3. Dubai: everyone has oil except us

We are in the 1930s, and what once was the promising market of pearls in Abu Dhabi and Dubai is now a memory. Japan entered the international market with cultured pearls, and India raised import tariffs on products coming from the Arab states of the Persian Gulf. ‘This the end, beautiful friend’, but no, is not.

Abu Dhabi 1954 (Source: BP Archives)

Abu Dhabi’s ruler is following the region’s recent oil discoveries very closely, and some companies have started explorations with promising but inaccurate results. Twenty years later, some holes are already producing oil. Still, the entire process takes too long, and the cost is exceptionally high compared to other countries in the region, such as Saudi Arabia, Qatar, or Kuwait. 

The year that would finally change everything is 1960. On October 27, oil in commercial quantities is discovered, and by 1962 Abu Dhabi exports oil for the first time. However, luck is not the same for every emirate. 

Abu Dhabi today (Source: https://visitabudhabi.ae/en/plan-your-trip/essential-info)

In a previous post, I explained that Ras al Khaimah was not part of the group of emirates that created the UAE in 1971. That was because the hope for an oil discovery was still alive. Yes, like Borgen Season 4, the potential revenues from oil production could guarantee future income and imply independence. The absence of any significant findings made Ras al Khaimah join the UAE in 1972.

In Dubai, there was oil, but in minimal quantities: in 1990, oil reserves were estimated at 4 billion barrels, against the 96 of Abu Dhabi. If we go to 2022, in effect, oil has run out. However, despite this fact, and without any doubt, we can say that Dubai was still successfully changing its landscape in a similar (or even more radical) way than Abu Dhabi. The boom is undeniable.

What did Dubai do to achieve this stage? Why do so many real estate projects take place in this city? Why did not the other emirates without oil follow what Dubai was doing? 

The answer that I reached in these weeks is that Dubai chose to do what they already knew how to do. From the beginning of the century, the city and its rulers understood that by improving the infrastructure and guaranteeing a suitable environment for private firms, investors would come: “Dubai shapes its own future” (Hvidt, 2007). 

What I find most notable is that Dubai started this process even before the oil in commercial quantities was discovered, which might explain why other emirates could not follow the same recipe. Oil did not change Dubai, it just provided the resources (through the UAE) required to make investments real.

The fundamentals of this place can be found one hundred years ago and cannot be easily followed and applied: it requires reputation and credibility. We know that Dubai was declared a free port in 1903, but that was just the first step. For example, in the 1950s, Dubai started dredging operations to make the Dubai Creek a place suitable for bigger ships. The government took debt from Kuwait to finance the investment and issued the “Creek Bonds.” In other words, even when the context did not allow to finance investments with public funds, the north star to follow was so clear that Dubai’s ruler decided to take a considerable amount of foreign debt to make it real. 

Investments in Jebel Ali, one of the most important ports in the city, began in 1976 with the primary goal of improving logistics and efficiency (we are going to talk about this very soon), but also encouraging the settlement of new industries (Hvidt, 2007). Three years later, Jebel Ali was the first free zone in the city; forty years later, we can find more than thirty of them. In these places, companies can import and export materials and products exempt from any tax or regulation that could be present in the UAE.

Aerial view of Jebel Ali Port, Dubai

Between 1970 and 1995, higher taxes in Lingah and India, and the war and political instability in Kuwait and Bahrain, led many traders and business people to move to Dubai. The virtuous cycle (investments -> people coming -> investments -> people coming) was underway. 

The spectacular and magnificent boom came in the 2000s, driven mainly by construction and real estate in a context of globalization where multinational companies were setting regional headquarters worldwide. Dubai was the main attractive option in the region: flexible rules, cheap labor supply, and low barriers to entry and exit.

To take the dimension of this boom, let’s think that in 2000 Dubai had a GDP of $16.5 billion, and the goal was to duplicate it by 2010. They did not require ten years, five was enough: In 2005, GDP was already $37 billion (Page & Vittori, 2020).

Before coming to the UAE, I thought all the cities in this country were the result of oil revenues. I used to believe that every building and luxury place in Dubai was just the product of not knowing what to do with so much money. 

However, I did not know that Dubai never had oil in large quantities or that the intentions of creating an open city for global business began even decades before the first significant oil discovery took place. Of course, oil played a role in this story: the UAE found in oil exports the required resources to finance the investments in infrastructure that Dubai was needing to make the plans work.

If now I had to define Dubai in one word, I would say “services”. Construction, tourism, financial, legal, logistics, etc. Everything is about services. Of course, not everything is good about that, but we will discuss that aspect later.

Dubai was able to opt for this path – and not the other emirates – because it was mentally prepared to take advantage of oil through economic diversification even before oil was discovered.  This success allowed Dubai to create political independence from the capital city, Abu Dhabi, and consequently, Dubai had enough room to open new businesses with countries that were not on the radar of the UAE, such as Iran.

However, during the global financial crisis in 2008, Dubai was in trouble, and they needed to ask Abu Dhabi for economic assistance, and it came, but at a very very high price: the tallest building in the world, Burj Dubai, needed to change its name. The new term was going to be Burj Khalifa, in honor of the UAE and Abu Dhabi’s ruler. While it could be seen as a fancy random fact to know, it is also a good reminder: even with high diversification, oil can still say “check mate”.

References

Hvidt, M. (2007). Public–private ties and their contribution to development: The case of Dubai. Middle Eastern Studies, 43(4), 557-577.

Page, M., & Vittori, J. (2020). Dubai’s role in facilitating corruption and global illicit financial flows.

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