Dubai has seen eight bear markets, in which the daily stock market has declined by 20% or more, in the past six years. On June 30th, the benchmark DFM General Index lost 26% in value. But Dubai is still considered one of the fastest growing markets in the world.
Volatility is often considered an impediment to economic growth. But in the case of Dubai, it appears to be contributing to a boom in consumption with higher growth rates, lower debt and greater foreign exchange reserves than many of the world’s developed markets. Dubai presents a modern day paradox. The country’s high risk-high reward model has facilitated strong economic growth. This strategy contrasts starkly with the aims of post-war Western governments, who have targeted stable macroeconomic conditions through modest growth, low inflation and full employment.
This raises an important question: how sustainable is Dubai’s growth?
A potential vulnerability of the economic model in Dubai and the UAE is that it relies on importing talent from abroad. The country currently has the finance and ambitions, but there is an acute shortage of local talent to lead and manage its businesses. Might this be a decisive threat to the region’s continued success? How much is the ‘volatility as the best asset’ model a sustainable one?
Dubai, as one of the world’s fastest emerging markets, has much to offer. In the 1980s, the government made the decision to diversify away from primary product dependency (mainly oil) towards high value-added services. This decision proved to be prescient – creating the foundations for more sustainable growth in the face of declining oil reserves. As a result, the area is booming – in particular the retail, real estate and tourism sectors. Constantly building new hotels and high quality self-contained communities provides the illusion of dynamic growth and an unending supply of wealth. This illusion has brought confidence and with confidence has come further investment. One need only consider that the Dubai tourism sector contributes 8.7% to overall UAE GDP to realise the extent of this dynamism. The Expo 2020, similarly, is the epitome of Dubai’s flashy new image, designed to encourage foreign exchange. The World Expo in Dubai, that lasts six months, is expected to attract 25 million visitors, exploring exhibits and cultural events staged by international organisations. It is expected that by 2024 with the help of the Dubai Expo 39.9million tourists will arrive in Dubai, generating an estimated expenditure of Dhs 105.4bn.
However, more traditionally-minded analysts tend to approach this kind of growth with scepticism and hesitancy. From their perspective, the methods of doing business and regulations in Dubai are inadequate and contribute to continued volatility. If we combine this with the entrenched cultural hierarchies that prevent employees lower down the chain from taking initiative, it seems that growth in Dubai may not be sustainable.
Dubai relies heavily on interventions from abroad to support economic growth. It is, however, dangerous to rely upon these interventions indefinitely. A high turnover of expertise – with ex-pats tending to stay fewer than six years – does not provide the resources needed to encourage a consistently flourishing service sector. It also leads to wastage of resources on retraining. Likewise, to continue the stream of construction projects in real estate and retail, Dubai requires an equally constant stream of migrant workers from Nepal, India, Pakistan and the Philippines. There is no guarantee that this stream will persist. Without workers, construction projects cannot be continued. The World Map Island and Dubai Pearl constructions are examples of stalled projects. For the time being, the tertiary sector in Dubai is booming. But if they lose this external supply, Dubai’s strong growth could easily lose momentum.
The method of business in Dubai is heavily focused on profit and cutting costs. To maximise profit, social schemes are limited and where they are made available, are conducted on an ad hoc, short-term basis. This profit-driven mind-set means there is limited job security, which, in turn, can create individualistic competition detrimental to the success of individual companies. Competition can drive efficiency, but in the case of Dubai, it has come at the expense of teamwork – leading to duplications and inefficiency. Workers build an image around their position in a company to prove that their role is instrumental to the organisation. Many of the local Emiratis in senior positions lack the experience to lead but will not admit to this, because of the intensely competitive labour markets. For example, engineers of the great Palm construction did not develop a sufficiently rigorous plan at the start of the project because of their obsession with getting it built quickly. This meant in retrospect they had to implement a multi-million pump system to prevent the growth of algae between the fronds.
It is not only the sense of pride and obstruction of good practice that could threaten the high growth model in Dubai. Entrenched cultural hierarchies affect business by preventing initiative lower down the chain in an organisation. The local Emiratis, who make up 15% of the Dubai population, must own 51% of the shares of every company set up in the area. Although this does not mean they have direct control of the company, this practice does, nonetheless, introduce a cultural obstacle to capital flows. Recently, Arabtec Construction Company lost 60% of its face value because the Emirati-run Aabar Investments reduced its shares in the company from 22% to 19%. Losing the approval of local Emiratis damages the company’s reputation. Cultural hierarchies and a lack of meritocratic values reduce transparency and introduce an obtrusive level of personal politics into business. If the wealth and ownership continue to be focused at the very top in society, it will continue to reduce incentives for workers to raise productivity. This short-termist approach is oppositional to what Western economies are trying to achieve.
Dubai has had a unique experience. There are clearly aspects of the region’s economic model that need refining to ensure its growth is sustainable. However, Dubai should not be viewed simply as an exception to the rule about growth and volatility. Abu Dhabi is also instrumental in preventing Dubai’s volatility from spiralling out of control. Dubai is able to take the risks that it does – the incessant construction of world beating towers, malls and hotels – because it has Abu Dhabi as a buffer. In 2008, it was Abu Dhabi’s ruling families who paid the international payments that Dubai owed. It was Abu Dhabi who provided capital for the finalisation of the Burj Khalifa and Burj Al Arab. Dubai creates the image and Abu Dhabi backs it up, if it falls through. Dubai is the child trying to dabble with business and Abu Dhabi is the parent there to bail them out when things do not quite work out. That is why the high-risk and volatile economic model can work so well in Dubai.
Economic instability and the constant turnover of workers are fundamental parts of Dubai’s market model. The built-in volatility is its asset in the way it can lead to high returns. Normally, insufficient resources in a country would cause this kind of model to fail, but this does not seem to have hampered Dubai’s exponential growth and ability to attract foreign exchange reserves. Dubai does not necessarily make investment decisions based on any particular benchmark; the region has been seen to benefit from a less conventional, unconstrained approach. Spontaneity within the market is an ideal environment in which new companies can gain indirect exposure to technology, through banking stocks with strong micro-lending businesses. This has made Dubai a vibrant emerging economy.
Dubai can be compared with Las Vegas – a unique market isolated from the emerging/developed labels. It attracts investments for short periods of time due to its high risk, high reward strategy.
In this vein, it should not be assumed that volatility is always negatively correlated with growth. Dubai fulfils the system of wicked problems. Its leaders acknowledge the impossibility to solve and the need only to improve and refine cultural and social problems in their organisations. This approach is about creating an environment of controlled instability. Capital markets will always involve a degree of volatility – investment is determined by confidence and expectations. So far, Dubai has attracted significant investment. In this sense the model has worked.
Wicked problems are often associated with entrenched sociological issues of poverty, terrorism and environmental degradation. The causes of these issues are often interlinked. For instance, poverty is linked with environmental degradation, environmental degradation with education, and education with poverty. There are economic problems that cannot be accounted for with the additional collection of data, but require close examination of cultural and social forces. Dubai is facing an ongoing wicked problem in the way that the very diversification of investments that it thrives off also causes very high risk that could threaten ongoing growth. Dubai does not suit a Western economic model of stable economic growth and macroeconomic conditions, so its leaders must make the best of what they have.
The unprecedented challenges facing Dubai have been touched on already – the high turnover of expertise, entrenched cultural hierarchies and cherishing of local Emiratis who frequently lack corporate experience. The question is, therefore, how can these entrenched cultural barriers be reduced but not removed? How can the length of time ex-pats stay in the country be extended? How can an education system be developed to reduce the lacking of expertise in senior positions?
For the time being, the promise of high reward is paying off. But, these wicked problems need taming to ensure that the inherent instability is controlled and continues to translate into successful returns.
Dubai does not possess the most advanced primary, secondary or tertiary resources. Nor does it deploy the best practice to exploit these. It is the illusion of having the resources and the speed of adaption that has created a boom. Indeed, the wise man builds his house upon the rock but when you have only got sand on which to build, you have to be innovative.
Dubai has developed a short-term, high risk, high return market that relies heavily on maintaining the image of success to encourage investment. It is the illusion of Dubai’s success that attracts people in and uniquely, this makes the model sustainable. However, at the same time, high-risk investments will always be bailed out by the wealthy in Abu Dhabi if they do not succeed. It is a unique environment, which could result in big gains or big losses – normally a country would not risk the latter, but its relationship with Abu Dhabi allows Dubai investors to keep making the same high-risk investments. Were it not for that buffer, Dubai’s economy would likely fall through as a sandcastle built on sand.