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Monday, May 27, 2013

Scarcity as Incentive: Making Do with Less in Dubai

DUBAI – When one thinks of the Persian Gulf, one normally thinks about oil. But not all of the region’s states rest on vast petroleum pools. 

Dubai, the largest of the seven kingdoms that make up the United Arab Emirates, is oil poor. (In fact, its petroleum reserves recently ran dry.) That hasn’t prevented Dubai from growing wealthy, however. The country just had to find a way to attract outside business, which demonstrates how making do with less can be an economic boon, not a bane.

Some of the region’s entrepreneurs have noticed. 

Waleed Moubarak is an example of someone almost compelled by circumstances to be successful. He grew up in Lebanon, but his family left as the country descended into bitter civil war. He was educated and worked in America, but recently settled in Kuwait to be closer to his parents.

Waleed works as chief legal officer for Alghanim Industries, which engages in industrial manufacturing, retailing, and automobile sales. His firm hopes to do more business in Dubai, a place that he calls “unique” and “fascinating.” Today people around the world have heard about the emirate, but “rewind 10 years ago and people didn’t know of it.”

He argues that Dubai was “forced to develop” because it “doesn’t have the oil resources that its neighbors do.” It’s a bit like Singapore and Hong Kong in that way. “When you are forced to do something, it is a pretty powerful driver.” Hong Kong was built on a barren rock. Dubai was built in the middle of the desert.

To be sure, Dubai is no paragon of democracy and civil liberties. But the royal leadership realized that fewer arbitrary restrictions are good for business. Thus, starting in 1985, it set up more than 20 free zones. Several more are in development. These areas offer a number of economic benefits, like tax exemption, full foreign ownership (elsewhere within the emirate, 51 percent local ownership is required), and capital repatriation.

Businesses can also choose to operate under the independent jurisdiction of the the Dubai International Financial Center. Established in 2004, the DIFC draws judges from common law systems around the world. It sits in the middle of the city, offering the benefits of urban living along with its special investment protections: On one stroll through the financial district, my colleague Waleed and I had 42 eateries to choose from. 

It’s been a big hit. So much so that Abu Dhabi, another member of the UAE, is going to open a free zone of its own, despite having plenty of oil wealth. 

Of course it would be better if all of Dubai was a “free zone.” The International Herald-Tribune once described the emirate as “centrally-planned free-market capitalism,” since the government spends heavily to promote particular industries—constructing the world’s largest man-made harbor and maintaining the state-owned Emirates airline, for instance. The global financial crisis helped trigger a property crash in Dubai, where commercial and residential construction had been rapid. Foreign workers have been abused. Businessmen outside of the free-trade zones have found themselves subject to criminal action as a result of commercial disputes, while inadequately clad tourists sometimes end up deported or jailed by Muslim officials.

Nevertheless, the lack of oil as the source of a welfare state has forced Dubai to encourage wealth generation. Waleed pointed in contrast to Kuwait, a semi-democratic state now buffeted by its own Arab Spring: “People have cradle-to-grave benefits, but that’s not necessarily enough.” It’s important to “give people the feeling that they can do something with their life.” In fact, he added, that is the “importance of the American dream, which resonates with people.”

The “American dream” is most achievable in an open society. Even the United States is sacrificing its freedom heritage, with an increasingly expansive state, more “generous” yet restrictive social welfare benefits now extending to health care, tougher and more burdensome economic regulation, increasing nanny-state controls, and a growing anti-entrepreneurial culture. Yet there still is openness to achievement, success, innovation, and invention that seems to have almost disappeared from some European countries and not existed for years or decades in others, including in the Middle East.

Yet Dubai gives reason for hope in the Middle East. Once dependent on oil, the emirate has remade itself, becoming a commercial, financial, and transportation hub. Stand atop the Burj Khalifa, the world’s tallest building, and look out and you don’t see oil fields, but abundant construction. The eclectic architecture is interesting in its own right, but it also demonstrates that a Middle Eastern country has discovered—or rediscovered, really, since Arabs have a long history as traders—the importance of creating wealth, not just unearthing it.

This lesson needs to be more widely learned and applied if the Middle East is to thrive. Sclerotic, self-serving leaderships attempt to use hydrocarbon revenues to retain power, yet burgeoning youth populations are desperate to, as Waleed put it, “do something” with their lives. Only freer and more open economies will provide the opportunities Arab peoples crave and Arab economies require.

  • Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.