By Victor Bhoroma
Dubai is the capital city of the Emirate of Dubai, which in itself is one of the seven emirates (states) that form the United Arab Emirates (UAE). The emirates are former British colonies which got independence in December 1971 and formed the modern day UAE. Dubai is located in the Arabian Desert on the east coast of the Persian Gulf and is home to about 4.2 million people that come from over 200 nationalities. The city has a Gross Domestic Product (GDP) of US$109 billion (equal to Ethiopia or Kenya’s GDP) and five times the size of Zimbabwe’s economy. The city was remarkably transformed from a desert fishing port of the 1960s to a global trade hub in less than 50 years. Dubai’s transformation began with the discovery of oil in 1966 which helped accelerate infrastructure development, commodities trading and foreign investment into the city. Today oil revenues account for less than 1% of GDP and the majority of the city’s revenues come from Trade, Real Estate, Banking and Tourism.
In 2019, Dubai welcomed 16.73 million visitors and the visitors spent a whopping US$28 billion on goods and services in the city. Dubai has the region’s busiest international airport (Dubai International Airport) measured in total passenger numbers. It has over 148 jaw-dropping skyscrapers (Tallest in the world being the 830m Burj Khalifa) and 917 high-rise buildings (which are 3rd highest in the world) which underlines the rate of growth in real estate for the city in the past 20 years. It also has the world’s biggest shopping mall (Dubai Mall) and best inner city road infrastructure which makes driving and shopping experience a pleasure.
The relentless commitment to economic and infrastructure development has turned Dubai into the Middle East hub for global finance, information technology, real estate, shipping and trade. However, it is critical to look at the transformation of Dubai with economic lenses to understand why it breaks the record on a number of business aspects. How can a desert port so devoid of fresh water and natural resources (save for oil and gas) transform itself into an economic powerhouse so popular that most people think that Dubai is a country or capital city of UAE when it is not.
Low levels of taxation
To attract foreign investment in real estate and infrastructure projects, the ruler of Dubai (Sheikh Mohammed Rashid Al Maktoum) scrapped all taxes in Free Trade Zones (FTZ). The tax incentives usually include tax holidays of up to 50 years. Currently, there are over 30 industry-focused FTZs in Dubai that offer a combination of tax and business incentives. These range from health care, media, manufacturing, technology and internet. One such FTZ is the Internet city which hosts the Middle East headquarters of Microsoft, Hewlett-Packard, Google, Twitter, Facebook, LinkedIn, Amazon, Dell, Xerox and Canon, among others. Additionally, there are no withholding taxes, no capital gains tax and no personal taxation in Dubai (Just as the whole of UAE). The city does not impose social security on expatriates. Currently, there are no separate excise taxes levied in the UAE and this has benefitted Dubai on attracting expatriate skills especially in real estate development.
Up until 2018, companies invested in Dubai did not pay Value Added Tax (VAT) and sectors such as health, education, public transport and basic food items are still exempt from paying the 5% VAT rate that was introduced by the UAE government to shore up tax revenues after the slump in global oil prices. Over 70% of the VAT revenues goes back to service delivery in Dubai. The result of these generous tax concessions is that global finance flocks to Dubai and circulates in the economy as corporates spend most of their earnings on reinvestments which create jobs. The government is mainly funded from the profits of state-owned enterprises (SOEs), oil revenues and sin taxes on alcohol. The Zimbabwean government declared Victoria Falls as a Special Economic Zone for financial services and tourism. To attract global capital for the VFEX, the government needs to consider most of the tax concessions above with an eye for indirect economic benefits that will accrue to the town and country at large.
Free trade policies
As the center of Middle East Trade, Dubai’s maintains a free exchange and liberal trading system. The city streamlined procedures to process documents and reduced the time required to clear customs to less than 24 hours, through introducing totally electronic clearance procedures and a risk assessment system. Raw materials imported for value addition and intended for finished goods exporting benefit from Customs Duty exemptions. This also applies to manufacturers on importation of machinery, raw materials and spare parts used for industrial purposes.
Dubai does not apply export taxes, charges, and levies, other than a tax on steel scrap exports. The city applies a number of policies to promote exports, including a Free Trade Zones (FTZ) incentives as highlighted above. By simplifying trade protocols and giving incentives to corporates who value add for exporting in Dubai, the city attracted the biggest multi-national corporations (MNCs) who assemble and export from FTZs. The lesson for Zimbabwe is on implementing liberal trade reforms. Key is the streamlining of import and export procedures so that the trade becomes less bureaucratic and turnaround times are less than 48 hours. The government can actually scrap all export licensing fees or levies as a sustainable way of incentivizing exports into the region and beyond.
Good Governance
Administratively, the UAE is a federation of seven emirates, each with its own ruler. The pace of local government reform in each emirate is set primarily by the ruler. Under the provisional constitution of 1971, each emirate reserves considerable powers, including control over mineral rights and tax revenues. Dubai is a regional leader in the protection of Intellectual Property (IP) Rights, with ever evolving enforcement of copyright, trademark and patent laws. Dubai’s ruler issued eight principles that guide the governance in the Emirate. Apart from mandatory reporting on utilization of public funds by all state entities and local councils, the eight principles underscore the role of good governance on economic growth. The principles emphasize that rule of law guarantees prosperity and economic stability considering the role played by foreigners in economic development.
There is strict protection of investor property rights and enforcement of contracts by the government. For example, the Dubai International Financial Centre (DIFC) operates under a unique legal and financial regulatory framework to optimize financial sector growth and allow for free movement of capital in and out of the city. Failure to settle debt attracts prison sentences and hefty fines. In 2019, the city attracted Foreign Direct Investment (FDI) inflows worth over US$23 billion.
Under the uncompromising vision of Sheikh Maktoum, Dubai has strived to implement and develop a strict code of business ethics, a transparent government, an open marketplace and a desire to deliver best standards of living for its citizens. These essential ingredients for success, combined with political stability and a vision to play a key role in the future global economy have made Dubai one of the most attractive business and tourist destinations in the world. And its innovative policy initiatives mean that building a business in Dubai is straightforward. Foreigners do not need to understand the political dynamics of the emirate so as to invest or cut deals with political leaders to get government contracts as the Dubai Investment Development Agency (Dubai FDI), an agency of Dubai Economy handles all investment enquiries autonomously.
Dubai diversified its economy in the last 20 years in order to survive the decline of fossil fuels and fluctuation in global prices. The economic development story of the city Dubai proves that good governance, leadership and vision are the most critical pillars to economic growth in the modern world and natural resources are only facilitators to that development. Dubai outshines all low income and most middle income countries which boast of billions worth of reserves in oil, gas, diamonds, gold, platinum, cobalt and other natural resources largely because of its strong institutions, astute leadership and good governance. Without good governance, resources rarely lead to sustainable economic development as clearly explained by the paradox of the Dutch Disease.
Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.
