Tuesday, January 8, 2013

Make the history or “Just do it”

Make the history or “Just do it” © Nike 

by Jamila Mammadova

The agglomeration in Dubai is broadly discussed by many economists as an example of  rapid growth and successful policy implementation. Its development is unusual since Dubai  has a list of obstacles to the revolutionary development it achieved. Even though, the reasons are economically explainable, and bunch of literature is provided on the subject, we would like to re-consider the Dubai case in the frameworks of the new economic geography. The main argument we are supporting here is that artificial interventions and
planning in the geographical economy matter. The statement comes from the classic economic geography, which argues that history matters for the agglomeration. By the same logic, if the history matters, it can be corrected by policymakers in such a way that forces leading to agglomeration in the target destination are activated. The theory says, after certain level of economic cluster is reached, the decreased transaction costs for market players and beneficial market conditions create sort of spiral proliferation of the agglomeration.

Why the agglomeration in Dubai would not happen by itself? Firstly, Dubai is oil rich zone that has all preconditions to fall into the pitfall called “resource curse”. In fact, it happened with similar economies of Gulf States, like Oman or Qatar, which are rich countries, but are too reliant on the oil sale. Dubai could have historically ended up there, but in contrast, its economy is highly diversified, despite the fact that oil money played a high role in the initial investments. Secondly, the climate of Dubai would keep a great part of the travelers far from the city in hot periods. This could, in theory, lead to some tourism increases in winter and sleeping periods in summer. The mirror image of economic activities can be empirically demonstrated by Antalya or Bodrum, which are Turkey resort zones, and are frozen cities in cold times of the year. By the same token, there should be strong motivation to stay in the emirate during tremendously hot summer. Even though today summer life in Dubai allows closed-air skiing, thanks to the engineers and magic of the air
conditioning, the puzzle is in the achievement of the threshold that led to this development. The confusing part is how did they manage to make the first people invest, to bring FDIs to the country? Thirdly, religious and cultural background would never suggest that emirate can open up its economy and internationally integrate to the extent that it became one of the most popular tourist destinations in the world. 

In fact, it is not only tourism, which brings money to the economy, but also business and finance activities. The history of Dubai would never foresee it. Perhaps, it is because somebody stepped in and changed the road. In fact, the intervention to the development of the city took a long path. Even though Dubai was never poor before, it was definitely not on this scale of agglomeration. Interestingly, the first investments in the economy in the 60-s were made by Ruler Rashid bin Saeed Al Maktoum, who is perceived as the main driver of today’s expansion of Dubai. Thus, it is an individual and not a simple historical outcome that is treated as the favorable reason. Interestingly, the first investments in non-oil sector of the economy, infrastructure, were made even before oil money influx started, and were borrowing-grounded.

During two generations of rulers of Dubai, the aggressive investments in the various fields of economy were made, starting from the dredging of the Dubai Creek in order to allow larger ships to accost in Dubai. Later, the investments were made in the airport, hotels, aluminum and desalination plants, tourism promotion, trade promotion in form of festival arrangements, and, importantly, establishment of the free trade zones. All of these measures successfully brought the result, despite the fact that it took long time and large volume investments. As an award, today Dubai enjoys rich and stable economy thanks to its diversification and investments continuation. Nothing is black or white, and the debt accumulated for these investments is to be repaid by the government. Nevertheless, the city attracts business units as magnet given its developed market and, thus, low transaction costs, which ensures large money turnover. 

In the framework of our theory, all these measures taken by the rulers of Dubai represent artificial intervention in the history. The theory anticipated that once threshold is achieved, agglomeration would occur on the target geographical place. Indeed, what Dubai did, it practically managed to achieve this theoretical threshold.

The Dubai case should inspire the policymakers of other “oil embraced” countries to be not led by the history, but make it. Dubai does not have to invest so hard anymore, since the market players are clustering there and trying to amaze tourists, rich country citizens, and create more and more new services. Moreover, the high concentration of the firms provides Dubai with a luxury good: easy access to information, rapid modernization, and upto-date market. Indeed, Dubai has all possible international firms, restaurants, hotels, brands. And as one of those brands would suggest to the weaker countries, “Just do it”.


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