Competing agenda

Revving the engine

The UAE and the countries of the Gulf generally have been moving up the world's economic league tables, as recent upgrades by international rating agencies have shown. Much of that owes simply to the oil-price condition.

At the same time, conscious efforts are being made to reduce collective reliance on that resource and that circumstance. For some time economic diversification into non-oil activities has been the watchword for the region. Such a programme requires an enabling business environment.

So, just how well-placed is the UAE and the Gulf in respect of this, less obvious aspect of performance? On an aggregate basis, i.e. the level of the economy as a whole, such a question is answered in terms not of rankings of creditworthiness, but instead of competitiveness. What does that mean?

Industry academic Professor Michael Porter explained what is involved in a seminar in Dubai in 2003: "successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competing". *

That sounds both basic and complicated at the same time, but can be condensed into a simple sequence. The stages of competitive development typically are: (1) factor-driven (utilising low-cost inputs), (2) investment-driven (pursuing efficiency), (3) innovation-driven (creating unique value). It is not difficult to associate those steps with three successive levels of economic progress.

Rising productivity is what leads to rising prosperity. The determinants of productivity growth, he added, are (i) the surrounding context, in terms of macroeconomic, political, legal and social conditions, and (ii) the abilities of local companies, and the state of local competition. The combination of the two determines the innovative capacity which drives competitiveness.

It is not earth-shattering stuff, but surely makes sense. Porter identified certain, key provisions to promote that process. First, high-quality, specialised inputs should be available for firms (i.e. human and capital resources, and physical, administrative, information and technological infrastructures, and natural resources).

Second, a competitive, rules-based system should be put in place (i.e. intellectual property protection, meritocratic incentives, open rivalry between firms).

Third, there needs to be a knowledgeable and demanding customer base. Fourth, industries should be arranged in clusters rather than isolated, facilitating mutual benefits (externalities) and linkages across firms and associated institutions.

Porter had one further point to make, based on extensive international observation. Namely, government has a role to play, but as a "facilitator and participant", rather than merely announcing edicts and installing incentives.

The best examples of cluster development around the world (whether in the Norwegian maritime sector, or Californian or Australian wine) are effectively public-private partnerships, and are non-discriminatory across industries and between domestic and foreign ownership.

On the grid

Frankly, those concepts, while reasonable enough, still seem woolly, needing illustration and precision.

Drawing on a World Bank report of the previous year, Farrukh Iqbal delivered a conference paper in 2004 which put some meat on those bones in policy terms. **

Initially, the Middle East context had to be specified more closely. It was noted that Mena had failed to ride the wave of globalisation that began in the mid-1980s. While world trade rose by around eight per cent in the 1990s, Mena's had grown by only three per cent, non-oil exports displaying "considerable structural weaknesses", with falling market shares, and likewise in services.

The reason was that Mena was "not well connected with global investment and production chains", as reflected in "relatively stagnant" capital flows, typical of inward-looking, import-substituting economies.

Besides correcting trade policy away from overprotection of industry, and exchange-rate policy away from overvaluation (which might mean currency de-pegging), Iqbal focused on the "critical role" of the investment climate in determining a country's competitiveness.

This was described in practical terms as: the burden of regulations, the transactions costs of trade in documentation and shipping, and routine business expenses, for instance in telecom, electricity, and the cost of finance.

World Bank research has shown that trade expansion (as WTO membership may be expected to induce) does not itself add significantly to job creation, a vital preconcern, if FDI is low and the investment climate weak.

Policy proposals arising were thus to: (a) curb barriers to entry, since "business dynamism is strongly affected by how easy it is to go into or out of business", (b) redefine customs and freight procedures to limit costs and boost reliability, and (c) reform transport, telecom, power and financial sectors by liberalisation.

Taking the two submissions together, the advice is clear enough: seek co-operative synergies on a playing field conducive for business.

So how is the UAE doing? It seems to depend on where you look and whom you believe.

For instance, the World Bank's latest Doing Business survey has global rankings according to a range of criteria. It places the UAE 69th of 155 countries, behind Saudi Arabia in 38th place, Kuwait in 47th, and Oman in 51st, with scores below the regional average and well below the OECD's (Table 1). It's not exactly obvious why. Also, Qatar and Bahrain are not listed.

Setting benchmarks

Another logical reference would seem to be the Arab World Competitiveness Report 2005, produced by the World Economic Forum, which was the first systematic benchmarking exercise for the Arab region.

It contained rankings based on calculations relating to 'three pillars' or components (macroeconomic, public institutions and technology indices), supposed to capture the underlying drivers of productivity. It showed the UAE and Qatar outperforming the other Mena countries (Table 2).

Unfortunately, they were based on a data mismatch, using 2004 figures for UAE and 2005 for Qatar. By the time the WEF issued its annual Global Competitiveness Report 2005, UAE had leapfrogged ahead, by one place!

A recent paper by the Economic Policy Research Unit (EPRU) at Zayed University in Dubai reviewed the report, and took issue with the findings, on the grounds of statistical technique. ***

It gave an interesting insight to the mechanics of compiling such rankings. For instance, both UAE and Qatar achieved their relatively high scores because of the macro-economic dimension, where the data were especially strong, although ironically both suffer from belonging to a region systematically "deemed to be risky" in such assessments.

Yet, that aspect may have been overweighted, in terms (apparently) of intrinsic methodology. Using an alternative, but "robust" approach, all the Arab countries emerge lower in the tables, the UAE dropping from 18th to 29th globally, and Qatar from 19th to 36th. Clearly, "considerable care needs to be taken when undertaking such analyses, particularly given the political sensitivity associated with creating league tables of country rank order". Quite. (Don't you just love structural equation modelling?)

It also implies that the UAE and the countries of the broader region have more to do than perhaps imagined. The best chance to advance further seems to rest in the field of technology, specifically information and communications infrastructure.

The race ahead

The challenge is becoming well understood in the region. Last December the Gulf Organization for Industrial Consulting (GOIC) conducted the 10th GCC Industrialists Conference in Kuwait, adopting the themes of productivity & competitiveness, R&D, export-oriented industries, and future industries in the 'new economy'.

Its framework focused the 'knowledge gap' to be bridged as a matter of priority in development strategy, faced with globalisation and the dominance now of market forces. SMEs in particular had to be helped in their efforts, with the "redirection of industrial policies" away from protectionism towards innovation.

Recently the Dubai Government signed an MoU with GOIC to guide industrial development of the UAE along such lines: streamlining and developing industry for diversification, attracting FDI, and moving towards a knowledge-based economy.

So we come to the latest business forecast report from Business Monitor International in London, which reiterates the pressure which the UAE faces as it negotiates an FTA with the US (a process already completed by Bahrain and Oman). **** Publishing its own business environment ranking (table 3), BMI notes the likely boost to FDI, already up to a massive $18.7 billion in 2005 from just $2.5 billion in 2004, though mostly concentrated in construction and real estate. Its core scenario foresees "continued efforts to improve transparency and incentives for investors".

The planned, massive Jebel Ali airport, with accompanying industrial projects mooted, is given as an example of the way ahead. In this regard, "Dubai's track record of making large projects work, in defiance of the sceptics, lends a good deal of credibility ... [though] questions must remain over whether the emirate's infrastructure" will be able to cope.

Additionally, there is scope still to improve the legal framework for the private sector, the cost of enforcing contracts still "burdensome" and below OECD standards, the report says, actually quoting the World Bank.

However, agreement between the UAE's central bank and the International Finance Corporation (an arm of the World Bank) to strengthen corporate governance in the banking sector is another "welcome sign of the country's commitment to reshaping its business environment".

Observation

Speaking this week with Gulf News, Dr Kenneth Wilson, director of EPRU of Zayed University, observed how far things have moved on since Professor Porter's presentation in the UAE three years ago, fulfilling the ideas conveyed then. Examples sprang quickly to mind. First, the continued development of the cluster concept (e.g. DMC, DIC, Knowledge Village, Dubai Healthcare City).

Second, greater transparency in the financial regulatory environment (using British common law), a "major breakthrough".

Third, the commitment to building further transport infrastructure (e.g. Dubai's planned monorail, and Jebel Ali-Dubai airports road link).

Dubai is indeed the most extreme, but shining, example of the evolving non-oil story. In that sense it is both at the cutting edge and a microcosm of what might emerge across the Gulf, to greater or lesser degrees. That process is well under way, most visibly down the road in Abu Dhabi, around the corner in Qatar, and over the horizon in Saudi Arabia.

These collective efforts, independently motivated, all belong to a mood shift towards engaging the global economy. The sunnier scene was set in fact in the WEF report: "Gulf states show the region has the capacity to shift gears and tackle ... the challenges of effective integration and modernization ... Within several countries ... good policies are rapidly taking root, with tangible benefits increasingly in evidence."

But those initiatives and that intent have to be matched by an ongoing resolve and persistence.

If necessity is the mother of invention, then application is the father of progress. There is no shortage of either in this region or this country right now. When the two concepts are married together, a bright legacy of new development is likely to emerge.

* Building a competitive UAE economy: the new learning, Professor Michael Porter, Harvard Business School (Dubai, 2003)

** The international competitiveness of the MENA region, Farrukh Iqbal, World Bank (Marseilles, 2004)

*** How competitive are Arab economies?, Hugo, Squalli and Wilson, Working Paper 06-01, Zayed University, Dubai (2006)

**** The UAE Business Forecast Report, 2006 Q2, Business Monitor International

NOTES
Competitiveness and productivity

- Competitiveness is determined by the productivity with which a nation uses its human, capital and natural resources. Productivity sets a nation's standard of living (in returns to those resources).

- Productivity depends on the value of products and services (e.g. uniqueness, quality) as well as the efficiency of their production.

- It is not which industries compete that matters for a nation's prosperity, but rather how they compete.

- The productivity of industries situated locally is fundamental to competitiveness, not just that of trading industries. However, location of ownership is not so important.

Source: amended from Prof. Michael Porter, Institute for Strategy and Competitiveness, Harvard Business School, 2003

OPINION
Viewed from abroad

"In centuries past the Arab world was a thriving centre of knowledge, learning and innovation. Its peoples long ago demonstrated their capacity for enlightened, creative engagement with the rest of the world, [leaving] an indelible mark on the course of civilization. [Now] the Arab world finds itself at a critical crossroads...

The call for urgent action is underscored not only by the burgeoning pressures on labour markets, but also the resurgence of other major emerging economies -- China, India and central and eastern Europe to name a few -- whose presence in the global economy is quickly expanding...

It is vitally important that the Arab countries improve the overall quality of governance, significantly raise their levels of competitiveness, improve macroeconomic management, institute reforms to enhance the efficiency of public sector institutions, and facilitate the absorption of new technologies."

Source: Augusto Lopez-Claros, Editor, Arab World Competitiveness Report, World Economic Forum, 2005