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Dubai’s Model of Economic Diversification


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We examine the economic diversification model of Dubai. We argue that the uniqueness of Dubai’s model lies in its business openness and integration into the global economy, rather than oil dependency. In line with the common perception that there is a significant negative relationship between resource rents and economic diversification, we find that the decline of oil contribution to Dubai GDP from 5.48 per cent in 2000 to 1.4 per cent in 2013 could have been a facilitator rather than a hindrance to the city’s economic growth and development. In contrast with the prevalent views on various inefficiencies associated with resource rich economies, we also find that Dubai’s model of development rests on government leadership with specific governance and state entrepreneurship models, inward investment orientation, unhindered access to capital and labour markets, protectionism and legal dichotomy and policy of systematic diversification. This model offers a promising future for Dubai and provides some key lessons to be considered by other GCC countries with similar economic systems and conditions.
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89© Gulf Research Centre Cambridge 2018
A. Mishrif, Y. Al Balushi (eds.), Economic Diversication in the Gulf
Region, Volume II, The Political Economy of the Middle East,
Dubai’s Model ofEconomic Diversication
AshrafMishrif andHarunKapetanovic
Dubai has made signicant progress in its economic development since
the early twenty-rst century. Analysts attribute much of Dubai’s eco-
nomic success story to its unique business environment that is very attrac-
tive to businesses, shoppers and more recently to academics and researchers.
What makes Dubai unique is the scale of its economic activities, the ef-
ciency of business and nancial services and tourism facilities. This is
apparent in its ambitious plans to become the main trading hub in the
Gulf region, and turn some of its major companies and facilities in airline,
aviation, ports, logistics, construction, real estate and nance into world-
class services providers (Nyarko 2010). In contrast with Abu Dhabi, where
oil contributes approximately 90 per cent of the UAE’s oil revenues and
annual production and explains much of its economic development, Dubai
has very little oil reserves and its oil contribution to GDP has declined
from 5.48 per cent in 2000 to only 1.4 per cent in 2013. As a result,
Dubai has little to do with the rentier state model of economic develop-
ment. Despite the uniqueness of this case, little attention has yet been paid
to this success story in the heart of the oil-rich GCC countries. Only a
handful of scholarly works cover this development approach such as those
A. Mishrif (*) • H. Kapetanovic
King’s College London, London, UK
written by Al-Sayegh (1998), Davidson (2007a, b), Hvidt (2009) and
Schiliro (2013), at the time when GCC countries are seeking innovative
approaches to diversify their economies.
This study argues that part of the success of Dubai’s economic develop-
ment is owed to its small, open and well-integrated economy into the
global economic and nancial system. The city-state may have received
substantial nancial support of its oil-rich sister city, Abu Dhabi, during
the 2008–2009 global nancial crisis; hence, oil is still an important factor
in its long-term sustainable development. What is crucial here to stress is
the misperception that oil is the driving force for Dubai’s economic devel-
opment. Indeed, Dubai is centrally positioned in a region that is well
endowed with hydrocarbon resources, and this may have allowed many to
believe that its economic prosperity, almost by default, is ascribed to abun-
dant oil revenues. Perhaps that is the reason why the Dubai model has not
received due attention from the academic community despite apparent
economic and business success. While much of literature on the GCC
economies focuses on the availability and role of natural resources in eco-
nomic development, the rentier state theory offers little to explain Dubai’s
development drivers, motivations and outcomes. We also argue that the
rentier state theory is somewhat deterministic, and its pejorative nature
may have, in fact, inadvertently contributed to inadequate research of
Dubai’s economic model. Moreover, the posturing connotation of Dubai
with the rentier state theory has obscured many strengths of its develop-
ment paradigm; hence, the limitations and various lessons of Dubai’s eco-
nomic model are not examined well enough.
In this chapter, we attempt to show that Dubai has successfully diversi-
ed away its economy from the natural resource dependence, with oil
revenues contributing less than 1.5 per cent of the GDP. We are not
intending here to investigate how Dubai has diversied its main economic
sectors. The aim is to identify and examine the drivers of Dubai’s eco-
nomic development, highlighting salient features and economic structures
that enabled this development model to yield a highly diversied econ-
omy. We show that the success of Dubai is not accidental and hence it is
important to understand the merits of its developmental approach and its
relevance to regional economies. However, we nd that in-depth compre-
hensive analysis of Dubai’s economic trajectory is a daunting task for sev-
eral reasons: (1) ofcial data is scarce and not very reliable; (2) the
boundaries between local vs. federal policies are often blurred, as Dubai is
a city with great autonomy within the UAE; (3) the size of Dubai’s econ-
omy is not signicant globally as compared, for example, with Singapore
or Hong Kong to attract attention of researchers; and (4) the impact of
regional factors such as oil and access to liquidity are often overempha-
sized. We acknowledge that the role of oil is undeniably an important
factor in shaping the economies of Dubai and other GCC countries, but
in the case of Dubai, oil plays the role of a catalyst as opposed to being a
hindrance, as resource curse theory may suggest. Hence, we start with the
discussion on whether the rentier state theory is applicable to Dubai in the
rst place. This is followed by analysing the key elements of Dubai’s eco-
nomic development model. In section three, we assess the strength of the
model by examining its capacity of coping with the debt crisis in the after-
math of the 2008 global nancial crisis.
rentIer State theory anddubaI
Some literature considers Dubai’s model within the context of the rentier
state theory and neo-patrimonialism. Originally, Mahdavy (1970)
attempted to highlight economic challenges faced by the oil-exporting
countries and suggested ways to address such problems. Closely related to
the rentier state theory is the theory of the resource curse, which similarly
looks into poor economic performance of resource-rich economies.
Resource curse theory attributes an ‘anomaly’ economy or an economy
with adverse socio-economic consequences to the fact that a substantial
portion of national revenue is derived from the oil and energy-related
income. Gray (2011) denes the rentier state theory as a state-society rela-
tionship, in which the state generates a large portion of income from rents
or externally derived payments, typically that of oil and gas. This theory
considers the state autonomous from society. It assumes that states do not
need to impose any taxation as long as they distribute rent income to soci-
ety. In turn, the state does not need to have any development strategy.
In fact, Ruthledge (2014) considers these two theories as two elements
of the same paradigm. In this particularly critical account of the rentier
state and resource curse theories, she points out that rentier state theory
has become more deterministic (and pejorative) in nature in the late 1980s
onwards. More importantly is that the state is used in a broader meaning
to include the institutions of government, commercial entities and the
citizens as a whole. Gray (2011) discusses rentier state theory in a context
of economic achievements rstly in Dubai, but also in Abu Dhabi and
Qatar, and concludes that these states do not t in the original framework
of this theory. Notably, it seems that there is increasing recognition that
not only Dubai, but also other GCC states deserve more attention in
understanding their developmental model and the specic role of oil rev-
enues. El Katiri (2014) aptly describes the strong economic-welfare func-
tion as a distinguishing feature of GCC economies in relation to other
resource-rich states. She denes the type of state in the GCC, as a Guardian
State—a state in which benevolent state elites aim to maximize social wel-
fare supported by the state autonomy in decision-making. The relatively
small population sizes, geographical position and inherited governance
mechanisms such as tribal societies are some of the key factors of the
apparent divergence from the expected outcomes of the classic rentier
state theory.
These are important learning developments. Assuming that such a state
as Dubai exhibits all the features of the rentier state theory and primarily
autonomous from the society, it would be difcult to envisage how such
an economy would be able to make such a progressive economic advance-
ments in essentially an environment without abundant natural resources.
As we shall explain below, the Government of Dubai has traditionally
played a key role in economic development, not only in policy-making and
regulation but also in making direct investments in private enterprises.
Pradhan (2009) refers to this sort of state investment as a best case of the
success of state-led capitalism.
The theory of a ‘Guardian State’ makes important contributions in
explaining development models relevant to GCC economies. It recog-
nizes the resource-led nature of a development model similar to the rent-
ier state theory, but it also highlights its strong socio-economic welfare
objective function. This is how the term ‘guardian state’ developed.
However, the success of guardian states to promote economic growth has
never been free of some negative externalities, which are often associated
with resource wealth and include a high propensity for waste and systemic
dilution of market incentives. As a result, sustainability of economic
growth is thereby a key challenge in guardian state economies.
characterIStIcS andcomponentS ofdubaIS
development model
One of the main characteristics of Dubai’s economy is being small, open
and well integrated into global economic and nancial systems. Free
movements of factors of production, including capital and labour, as well
as of goods and services are a cornerstone of its development strategy.
Dubai pursues a regime that is consistent with liberal economic policies
and does not impose restrictions on capital inows and outows or taxes
on capital or labour, except foreign banks and oil companies that are reli-
able to paying 10 per cent corporate tax. A diverse corporate sector has
developed, led by public sector companies such as Emirates Group, DP
World, and comprising a myriad of global and international rms operat-
ing in virtually every sector of the economy.
Another key development in Dubai’s economy is the rapid growth in
real GDP in the past 15 years. According to Dubai Statistics Centre,
Dubai’s real GDP has almost tripled from AED 113 billion in year 2000
to AED 293 billion in 2010 and to AED 335 billion in 2014. Notably, this
period includes the negative effects of the 2008/2009 global nancial
crisis and Dubai’s debt crisis, without which the growth could have been
much more impressive. The negative effect of these crises is reected in
negative GDP growth rate of 2.5 per cent in 2009.
Historically, Dubai has played the role of a regional entrepôt. Bearing
in mind the demographic diversity of Dubai’s population throughout time
as well as the nature of trade business meant that a broad range of eco-
nomic, institutional, political and cultural factors have shaped the evolu-
tion of Dubai’s economy. Hvidt (2009) supports this argument by arguing
that Dubai’s overall development process has to be seen in the broader
context, implying a multi-causal explanation. Hvidt (2009) lists nine
parameters that dene Dubai’s model: (1) government-led development
(ruler-led); (2) fast decision-making and ‘fast track’ development; (3) ex-
ible labour force; (4) bypass of industrialization—creation of a service
economy; (5) internationalization of service provision; (6) creation of
investment opportunities; (7) supply-generated demand (rst mover);
(8)market positioning via branding; and (9) development in cooperation
with international partners.
Similarly, Nyarko (2010) discusses elements of UAE’s development
strategy, which may also broadly apply to Dubai. His main elements are
dened as (1) a political system, which has resulted in the perception of
stability and minimal political risk, encouraging investment; (2) oil;
(3)development strategies that have resulted in a very dynamic business
environment; (4) openness to foreign skills and management; and
(5)labour policies that have enabled the immigration of vast numbers of
foreign low-skilled workers. Along similar lines, Davidson (2009) argues
Dubai’s new post-oil economy benets from its long history of trade,
merchant immigration, re-export activity and its relative openness com-
pared to its Arab peninsular neighbours. Indeed, Dubai’s demographic
circumstances, together with the geographic position it occupies, have
underpinned and determined the nature of its development process.
It is certainly true that all of the above factors have played a signicant
role in shaping the development path and outcomes in Dubai’s economy.
Nevertheless, one could argue that some of these factors are more of an
exogenous nature from Dubai’s standpoint, given the limited control it
has over them, while some others are actually direct result of a broader
principle or a policy. For example, fast decision-making is the result of a
specic role the Government of Dubai plays and its governance approach.
Meanwhile, some policies are formulated at the federal level such as the
labour policy, where Dubai has limited scope or control. One could also
argue that Hvidt’s bypass of industrialization and creation of investment
opportunities can be more of an effect than a cause or driver of Dubai’s
model. Bypassing industrialization is a natural outcome for Dubai, having
in mind rapid and recent accumulation of wealth, limited natural resources
and a small domestic population. It is true, however, that bypassing indus-
trialization has led to the development of a service-based economy and the
governance mechanism as practiced today. Similarly, the creation of invest-
ment opportunities is a consequence of its development and governance
approach. Thus, the challenge in dening Dubai’s economic model lies in
distinguishing between the sources of its development and the effects of
its policies and strategies.
dubaI andtheuae polItIcal andeconomIc SettIng
To understand Dubai’s development model, its path and strategy, one
needs to distinguish between federal policies and Dubai’s own develop-
ment strategy. Dubai’s economic autonomy is conned within a broader
UAE economic framework, which includes macroeconomic policy, labour
policy, regulatory frameworks for banking and nancial industry, and for-
eign exchange regime, among other policies determined at the federal
level. Federal policies are the result of a common and shared economic
and political dynamics of the seven emirates. When it comes to policy for-
mulation, Dubai has a strong inuence but not decisive over the national
or federal policies. In fact, federal policies are reective of Dubai’s eco-
nomic circumstances, but Dubai often nds itself in the legal loopholes,
especially when it has to manoeuvre around the legal pillars to implement
its own policies. For instance, Davidson (2007b) highlights the case of the
rst residential house sales to expatriates and the creation of free zones, as
a measure to circumvent the federal restrictions on property ownership by
Although Dubai has to manoeuvre between what is federal and what is
its own, evidence shows that its macroeconomic and regulatory structures
are aligned with the federal system; hence the emirate is largely inuenced
and shaped by the common federal policies. This is apparent in key areas
such as monetary policy, exchange rate policy, scal policy, including taxa-
tion, ownership policy and company law. For instance, Dubai follows the
federal policy of pegging the UAE dirham to the US dollar, which implies
that a local monetary policy must align with US monetary policy, as well
as tracking the US interest rates regardless of the phase of its own eco-
nomic cycle. Such policies do not necessarily serve the best interests of
Dubai at all times, as the rigidity of monetary policy due to the dollar peg
greatly contributed to the exacerbation of the business cycle in Dubai in
late 2007/2008. As Dubai’s economy was experiencing a broad expan-
sion, the US economy was going through difculties that led it to run an
expansionary monetary policy such as a low interest rate policy, which in
Dubai’s case was unfavourable and a pro-cyclical measure. Despite such
adverse effect, the federal system supported Dubai to overcome its debt
crisis in 2008–2009. Dubai also benets from the federal immigration and
labour policy that are highly exible and, along with other federal policies,
are one of the key developmental pillars of Dubai economic model. Thus,
UAE macroeconomic policies serve as a broader framework for Dubai’s
developmental strategy and facilitator for its unique approach to economic
development. Figure5.1 illustrates this and explains the key elements of
Dubai development model, as explained below.
Government-Led Economic Development
In contrast to the rentier state theory, which assumes government’s pas-
sive role in economic planning and development, the role of the
Government of Dubai has been signicantly large in the Emirate’s eco-
nomic development. This role is in line with the argument developed in
the guardian state theory, which asserts that those states markedly differ
from most other economies not only by its resource wealth but also by the
‘guardian’ role the government plays. Al-Sayegh (1998) argues that Dubai
has a long tradition in a strong government role in economy, greater inter-
action with the business community and consolidated social contract with
its citizens. Importantly, the relationship between the state and its citizens
has not come about as a result of oil revenues and rents distribution but
rather the vice versa. It is also important to note that the specic role
played by the Government of Dubai is primarily inherited through centu-
ries of old relationships between Dubai’s rulers and its merchant commu-
nity. El Katiri (2014), who highlights the pre-existing political and
economic structures as a distinctive feature of the Guardian States, under-
lines this tradition. The pre-existing structures include the tribe as the
central social unit in structuring socio-political life. The tribe is divided
into families and headed by the tribal sheikh whose role as a guardian is to
lead his family members and protect their socio-economic interests.
Developing on its tradition and existing structures, Dubai has devel-
oped idiosyncratic governance mechanisms and oriented its government
towards a proactive state entrepreneurship and investment policies leading
to greater diversication in all economic sectors. Hvidt (2009) attributes
UAE Seng
•Common macroeconomic policies [monetary, financial )
•Shared immigraon, Labour policy
•Fiscal policy -Taxes
•Company law, ownership and agency laws
•Government led development
•Inward investments orientaon (Infrastructure)
•Access to capital and markets
•Proteconism and Legal Dicotomy
•Diversified, open and liberal economy
•First movers’ advantage
•Excellent physical infrastructure
•Regional and global connecvity
•Accumulated knowledge and know-how
Fig. 5.1 Dubai economic development model. Source: Authors’ own analysis
much of Dubai’s exceptional growth levels in 2000–2007 to the quality of
leadership and initiative of the Government, which are felt in the develop-
ment and modernisation of public services, institutional frameworks, leg-
islation, regulation and infrastructure, as well as the launch of strategic
projects such as tourism ventures, the Internet and Media City, Health
Care City, Logistic City and Dubai’s International Financial Centre—all
of them are developed, nanced and run by the government. These initia-
tives have been the driving force behind the impressive development and
the catalyst for private sector companies to follow the government lead
and participate in the development process.
One can also argue that the institutional structure and centralization of
decision-making has enabled the government to easily control and ef-
ciently run its key economic organizations. In addition to the local
government represented in the Dubai Municipality and its afliated
authorities that are responsible for the day-to-day running of the city-
state, the newly created Executive Ofce is the place, where the ruler man-
ages all economic activities and new developments such as mega projects,
SOEs, FDI, free zones, ports, investment banks and specialized cities. The
ruler has also placed his most trusted men in charge of the Dubai Holding,
Dubai World, The Department of Economic Development, Dubai
Municipality and Emaar. Hvidt (2009) argues that ‘although this is not a
democratic ideal, this kind of centralisation allows for fast decision-making
and signicant coordination of development activities and investments’.
Dubai’s Governance Model andtheRole ofMerchants
Given its unique governance approach, Dubai’s model is a deviant case of
economic development. The peculiarity of this case reects the nature of
the relationship between the ruling family and the merchant community,
when Dubai was an entrepôt in the Gulf and derived its prosperity from
trade and commerce. Al Sayegh (1998) argues that Dubai’s merchants
have played an important role in shaping Dubai’s economic and political
development. Scarce resources and trade meant that merchants and rulers
needed to work together to secure their livelihood. Partnerships, genuine
creativity and innovation were utilized to create businesses and develop
channels to support all kinds of economic activities. Dubai’s natural har-
bour, strategic location and thriving merchant community maintained it as
entrepôt for many decades. Contrary to expectations, the merchants’
inuence did not slow down with the advent of oil; rather it has taken
advantage of the new wealth to continue its inuence and contribution to
the development process until today. Indeed, the government and the
merchants share the responsibility for developing and contributing social
aspects of their society. Social development has never been conned to
strictly government affairs, as merchants have taken on additional roles as
service suppliers, urban planners, culture mediators and internationalists
who represent the Gulf throughout the world.
Interestingly, on many occasions the ruler’s income was not as high as
that of the pearl merchants. In fact, there were many times when the ruler
resorted to the merchants for nancial assistance. Financial dependency of
the ruler on the merchant community and vice versa implied the need to
focus on business development. In addition, it allowed merchants to have
an upper hand or at least equal inuence with the ruler in matters affecting
their lives. Since the early twentieth century, rulers used to appoint mer-
chants to his Majlis (advisory board); majlis was constituted as a consulta-
tive body and has effectively become a de facto government led by the
ruler and composed of merchants. The relationship between the ruler and
Dubai’s merchants remains until today. In fact it became even more com-
plex given the legacy of old relationships. The critical juncture took place
in the early twentieth century when the ruler of Dubai persuaded the busi-
ness community of the Persian city-state Lingah to relocate to Dubai. It
instituted the strong private sector and pro-business development path
which has characterized Dubai ever since.
As a result, Dubai’s achievements are remarkable and noteworthy not
only in terms of its economic performance but also in how that perfor-
mance was achieved. The cosmopolitan nature of Dubai’s merchants has
added an important dimension in the fabric and nature of the business
conduct and its economic structure. Given limited natural resource
endowments, the small size of the local labour force, the complex political
surrounding and challenging global economic environment, this gover-
nance model has proved to be particularly resilient.
One cannot underestimate the achievements of Dubai in this complex
environment in terms of social cohesion, safety and a high standard of liv-
ing. It is clear that Dubai’s economic and social aspects are often insepa-
rable as religion and culture shape Dubai’s decision-making process
through its own management and governance styles. Therefore, combin-
ing economic and social achievements of Dubai’s model in a complex
environment with many exogenous economic and social factors points out
that its success is intrinsically driven.
State Entrepreneurship
An important characteristic of Dubai’s government engagement in the
economy is entrepreneurship. The role of state-guided entrepreneurship
cannot be overemphasized as many SOEs are effectively competing in
international markets. Shome (2009) argues that state entrepreneurship, as
in the case of Singapore, is crucial for small, transitional economies to
achieve global competitiveness. Dubai shares a similar orientation, where
the state entrepreneurship model seems to be working efciently.
Unfortunately, entrepreneurship in Dubai has not received much attention
in academic literature, and hence sharing the general scarcity in research
indicates that this aspect of Dubai has largely been overlooked (Nasra and
Dacin 2009). In fact, in the period from 1990 to 2006, there was no single
article focusing on the examination of entrepreneurship in the Middle East
as a whole; only in 2015 that Sherbiny and Hatem produced a historical
account of the relationship between state and entrepreneurs in Egypt since
1805. Again, a plausible explanation to this phenomenon could be the
perception of the GCC economies as rentier economies and hence not
deserving the attention of the research community.
Nevertheless, our examination of the Dubai experience acknowledges
the growing role of the state in entrepreneurial activities. This case under-
scores a contrasting vision to what rentier state theory posits—that the
state is deriving rents from the revenues on the account of natural resources
and redistributes them within the economy with the objective of keeping
the regime in power. The Government of Dubai has undertaken invest-
ments and created businesses with private sector management orientation.
Such companies, often so-called government related entities (GREs)
including Emirates Group, Emaar, Nakheel and Dubal have been used as
main investments and development vehicles. It is not uncommon to nd
the denition of GREs as ‘100 per cent government owned, private sector
company’, a denition that reects both ownership and the intended gov-
ernance style of Dubai’s GREs. While being publicly owned, the GREs’
management and governance orientation are that of private sector entities.
Hence, the Government of Dubai has a multiplicity of roles to play.
Whether it acts as a policy maker, regulator or investor, the default objec-
tive is business expansion and economic development.
Another key driver of successful state entrepreneurship is the interplay
between the various public and private sector actors in the development
process. Hvidt (2007) argues that there is apparent absence or lack of
formal institutions and channels to link the public and private sector com-
panies; this absence of formal institutions has been compensated for by the
Majlis, the liberal economic policies and the multiple role of leadership
through which the distinction between the public and the private sector
gets blurred, as many private businesses are often absorbed into the gov-
ernance structure. As many members of the ruling family are engaged in
private investments, one could argue that strong ties between the public
and the private sector exist in practical policy formulation and implemen-
tation. The close public-private partnership can also be noticed in the divi-
sion of work and labour, where the government ofcials focus on the
design and formulation of policies and projects while outsourcing to some
private companies the task of providing useful intelligence and feasibility
studies, and to some others the possibility of decentralising the implemen-
tation of policies and projects. Hvidt (2007) adds that this form of engage-
ment shows the extent to which the government has been instrumental in
creating many economic actors through the establishment of both public
and semi-private companies.
On a nal note, one could argue that the development of the entrepre-
neurial sector in Dubai has largely depended on the role played by the
state through public policies, regulation, public spending, public services
and corporate leadership. The governance model has contributed to creat-
ing well-managed, protable SOEs in Dubai, thus contradicting the com-
monly accepted views on inefciency of SOEs and poor quality of public
sector in rentier economies due to large bureaucracies. Hertog (2010)
argues that the source of SOEs’ success is the prot-driven and market-
oriented management ‘that is autonomous in its daily operations, hence
insulated against political and bureaucratic predation, and that receives
clear incentives from a strictly limited, coherent set of high-level principles
in the political regime’. This success is enabled rstly by the absence of a
populist-mobilization history of economic development, and second, a
substantially decisional autonomy of the regime leadership from interest
groups within state and society.
Inward InveStmentS anddevelopment orIentatIon
The attraction and facilitation of foreign direct investment has topped Dubai
economic agenda for many years. FDI is instrumental in national capital
formation in countries such as Dubai that is suffering from scarcity of natu-
ral resources. FDI does not only compensate for the lack of domestic capital
resources, but it is also vital for employment generation and transfer of tech-
nology and knowledge. Dubai has been an attractive destination to global
FDI inows. This is owed primarily to its high levels of integration in the
global economy and the relatively liberal, friendly business environment.
Dubai has also invested heavily in its infrastructure, including roads, ports
and industrial and free zones such as Jebel Ali Free Zone, while streamlining
its administrative procedures and reducing the cost and time of doing busi-
ness. It has also improved its legal and regulatory frameworks, allowing full
foreign ownership of properties and business premises in certain business
services and professions such as accountancy and legal services.
While the improvement in infrastructure has been a key factor in attract-
ing inward FDI, the rise in FDI capital ows has simultaneously nanced
major infrastructure projects essential for the city’s economic develop-
ment, particularly in areas such as ports, roads, bridges, power genera-
tions, water desalination, schools, hospitals, construction and real estate.
One can only praise the long-term strategic plan that began with the
1950s, with the dredging of the Creek in 1955 and the development of
Port Rashid in 1972—to the more recent Al Maktoum International
Airport and a vast network of highways as well as a strong global connec-
tivity that places Dubai as a top-class city worldwide. All these investments
in infrastructure-related industries have not only created jobs and business
opportunities but they have also fuelled Dubai’s exponential economic
growth and facilitated its economic diversication.
Trade and the manufacturing sector have also played an important role in
the development of Dubai. Trade is one of the traditional pillars of the econ-
omy and has been a window through which the city-state has achieved its
tremendous openness to the regional and global economies, even though it
has also amplied its economic exposure to international economic and trade
cycles. Unlike other GCC countries with strong oil revenues, Dubai has not
shifted from production-state to allocation-state, thereby creating a vibrant
and dynamic economy. Given the tremendous income from oil exports in the
‘allocation state’, the population assumes a role of passive recipient of services
and benets and as such, the state and the private sector are far less depen-
dent on each other than in the production- state. This is why Dubai’s eco-
nomic sustainability essentially depends on its ability to maintain a production
state orientation and avert conversion into allocation-state.
One can also argue that Dubai’s inward investment orientation is
reected in infrastructure investments and development, creation of GREs
across industries, and establishment and promotion of a pro-business envi-
ronment. Dubai actively participates in competitive local and international
markets, while creating new state assets in various forms, shapes and indus-
tries. This, in turn, creates new business and ample investment opportuni-
ties for local and foreign private sectors, thereby sending a positive signal
to foreign investors and global markets (Hertog 2010). Dubai’s economic
development path highlights the positive effects of diversication via com-
mitment to development that resulted out of a series of policies of inward
investments, diversication, openness and liberal economic policies that
coupled with pragmatic leadership, and all of them have resulted in a
rather unique economic model.
unhIndered acceSS tocapItal andlabour marketS
As Dubai is not endowed with abundant natural resources and consequently
does not have abundant liquidity, access to international capital and banking
markets is one of the critical factors that have contributed to accelerated
growth and development of the Emirate. Dubai Government and GREs,
while not being rated by international rating agencies, have successfully
raised funds in international capital markets using conventional and Islamic
instruments. GREs nanced their growth using a combination of equity and
debt. Nonetheless, a negative aspect in this respect is that access to inter-
national capital markets precipitated Dubai’s Debt Crisis in late 2008.
Similarly, the ability to attract and maintain a necessary foreign work-
force is yet another factor of Dubai’s economic model. The economic
success of Dubai is underpinned by the growth of its population, which is
essentially driven by the inux of expatriate workers and their families.
Almost 90 per cent of the population is composed of non-nationals, rep-
resenting close to 95 per cent of the total workforce. The strong popula-
tion growth has induced increased demand for real estate, retail, tourism
and services. In turn, a exible immigration policy as per the federal law, a
highly efcient government apparatus and the availability of business and
job opportunities support population growth.
Dubai’s development has been driven by labour-intensive sectors that
have seen the largest inows of low-skilled non-national labour. Data
shows sharp increases in labour inows in labour-intensive sectors such
as construction, real estate and services. However, large labour inows
have been accompanied by declining labour productivity. Economic
growth in the UAE has been outpaced by labour force growth in recent
years, leading to declines in labour productivity per capita. Figure5.2
Fig. 5.2 Relationship between employment and productivity (2006–2009) and
population (2000–2010). Source: Dubai Statistics Centre
2006 2007 2008 2009
Employment and Producvity
ConstruconWholesale, Retail Trade
and Repairing Services
Real Estate and Business Services
Transports, Storage and Communicaon Total Gross Value Added per Person Employed
2000 2001 2002 2003 2004 2005 20 06 2007 2008 2009 2010
Populaon and employment rates
Total Populaon Employment/Populaon rao
shows that labour force growth was substantial, in particular, prior to the
recent crisis—reaching over 10 per cent annually from 2006 to 2008. It
also exhibits a declining labour productivity that is a negative spillover
effect, as argued by the guardian state theory. Yet, another important
reection of the guardian state is the large proportion of the national
workforce employed in the public sector. The public sector is an attrac-
tive employer due to various rent streams and contacts, generous retire-
ment packages, job security, favourable working hours and good
prospects of promotion with time. Dubai is no exception to this produc-
tivity anomaly. This is worsened by the inability of the private sector to
match the public sector’s high reservation wage (El Katiri 2014). In
addition, employment subsidies in the private sector coupled with the
nationals’ employment quotas, further exacerbate a rent-seeking incen-
tive system as a source of economic benet. Hence, public sector employ-
ment policies contribute negatively to labour productivity resulting
essentially in wastage of resources.
To improve future sustainability of the existing economic approach, the
Government of Dubai seeks to promote a gradual move towards a
knowledge- based economy and an economic policy moving towards
encouraging capital investment and promoting growth in higher value-
added sectors. The ability to attract and increasingly retain qualied
human capital is essential in ensuring that these shifts occur.
protectIonISm andlegal dIchotomy
Dubai’s demographic structure with a small local population is in stark
contrast to the size of its economy and the number of foreign workers
and businesses. In addition to labour market incentives, subsidies and
quotas, the federal government has developed schemes to protect the
economic interest of the local population mainly by mandating Emirati
ownership of at least 51 per cent of any business established in Dubai.
Exempted from this rule are certain activities such as professional jobs of
accountants, lawyers etc. who are allowed to set up 100 per cent foreign-
owned businesses. Ownership limitations also extend to property and
asset ownership.
Given the limited attractiveness of such restrictive policies to prospec-
tive foreign investors, a number of free zones have sprung throughout
Dubai. Currently, there are 22 distinct zones targeting different industry
clusters and client bases. Hence, Dubai connes liberal economic policies
in terms of property and business ownership and business conduct within
the special economic free zones. The ever-growing economy has
necessitated the creation of a new institutional framework in the form of
specialized free zones. This has allowed Dubai to create and manage inter-
national and national legitimacy by way of decoupling new economic
structures from traditional national institutions. As such, Dubai has effec-
tively been able to become an attractive destination for international inves-
tors while keeping its political stability within the Middle East (Nasra and
Dacin 2009). A case in point is that of the Dubai International Financial
Centre (DIFC), a federal free zone focusing on provision of nancial ser-
vices. Strong and Himber (2009) argue that the legal autonomy of the
DIFC is a scalable strategy suitable for global free-market reforms. While
the DIFC has its separate Common Law based legislation within the free
zone including its own courts, this legal system exists in parallel to Dubai
and federal legislation.
Outside the free zones, the Company Law of the UAE requires only
locals to own property and businesses and provides some protection
mechanisms, perhaps as a reection of the rentier orientation in which the
state is effectively covering social costs and economic welfare benets.
economIc dIverSIfIcatIon Strategy
Dubai’s economic development strategy has gone through various phases.
The rst phase is to shift its dependence away from oil revenues. Oil rev-
enues played an important role in Dubai’s quest for development in the
early post-discovery years, but this effect has been recently indirect,
through the higher liquidity that Abu Dhabi and other GCC oil exporters
have injected in Dubai’s economy (Nyarko 2010). In fact, Dubai’s oil
contribution to GDP is now insignicant, accounting for 1.4 per cent in
2013. Contrary to other oil-rich exporting countries that experienced
slower economic development due to natural resource endowments,
Dubai has not suffered from the Dutch disease phenomenon because of its
capacity to take advantage of available regional liquidity to jumpstart eco-
nomic transformation and achieve diversication.
The second phase of diversication is closely linked to inward invest-
ment and development orientation strategy that focuses primarily on
developing and investing into enabling sectors such as infrastructure and
communications. In fact, the success of this long-term policy of develop-
ing and investing into enabling sectors has allowed the development of
other dynamic and striving economic sectors such as nancial services,
tourism and manufacturing. Without this deliberate strategy to develop
and diversify the economy away from oil, the resource curse theory would
The third phase of development and diversication is enabling Dubai to
develop a competitive edge resulting in a diversied, open and liberal
economy. Dubai was the rst in the region to open up to foreign capital
and labour in a signicant way and consequently gained large benets
from the rst movers’ advantage. The creation of economic clusters and
free zones have gained critical mass and allowed for the introduction of
economies of scale, which turned the city-state into a regional and global
hub for many international companies and multinational corporations.
The fourth phase of diversication is the move towards the creation of
a knowledge-based economy. Dubai’s model has not only been closely
watched and emulated by Abu Dhabi and other small GCC countries such
as Qatar, but it has become an exemplary model of capitalising on the
already excellent physical infrastructure to develop a rst class regional and
global connectivity. Attracting and retaining a skilled workforce has also
resulted in the accumulation of knowledge and know-how, which pave the
ground for less labour-intensive economic development. However, many
challenges such as educational development and sufcient investment in
research and development have yet to overcome.
dubaI debt crISIS: how SuStaInable IS dubaIS
development model?
One can hardly make a fair and sound judgement on the sustainability of
the Dubai development model without analysing the most stressful test
that the city-state has ever experienced: Dubai debt crisis in 2009. This
crisis exposed major structural weaknesses in the way the nancial and real
estate markets operated in the pre-global nancial crisis of 2008. In the
2000s, Dubai had experienced an extraordinary growth across most eco-
nomic sectors. Local credit markets were at the highest levels similar to
those of real estate and stock markets, where speculation was the norm
rather than the exception. It was also noted that IPO listings were hun-
dreds of times oversubscribed, executives were paid seven-gure bounces
and GREs were acquiring high-prole international trophy assets.
Hasan (2010) argues that debt crisis peaked at the government’s
announcement of US$59 billion debt-payment-standstill on November
26, 2009. Prior to the announcement, the global nancial crisis was
already in full swing and resulted in virtually shutting nancial markets and
loss of condence across markets. Owing to its open economy with strong
reliance on global trade ows and access to global nancial markets,
Dubai’s economy experienced major disruptions in activity across sectors,
while structural vulnerabilities were exposed. Among key weaknesses were
pro-cyclical scal and monetary policies that exacerbated by the dirham’s
peg to the US dollar. Cevik (2011) provides empirical ndings indicating
how pro-cyclical scal policies prior to the crisis reinforced the nancial
sector cycle, exacerbated the economic upswing, thereby contributing to
the build-up of macro nancial vulnerabilities. However, for the purpose
of this discussion and strictly speaking from Dubai’s angle, scal and mon-
etary pro-cyclical weaknesses are exogenous factors over which Dubai has
limited control.
Nassehi (2013) explains Dubai/UAE open capital account policy as an
instrument of a liberal environment for foreign capital, but also as a factor
exacerbating Dubai’s boom-bust cycle. Dubai’s construction boom
encouraged the inux of immigrant labour that was instrumental to
Dubai’s high economic growth. This boom was funded by a rapid increase
in foreign borrowing—mainly short term. Foreign liabilities held by the
banking sector rocketed from AED 35 billion in 2003 to AED 320 billion
in 2007, representing 33 per cent of GDP in 2007. Chailloux and Hakura
(2009) also attribute sharp increases in foreign deposits in the banking
industry—which rose from AED 47 billion to AED 127 billion in 2007—
to the expectations of a dirham revaluation, only to be reversed in
This has posed severe internal liquidity pressures in the economy.
Ample liquidity in the banking sector meant cheap money that was lent
mainly to GREs. Increased liquidity followed by increased credit and ele-
vated ination levels were not offset by tightening of monetary policy,
given dollar peg restrictions. Contrary to desired monetary policy, the
UAE had to follow a low interest rate regime as per US monetary policy
which resulted in negative interest rates. Due to the absence of a domestic
debt market and the Central Bank’s inability to conduct sterilization,
Dubai’s boom cycle was heightened. Further, due to high domestic liquid-
ity and ensuing increased credit levels in the nancial system, Dubai’s cor-
porates—mainly GREs—have also raised short-term funds in international
markets, banking and capital. According to the IMF, at its peak, external
debt of the banks and the GREs amounted to 74 per cent of GDP.
Interestingly, Nassehi (2013) also relates the oil boom of the mid-2000s
and the perceived implicit government guarantee for GREs’ debt, to the
debt overhang. The so-called crony capitalism led international banks to
provide nance to GREs despite obvious moral hazard risks, which have
contributed largely to pro-cyclical credit growth.
One of the prime lessons of Dubai’s debt crisis is the realization of the
inability of Dubai’s nancial markets to serve local development needs and
the excessive reliance on short-term debt accumulated by the majority of
Dubai’s GREs. Clearly, not being able to renance such debt has led
Dubai into a spiral. Dubai’s nancial markets are primarily cantered on the
banking industry, which was highly exposed to the real estate sector.
According to the IMF estimates, commercial banks’ exposure to the real
estate amounted to 29 per cent of their total assets in 2010. This exposure
took place not only via lending to developers but also through retail mort-
gage nance, construction nance, as well as personal loans that were con-
tracted mainly to nance real estate acquisitions.
Following the debt crisis, Dubai took important steps to prevent the
repetition of earlier mistakes by bringing about greater discipline in
public spending, rationalizations and standardization across the real
estate market, and greater efciency in public services. Nevertheless, the
risk of debt overhang still looms over Dubai, albeit at much more man-
ageable levels. Since the beginning of 2011, Dubai’s economy has
rebounded and recorded growth, and this is expected to continue at a
similar pace in the medium term. In spite of persisting global economic
challenges and modest global growth, Dubai has shown resilience and a
great capacity to bounce back—not withstanding its structural chal-
lenges, driven by traditional sectors such as trade, logistics and trans-
portation, and tourism.
concludIng remarkS: dubaIS unorthodox
approach todIverSIfIcatIon
We have systematically developed an understanding of Dubai’s economy
by examining its performance and structures to derive its development
model. Given the uniqueness of Dubai’s economic path and achievements,
Dubai’s economic story has not been adequately researched. While
Dubai’s economic performance is analysed in isolation from its historical,
cultural and religious background, we have shown that the success of
Dubai is not incidental. In fact, it is the result of policies instituted by the
founding fathers of the Emirate in the early 1900s.
In contrast to prevalent views on various inefciencies associated with
resource rich economies as framed in the rentier state theory, Dubai’s
model of development rests on the (1) government leadership with spe-
cic governance and state entrepreneurship models, (2) inward invest-
ment orientation, (3) unhindered access to capital and labour markets,
(4) protectionism and legal dichotomy and (5) policy of systematic
This model seems to better differentiate between causes and effects of
Dubai’s economic development approach than some models previously
put forward. Other models found in a limited literature do not offer a
coherent and internally consistent model that provides a framework to
capture various drivers at play. Therefore, these models fail to provide clear
explanations of Dubai’s developmental path. Rather, such models seem to
point to Dubai’s success as a haphazard set of developmental priorities
that emerged as an answer to opportunistic circumstances.
Economic development and diversication have been facilitated by
leadership commitment to development and access to labour and capital
markets, among others. However, a debt crisis in 2008–2009 reveals
many structural weaknesses. An important lesson was the realization of
Dubai’s pro-cyclical macroeconomic policies, structural weaknesses in the
real estate market, shallow and underdeveloped nancial markets, weak-
nesses in public spending policy and inadequate support for private sec-
tor development.
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U.A.E.: Issues and Options. Working Paper. IMF.
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1920–66. Middle Eastern Studies, 43, 879–892.
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in the International System. Asian Affairs, 38, 33–48.
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University Press.
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