On November 25, 2009, Dubai’s announcement to restructure $26 billion (Dh95.4 billion) worth of borrowings surprised the financial markets. The suspects were usual — excessive short-term borrowings by government related entities (GREs), the real estate crash, and inability to rollover debt in the midst of the financial crisis.
Dubai’s development story starts in the 1960s, when the small Fateh oil field was discovered. Proceeds from Fateh were invested locally in the Jebel Ali port complex, one of the world’s largest. Dubai Aluminium, a world-class smelter, followed.
The 1980s and ‘90s saw the emergence of Emirates airline, DP World, Jumeirah hotels and Emaar Properties. Then a new phase of diversification came around 2004, following the government’s decision to allow non-UAE nationals to own property in designated areas.
The economy then went into overdrive: liabilities to global banks as a ratio to GDP — which were at Singapore level in 2004 — became two times higher by mid-2008. Further, domestic credit growth during 2004-08 was among the fastest in emerging markets. Property prices went through the roof and inflation shot up.
Five years on, while the recovery in advanced economies is still rickety and emerging markets are experiencing what is being dubbed as the “Great Deceleration”, Dubai has quietly staged a remarkable economic comeback.
In 2012, its third year of consecutive growth, Dubai’s economy grew by 4.4 per cent; growth in the second quarter of 2013, reckons Dubai Economic Council, was 4.7 per cent. Trade, industry, tourism, and transport — not real estate — are driving growth. Airport passenger traffic
Aviation is booming, with 38 million travellers passing through Dubai in the first six months of this year; Dubai is now the second busiest airport in the world for international passenger traffic, just behind Heathrow.
Many government related entities are back in black. The New York Times considers Dubai as the frontrunner to host Expo 2020, which will attract more than 25 million visitors and create 270,000 new jobs. Dubai’s government debt-to-GDP ratio — which peaked at 48 per cent in 2009 — has steadily declined and is currently 39 per cent.
The IMF expects it to fall to 30 per cent over the next five years.
In a world trying hard to rekindle growth with unconventional approaches, Dubai offers two fundamental lessons on economic growth, which policymakers across the world seem to have forgotten.
First, physical capital and infrastructure are key to long-term economic growth; and in the short run, they boost recovery and create jobs. Unfortunately, this basic lesson has been lost on policymakers.
Witness the $1.1 trillion investment gap in America’s infrastructure by 2020, which the American Society of Civil Engineers estimates. Now contrast this with Dubai: the World Economic Forum ranks the UAE’s infrastructure — the federation to which Dubai belongs — fourth in the world; the US is 19th and Britain does not appear even in the Top 25.
Scepticism
Dubai’s world-class infrastructure did not happen overnight. It has been in the making for decades and continues in today’s environment, undeterred by some international observers’ scepticism. It was out of sheer shortsightedness in 1980 that The Wall Street Journal featured an article on Jebel Ali port titled “Is Dry Dock in Dubai to be High and Dry and Pie in the Sky?”
Then again in 2011, The Economist sarcastically noted that Burj Khalifa, the world’s tallest building in Dubai, violates a basic rule of commercial property: when land is plentiful, build outward to use up as much of it as possible. Both completely missed the point.
Besides direct economic gains, huge benefits from infrastructure spill over to other sectors: tourism in the case of Burj Khalifa and trade for Jebel Ali, which brings us to the second lesson.
That trade promotes growth is so fundamental a truism that it is surprising policymakers need to be reminded. “What is good for the merchants is good for Dubai”, are the famous words of Shaikh Rashid, who ruled Dubai for much of the second-half of the 20th century. Trade remains the cornerstone of Dubai’s economy.
In a world where squabbles over China dumping solar panels in Europe and threat of duties on European wine in China make headlines, Dubai remains committed as ever to trade. Dubai’s non-oil trade in 2012 reached an all-time high of $337 billion — roughly three times its economy and a 13 per cent increase on previous year. World trade growth, on the other hand, fell to 2 per cent in 2012 from 5.2 per cent in 2011.
Challenges
Dubai’s economic revival notwithstanding, challenges remain — a recent IMF report cautions that strengthening and closely overseeing the GREs will go a long way in preventing boom-bust cycles. With luck, the right policies and focus on growth, this challenge is not insurmountable.
In the meantime, though, other policymakers might well take a leaf or two out of Dubai’s economic textbook.
The writer is vice-president at National Bank of Abu Dhabi (NBAD). The views expressed are those of the author and not necessarily of the Bank.
