Is Dubai a model for economic diversification in the Persian Gulf?

On a sunny October morning just over three decades ago, an unknown airline from a little-known city took to the sky f...

Posted: Jun 5, 2018 12:09 PM
Updated: Jun 5, 2018 12:09 PM

On a sunny October morning just over three decades ago, an unknown airline from a little-known city took to the sky for its inaugural flight. With scarce resources, the airline had leased two planes from Pakistan International Airlines for those first journeys to Karachi.

Today, Emirates Airline -- based in Dubai -- is a global aviation giant. Its distinctive logo is splashed across the shirts of Premier League football teams and adorns the courts at global tennis tournaments. With a passenger capacity of more than 60.5 million at the end of 2016-17, it is the world's largest international carrier.

Although Dubai most often makes sensational headlines for its dizzying skyscrapers, inventively shaped man-made islands, and ski slopes in shopping malls, the carefully crafted rise of Emirates Airline reflects the serious economic planning that has underpinned the evolution of this emirate from a modestly successful regional entrepot to a leading world city.

Mutually beneficial

Dubai struck oil in 1969, but today oil accounts for less than 1% of its GDP -- the result of remarkable economic foresight.

Sheikh Rashid bin Saeed al Maktoum, the emir of Dubai between 1958 and 1990, famously said throughout the 1950s and 60s: "What's good for the merchants is good for Dubai."

Rather than relying on a resource that depletes, Sheikh Rashid -- and subsequent rulers -- banked on a permanent resource: Dubai's geography. Located along key trade routes between East and West, the emirate has maritime access to the Arabian Sea and Indian Ocean via its Persian Gulf coastline. From Dubai, you can fly to one third of the world's countries within four hours, and to two thirds within eight hours. In short, Dubai has enviable commercial geography.

Sheikh Rashid, and later his son -- the current ruler of Dubai and prime minister of the United Arab Emirates, Sheikh Mohammed bin Rashid al Maktoum -- leveraged this in three ways: trade, transport and tourism. These three Ts underscore a strategic diversification that has created an oil-independent economy in the thriving emirate.

Whether it was dredging the Dubai Creek in the early 1960s to allow larger trading ships to dock, or the creation of the massive sea port, Jebel Ali, in 1979, Sheikh Rashid shrugged off nay-sayers at home and abroad who dismissed such projects as fanciful white elephants, historian Graeme Wilson notes in his book, "Rashid's Legacy: The Genesis of the Maktoum Family and the History of Dubai." His persistence paid off. In 2015, the Jebel Ali Port was the ninth-largest container port in the world by trade volume, with weekly services to 140 ports.

Dubai's air connectivity is even more impressive. In 2014, Dubai International Airport surpassed London Heathrow as the world's busiest airport in terms of international passengers. Dubai's leaders are planning a new hub, Al Maktoum International Airport, which has already opened for cargo flights and, upon completion in 2025, will be the new home for Emirates Airline with capacity for up to 120 million passengers. It's no wonder that aviation accounts for more than a quarter of Dubai's GDP, and could account for 44% by 2030, according to an Oxford Economics study.

Rebalancing act

Of course, there's been some luck. When Dubai's leaders embarked on their masterplan, they could not have predicted the geo-economic tectonic shifts ahead; that China, then India, and many other Asian states, would become part of the rebalancing of economic power from West to East. Last year, China surpassed India as Dubai's largest trade partner, while a staggering one-third of all international flights from India head to the UAE, according to Indian aviation authorities. Chinese tourism to Dubai saw a whopping 46% growth in 2017, and Indian travelers nearly hit 2 million.

Other Arabian Peninsula cities and states have similar geographies, most notably Aden, Muscat, and Doha. But none have exploited their positioning so successfully.

Building a global transport, trade and tourism hub is not cheap, however. Consequently, the government of Dubai and its state-owned entities carry significant debt. In 2009, the city faced a severe debt crisis, that required support from neighboring emirate, Abu Dhabi, as well as a spider web of debt restructurings and roll-overs. However, the three Ts helped Dubai recover. Today, the IMF says that Dubai's debt sustainability has improved, and the debts of its state-owned entities have fallen significantly.

Of course, there are risks: hub cities are highly dependent on global trade and, in Dubai's case, real estate plays a prominent role in its growth story. If both falter, Dubai's growth will inevitably slow. On the other hand, Dubai's hosting of the 2020 World Expo has stimulated infrastructure spending that will boost growth across the UAE, according to a regional investment bank report. And Dubai has the added advantage of having oil-rich Abu Dhabi -- home to one of the world's largest sovereign wealth funds, and an emerging trade and transport hub in its own right -- as a partner.

A model partner?

All this begs the question: can Dubai's successful diversification serve as a regional model? As rapid urbanization, growing middle classes, and technological advances fuel emerging markets growth, there will be room for other aviation and shipping hubs, particularly along the Arabian Peninsula's well-positioned coastline.

Oman has access to the Indian Ocean and Arabian Sea from its southern Salalah Port and is planning a major industrial zone, financed partly by Chinese investment, along its eastern Arabian Sea coast. Saudi Arabia's Vision 2030 lays out a plan for the Kingdom to become a "hub connecting three continents" -- a role already played by Dubai. A more liberalized Saudi Arabia could attract professional services firms which currently base their staff in Dubai or Bahrain for lifestyle reasons.

While others can learn from Dubai, the city's critical mass of sea, air, and land connectivity puts it in a good position to stave off competitors. What's more, Dubai seems eager to add a fourth "T" to the mix: technology. The emirate has made a name for itself as a tech start-up hub and appointed a Minister for the Future to drive tech initiatives.

On the cutting edge of blockchain and transport technology and with a UAE-led mission to Mars, Dubai's fourth "T" might just be the most consequential of them all.

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