Middle East Economic Development: Oil, Dubai, and Beyond

Introduction to the Middle East Region

There is no hard and fast rule that defines what constitutes the Middle East. It traditionally includes countries or regions in Southwest Asia and parts of North Africa. The Persian Gulf is considered the main centre around which the area generally referred to as the Middle East lies. Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, Turkey, the United Arab Emirates, Yemen, and the Palestinian Territories are collectively known as the Middle East. The region rose to prominence because of its vast reserves of oil, and the economies of most of these countries received a significant boost based on that resource. However, with the passage of time the region has established its own distinct identity in the world. The Gulf region, with the UAE as a model of success, is now recognized globally.

Oil-Based Economies and Saudi Arabia's Rise

The Middle East is the region with the greatest oil reserves in the world. The reserves present in Saudi Arabia, Iran, Iraq, and Kuwait exceed those found in most other parts of the world. World oil supply is therefore mainly provided by large companies operating in countries with large reserves. Price is generally a market factor, but in the case of oil, prices are significantly controlled by the group of oil-rich countries that formed a cartel known as OPEC (Organization of Petroleum Exporting Countries). OPEC can greatly influence world oil prices. The first major oil crisis was faced in 1973 when an OPEC oil export embargo was imposed by many of the major Arab oil-producing states in response to Western support of Israel. The year 1979 brought the Iranian Revolution and another oil crisis. Similarly, the Gulf War also affected oil prices. This region has always been considered strategically important mainly because of oil. Some Gulf States within the UAE have gone beyond oil and created diverse economies. Initially Saudi Arabia was cited as an example, but its economy largely remained dependent on oil. Dubai, and to some extent Israel, adopted different approaches and now stand apart in the community of nations.

Saudi Arabia was initially considered a leading example of growth and development before other Gulf States emerged as clear winners. Saudi Arabia used its oil resources and the resulting revenues for the development of the country's infrastructure. However, the fall in crude oil export volumes as well as prices created cause for concern. The Saudi government responded by launching major expansion projects to add value to oil exports, helping to secure international markets. Petrochemical companies in Saudi Arabia even formed joint ventures with foreign partners in the sector. The Kingdom holds clear advantages in the form of low costs of producing oil and gas; therefore, when world demand falls its feedstocks can still compete for sales. Saudi Arabia continues to benefit from its oil resources, but it has also recognized that, like other states in the region, it must open its doors to the world economy and globalization.

"The Saudi government has also taken steps to encourage more private investment in the economy. Although progress has often been slow, the need to curb spending given the rising budget deficit, together with a growing conviction among a new generation of Saudi officials that subsidies — especially for utilities such as power and water — cannot be continued forever, is giving rise to moves to open up investment channels. The Al Zamil flotation, for example, was made possible by new regulations issued by the Ministry of Commerce that encouraged the merger and share offering. Privatization of the Saudi telecommunications sector is also a case in point" (Smith, 1998).

Changes in policy and business outlook are seen as necessary if Saudi Arabia is to maintain a competitive edge in the world market. No country can afford an inward-looking and closed approach. Today the country's integration into the global economy is marked by private businessmen and investors, initial public offerings (IPOs), mergers of public companies with smaller private companies, privatization of state shareholdings, and the involvement of private investment in utilities and infrastructure projects. These changes are essential to enhance the competitive edge regionally and globally, which could also open up more opportunities for Saudi investors in capital markets. Sustainable development and progress are clearly the goals of present-day Saudi Arabia, but it has to recognize that oil alone is not sufficient for the years ahead.

The Dubai Model of Diversification

Dubai's story starts with a man named Rashid bin Saeed al Maktoum, who saw potential in a small creek village on the shores of the Persian Gulf and borrowed millions of dollars from Kuwait to dredge the creek. He implemented his plans by building warehouses, roads, schools, and buildings, and his dream turned into reality with skyscrapers, a world-class port, and a colossal duty-free shopping complex. Today Dubai is building man-made islands, attracts more tourists than the whole of India, and has an economic growth rate that exceeds many countries. People from 150 diverse nations come here to work. Dubai has become a success story from the Middle East region and a model for others to follow.

Dubai, along with six other emirates, is part of the United Arab Emirates. It has emerged as one of the most exciting cities on earth. Tennis stars Andre Agassi and Roger Federer made the city famous when photographs of them playing an exhibition match on the rooftop helipad of the Burj Al Arab hotel spread across the globe. The Burj Al Arab is widely known as the world's tallest hotel. Dubai also features the world's tallest building, the Burj Dubai, which was under construction at the time of writing. Today it has become a shopping paradise where millions of people purchase everything from clothes to diamond-studded cell phones. Dubai International Airport is one of the busiest in the world.

"The United Arab Emirates, of which Dubai is part, has gone from being one of the most oil-dependent Gulf economies in 1980 to one of the least dependent. People returning to Dubai after a few years' absence say they hardly recognize the place as towering office blocks, housing estates, shopping malls and business parks spring out of the desert. Forty part-built apartment towers — the world's biggest single-phase housing project — loom over Jumeirah beach, along which tribesmen would lead their camels until only two decades ago. Advertising campaigns revel in superlatives to draw the eyes of the world to Dubai: the world's tallest tower, the biggest man-made islands, the richest horse race, the only underwater hotel, the only seven-star hotel, a ski slope in the desert" ('Dubai Shows Gulf There Is Life after Oil,' 2005).

Multiculturalism is one important aspect of the emerging Middle East and Dubai in particular. All kinds of eateries and restaurants — Italian, Chinese, and others — can be found throughout the city. Indians, Filipinos, Pakistanis, people from Arab countries, and people from Western nations comprise the workforce in Dubai, in both white-collar and blue-collar roles. The new cultural wave of tolerance allows foreigners to spend the late hours of the night in a pub while the call to prayer still fills the air five times a day. "Dubai's tolerance can also be a good thing. Alongside its bars and nightclubs there are mosques and churches and Hindu temples, and for a city with so many competing religions and nationalities, it is remarkably free of ethnic conflict. 'I don't know who is a Sunni and who is a Shia and I don't care,' Sheikh Mohammad told the author in a brief meeting. 'If you work hard, if you don't bother your neighbor, then there is a place for you in Dubai.' Even Israelis can do business — quietly — with Dubai" (Molavi, 2007).

Dubai Ports World expanded internationally when it purchased a British firm that managed six U.S. ports. Even though UAE ports host more U.S. Navy ships than any port outside the United States, the decision garnered a mixed response from U.S. experts. The apprehension was rooted in the 9/11 incident, in which Arabs were involved; however, since then the UAE has shown itself as a strong supporter of the United States in its war on terror. The management of Dubai Ports World dismissed those concerns, noting that their business is not restricted to America and that they could find ample business globally given their competitiveness.

In a world concerned about rising Islamic extremism, Sheikh Mohammad, the current ruler of Dubai, is known as a modernizer. Parallels are drawn between Sheikh Mohammad and King Abdul Aziz of Saudi Arabia, who used oil to build the foundation of modern Saudi Arabia. Sheikh Mohammad can also be likened to a CEO who manages his emirate like a major corporation, applying modern management principles. He practices participatory management by visiting workplaces and construction sites rather than confining himself to boardrooms. He is known to make tough decisions on the spot — rewarding employees for good work while also removing poor performers. Another important aspect of his policy is the encouragement of women in the workforce; he not only hires women but actively supports their career advancement and broader participation in business. He is also a strong supporter of foreign-educated locals, encouraging these modern and educated individuals to reduce bureaucratic inertia. He has a clear vision for his emirate and knows how to inspire others to share it.

Dubai has created its advantage by building one of the most dynamic business environments in the world. This has been achieved not only through iconic buildings, artificial islands, and luxury hotels, but through facilitating all the necessary components of a sound business environment — including laws and regulations, no corporate or income taxes, clear property and ownership rules, and a liberal social environment. Dubai's stock exchange is also set to make waves in world financial markets. "The new Dubai International Financial Exchange (DIFX) expects to open its doors to issuers and investors of any nationality. The new bourse will offer settlement and clearing facilities and corporate governance standards on par with prime exchanges, notably New York, London, and Tokyo. It will target potential issuers in the UAE, other GCC states, the Levant, North Africa, Turkey, and India. Steffen Schubert, chief executive of DIFX, explained: 'Our role is to allow companies an alternative to listing in Europe or the U.S., and to list on a market that is in the same time zone'" (Siddiqi, 2005).