Economics Coursework

Contents

Introduction. 2

Brief history of Dubai 2

Dubai’s business strategies. 3

Differences between Dubai and its neighbors in the Gulf region. 4

The next step in Dubai’s business model 6

Conclusion. 7

References. 8

Introduction

Fifty years, ago, Dubai was a very poor, insignificant settlement with a population of about 30,000 people (Hvidt, 2007). This settlement was not only poor but also insignificant to the world. Today, it has grown rapidly to become a city inhabited by some 1.4 million people (Matly, 2007). It has also become one of the richest cities in the world. The city has expanded its global outreach by undertaking many high-profile acquisitions and investments. Today, it is competing with the biggest players in various industries, notably logistics, tourism, financial services, and port operations.

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The aim of this paper is to discuss the business strategies that Dubai implemented to achieve this dramatic transformation and become what it is today. The thesis of the paper is that Dubai’s success story may be explained through the developmental state paradigm. For this reason, the state may be referred to as a capitalist developmental state. Within the developmental state paradigm, the state plays a critical role in all aspects of development. In recent years, the role of state intervention has been critical particularly with regard to the establishment of proper political and institutional bases.  The paper also examines differences between Dubai and its counterparts in the Middle East, what the state’s next step might be, and where Dubai might be going in the future.

Brief history of Dubai

Most of the intensive developments that make Dubai what it is today were undertaken during the past two decades. During this time, intensive development initiatives were undertaken. Prior to this, Dubai used to exist as a small trading port that was of very little significance to the world. For several centuries, Dubai had existed as a fishing village before the gradual transformation process began in the eighteenth and nineteenth centuries. Up to two decades ago, Dubai had only managed to grow into a small trading port. However, today, Dubai has secured a place among the world’s richest and magnificent cities.

By 1900, Dubai had become sufficiently prosperous and had started attracting settlers from India and Iran. By the early 1930, about a quarter of the population in Dubai was foreign. In 1954, the British established a political agency in the state. The British withdrew in 1971, upon which Dubai integrated with the states of Abu Dhabi, Ajman, Sharjah, Umm Al Quain, Fujairah, and later on Ras Al Khaimah to form the federation that is today known as the United Arab Emirates. Today, Dubai is the third most important center for re-export in the world (Hvidt, 2007).  Moreover, the world’s fastest growing investment firm focusing on real estate development is Dubai Properties, whose heritage is in Dubai. The population of the city reached 1.2 million in 2006 (Hvidt, 2007). It is estimated that the population may rise to 4 million by 2017 (Hvidt, 2007). Three quarters of the people who live in Dubai are expatriates (Hvidt, 2007).

Various factors have contributed to the rapid development witnessed in Dubai. Some of these factors include visionary leadership, expatriate-friendly environment, high-quality infrastructure, low import duties, and zero tax on corporate and personal income. These factors quickly transformed Dubai into a regional hub for tourism and business. The city attracted businesspeople from different countries in the region, including Egypt and the Indian sub-continent. The city also became a strategic re-export hub for countries such as South Africa and former Soviet republics.

The origin of the Dubai’s current property boom may be traced back to 2002 when the former Ruler of Dubai announced that certain properties in Dubai would be put under freehold ownership for investors from all parts of the world. This announcement inspired many property owners to develop them before selling them to foreigners. Between 2000 and 2005, the number of housing units in Dubai nearly doubled (Hvidt, 2007). This was an indication that a building boom was underway in Dubai.

Dubai’s business strategies

Dubai’s business strategies were founded on conscious policies aimed at ensuring that the developing state caught up with the developed world. The emirate of Dubai achieved tremendous growth because of the willingness to put in place a wide range of economic, political, institutional, and cultural frameworks that functioned in an interactive fashion. This strategy has enabled the emirate to undergo rapid changes in both the cityscape and in terms of Gross Domestic Product (GDP). The conscious efforts to ensure that Dubai caught up with the developed world in terms of development were launched in the early 1990s.

Sometimes, studies on the development process of the city regard Dubai as a ‘deviant case’ because not much is known about the business strategies that the leaders of the emirate launched in the 1990s. Moreover, it is not clear whether these leaders foresaw a situation where Dubai would be the world-class city it is today. In this situation, the best thing would be to track the development path of Dubai between the early 1990s and the present day. In this analysis, focus should be on comparison between Dubai and other states within the Middle East.

One common way of explaining Dubai’s development process is through the developmental state paradigm. This paradigm emerged because of failure by neoclassical free market or socialist models to provide satisfactory explanations for economic successes of East Asian countries such as Japan. Scholars resorted to the use of the concept of the ‘capitalist developmental state’ to explain the so called Asian Miracle (Hvidt, 2007).

In the developmental state paradigm, emphasis is on the critical role that the state plays by intervening in the economy of a country. Focus is also on the political and institutional bases of ensuring effectiveness in state intervention. In Dubai, the state intervened in various sectors of the economy with the aim of ensuring that a foundation for future development had been established. This led to the emergence of the concept of state-sponsored capitalism.

In the case of Dubai, a major question is on why other countries in the region did not succeed in achieving a similar feat in terms of development. During the 1980s, two theoretical positions emerged; namely statist and pro-market schools (Matly, 2007). The aim of these schools of thought was to explain differences in rates of development among different countries. The pro-market position embraced the role played by international financial institutions in development. In contrast, the statist school did not put any emphasis on these institutions. Instead, emphasis was on the role of the state in development.

By the turn of the twenty first century, it was evident that the pro-market position had lost ground to the statist school of thought. Eventually, the statist school seemed to predominate as many states continued appreciate the critical role of the state in crucial sectors of the economy. Dubai is one of the states whose development process reinforces the acceptability of the statist school of thought. In Dubai, the state played a central role in putting in place a formidable vision and business strategy.

Statist scholars have been keen to develop and refine the developmental state paradigm over the years. In this literature, one of the issues addressed is embedded autonomy. Embedded autonomy means that although the state bureaucracy is autonomous in the process of formulating goals independent of elites in society, it remains embedded in various economic activities through the private-business sector. These ties and partnerships are essential in the process of gathering information regarding economic performance as well as the actual implementation of various development policies.

In developmental states, governments play an interventionist role in ensuring that the development agenda is actualized. Such states feel a strong urge to improve their level of development in order to catch up with the developed world. Some of the states that belong to this category include Taiwan South Korea, Hong Kong, and Singapore. Dubai may also be regarded as a developmental state.

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Like Hong Kong and Singapore, Dubai is a very small city-state. All these three city states have veered away from the normal route to economic development. They have shifted away from agriculture and industry. Instead, they have chosen to focus on services. They have chosen to invest in large commercial and service sectors through which they function as intermediaries between regional and world economies on the one hand and primary-exporting hinterlands on the other.

In its business strategy, Dubai bypassed the stage of being a trading society to that of being a service society. Through a strong developmental vision that was articulated by the state, the city-state managed to use its state apparatus and financial power to invest heavily in various development projects in real estate, tourism, and financial services.

Another factor that led to success in Dubai’s business strategy was the state structure. The regime of this state is modeled around the ruler in his individual capacity. In this model, several members of the elite interact with the ruler, thereby necessitating a relationship of personal dependence. In this environment of patronage by the supreme ruler, Dubai seeks to main its cultural heritage in all aspects of political and social order. In this practice, the leader seeks to uphold the culture of distributing gifts to followers in return for loyalty and unwavering support. In this relationship, the ‘clients’ of the leader receive protection and material benefits. In this relationship, office holders seem to be playing the role of patrons who simply build loyalty among clients using public funds in order to stay in power.

Differences between Dubai and its neighbors in the Gulf region

The path of development that Dubai has adopted is radically different from that of its neighbors. In one of these strategies, Dubai chose the path of becoming a rentier state. The state has over the past 20 years shifted from being a ‘production’ state to being an ‘allocation’ or rentier state. In fact, this characteristic alone sets Dubai apart from all its neighboring oil-rich states in the Gulf region.

The oil resources that Dubai has are much fewer compared to those of her neighbors. Moreover, these resources are more expensive to exploit, meaning that they cannot be relied upon as an income earner for the nation. In fact, the scarcity of oil resources was one of the reasons why Dubai chose to invest oil revenues in various economic activities. The state hoped that this strategy would strengthen its income-earning potential, thereby bringing about economic sustainability.

Unlike other Gulf countries, Dubai focused a lot the use of oil rents in the objective of building and expanding infrastructure. The state built two harbors, an extensive road network, an airport, significant warehouse capacity, and industrial zones. Moreover, unlike other Gulf States, Dubai chose to keep its tax rates low as a way of improving the competitive advantage of its commercial sector.

For Dubai, oil money played a critical role in strengthening the economic position of the ruler. In other Gulf countries, the need to improve their economic position did not arise. This is simply because they had vast oil resources. Moreover, they already enjoyed some sense of dominance and entitlement in the region. The disadvantaged position of Dubai inspired the ruler of the city-state to endeavor in strengthening his economic position to be able to ‘buy’ loyalty from both the merchant elites, Bedouin tribes as well as from society in its entirety.

The state structure of Dubai is also different from that of the state’s neighbors. The ‘Dubai model’ is pro-business and it puts a lot of emphasis on economic openness and market liberalism while at the same time embracing globalization. The state has also refrained from challenging its traditional neo-patrimonial structure of leadership. In this way, the Dubai model has continued to be distinctly different from the models applied by other Gulf Cooperation Council (GCC) countries.

Many countries in the Middle East have been endeavoring to put in place economic reforms. Some of countries that have put in place very robust development strategies include Saudi Arabia, Kuwait, and Bahrain. Despite these efforts, these countries have not succeeded to replicate the rate of economic growth and development experienced in Dubai. The approaches that these countries have been adopting are radically different from those of the Dubai model.

In Saudi Arabia, for instance, the cost of doing business has been extremely high. For example, the minimum capital requirement for the country was the highest in the world until it was adjusted downwards in 2006 (Hvidt, 2011). Since the early 1990s, Dubai has remained far much ahead of Saudi Arabia in terms of attractiveness to foreign investors and workers (Hvidt, 2011). Saudi Arabia’s highly restrictive labor regulations were in sharp contrast to Dubai’s policy of welcoming foreign investors. In Saudi Arabia, the government is always reluctant to give foreigners a free hand in influencing the country’s economic destiny. This is unlike in Dubai where three quarters of the people who live there are expatriates.

The next step in Dubai’s business model

In order to understand the next step in Dubai’s business strategies, it is imperative to examine trends derived from the city-state’s chosen developmental path. A developmental path ordinarily emerges over some time as an outcome of continued influence of various features, including historical, size, institutional, political, and cultural factors. The next possible step in Dubai should be viewed in the context of the continuation of the events that were taking place during the early twentieth century when the ruler of Al Matoum, Dubai’s ruling dynasty, offered significant incentives to the merchant class based in Persia with the aim of persuading them to relocate to the present-day Dubai (Bagaeen, 2007). This was the branding point at which Dubai would start growing into a pro-business state. It was the critical moment when a culture of openness towards foreigners was unveiled. It is for this reason that people from different parts of the world have been coming to Dubai to live, to do business, to seek employment, and for tourism.

This trend of openness to foreigners will continue in the foreseeable future. Moreover, the strong belief in the role of the state in the city-state’s economy will continue being appreciated. Other factors that will continue fostering continued growth in the state include government-led development, flexibility in the workforce, fast-decision making in the corporate circles, and the decision by the state to bypass the stage of industrialization. Instead of going through this state, Dubai opted to create a robust service economy. One should also expect Dubai to continue with its process of internationalization of its service industry.

In all the factors relating to Dubai’s next step, one should expect the state to continue adhering to the tenets of the developmental state paradigm. In this paradigm, the state will continue promoting the service industry by promoting development in cooperation with various international partners. The government will continue taking leadership in development. The private sector will not take over this role in the foreseeable future. This is simply because although the private sector is financially strong, private entrepreneurs in Dubai continue to be politically weak.

The position of the government in the development of this state will not be challenged by an increasingly powerful private sector. After all, the government has already demonstrated its willingness and desire to continue building and maintaining infrastructure necessary for future economic development and prosperity. This commitment on the part of the government is evident in various projects including the establishment of institutional framework and legislations. The government will also continue playing a critical regulatory role.

Moreover, the role of launching strategic projects will continue being the prerogative of the Dubai government. A case in point is the recent launch of strategic tourism ventures. The government is also in the process of promoting the development of the internet infrastructure as well as the establishment of strategic media cities. Some of the other projects that the government does not intend to leave in the hands of the private sector include specialized zones and the management of the Dubai International Financial Centre. In each of these initiatives by the government, the primary objective is to encourage the private sector to invest in the state. Projects of this nature not only enhance investor confidence, they also create substantial employment opportunities.

Conclusion

This paper has examined the unique model of development adopted by Dubai over the past two decades, commonly known as the Dubai model. Within this short time, Dubai managed to grow from a small trading port of little significance to the world to one of the richest cities in the world. This paper has argued that this remarkable change can best be explained using the developmental state paradigm.

This paper concludes that this theoretical framework is applicable in explaining this phenomenon given the fact that the state has played a critical role in all aspects of Dubai’s development during the last twenty years. Dubai defied the pro-market school of thought that emphasizes on the importance of international financial institutions in state development. The state also has succeeded in bypassing the stage of industrialization by investing heavily in the service industry. As Dubai heads into the future, the state will continue with its role of providing critical infrastructure while at the same promoting its policy of openness to foreign investors. For this reason, Dubai will continue experiencing an event higher rate of economic development.

 

References

Bagaeen, S. (2007). Brand Dubai: The Instant City; or the Instantly Recognizable City. International Planning Studies,12(2), 173–197.

Hvidt, M. (2007). Public – private ties and their contribution to development: The case of Dubai. Middle Eastern Studies, 43(4), 557-577.

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

Matly, M. (2007). Dubai strategy: past, present, future. Boston: Harvard University Press.

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