November 1, 2017 / 2:33 PM / a year ago

Breakingviews - Dubai demonstrates the distance ahead of Saudi

NEW YORK (Reuters Breakingviews) - The bustling metropolis of Dubai should not, by rights, exist. The most populous of the seven absolute monarchies that constitute the United Arab Emirates has only modest oil reserves. To generate electricity it relies on importing natural gas - especially from Qatar, with which it severed diplomatic ties in June. And it has virtually no natural fresh water. Yet Dubai and its population of 2.7 million people now boast GDP of around $40,000 a head, according to the government of Dubai’s Statistics Center.

The near 33 million people living in neighboring Saudi Arabia, by contrast, account for an average GDP of less than $22,000 a head, according to the International Monetary Fund. Crown Prince Mohammed bin Salman wants to improve on that, judging by a goal unveiled at last week’s Davos-in-the-desert conference, entitled the Future Investment Initiative, to create a regional financial powerhouse – an event which drained Dubai of many of its business and financial elite for several days.

Saudi Arabia can learn much from Dubai, which the Banker magazine just last month anointed the world’s 10th-biggest financial center. That feat is now splashed across twin thin electronic message boards outside the Gate Building, the heart of Dubai’s financial markets. Around the corner Nasdaq is building its new regional headquarters. Riyadh doesn’t even make the publication’s ranking of 57 cities.

Dubai’s success stems in part from its relative dearth of oil and gas, which account for less than 5 percent of GDP. That forced the emirate to build a more diversified, service-led economy than most of its neighbors, from its ports operation to tourism, from high tech to business and finance – and set up a number of free economic zones to encourage development.

Construction is back as a big economic contributor, too. The city is already home to some of the most eye-catching skyscrapers – including the Burj Khalifa, which at 2,722 feet is the world’s tallest. It was completed in 2008 towards the end of the last real-estate boom, when it was often said that 25 percent of the world’s operational cranes were in Dubai. That statistic is doing the rounds again, even though its veracity has long been debated - some put the past and current tally closer to 5 percent. But the surge in the bricks, mortar and, increasingly, glass business is unmistakable.

Dubai has some successful home-grown businesses, too, not least the Emirates airline, which routinely wins industry accolades. Its airport is also the busiest in the world based on the number of international travelers who fly through it, according to Airports International Council.

The emirate is relatively accepting of Western culture, too. Consumption of alcohol is allowed under certain conditions; the dress code is far less proscriptive than in some other Arab countries; and women are treated far more fairly, from being allowed to drive to holding government office and senior private-sector roles.

That is one of the most important factors behind Dubai’s rise: its economy relies on foreigners, and not just as tourists. Fewer than 10 percent of residents are Emiratis and the ratio falls each year. The UAE as a whole recognizes the issue, too: early last year it created the Ministry for Tolerance – as well as the Ministry for Happiness and Wellbeing. It sounds Orwellian, but the stated aim is to foster an inclusive society, with Sheikh Mohammed bin Rashid Al Maktoum - UAE vice president and prime minister as well as ruler of Dubai - noting that “when the Arab world was tolerant and accepting of others, it led the world ... in science, knowledge and civilization.”

Economic success has come with its costs, though. There are still strict rules against both homosexuality and sex outside marriage; a British man was recently jailed for brushing against a German man in a bar, for example, before Sheikh Mohammed pardoned him last week. The lack of bankruptcy laws gives an incentive for the indebted to leave the country rather than restructure what they owe. Labor and business laws are either non-existent or ill-defined enough to make investors worry they are insufficiently protected, too – although the legal framework is stronger for companies incorporated in the Dubai International Financial Centre.

The environment has paid a price, too. Per capita, Dubai belches out just shy of 20 tonnes of carbon emissions a year, making it a top-five polluter by that metric and worse than the United States, Australia, Russia and China. A third of the emirate’s tally stems from using fossil fuels to provide energy and water, 90 percent of which has to be desalinated before use.

The government has been increasing efforts to address that in recent years, committing to reducing water and energy use by a third and generating a quarter of its electricity from renewable supplies by 2030, by which time its population may have doubled. It further intends to reduce emissions by 75 percent by 2050. At the fourth annual World Green Economy Summit in Dubai last week, Saeed Mohammed Al Tayer, chief executive of Dubai Electricity and Water Authority, said it was launching a 2.5 billion dirham ($680 million) green fund as part of a previously announced 100 billion dirham fund.

That’s peanuts compared to the $500 billion Saudi’s crown prince pledged last week to build NEOM, a 26,500 square-km futuristic city on the Red Sea ripe for developing solar and wind power.

Dubai, though, despite its drawbacks, offers an atmosphere far more conducive to success. It needs that to continue: a service-based economy requires more than just its almost 3 million people to thrive; it needs to export its skills.

Saudi Arabia’s latest push to expand its economy should provide yet more customers – early morning flights from the emirate to the kingdom and the return flights in the evening are already packed.

Relations between the UAE and Saudi Arabian governments are closer than they have been for years. That’s evident not just in matters of state like joint participation in both the war in Yemen and the boycott of Qatar. It also shows up in everyday life: last month, for example, mobile phones across the UAE suddenly displayed “UAE KSA TOGETHER” where the carrier’s logo usually resides, in the run-up to the 85th anniversary of Saudi Arabia’s founding.

Of course, if Saudi Arabia significantly ups its game, Dubai would have a serious challenger to its status as a regional financial hub. That, though, would be a long way off.

An aerial view taken from a sea plane shows Swiss pilot and original Jetman Yves Rossy (front) and Vince Reffett flying over Dubai's Palm Island, Dubai, United Arab Emirates May 12, 2015.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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