Elongating the visa duration and extending that preference to various sectors of the economy has been one way the UAE government has responded to stimulate the economy. Reducing fees across a variety of services has been another.
While these two mechanisms will work their way throughout the economy, there are a number of other levers that can be used to accelerate growth, a question that is now being confronted by economies across the globe. These measures reveal unconventional thinking, across a sectoral approach using regulatory measures as well as confront the question of what regulation can do in an effectively zero interest world.
Incentivise
What if the government were to resort to investment tax credits? Given the fact that there is no direct taxation in the economy, overcoming the liquidity trap could be done in a manner of ways across sectors. For example, in the real estate sector, what if the master-developers would allow for an increase in the built-up area (BUA) of existing plots purchased by the investors, thereby reducing the per square foot cost of land, and incentivise building in suburban areas whereby the problem of affordable housing could be more effectively addressed?
Currently, the standard response by developers has been to reduce the sizes of apartments, and resort to schemes like co-living (which is effectively a glorified version of student housing). But all that has done is result in stock that have higher vacancy rates.
Reducing the per square foot cost of land by increasing for BUA would allow for more creative architectural responses, which at the same time would more effectively address the issue of affordable housing. At the consumer level, this tax credit could be extended to lowering the cost of acquiring the first asset by reducing the transfer fees, thereby stimulating demand for end users.
Get businesses to spend
As we move away from the real estate sector, we can see how this mechanism could be used across the board in other areas. For example, costs of visas could be reduced in new sectors of the economy, or for SMEs that employ less than 20 people as a way of generating new business activity.
This could be extended to free zones giving tax credit in terms of reduced licensing costs for the first three years. This thinking could be extended at the other end of the spectrum as well; rewarding long running firms by giving them a “license fee holiday” or grant in specific sectors for a period of one to three years as a way of increasing the propensity to spend.
Another way to galvanise investment is to relax the “zoning” laws further as we move towards a gig economy. We already have the ability for people to freelance from their homes, but at a macro level, the ability for schools to move into malls, for offices to double up as residences or retail and vice versa, and for there to be a shared mechanism to capitalise on the infrastructure that is already available, is a process by which costs can be driven lower in an environment where profit margins have been pressurised.
The impulse behind this line of thinking is the acknowledgement that costs have to be competitive at the producer level, such that at the consumer level the demand can be increased. Of course the most obvious ways to do this in the UAE is to reduce rents, but that phenomenon is already underway across the board.
Offering investment credits such as the ones mentioned above allows for the competitiveness of the economy to increase further and stimulates consumer spending, thereby restoring aggregate demand to full employment levels. Regulation plays a critical role here to shape change the structure of the economy.
The coming months will determine the regulatory path further as we move towards showcasing the UAE to the rest of the world in the 2020 Expo.
Nasser Malalla Ghanem is Senior Partner at the law firm of NM Associates, which is a joint venture with GCP.
