Economic Diversification Strategy in Dubai

Abstract

This paper analyzes the reasons behind the economic diversification strategy in Dubai and then proceeds to gauge the successes of this strategy in the emirate. The paper begins by defining diversification and demonstrating why it is a desirable strategy for many governments. It then notes that Dubai adopted this strategy due to its limited oil reserves, the need to protect itself from the volatility of the oil markets, and the desire to create a modern economy that could create employment opportunities for the emirate’s populace.

To fulfill its diversification ambitions, the government expanded its transportation networks, established a manufacturing industry, created an environment conducive for foreign direct investment and enhanced its service industry.

The paper notes that the diversification efforts have been a major success and oil, which was a major contributor to the initial growth and development of Dubai, has become a less important source of income for the emirate. The paper concludes by noting that Dubai’s future economic prosperity is assured due to the economic diversification strategy embarked on by the government.

Introduction

The sustainable economic growth of a country is crucial for the prosperity of its citizens. Policy makers are therefore keen to ensure that the economic development is undertaken in a sustainable manner. This is especially significant for countries that have vast amounts of one single resource such as oil, copper, or precious metals. Such countries are likely to overly rely on the single product for their economic growth. However, such a practice is undesirable since the country’s economy would be devastated once the resource ran out.

Dubai is one region that could have faced this danger since it has oil reserves that served as the major economic driver in the early 1960s. Dubai is geographically located in the Middle East and it occupies an area of 4,114 square kilometers. The United Arab Emirates is made up of several countries and Dubai is one of them. Like other regions in the Middle East, Dubai has oil reserves that have contributed to its economic growth and development.

While the quantities of oil and gas reserves in Dubai are far smaller than those of Emirates such as Abu Dhabi, they are capable of providing substantial revenue for Dubai. However, the Dubai government chose to engage in a diversification strategy. This paper will set out to highlight the reasons why Dubai chose to engage in economic diversification. It will then outline the various steps that the emirate has taken to foster diversification and gauge the success of Dubai.

Defining Diversification

All governments aspire to achieve sustainable economic growth and development for the good of their populations. Research indicates that one of the ways through which this outcome can be reached is economic diversification. By definition, economic diversification is the process by which a government encourages the development of multiple sectors of the economy in order to avoid over dependence on a single commodity.

A diversified economy is one where the GDP is balanced across various economic sectors thus ensuring that the country’s economy is not exposed to the risks that arise from being overly dependent on a single sector. Without diversification, the economic prosperity of a nation will be heavily dependent on how well the dominant sector is doing in the marketplace. Shediac, Abouchakra and Moujaes (2008) contend that this is a situation that many nations would prefer to avoid since it makes economic growth inherently unsustainable.

Why Dubai Adopted the Diversification Strategy

There are several important factors that motivated Dubai to engage in economic diversification. To begin with, there was a realization by policy makers that the oil supplies that served as the primary sources of wealth for the country would not last forever. Kubursi (1984) best articulates this by noting that “Were oil supplies everlasting, and the demand for oil strong and continuous, economic diversification would be pointless” (1).

Since the oil reserves will run out at some point in future, the government must seek ways to ensure the economic success of the Kingdom without oil revenue. Compared to other oil-rich countries and Emirates in the Middle East, Dubai demonstrated a greater motivation to engage in economic diversification. This agency was fostered by the realization that Dubai’s oil reserves are fairly modest. Dubai does not enjoy the vast oil reserves that other oil-rich nations enjoy.

For example, Abu-Dhabi is the Emirate with the greatest oil reserves and it is estimated that 10% of proven global oil reserves are found there. Contrary to this, Dubai faces dwindling oil supplies making it unlikely that oil can play a dominant role in economic development for many decades to come. Henderson (2006) confirms that as a territory less endowed with hydrocarbon reserves, Dubai worried about the eventual exhaustion and its economic, social and political repercussions.

Another reason for the implementation of the diversification strategy was the perceived volatility of the oil market. Over the years, the prices and demand for oil have fluctuated significantly. Shediac et al., (2008) acknowledges that oil-producers have historically been susceptible to changes in oil prices. Exposure to the oil price shocks led to the expansion and contraction of the emirate’s economy in response to the fluctuations in the oil market.

In addition to the fluctuation in revenues due to the global changes in oil prices, the non-oil sectors suffer from a spillover effect. Buckley and Hanieh (2013) note that heavy dependence on oil revenue by the oil-rich Arab Gulf region countries makes them deeply vulnerable to the price volatility of the internationalized oil markets.

Only effective economic diversification efforts can assist a government to protect itself from the negative impacts of the volatile oil market. Shediac, et al., (2008) declare that “the higher and more diversified a country’s exports, the lower its volatility” (p.11). Dubai therefore embarked on intense diversification to lower its volatility.

The diversification strategy was also fueled by the need by the government to produce a viable and modern economy. As the main revenue earner for the emirate, oil had by the 1960s crowded out all other economic activity (Hvidt, 2013).

This created an unsustainable economy as oil revenues made the greatest contribution to the emirate’s GDP. Shediac, et al., (2008) declare that a sustainable economy is one where the GDP is well distributed across various sectors. The diversification strategy provided Dubai with the means for creating a sustainable economy made up of various sectors, each making a sizable contribution to the entire economy.

Finally, the diversification efforts were envisioned as a means for Dubai o create jobs for its population. The government acknowledged that the oil industry could not provide sufficient job opportunities for the entire population. Direct employment opportunities in the oil industry are few.

Shediac et al., (2008) notes that the oil and gas sector accounts for 47% of the GDP in GCC countries and only employs 1% of the region’s population. The majority of the remaining workforce is employed in areas of low economic value. Without the presence of other meaningful economic activities, the citizens of Dubai would engage in labor activities that do not contribute to the growth of the economy. Shediac et al., (2008) warn that such an economic model is likely to result in economic degradation.

How has diversification taken place in Dubai since the 1960s?

Dubai’s diversification efforts began in the 1960s and the government formulated a formal strategic plan that mapped out the future economic course of the emirate. To fulfill the desirable goal of economic diversification, Dubai has engaged in some noteworthy efforts.

Transport Networks

The emirate engaged in the construction of infrastructure that was meant to promote the non-oil economy. The transportation sector was seen as crucial to opening up the emirate to international trade. As part of its diversification strategy, Dubai engaged in the improvement of its transportation infrastructure.

These activities were undertaken as the emirate wanted to exploit its strategic geo-positioning for economic gain. Shipping has always played a major role in the economy of Dubai. In the late 1970s, Dubai embarked on the development of a world-class port. This new port had twice the capacity of the original port and it would also incorporate a dry dock. The Jevel Ali Port is one of the largest seaport operators and it operates over 60 terminals.

The civil aviation industry grew rapidly making the Dubai International Airport is an significant hub in the area. While the airport was first opened in 1960, major expansion works were carried out over the 1970s and 1980s as part of the government’s diversification program. These projects increased the length of the existing runway, added the number of runways and modernized the airport. In 1998, Dubai International Airport opened a second Terminal and a third terminal was opened in 2008.

These expansion efforts have greatly increased the capacity of the airport ant it can now serve up to 75 million passengers and 3million tons of cargo per annum. The emirate continues to engage in aggressive development of its airport sector. Henderson (2006) documents that Dubai aspires to be an air transport hub for the Middle and Far East.

To promote transportation in Dubai, the government established its flagship carrier, the Emirates, in 1985. While the government provided the start-up capital for the airline, it was expected that the Emirates Airline would operate without government subsidies.

Manufacturing Industry

As part of its diversification strategy, Dubai set out to establish a light manufacturing sector. The motivation for the establishment of light industries was to reduce the emirates dependence on imports and therefore lower its foreign spending. To demonstrate its determination to establishing a light industry, Dubai passed the Industrial Law of 1979 which articulated the government’s obligation to create an environment where manufacturing industries could develop and thrive.

The most significant light industry established by the government was the Aluminum smelting plant. This facility began commercial production of in 1980 and it currently has a capacity to produce 1m tons of aluminum each year. In addition to the Aluminum plant, Dubai opened many factories over the 1980s. The factories were engaged in the manufacture of various products including cement, pipes, plastic water bottles, and clothes.

Foreign Direct Investment

The kingdom has carried out some financial sector reforms that are meant to encourage investors into the region. Dubai has opened itself up to foreign direct investment from Western Countries including the US and Britain. The government has come up with rules aimed at attracting foreign businesses in the region. For example, there are special government laws that make it possible for foreign-owned companies to bid for lucrative government development contracts.

In addition to this, the government has encouraged privatization in non-oil related industries. Investors from India, China and the UK were quick to take advantage of these opportunities and they invested heavily in the emirate. The real estate market has emerged as an important part of the diversification strategy over the last decade.

In 2002, the Dubai ruler issued a decree that allowed foreign ownership of freehold property in designated areas of Dubai (Buckley & Hanieh, 2013). Before this decree, most of the land in Dubai was owned by the ruling family and foreigners could not own land. The change in land ownership policy encouraged foreign companies to acquire land in Dubai and engage in large-scale real estate development projects.

Service Industry

The last decade has been marked by an emphasis on the role that the knowledge and service sectors can play in Dubai’s overall diversification strategy. There has been significant investment by the government in these two areas. The government has dedicated a lot of resources to providing the material and symbolic urban infrastructure required to transform Dubai into a global service sector hub.

To aid in the development of a service oriented industry in Dubai, large-scale urban development projects have been undertaken. Buckley and Hanieh (2013) document that since 2000, the Emirate has engaged in the widespread development of spectacular malls, hotels and apartments. These amenities have been developed to cater to the global knowledge-sector firms that Dubai has attracted.

Tourism

Dubai has marketed itself as a tourist destination of choice. Tourism has been singled out as a ubiquitous vehicle for economic development and diversification for countries in the developed and developing worlds. This activity has become an integral element of economic development policy for many countries and it is projected to play an even greater role in global economy in the future. Traditionally, the UAE in general and Dubai in particular has not been associated with the leisure/holiday tourism market.

Christensen (2010) explains that within the Middle East region, international leisure tourism has been culturally undesirable and economically unnecessary. Up to the year 1990, tourism in Dubai was dominated by business travelers. However, the government has taken steps to develop non-business related tourism in order to diversity its economy. The first activity carried out by Dubai to promote itself in the tourism sector was destination development.

Henderson (2006) asserts that a region is more likely to develop as a tourist destination if certain factors related to accessibility, attraction and amenity standards are present. The Dubai government increased the accessibility of the Emirate by improving its airport infrastructure. The private sector was officially encouraged to engage in hotel construction. This increased the number of rooms available for tourist accommodation.

As a measure to promote tourism in the Emirate, a Commerce and Tourism Promotion Board, DCTPB, was formed in 1989. This board was meant to engage in activities aimed at promoting tourism in the Emirate. In 1997, the DCTPB was replaced by a government department, the Department of Tourism and Commerce Marketing.

This replacement reflected the importance attached to tourism by the Dubai government. The government department has many offices overseas, which promote Dubai as the choice tourism destination in the Middle East. The Emirate offers white-sand beaches, world-class malls and a wide range of tourist activities.

Gauging the Success of the Diversification in Dubai

The diversification strategy employed by Dubai for the past four decades has led to a number of significant gains for the emirate. Due to the government initiatives to attract foreign-owned companies in Dubai, there has been an influx of foreign firms in the Emirate. Buckley and Hanieh (2013) reveal that due to the wide range of liberalization measures adopted by the government, companies are able to enjoy significant profits from their development contracts in the Emirate.

Many multi-national companies have moved in to take advantage of the investment opportunities available in Dubai. Another measure of Dubai’s success in its diversification projects has been the notable decrease in government spending for development projects. The last decades have witnessed a significant shift in the manner in which major projects in Dubai are financed. In the early 70s and 80s, all major development projects were funded by the government using oil revenue.

The last two decades have witnessed a marked shift from this system with Dubai relying on foreign capital to finance major urbanization projects. The government is increasingly relying on non-oil private capital to finance development projects in the Emirate. This has the advantage of allowing the government to share the risks and costs of development with the private sector and providing the government with a bigger capital base.

Another marker of the success achieved by the diversification strategy is the significant growth of the tourism sector in Dubai. In spite of the fact that the Middle East entirely invites relatively few tourists, Dubai has confirmed its ability to launch itself as a rather popular target with a great tourism growth rate. Dubai has largely succeeded in promoting its international image as an exotic but safe beach tourism location offering diversions of shopping and assorted cultural and natural heritage attractions (Henderson, 2006).

Sharpley (2002) declares that within the Middle East, Dubai has emerged as the “forerunner in efforts to build tourism infrastructure and market its attractions” (p.227). In addition to the Emirate’s sandy beaches, tourism in Dubai has been fostered by the increasing number of conferences and events in the Emirate. The tourism sector in Dubai has witnessed growth over the last decade.

In 2000, the number of annual visitors to the Emirate was 3 million. Christensen (2010) reveals that this figure had increased to more than 7 million in 2009. Tourism officials are aiming for up to 40 million visitors by 2016. Sharpley (2002) observes that Dubai is the dominant tourism destination in the Gulf region and that it is the Emirate that is synonymous with tourism in the UAE. This international recognition as a destination has been the result of the diversification efforts implemented by the government.

The recognition has given Dubai a high profile in the international tourism market. As of the year 2003, the earnings from tourism exceeded US$ 11 billion and surpassed oil revenues in Dubai accounting for 28% of the Emirate’s GDP (Henderson, 2006). By 2011, tourism accounted for 31% of the emirate’s GDP making it the most significant contributor to Dubai’s economy.

The investments in the transportation sector have provided Dubai with revenue in addition to providing great employment opportunities for the emirate’s population. Henderson (2006) asserts that Investments in sea and air transport infrastructure have helped place Dubai at the center of an active global transportation network. Dubai’s flagship carrier, Emirates Airlines, has been central to the growth and development of the emirate’s airport sector.

The government owned Emirates Airline is the largest Arab airline and it is ranked by analysts as an eventual serious challenger to the world’s dominant airlines (Henderson, 2006). Since its establishment in 1985, this airline has grown and it helped generate over $11.7billion in 2011. The airline is a major employer in Dubai contributing over 259, 000 jobs both directly and indirectly in the emirate. Dubai’s port caters to the high Gulf shipping traffic and also offers ship repair services to the vast fleets of ships in the region.

Dubai has a thriving light manufacturing industry. The emirate’s aluminum plant is a major contributor to the economy. This state owned production plant called DUBAL engages in the commercial production of aluminum. Most of the aluminum produced by the plant is sold to over 300 companies spanning 45 countries worldwide. DUBAL contributes an estimated 2.5% of Dubai’s GDP and represents about 12% of the emirate’s exports. At the present, the portion of Dubai’s GDP based on oil and gas output is at an all-time low.

Before the implementation of the diversification strategy, revenue from oil and gas accounted for over 80% of the Emirate’s GDP. This meant that Dubai’s economy was almost entirely reliant on oil dollars. As a result of the various diversification projects implemented over the decades, reliance on oil revenue has been on a decline. By the 1990s, oil revenue made up half of Dubai’s GDP. This figure has fallen dramatically and presently, only 2% of the Emirate’s GDP is based on oil and gas output (Ramady, 2013).

Discussion and Conclusion

Dubai’s diversification strategy has led to it being ranked as the most diversified of all the GCC countries, as well as the most open. It can therefore be declared that the economic diversification efforts started in the 1960s have been successful as a whole.

While oil was a major contributor to the initial growth and development of Dubai, this commodity has become less important over the years. The reduction in the importance of oil in Dubai’s economy has been caused by the growth of other sectors primarily because of the diversification strategy adopted since the 1960s.

This paper set out to discuss economic diversification in Dubai. It began by defining diversification and highlighting the reasons why the emirate choose to engage in diversification. A review of the actions of the Dubai government over the last few decades demonstrates that the economic diversification agenda is a core priority in the Kingdom.

The paper has noted that Dubai has succeeded in investing oil money in productive assets thus fostering economic diversification. The paper has acknowledged that Dubai has succeeded in enhancing the growth of its non-oil sectors such as hospitality, service industry, and real estate. While the future of Dubai is an open question, most of the indicators suggest that the Emirate’s economy will continue its success into the far future.

References

Buckley, M., & Hanieh, A. (2013). Diversification by Urbanization: Tracing the Property-Finance Nexus in Dubai and the Gulf. International Journal of Urban and Regional Research, 38(1), 155-175.

Christensen, S. (2010). Frommer’s Dubai. John Wiley & Sons.

Henderson, J. C. (2006). Tourism in Dubai: overcoming barriers to destination development. International Journal of Tourism Research, 8(2), 87–99,

Hvidt, M. (2013). Economic diversification in GCC countries: past record and future trends. London School of Economics, London.

Kubursi, A. A., 1984. Oil, Industrialization and Development in the Arab Gulf States. London: Croom Helm.

Ramady, M. A. (2013). Political, Economic and Financial Country Risk: Analysis of the Gulf Cooperation Council. NY: Springer Science & Business.

Sharpley, R. (2002). The challenge of econmic diversification through tourism: the case of Abu Dhabi. International Journal of Tourism Research, 4(1), 221-235.

Shediac R., Abouchakra R., & Moujaes C. N. (2008). Economic Diversification. The Road to Sustainable Development. Abu Dhabi: Booz and Co.