resource, Alberta Canada. Modified 2 Oct. 2006. Accessed 20 Nov. 2012. http://www.stocktalk.no/Msg.asp?GroupID=13&Group=Utenlandske%2Baksjer%2B%2BValuta%2B%2BR%25E5varer&TopicID=35326&Topic=Oil+Sands+resource%2C+Alberta+Canada &Keyword=OILSAND&Pos=All.

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