The experts of the Economic Policy & Research Center (EPRC), have recently issued a study about the relationship between economic growth, export structure and development strategy of Dubai. The study stems in terms a series of economic policy researches that EPRC involved. These studies are focusing on macroeconomic issues that have strategic implications to the local economy.
The methodology the study adopts is based on the comparison between Dubai and similar city economies such as Hong-Kong and Singapore. These two economies share Dubai’s view of becoming an international economic and financial hub, enjoy a spectacular geographical location alongside trade routes and powerful neighbors, and are relatively poorly endowed in terms of territory and natural resources on which to base economic development. These three economies share, in addition, a common experience of being very open economies that benefited from substantial financial resources and massive labor inflows.
The study collected data on value added in production for thirteen sectors of the economy of Dubai: Agriculture; Oil, mining and quarrying; Manufacturing; Electricity, water and gas; Construction; Trade; Restaurants & Hotels; Transport, Storage & Communication; Real Estate; Social & Personal Services; The Financial Corporation Sectors; Government Services Sector; and Domestic Services of Households. They comprise almost all of GDP, as the sectors we were forced to exclude are of very small size (e.g., government services).
The study shows that Dubai’s economy witnessed extraordinary expansion in the past 35 years. Between 1975 and 2008, its output expanded by a factor of 11 in real terms. It can be seen, nevertheless, that the pace of economic growth has not been smooth: while annual GDP growth was sustained in the 1975-1990 at around 6%, it was in the last 15 years that Dubai´s gross domestic product (GDP) grew at an extraordinary pace for international standards: almost 9% per year. If one only focuses on the period 2000-2008, annual growth rates have been on average above 10%.
Few countries in the world have been able to sustain such extraordinary pace of growth for an extended period of time.
It is also shown that economic growth has not been smooth either in Dubai or in the other city states. GDP growth in Hong-Kong and Singapore was much faster in the period 1975-1990 than in the following two decades. This is because countries become rich their growth rate tends to converge to that of the developed economies once the catching-up process is completed. That seems to be the case of Hong Kong and to a lesser extent Singapore. Economic growth in Dubai, on the contrary has been much faster in recent years than in the period 1975-1990, without traces of slowing down.
However, experiences of these comparable countries show the following differences:
• Capital accumulation: while on average all three economies accumulated capital at the same rate, in Hong Kong and Singapore accumulation has been smoother than in Dubai, where accumulation was relatively slow in the period 1975-1990 and quite fast in the following 18 years.
• The use of the labor force: in Dubai the expansion in the labor force has been much higher than in the other city states in both periods. It should be noted that the labor markets in these three economies operate in a very particular form: in Dubai and Singapore work permits and visas are issued by the authorities for a substantial fraction of the labor force, while in Hong Kong special treatment for mainland Chinese workers and internal labor markets largely determines employment. In all three cases, the authorities have a tight grip on immigration and are able to influence –if not control— the characteristics of the labor force.
• The accumulation of human capital, which has been similar in three economies in the whole period, but markedly higher in Hong Kong and Singapore in the period 1975-1990. The latter is the period of higher GDP growth in these indicating the importance of human capital in fostering economic development.
• Total factor productivity: TFP growth in Dubai has been rather low; while in Hong Kong and Singapore it has grown at around 2% per year, roughly in line with the developed economies. This is a very worrisome feature for much of the empirical evidence indicates that sustained growth is largely dependent up significant improvements in factor productivity.
In order to understand what lies behind the fast growth of Dubai, the study decomposes GDP growth according to its “sources”. The sources of economic growth in Dubai, as in any other economy, are a combination of physical capital accumulation, expansion in employment and its capacities, and increase in total factor productivity. It can be seen that these factors evolved in tandem with GDP during most of the period with two exceptions –the early 1980s and the 2000s.
While the expansion of economic activity in Dubai is remarkable, output per working-age person has not evolved equally fast. This variable has been used, as opposed to GDP per-capita, because it is relatively insensitive to important changes in demographic factors that characterize the development of any economy and also because it is immune to transient phenomena in the labor market (unemployment waves). Output per working-age person is, therefore, a measure of the average productive capacity of the working force in an economy and its evolution indicates an important feature of Dubai’s development. It can be seen that average productivity remained stagnant for a long period of time (1987-2004) after a substantial decline in the early 1980s.
Understanding the reasons for the slow growth in average labor productivity becomes an essential task to understand the working of Dubai’s economy. In turn, this would allow us to propose policy reforms to improve the performance of the economy. It has become customary to an additional measure –dubbed multifactor, or total factor, productivity— to identify the factors of production that are the major or minor sources of growth. Hence, TFP becomes a main measure of economic performance, in addition to the impact of technological advances. It can be affected by the quality of macro and microeconomic policies and transient phenomena, such as commodity booms or unemployment cycles.
To some extent, the measurement of GDP and consequently that of TFP are sensitive to transient phenomena. In the case of Dubai, there are two periods need careful analysis: the early 1980s and the late 2000s. There are noticeable cycles in both variables: these could be the result of “expenditure booms”. The latter, in turn, could be associated with the oil-price shock of the late 1970s and the real-estate/financial boom of 2005-2008. It is worth noting that by itself an oil-price shock should not affect TFP calculations if national accounts are properly measured (double-deflation national accounts are insensitive to transitory price shocks); however, it has an indirect impact on imports and consumption via income effects.
It can be seen that, while there is some effect derived from the real estate and financial boom in the mid 2000s, the main differences between TFP and GDP per working age person stem from the evolution of the oil sector in the late 1970s and early 1980s. These results clearly indicate that the decline in oil production was a major, long lasting, negative shock for the economy of Dubai. In fact, There was a continuous and accelerated decline in the share of the oil-producing sector in the economy, which saw its participation dwindle from almost 50% of the GDP in the early 1970s to a mere 2% in the late 2000s. By the same token, Dubai seems to have achieved a spectacular restructuring in production, substituting the ailing oil sector for a robust service sector, including finance, trade and real estate.
Aggregate measures of productivity and their evolution are useful in identifying the relative weakness of Dubai´s economy but do not bring light as to contribution of the different sectors to economic activity. An economy’s aggregate TFP is a weighted sum of individual sector TFP levels. But economy-wide TFP growth is not simply the weighted sum of sectoral TFP growth rates. It also reflects all the changes in the structural composition in the economy. Thus, an important source of economic growth is the benefit of moving labor from relatively unproductive to relatively more productive sectors. We would like to explore the evolution productivity in these sectors and compare their efficiency levels with those in other economies, in particular Singapore and Hong Kong.
The period of this study is split in two segments corresponding to the 1990s and the 2000s. Several issues arise. The decline in oil production is apparent with negative growth rates in both sub-periods. The very slow growth in electricity, water and gas as well as in government services indicates one potential weakness of the Dubai economy: these sectors could become bottlenecks in a near future as they link directly to the provision of basic services required for sustained economic growth.
On the contrary, the vigorous expansion of services is noticeable in all sectors but surprisingly high in trade commerce and real estate in the 2000s, where annual growth rates of 25% indicate that value added duplicates every three years. Of course, these growth rates are most likely unsustainable. In the rest of the sectors it is noteworthy the sustained expansion of manufactures with double-digit growth rates in both periods: while in 1990, this sector accounted for less than 8% of total GDP, by 2008 it has risen to almost 20%.
It seems that there are two types of sectors: those that lead economic growth and those that lag the expansion of global activity. Investment and capital stock accumulation has been quite high in both sub-periods in all leading sectors: manufacturing, construction, trade and commerce, hotels, transportation, and financial services. On the contrary, three sectors show evident signs of backwardation: oil and mining, electricity, water and gas and government services. On the latter two, it should be remembered that population and the labor force in Dubai have expanded dramatically in the past two decades at around 7% per year, indicating that the economy has underinvested in per-capita terms.
Naturally, low investment rates could be matched by a more efficient use of resources and higher labor productivity. Unfortunately, this does not seems to be the case in the lagging sectors: the annual growth rates in employment in these sectors are much higher than the growth in sector value added indicating that average productivity levels is actually declining. On the other hand, the growth in employment in the leading sectors is sustained and strong, although in the second sub period it seems to have declined to some extent in trade and commerce. It is remarkable, nevertheless, that in the oil sector –where value added all but disappeared over the last years— employment growth has been quite significant in both periods.
As mentioned, in three sectors productivity growth has been negative in the entire period (oil, mining and quarrying; electricity, water and gas: and government services). The case of the oil industry has been already discussed; negative TFP growth is consistent with lack of investment in physical capital and a substantial expansion in employment. In the other two sectors a similar, yet milder, pattern explains the negative productivity gains: a combination of the substantial growth in employment with little investment in physical capital effort that yields very minor increases in production and value added.
Finally, in the remaining sectors, total productivity growth has been insignificant in the entire period (agriculture and real estate and financial sector). However, their trajectory differs dramatically: while in agriculture productivity have declined over the years, in the real estate and financial sectors the path has been the opposite. Naturally, the agricultural sector is very small in Dubai, while the real estate and the financial sectors have been at the cornerstone of recent growth acceleration.
It is useful to look at the evolution of average labor productivity in the different sectors of the economy of Dubai and compare them to those in the other city states for two reasons. First, to isolate common shocks that led to higher productivity growth in all economies in the world. For example, the digital revolution in telecommunications led to significant investments and substantial productivity gains in most countries in the world and, thus, one should not jump to conclusions on the Dubai case without scrutinizing other economies in similar conditions. Second, to identify development patterns that differentiate Dubai’s case from those of the other city states.
It can be seen that at the sector level, Dubai’s experience resembles more that of Singapore than that of Hong Kong. In the latter several sectors have experienced very low or even negative productivity levels in the last two decades: construction and manufacturing –once the cornerstone of development in Hong Kong— ceased to be leading industries and were taken over by services (in particular trade commerce and the financial sector). In construction, there is “heavy reliance on foreign workers, use of pre-cast component, and increase in construction accidents were factors hampering to TFP “growth. On the other hand, due to labor cost considerations most manufacturing firms in Hong Kong relocated to Mainland China. On the contrary, in both Singapore and Dubai these sectors had been engines of growth, showing a very similar expansion path.
Likewise, the transport and communication sector has evolved in a similar fashion in Dubai and Singapore, growing much faster than in Hong Kong. Hong Kong’s growth weaknesses in these sectors vis-à-vis Singapore had already been identified by Lee and Sheperd (2006) which indicate that lack of competition and a weak regulation could be the causes of the marked differences between the two city states’ performance.
One main difference in labor productivity growth between Dubai and the other city states is in the utilities sector (water, gas, and electricity). On average productivity levels in Dubai remained stagnant over the period 1991-2008, while there has been vigorous growth in Singapore and Hong Kong. To the extent that this sector indicates the availability of infrastructure and an adequate pricing of basic inputs to production, one should be concerned by the low levels of efficiency gains shown by Dubai.
Finally, in all three economies the services sector –in particular the financial sub sector— is a crucial component in the development strategy. It is not surprising to find that labor productivity growth was negative in the financial sub-sector in Dubai and Hong Kong in the 1990s, a year marked by the Asian crisis. Singapore managed to perform better. Likewise, the vigorous growth in the 2000s in all economies matches previous findings.
It can be seen that the notable expansion of this sector in Dubai –which comprises real estate and banking— is not substantially higher than that on the other two economies, perhaps reflecting a global trend and not a “bubble” as has been popularly described.
On the other hand, there is wide disparity in growth rates in the trade commerce sub-sector. Dubai´s data indicates a negative growth rate in productivity levels in the 1990s, a period of relatively low expansion in economic activity. On the contrary, growth rates in productivity in the 2000s were extraordinarily high, even when compared to a very fast growth economy such as Singapore, in a period where value added also expanded quite fast. On the contrary, in the Restaurants and Hotels sub-sector growth rates in productivity levels are quite modest, in close resemblance of the cases of Singapore and Hong Kong. In fact, there is a slight decline in productivity levels in the last decade in Dubai.
Dubai´s economic growth in recent years concentrated in “non-traded goods” industries. We include in the latter construction, real estate, personal services and utilities. Clearly, in these economies manufacturing and services are largely directed towards foreign sectors. Note, then, that in Dubai the annual growth rates of the non-traded goods industries has been much higher than in Singapore or Hong Kong, while that of the traded-goods sectors has been similar, at least to Singapore.
The evolution of TFP and economic growth points at the weaknesses and strengths of the economy of Dubai in dynamic terms. The capacity of the different sectors to become the sources of future growth, nevertheless, is determined not only by the ability of the entrepreneurs in acquiring and developing new, more efficient production technologies and managerial practices, but also by their competition in international markets. In this context it becomes interesting to evaluate also productivity levels in Dubai and its closer competitors (Singapore and Hong Kong) and determine if there is room for further productivity gains that would boost economic growth in the future.
The study arrives at a number of conclusions, importantly: after starting on a relative weaker foot in 2000; Dubai has managed to catch up with higher labor productivity levels in Singapore by 2007 in diverse sectors such as: retail and wholesale trade, construction, transport and communications, and the financial sector. The growth in manufacturing, though vigorous, has not been enough to close the gap with Singapore and there remains space for future improvement in Dubai. The more backward sector seems to be that of social and personal services.
At the end, the study ends with a number of policy recommendation to improve exports and economic growth, namely:
• To draw out an alternative road map for Dubai’s growth based on knowledge-based economy strategy. The driver of this strategy is enhanced human capital stock through stressing on education and labour market, in addition to establishing clusters in various industries particularly industry and knowledge.
• To increase the technology level and export sophistication index of Dubai’s exports.
• To draw out export strategy that focuses on the quality of exportable products.
• To intensify export development in the way that targeting the high added value products.
• To create new production lines for export, including some services, such as real estate-related services.