The Current State of Dubais Economy - Example

Country Report Dubai Name University Module Instructor Submission Date © 2011 Introduction Dubai was formed in 1971 and is located in the Middle Eastern region of the United Arab Emirates (UAE). Documented evidence indicates that Dubai city has the largest population and is second to Abu Dhabi in terms of area coverage (Abed and Peter 2001). Dubai’s geographical location shown in Appendix 1 and her excessive oil deposits have made the city an important trading hub in the UAE since 1966. These two conditions undoubtedly led to a massive influx of foreign workers who quickly expanded the city by 300% due to increased international oil interests as noted by Abed and Peter (2001). This saw the city growing rapidly until the start of the Gulf War of 1990 that saw a number of depositors and traders withdrawing their money and trade respectively (Ali 2010). Fortunately, the city recovered in the ensuing changing political climate and thrived to what it is today: “a global city and a business hub” (Jim 2009). To date, Dubai has attracted world attention through many innovative large construction projects and sports events as observed by Ali (2010). But in view of the recent worldwide economic downturn of 2007–2010, it now becomes necessary to analyse the current state of Dubai’s economy with a focus on its short, medium and long-term future prospects. The current state of Dubai’s economy The Dubai region is shown by Schmid (2009) to have diversified into tourism, exhibitions, ICT, re-export and financial sectors as opposed to the single oil-based economy. Taking advantage of its position near the head of the Gulf, the city has consolidated her historical reputation as a regional open port. For this reason, Dubai has developed prestigious hotels, massive port facilities (including Jebel Ali Port which hosts more US navy ships than any other port outside the US) and a range of free trade zones to attract both manufacturing and services industries as noted by Krueger and Nandan (2008). As earlier indicated, Dubai’s ambitious economic development started suffering during the 2007-2010 global financial crisis. But amidst this crunch, Dubai attempted to capitalize on the construction boom of 2008 by established itself as the preeminent regional hub for finance, trade, tourism, and shopping (Ali 2010). This argument is supported by the fact that Dubai has the second largest amount of cranes after China. In line with this, Ali (2010) observes that about 15-25% of the world’s construction cranes are in operation in Dubai. These large scale real estate development projects have led to the construction of some of the tallest skyscrapers and largest projects in the world such as “the Emirates Towers, the Burj Khalifa, the Palm Islands and the world’s second tallest, and most expensive hotel, the Burj Al Arab” (Schmid 2009). Research shows that Dubai’s gross domestic product as of 2008 was US$ 82.11 billion (Jim 2009). This economic growth is attributed to real estate and construction which accounts for 22.6% (Schmid 2009), while trade, entrepôt and financial services cater for 16%, 15% and 11% respectively. These figures had risen from respective figures shown in Appendix 2 as of 2000 (Jim 2009). These statistics are further supported by the fact that UAE’s market for heavy construction machinery stood at $165 million, that for road construction at $142 million and for earth moving at $125 million as of 2003 (Krueger and Nandan 2008). The size is indicated to have increased by 15-20 per cent since then. Dubai’s current success is attributed to its bold and visionary leadership and innovative human resources. This success is further fueled by government policies that are aimed at improving the business and investment environment as well as initiatives that establish specialized zones and mega projects such as Internet and Media City, Healthcare City, The Palm, Dubai land (Marsh and Yencken 2004 qtd in Ali 2010). In my view, I believe that these developments ensured a leading role for Dubai and helped attract excess regional liquidity in the form of Foreign Direct Investment (FDI) in line with observations by Jim (2009). This happened against the effects of the economic downturn of 2008 and 2009, which are being addressed through short, medium and long-term strategies discoursed below. Dubai’s short, medium and long-term future prospects The future of Dubai looks very promising as the region continues to grow very rapidly and consistently. This is underscored by the fact that Dubai is currently diversifying its investments and expanding other non-oil producing industries so as to ensure a stable economy (Ali 2010). Prior to this, a number of short-term strategies were adopted. Firstly, Abu Dhabi provided some conditional bailouts as indicated by Jim (2009). Secondly, a liquidity scheme from the UAE’s central bank was mooted to help Dubai meet some of her short-term debt obligations (Schmid 2009). Both these two strategies were seen as critical in acting as a stop gap for Dubai’s immediate economic woes. Apart from these short-term strategies, other medium-term strategies had to be adopted. One among them is the changing of certain rules in order to ensure that there is enough labour force to work in the country (Schmid 2009). Additionally, Jim (2009) underlines the importance of governments realising the needs of the poor instead of concentrating on winning multibillion dollar projects that would just increase inflation and cost of living. Guided by this premise therefore, Dubai sought to diversify her industries and escape dependence on oil revenues as highlighted by Krueger and Nandan (2008). This strategy is found to have worked for several years because the world’s elite got hooked onto Dubai’s luxurious new real estate until the onset of the financial crunch in 2009 (Ali 2010). As evidenced by Ali (2010), Dubai’s economy growth dropped from 6.4% to 1.3% in 2008. This forced the government of Dubai and her business entities to include viable long-term strategies in order to revive the dwindling economy. In view of this, Marsh and Yencken (2004) argue that several long-term strategies were lined up adoption. For starters, Dubai had to radically restructure her economy and adopt a more realistic goal for her future role in the world. This involved seeking avenues to diversify her economy instead of relying solely on commercial real estate (Jason 2007). For this reason, the “emirate’s plan to develop more real estate above ground than Manhattan by the end of 2010” as noted by Ali (2010) must be replaced by a less glamorous but more robust alternative. Rather than seeking to be a dazzling spectacle of high rise buildings and opulence, Dubai is advised by Krueger and Nandan (2008) to focus on becoming the international gateway to the Middle East. This can only be achieved by focusing on services instead of manufacturing and commodities. And if a favourable business climate continues to persist, then the private sector should be able to achieve similar developmental outcomes (Schmid 2009). This can be particularly so beneficial if further support is directed towards the media industry and the information technology. This is because technology for instance is already in the government’s interest with the current inauguration of the Dubai Internet City and the offshore campus for the Birla Institute of Technology (Ali 2010). This is for the fact that these two industries have stable long-term prospects and can bring sustainable growth in line with study findings by Krueger and Nandan (2008). A Briefing Paper Considering the construction and real estate industry in UAE, certain opportunities and threats abide for both incumbent and potential new entrants. To reform and revitalise this sector, embracing labour reforms in the short-term and reforms in the education system in the long-term were fundamental for creating good opportunities for survival in the market. This is as opposed to creation of transparency in the Gulf region (Jason 2007). This comes hot in the heels of company ownership laws and reducing bureaucracy that requires immediate attention so as to create the desired opportunities for both incumbent and potential new entrants. Another aspect resides in considering the sector’s boom in recent past, a fact that has resulted in nose-diving of prices in real estate since 2007. This in effect became a threat in itself because the government in Dubai heavily invested in the real estate industry (Jason 2007). This kind of investment has by far outstripped state support of other industries, hence making it a very dangerous situation for hopefuls and even incumbent firms. Lack of transparency is very precarious as evidenced by the recent crisis surrounding Dubai World. In this instance, critics have raised questions about investors’ inability to accurately assess Dubai World’s debt and risk levels as well as about the closed nature of governmental decision making around the crisis (Jason 2007). It also raises issues about the often confusing and incomplete communications that followed the company’s announcement that it was seeking a standstill agreement on its debt repayments. These and others are major threats that need to be addressed in order to foster cordial co-existence between incumbent and new entrants to the sector. The only way to successfully achieve this is to adopt the views of those most immediately engaged in the day-to-day management of business affairs in the region as suggested by Ali (2010). Abed and Peter (2001) advises that these on-the-ground perspectives are valuable not only for managers in the region as they develop and implement their strategic, organizational, and operational plans, but also for every executive around the world whose business has an interest in the region. Conclusion From the forgoing discourse, it has been established that the UAE as a country brand ranks high as number one for resorts and lodging options (Schmid 2009) and number two for being a rising star brand; for a shopping destination as well as a country to do new business in (Jim 2009). Similarly, the country is rated number seven for conferences; number 10 for fine dining; standard of living, advanced technology in the Country Brand Index of 2008 (Schmid 2009). The region is composed of seven emirates and has a total population of approximately 4.8 Million, of which 80% are expatriates representing 185 countries (Jim 2009). The UAE as a country has been politically stable since its inception in 1971. In addition to all this, there are three governments – the federal government which oversees the country strategy, the administrative government which rules each emirate and finally the municipalities within each emirate (Schmid 2009). Till recently, the emirate of Dubai was pioneering the aggressive development as quoted in Krueger and Nandan (2008). As the strategy is now being replicated across different emirates within UAE, study findings by Ali (2010) show that some consolidation is taking place through the federal government based in Abu Dhabi. According to the World Economic Forum Global Competitive 2008-09 report, UAE ranks 31st among 134 countries in terms of national competitiveness. The region is the 5th largest oil producing nation although its dependency on oil has decreased to less than 40% since the construction and real estate in 2008 (Jim 2009). Additionally, the Dubai city has the largest invested sovereign wealth funds according to IMF as quoted in (2008). Its diversified global strategies and huge investments in unique infrastructure projects have made Dubai a hub in this region not only for trade and logistics, but also tourism (Krueger and Nandan 2008). In spite of world recession, the Dubai economy is still forecast to grow by 2.7% in 2009 according to figures in Appendix 4 (Jim 2009). In a nutshell therefore, the future of Dubai looks very promising as the region continues to grow very rapidly and consistently. Dubai is also looking to ensure a stable economy by diversifying its investments and expanding other non-oil producing industries. But unless certain threats in the form of inflation, cost of living, emiratisation, and labour wages are dealt with once and for all, both incumbent firms and potential new entrants will forever have to grapple with inherent difficulties venturing into this region. Reference list Abed, I & Peter, H 2001, United Arab Emirates: A perspective. Trident Press. Ali, S 2010, Dubai: Gilded Cage. Focuses on the Arab emirate’s treatment of foreign workers. Yale University Press. Jason, D 2007, “Fearful Of Restive Foreign Labor, Dubai Eyes Reforms” New York Times Jim, K 2009, City of Gold: Dubai and the Dream of Capitalism. St. Martin’s Press. Krueger, D & Nandan, S 2008, “Branding in the Global Arena: The role of culture”, Marketing Management Journal, Spring, pp. 30-38. Marsh, I & Yencken, D 2004, Into the Future: The Neglect of the Long Term in Australian Politics, Australian Collaboration and Black Ink, Melbourne. Schmid, H 2009, Economy of Fascination: Dubai and Las Vegas as Themed Urban Landscapes, Berlin, Stuttgart. Appendices Appendix 1: Location maps Location of UAE on the World Map Source: BBC College of Journalism, News sources at World Service Trust b) Location of Dubai in the UAE Source: BBC College of Journalism, News sources at World Service Trust Appendix 2: Dubai GDP and Current Prices (USD Millions) 2000 Source: Adopted from (Jim 2009) Appendix 3: Dubai’s GDP and Export segments (2008) respectively Source: Dubai Chamber of Commerce and Ministry of Finance, 2009. Appendix 4: Dubai’s Future Prospects based on the Region’s inflation rate Source: Adopted from (Jim 2009) Read More