Thursday
Aug 28th
| Turning to Dubai for Ideas |
|
|
|
|
I’ve been doing some thinking recently and thought that this week’s article was a great way to share it. What is our path beyond diamonds? The need for diversification, though not urgent, is inevitable, and it’s up to us to find a renewable solution that will carry us through for years to come. A country that I believe we can look to as a role model is the emirate of Dubai in the United Arab Emirates. This small city-state in the middle of the desert had very little going for it till the discovery of oil. As early as 30 years ago, Dubai’s population was smaller than that of Gaborone’s and its economy was nothing to write home about. Today it’s home to more than three million people and is a global economic force. While not even a large producer of oil, Dubai managed to successfully use its limited oil wealth to diversify its economy, enrich its citizens, and place itself on the world map. While most oil rich nations enjoy their easy wealth, many have become complaisant with this easy source of revenue owing to seemingly limitless supplies. They have failed to liberalize their environments, attract foreign investment and diversify their economies. While they enjoy $140/barrel oil prices today, their failure to explore other avenues will some day return to haunt them as supplies dwindle, newer oil wells are discovered or alternative energy kicks off. Today, oil accounts for less than 5% of Dubai’s GDP, and the nation has made all its citizens relatively well off, truly making it a model to look up to. How can we take a leaf from the emirate and create our own diversification plan? Everyone knows that our government has been pushing for diversification for several years and has been successful in many instances. The IFSC is starting to pick up pace as the continent begins to grow as a whole. The DTC was a brilliant concept of downstream integration, and this is undoubtedly a great first step. But in the long run, diamonds and diamond related industries should account for less than 10% of our GDP; but how? Sovereign wealth funds – Many countries that have very large foreign exchange reserves that originate from a single source of income create investment vehicles known as sovereign wealth funds. A good analogy is to consider forex reserves like keeping your nation’s money in a bank, while wealth funds aggressively invest in large multinational companies. It’s a relatively new concept that has gained a lot of attention recently when many sovereign funds rushed to buy financial companies whose stock prices had been badly affected by the US credit crunch. Dubai’s ‘Istithmar World’ fund has rapidly grown since inception in 2003, and has made the emirate an investment powerhouse in global financial markets. Wealth funds, if managed and invested properly, can yield phenomenal returns in foreign exchange, help stabilize the economy from fluctuations in commodity prices, give smaller nations significant power over global markets and diversify the nation’s economy. Botswana’s massive $10 billion reserve could strongly influence global economies in a way that very few other nations can. More and diverse Free Trade Zones – Dubai’s diversification was originally fueled by free trade zones that encouraged companies to set up their bases, much like the Botswana IFSC, in Dubai to enjoy lower or sometimes even zero percent tax. Their rationale was that forgoing tax revenues today would increase foreign investment and boost the economy to come back again as tax revenues indirectly. Today, apart from their own IFSC, much like ours, they also have similar thriving free trade zones for IT, Media, Healthcare, Biotech and Research. Infrastructural boom – Dubai’s government recently pumped billions into funding massive world scale projects to kick-start the construction market. Dubai, a place that barely existed 40-50 years ago today has the world’s largest artificial private islands, largest and best hotel, tallest building ever, largest theme park (twice as big as Disney world), largest indoor ski-resort and largest mall just to name a few. All this construction fueled a residential boom; the city’s once barren skyline is lined with cranes and high rises. On the other hand, there are also things we can learn not to do from them. Dubai has been accused of having poor human rights records and in the pursuit of economic growth, the emirate has been accused of ill treating workers. Secondly, they’ve grown their economy at an unprecedented rate; perhaps unsustainably too fast. To ensure steady, long term progress, development and stability, it’s best to maintain a ‘goldilocks’ economy, a term derived from the popular children’s story, to mean an economy that grows at the right pace; ‘not to hot, but not too cold’. Economic cycles of boom and bust are almost guaranteed, and the larger the boom, inevitably, the larger the bust. I’m sure that some day we’ll all see Botswana grow to be a strong and diverse regional, and perhaps global contender; and if there’s one message we can take from Dubai, it’s to set the bar high, think global and act local. We’re blogging! Read more and post your comments online at www.arjunparameswaran.com |
| < Prev | Next > |
|---|
