The development of Dubai depends on sustainable development, economic diversification and the creation of world-class business centres for trade, finance, logistics and tourism, according to a Dubai Economic Council study.
The emirate’s authorities issued a new strategic plan for sustainable development in the emirate called Dubai Plan 2021. The plan identifies a number of policy goals in six areas: society development, quality of life, urban planning, human capital, economic development, and government management. On the economic front, the strategy is articulated along the development of world-class business centres for trade, logistics, finance and tourism.
Sustainable economic growth is expected to be driven by diversifying the productive base and expanding value-added activities to help achieve further innovation and increase productivity. These policies are anticipated to enhance the resilience of the local economy, allowing it to better absorb internal and external shocks.
While the quest for efficiency and international competitiveness is an important goal in most economies, the observed rate of success is appallingly low. The cases of Hong Kong and Singapore are the exception and not the norm. Empirical evidence indicates that the first stage of economic development tends to be a smooth ride in most small open economies, resulting from the exploitation of their resource base and the progressive integration to the global economy. Emerging economies are able to reap the benefits from both trade and financial markets, helping them to catch up with more developed economies. However, once countries reach “middle-income status”, achieving higher productivity levels becomes increasingly difficult.
Middle-income trap
Few countries are able to maintain their international competitiveness edge while continuing to grow on a sustainable basis (like South Korea). Most middle-income countries don’t follow this pattern. Instead, they have bursts of growth followed by periods of stagnation or even decline, or are stuck at low growth rates. Instead of steadily moving up over time, they fall into the middle-income trap, subsequently stagnating and failing to grow to advanced-country levels.
At the root of the problem is low productivity growth. Countries caught in the trap become unable to compete with low-income, low-wage economies in manufactured exports, while at the same time are unable to compete with advanced economies in high-skill innovations. Such countries cannot make a timely transition from resource-driven growth with low-cost labour, to productivity-driven growth.
The Dubai Plan 2021 attempts to deal with this challenge of transforming the engine of economic growth of the emirate. It is certainly true that when measured by income levels, Dubai ranks as a high-income economy. However, looking at average labour productivity, the emirate is far from developed economies and its performance is similar to that of upper middle-income countries.
Innovation is key
In middle-income countries, traditional exports cannot be as easily expanded as in the initial stage of development because business opportunities are used up, wages are higher and cost competitiveness declines. Export growth depends on introducing new processes and finding new markets, not just on expanding sales of the same product to existing markets. To do this, innovation and product differentiation to meet the needs of the market become an important objective of middle-income countries.
To avoid becoming trapped without a viable high-growth strategy, middle-income countries need to develop modern and more agile institutions for property rights, capital markets, successful venture capital, competition, and a critical mass of highly skilled people to grow through innovations as affluent countries do.
Evidence indicates that some East Asian countries, like South Korea, have successfully managed three critical transitions to avoid the middle-income trap: (i) from diversification to specialisation in production; (ii) from physical accumulation of factors to productivity-led growth; and (iii) from centralised to decentralised economic management.
Among the most important macroeconomic determinants of competitiveness is the exchange rate — the relative price between domestic and foreign currencies. There are several ways in which the exchange rate influences competitiveness. First and foremost, it affects the profitability of exporting activities: An appreciated exchange rate gives incentives to national produces to serve local markets and disregard foreign trade as an attractive market. Second, the exchange rate influences the competitiveness by affecting the production costs of local producers — a depreciated exchange rate makes purchases of imported inputs expensive, including raw and intermediate materials, capital goods and imported technology. However, a depreciated real exchange rate could also promote the competitiveness of exporting industries that are intensive in the use of domestic inputs.
Macroeconomic determinants are also important. The cost of capital plays a key role in both investment levels at the plant level and technology adoption.
Dubai has based its successful economic record on a particular strategy that combines both macroeconomic policies and microeconomic conditions. On the macroeconomic front, the most salient policies determining competitiveness are the fixed nominal exchange rate (with the US dollar) and an open capital account, allowing domestic investors ample access to foreign capital in the form of FDI and portfolio investments.
On the microeconomic front, several factors determine productivity gains. One issue is the long-standing governmental policy of maintaining energy costs disconnected from and well below international levels, thus inducing relatively high usage of both hydrocarbons and electricity.
