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City on a Hill

Dubai Dispatch

AS THE WORLD’S bankers gathered last September in the Persian Gulf city of Dubai, part of the United Arab Emirates (UAE), for the annual International Monetary Fund/World Bank meetings, talk inevitably turned to the economic stagnation of the Arab world. The statistics are grim: The 280 million people of the 22 Arab countries have a combined gross domestic product (GDP) less than that of 40 million Spaniards, some 25 percent of Arabs live below the poverty line, and some 20 million are out of work. The region’s economic growth—an insipid 0.5 percent over the past 30 years—is among the lowest in the world.

But the irony of this IMF/World Bank hand-wringing was that it was taking place in Dubai, a city that has transformed itself from a modest commercial entrepôt to the budding Singapore of the Middle East. Dubai does everything the Arab world doesn’t—and it could serve as a lesson to its larger neighbors. It promotes secure, attractive environments for foreign investment. It eliminates the red tape that slows business. It creates incentives for young entrepreneurs—including women. It invests in infrastructure. And it creates a tourism industry that attracts millions of travelers, some of whom like the country so much they consider locating businesses here.

DUBAI’S BUSINESS PHILOSOPHY seems simple: Build it, and they will come. The “it” is a business-friendly environment and world-class tourist attractions. And, while other Arab states talk, Dubai acts. In the past two decades, Dubai has slashed corporate taxes and cut tariffs on most items, creating a reputation as a place to do business. At the same time, the country has improved its world-class port; upgraded its airport; increased the number of facilities for Web access, making it the most wired city in the region; and built many new structures designed to house financial firms. In fact, the new Dubai International Financial Center is expected to give the regional banking hub, Bahrain, a run for its money. Dubai also has built a series of high-profile tourist spots, including the Burj Al Arab, a seven-star hotel with a Disneyland-meets-Arabian-kitsch interior, an array of upscale beach resorts, and dozens of glitzy shopping malls.

Sheik Mohammad bin Rashid Al Maktoum, the crown prince of Dubai, has been the guiding force behind the country’s development. A hyper-ambitious visionary with a Jack Welchian disdain for inefficiency, he is often dubbed the CEO of Dubai, Inc. Unlike many other Arab nations, where the rulers prioritize political order over economic gain, Sheik Mohammad charts Dubai’s path with an eye to how changes will impact the economy and relies on a team of Western-educated economic advisers, who understand both the bazaar and the NASDAQ.

Clearly, Dubai is doing something right. Since 1995, the city’s economy has grown by 71 percent and has emerged as a regional hub for tourism, transport, trade, technology, health care, media, and real estate. The British property consultants Jones Lang Lasalle recently named Dubai, along with Dublin and Las Vegas, one of the three most successful cities of the ‘90s, as measured by economic growth and real estate activity. Most important, the unemployment rate for Dubai citizens now hovers below 5 percent, less than half the rate of large Arab nations like Egypt, while the UAE’s GDP per capita is roughly $22,000, more than five times the GDP of Egypt. Dubai attracts almost five million visitors per year, besting Egypt and even India.

To be sure, Dubai benefits from its small population, roughly two million; large numbers of expatriate laborers; and its oil reserves, though Dubai has diversified away from oil. So one might ask: What lessons can larger, less resource-rich countries like Egypt or Jordan learn from Dubai?

Give the private sector access to capital, for starters. The first rule of wealth-creation is relatively equal access to capital, yet, throughout the Arab world, entrepreneurs are stifled by tight credit markets and weak lending structures. Of the annual Top 100 Arab banks listed by The Banker magazine, 17—the highest number—are located in the UAE. And, unlike their counterparts elsewhere in the Arab world, UAE banks lend relatively equally to private companies and state-owned businesses. In Egypt, by comparison, half of the country’s banking sector is run by plodding, state-owned entities that only lend to government-linked firms. Syria, meanwhile, only recently permitted private banks to operate; its state banks are notoriously inefficient and corrupt. Even in Lebanon, a traditional banking center, credit is tight and limited to well-connected elites. As a result, though non-oil-rich Arab states like Egypt possess considerable capital—Egypt has some of the largest banks in the region—most of that money is useless, because it is not invested in productive local companies.

It’s not just about capital, however. Commercial lenders need attractive investment opportunities, and Dubai’s liberal economic climate affords them. Indeed, the UAE has become an increasingly popular place for other Arab commercial banks to invest, according to the Kuwait-based Inter-Arab Investment Guarantee Corporation. What’s more, unlike elites in countries like Saudi Arabia, who keep their money offshore, the big merchant families of Dubai reinvest their money locally. “We have more investment opportunities here, so a lot of our money stays here,” says Sultan bin Sulayem, the head of one of Dubai’s free-trade zones.

Arab economies also need strong small- and medium-sized enterprises (SMEs), the engine of economic development in the industrialized West. And Dubai’s government spends a substantial amount of time and money nurturing local ones. The Dubai-based Mohammad bin Rashid Establishment for Young Business Leaders offers consultancy and incubator services to SMEs: A young business leader will be given a small loan, legal and tax advice, assistance in writing a business plan, and access to local business leaders. By contrast, Saudi Arabia simply offers young entrepreneurs a loan, without the other services, while other Arab states don’t have significant SME-promotion programs at all.

And Dubai promotes its attractions: It has aggressively marketed its improvements through a series of advertisements that run in global financial media, showing executives Dubai’s strengths. The city also promotes the UAE’s geography—its location as a crossroads that can serve East Africa and the Indian subcontinent. In fact, I once met a South African software marketer who covers 77 countries from his UAE base. Few other Arab states have any sort of organized campaign targeted at the international business community.

But, perhaps most important, Dubai doesn’t fear free markets. While Syria and Egypt protect state enterprises, earning low ratings in the Heritage Foundation’s Index of Economic Freedom, Dubai has opened its economy, but it also believes that government must create the foundations for a well-regulated market. Jeffrey Sampler, a London Business School professor and co-author of a new book on Dubai, says the city’s model lies somewhere between Singapore and Silicon Valley. “Singapore was very much top-down, government-directed, while Silicon Valley was bottom-up, individual-initiative driven,” says Sampler. “Dubai does both. The government spends heavily on infrastructure and large projects, then gradually steps away to allow the free-market and individual initiative to take over.

Dubai’s critics—often leftist Arab intellectuals—point out that the city-state’s glassy skyscrapers, Western-style shopping malls, and glitzy hotels have ruined its authentic Arab character. One wonders if the critics prefer, say, Yemen, which oozes “authenticity” and is an economic basket case. In any event, questions of authenticity are debated by intellectuals, not by the Arab working classes, many of whom jump at the chance to move to Dubai. As one Dubai-based Egyptian engineer told me, “Here in Dubai, I feel that my children have more opportunities. In Egypt, the rulers simply plunder and don’t give back. In Dubai, the rulers create opportunities for everyone. Arab leaders all talk about dignity, but it’s very hard to maintain dignity when you don’t have enough money to support your family.” Arab leaders would do well to listen to him.


This article appeared in the February 9, 2004 issue of the magazine