Business Capacity & an Adrenline Overrun

02 Nov, 2002

Adam Smith, last Millennium's eminent economist and father of the 'laissez-faire' (open market) theories, would have been a most happy man in Dubai, if he was still living (and will not turn in his grave) as Dubai exemplifies many of his theories. A robust, free market, pro-business administration and what many would call the 'Dubai Inc.' being constantly on an 'over-drive', from the chief executive downwards! A lesser mortal would collapse in fatigue at the constant packing of events, conventions and the new initiatives galore within a calendar. It would appear that everyone on the Dubai bandwagon (no offence meant!) is on a perennial 'high'. There are the cynics that have often wondered whether Dubai tries to overreach itself and some of them call this phenomenon as massive monumentalism; that might prove to be mistakes of Himalayan proportions. Then they are basing it on the fact that Malaysia's airport, the cyber super corridor or its Petronas-type structures, or the massive physical infrastructure in Saudi Arabia and the Disney-World in Paris, are all instances where giant steps were taken and the subsequent capacity-utilisation have been less than satisfactory; proving them to be somewhat unviable propositions. However cynics and doomsayers have never deterred Dubai's determined drive to be the 'hub' of the happenings in the region!

Dubai's record in implementation is decidedly different, be it the Dubai Aluminium Company or the ports at Rashid and Jebel Ali in the yesteryears, to the more recent creation of the Dubai Internet and Media Cities, the various hotels and the high-rise buildings, which have all seen their capacity filled up sooner or later. The project-owners regard them as pure real-estate propositions and they went on to prove them to be viable. However, many of the companies in the Dubai Media (DMC) or in the Internet City (DIC) may have created excess capacity in their own business vis-ŕ-vis the demand potential in that line of activity e.g. publications, printing periodicals etc. in DMC or marketing of technology services in DIC. The size of the market in Dubai, UAE or the region may not be adequate to absorb this huge over-capacity creation or warrant a mushrooming of players. That is not the fault of the project initiator however; who has delivered in his promise, in terms of providing quality infrastructure, superb ambience, a lifestyle to match in the City, communication and connectivity of world-class standard and the like. This is where it is for the strategic planners to evaluate the longer term impact and therefore may have to be assessed by the authorities in Dubai. It is one thing to build beautiful edifices and initially attract by sheer promotional hype and hoopla, the best and the strongest in the world. The domestic economy alone may not fully take up the arrivals of so many in the various free zones. Those that wish to do business elsewhere in the region face some cross-border hurdles.

This is where realistically and some might even say cleverly, Dubai is now thinking in terms of regional networking, when it talks of a few billion people; a mass-market available to companies operating from Dubai or a few-trillion Dollars of GDP if one were to aggregate Saudi Arabia, the Indian sub-continent and Egypt. By establishing networks and communication connectivity, companies can do business from the comfortable tax-free environment of Dubai.

This point was reinforced at the Dubai Strategy Forum last week, when it was said that a hub requires its own spokes i.e. a network for reaching out sensibly and strongly. This valid point has obviously been recognised by the authorities; given the theme for this year's Forum. But much further work needs to be done by them and the MNCs that flock to Dubai. Some research will have to be done to identify the three key markets. It would appear that Saudi Arabia, India and Iran would stand out to be the largest natural markets for those wanting to operate from Dubai. These countries have the GDP and the purchasing power on the one hand and yet lack, internally, the resources for trading and sourcing on a global scale. This is partly because of the stifling bureaucracies at home but also because of taxation and the poor quality of living in their home base. This lethal mix can deter even the best and the most friendly MNCs, from operating in those countries. Dubai has the wherewithal to exploit these weaknesses and benefit from the nimbleness, cosmopolitanism and superior physical and communication infrastructure.

Nevertheless, Dubai will have to reach out and perhaps, enter into service agreements with these trio (India, Iran & Saudi Arabia); similar to what Mauritius has done in terms of avoidance of double-taxation treaties. Countries like India, China, Pakistan and Indonesia have exempted or permitted Mauritius to be a low-tax transit route for huge investment flows into their countries. A similar recognition will have to be extracted by Dubai from India, Iran and Saudi Arabia, so that businesses that operate from here, are given free access to those markets and are not ostracised or penal tariff levied on them. This will inevitably, require a little bit of give and take. These countries will want to cut out middlemen or intermediaries, operating out of Dubai, as it might just add to the cost of the goods and services and take away what they think belongs to them! On the other hand, they are paying the price for a certain high quality and risk-taking by Dubai entrepreneurs and it can be adequately recognised, recorded and documented by way of appropriate agreements. This process will considerably enhance and legitimise Dubai's role, not as an intruder or unwelcome competition, but as a catalyst, conducive to enhancing trade, business, investment flows and therefore an ideal partner city for these three countries. Dubai can fulfil the role that Hong Kong performs for China and its Hinterland.

The laissez-faire of Dubai has resulted in significant capacity being created in most of the businesses, where there are too many players for too few domestic demand components; which, given the small population, is difficult to stoke up. Regional demand is huge both in value and in deal tickets.

While free enterprise and robust market-led capitalism may symbolise the ultimate in a city-state's business objectives, they have their pitfalls. They tend to create excess capacity during good times and may unfortunately, lead to a boom and bust cycle; unless cushioned, as Singapore tends to do, by active market intervention. That model may not work here, as many will resent the paternalistic and overbearing attitude of the Singapore bureaucrats, even if they intend to or prove to be helpful for the businesses in the long term. Singapore itself, has changed its attitude now, to one of dialogue rather than a dress-down disciplinarian approach.

Similarly, it would not help to have a highly-planned and regimented economy but nevertheless a research unit at The Executive Office or the Strategy Forum or the Dubai Economic Development Dept; should do industry and sectoral studies and monitor how much capacity is being created in each industry or trading activity segment, be it in hotels, real estate, construction, contracting, printing, telecom, etc. This would lead to a more rational allocation of resources at the macro-economic level. Through incentives, the capital flow and capacity creation can be nudged up or down. These can be good background dossiers, for the key authorities and businesses to base and to make decisions. This will save the considerable pain of someone starting an industry or a business venture on a limb or with a wing and a prayer! and then closing it within a year or so, because he has got it completely wrong. Such data collection and statistics, if made on a transparent basis, say published in the Net, will enable new businesses that are contemplating a foray into an activity here, to consider the pros and cons, on an informal basis. Otherwise, Dubai's strong business encouragement and larger than life projections of business prospect, thanks to the media, may lure many to come and set up, only to face disappointment later, because the competition becomes cut-throat and they are unable to sustain. Such a denouement could do some reputational harm.

The authorities have, thus far, been consultative, pragmatic and proactive. That wisdom will have to include periodic stock-taking on a more realistic basis of what has been achieved and how the pitfalls and problems can be mitigated; so as to fine tune the whole process and move to a higher plane in the economic comity of national and city states.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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