Showing posts with label Dubai. Show all posts
Showing posts with label Dubai. Show all posts

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”.

Sunday, January 8, 2012

Dubai as a Logistics Cluster


by Giorgi Machavariani

Dubai as a logistics cluster is one of the most successful cluster at the global level. It is a highly developed region of the United Arab Emirates (UAE). The country enjoys with relatively high income per capita (approximately 36.2 thousand USD). In the UAE the service sector represents 47 percent of GDP. As for Dubai, it has the most dynamic economy within the UAE where logistics play very important role in economic activities. Its share in GDP is 8.8 percent (including communication). Besides logistics are an industry that influences on the competitiveness of an economy. Logistics comprise transportation, inventory, material handling, warehousing, and packing and also very often security services.

Dubai has developed a dynamic logistic cluster that is playing a central role in the Europe-Asia-Africa trade. It also serves local markets and operates as a regional trade hub. Three main factors must be underlined in explaining why Dubai is such a successful logistic cluster. These factors are: advantageous geographical location, market conditions, and the role of the government.

The region has very strategic location in Gulf and therefore part of the fortune of Dubai is related to its proximity to some of the fastest growing economies in the world, basically China and India. So, advantageous geographical location helps this region to take a prominent position in the global logistics network and therefore today it is one of the critical nodes in the world’s supply chain.

Dubai’s (as a logistic cluster) market conditions are analyzed by using the diamond model of Porter (1990). Based on this model following four key factors must be considered: firm strategy, demand conditions, related and supporting industries, and factor conditions. Actually, these factors are the basic drivers of competitiveness of an industry which is crucial for a success.

From firm strategy point of view 6 factors must be highlighted: open markets in logistics and transportation sector, business supportive economic policy, favorable complementary policies, massive infrastructure investments, attractive regulatory and business environment, and growth oriented governmental companies. In fact these became contributors of Dubai’s logistic cluster development. It is also worth noting that massive and aggressive infrastructure spending became a key element for a success (see figure1).

Dubai’s ability to operate as a regional trade hub has been spurred by the demand conditions as well. Six main demand conditions can be underlined: Jebel Ali Free Trade Zone, domestic manufacturing sectors, Dubai Industrial City, population growth, increased import caused by economic growth, and trade measures against Iran. Among them most important factors are free zone, industrial city and domestic production. These determinants create economic activities and push significant demand for logistical services and much of it is captured by Dubai.

Related and supportive industries play considerable roles in the Dubai’s logistic cluster development. It, in fact, includes not only industries but also trends in related sectors, clusters and markets, associations and supportive governmental organizations. There are 6 main factors in this regard: highly developed finance, insurance, construction, and tourism clusters, substantial increase of FDI, rise in local capital markets, cluster associations, Dubai Industrial City, and rapid growth in trade. These industries and organizations provide necessary services, markets and information for improvement and strengthening of competitiveness of the logistic cluster (see figure1).

Dubai’s logistic cluster has some beneficial factor conditions – in particular its natural assets (harbor, oil, gas), advanced physical infrastructure (ports, airports, highways) and geographical proximity with the potential suppliers (mainly China and India) and buyers (EU, Asia) (see figure1). All factors listed above reinforce the potential of Dubai’s logistic sector to be competitive at the global level.    

State plays very important and active role in Dubai’s logistic cluster. In order to promote logistic sector the government (both local and central) actively intervenes. It has 5 main priorities: 1. Spurring growth by massive infrastructure spending; 2. Facilitating collaboration (public-private and personal relationships); 3. Strengthen links between port, free zone and customs; 4. Evolve innovations (for example airport in the port), and 5. Develop complementary policies (trade, fiscal, business environment improving).

The UAE’s government succeeded in creating world class infrastructure in transportation (seaport, airport, roads) energy, communication, and tourism sectors. This infrastructure is a strong asset and plays essential role in encouraging logistical development. Recently, for instance, a new logistics centre in Dubai Logistics City has been launched. 

The UAE government attempts to facilitate interactions between the government and business sector. This is crucial for a success of the logistics cluster because public-private and personal relationships are central issues in improving the competitiveness (Porter, 1998). In this regard, the major institution is the Chamber of Commerce. Its objectives are: encourage collaboration with private sector and support the development of small and medium sized enterprises. Besides the government launched the Dubai Cluster Platform and before this was created Focus Group of all stakeholders (public and private companies, service providers, educational institutions, associations, related and supportive industries) in logistics sectors. The aim of these actions was: boosting the competitiveness of Dubai in logistics by creating and fostering permanent network of collaboration.

It is also worth noting that the UAE government also uses complementary policies to spur logistics sector. It implemented business friendly tax system (very low corporate tax) which significantly reduces the cost of doing business. I addition, creation free zones also have positive impact on the cluster. It attracts capital form abroad and raises mobility of it.       

Hence, the main forces that make Dubai’s logistics cluster successful are favorable geographical location, market (factor, demand) conditions, effective complementary policies, highly developed related industries, and the world class physical infrastructure.


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