DUBAI is one of the seven cities (or emirates), which make up the United Arab Emirates (UAE). In 1930 its (Dubai) population was a mere 20 000 inhabitants, although it is currently a home to 3,6 million.
The town historically survived on fishing and pearls, which were retrieved by local divers, who then traded them with merchants from around the world that travelled to its coast.
Between the 1930s-40s, the pearl trade suffered heavily, due to the development of cultured (artificial) pearls and the town's economy slumped.
The slump was made worse by the negative effects of World War II. However, since it came under the visionary leadership of Sheikh Rashid Al Maktoum in 1958, the city's fortunes began to change for the better.
Dubai is now one of the richest cities in the world, and significantly contributes to the UAE's wealth, which has become one of the 20-richest countries, globally, with a GDP per capita of round US$54 000.
One of Sheikh Rashid Al Maktoum’s prominent projects, during his early years in power, was the deepening and widening of the city's main bay (the Dubai Creek), which enabled it to accommodate modern ships.
To achieve this, the Sheikh had to borrow, with various reports explaining how the project was a huge risk, which would have cost the city dearly, if it had not been successful.
The project's success, led to more ships docking at the port, with a similar increase in gold and other merchandise re-exports from Dubai to the rest of the world. This also increased the number of its local people in employment or involved in trade activities.
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Dubai is located at the crossroads (central part) of the furthest distances from Africa, Europe and Asia, whilst it also provides convenient access to the rest of the Middle-Eastern region. This is why re-exporting became an essential part of the country's economic activity.
This means that various traders have established their businesses there, so that they can access finished goods and raw materials from the rest of the world, at a faster rate and for decent costs, compared to other extreme locations.
After the goods enter Dubai, the various traders and manufacturers, can then add value to them (even through mere packaging and labelling), and then re-export to other parts of the world, for a profit.
The Sheikh also went on to use government revenue, which largely comprised charges to local and foreign traders, pearl and fishing revenue, at the time, to build roads, bridges, schools, clinics and multi-storey buildings.
This was before the discovery of oil. The ruler knew that for trade and economic activity to thrive, there was a need to have efficient transport networks and ports, alongside a healthy and knowledgeable population.
Private companies were also established to build and operate more infrastructure, including power stations, telephone networks, more ports and airports.
The infrastructural development led to an increase in the number of European and Arabian businesses setting up their operations there (in Dubai).
Oil was then discovered in 1966, about eight years after Sheikh Rashid Al Maktoum had assumed leadership.
The major advantage that the city had at that time, was that it already had a vision of expanding its infrastructural base.
This meant that the government’s portion of oil revenues already had a productive assignment to fulfil. The increase in income from the oil, thus meant that, more roads, buildings, social and other infrastructure, could be built.
The ruler went on to also borrow for other infrastructural projects, even in a time of general financial well-being, on the part of government resources. The commitment paid off.
By now (2024), the city has managed to diversify its economy such that, even oil contributes less than 1% to its total economic activity (GDP). Its (oil) importance has dropped from a height of providing as much as 24% of GDP in 1990.
Over the years, the infrastructural and economic development has also led to an influx of immigrants, foreign employees, foreign investors, alongside more housing, office and hospitality real-estate projects, meant to serve the growing population and visitors to the city.
As it stands, it is reported that Dubai has the highest number of five-star hotels, of any other city in the world, and is the fourth-most-visited (city).
Tourists are drawn to the city by the lure of shopping (both cheaper and elite goods), unique architecture, hot weather (favoured by Westerners) and conferencing services, among others.
One of the most iconic features pertaining to Dubai's economic progress, was introduced in 1985, in the form of Free Trade Zones. The city has more than 26 designated locations, which provide "Free Zone" benefits, mostly to exporting companies.
Corporations, which are based in the free zones, can be 100%-owned by foreigners (unlike 49% for Dubai's mainland), capital can be repatriated without exchange controls, whilst the same businesses also enjoy full (100%) retention of foreign currency earned, in most cases.
Entities operating in the zones also pay little to no corporate tax at all.
This is a further reprieve from the already soft taxation regulations in the UAE (including Dubai). Businesses not covered by the Free Zones pay zero tax if they earn below AED375 000 (US$102 000) per year, whilst those which earn above that amount, pay only 9% corporate tax.
Moreover, all personal income earned by the city's citizens or permanent residents, is subject to 0% income tax.
This has led to rapid inflows of wealthy immigrants. The city now has a very high concentration of millionaires and billionaires, who seek to grow their wealth through tax exemptions, among other things.
Types of free zones in Dubai
The Jebel Ali Free Zone (JAFZA) was the first of Dubai's free zones, which was commissioned in 1985. It had only 19 companies in the beginning, which have since grown to surpass 9 500, mostly global companies.
Its proximity to the city’s largest sea port and airport (Jebel Ali Port and Al Maktoum Airport), enable it to benefit from huge visitor (customer) numbers from the rest of the world. Businesses in the construction, real estate, manufacturing, retailing, logistics and warehousing sectors, can set up their operations in this free zone and enjoy the pertinent benefits, such as zero corporate tax, 100% foreign currency retention, among others.
The regulations, however, outline that free zone businesses should either do their transactions only within their dedicated zone and with the rest of the world, through exports of their products or services.
In other words, businesses in the free zones are supposed to serve each other as an ecosystem, whilst they also provide for visitors and residents, who seek cheaper or specialised goods upon travelling to the zone (which also has residential areas).
However, for such free zone businesses to serve the rest of Dubai, for example through product delivery services to domestic clients, they will need to get authorisations from relevant authorities, who may curtail some of their benefits for that.
As of 2016, the zone (JAFZA) contributed about 32% of the country's (UAE) total Foreign Direct Investment (FDI) flows, 21% of Dubai's overall economic activity (GDP), and 144 000 jobs for people resident in the country.
The Dubai Multi Commodities Centre (DMCC) is a free zone, which serves as a commodities exchange which deals in four main sectors; precious commodities (gold, diamonds, etc), energy, steel and metals and agricultural commodities (tea, cotton, etc).
Much of the products traded and activities carried out in the free zone are neither extracted nor originally from Dubai.
Therefore, the free zone benefits simply earn the city more revenue as it draws global businesses which were already unavailable there.
Businesses in the zone can import raw materials and stock at duty-free rates and also export final products without corporate and export tax obligations. The incentives allow the businesses in the free zone, to have the most competitive prices and efficient services.
The city also has more than 20 other free zones. These have strongly driven the economy's exports, overall economic growth and the diversification of Dubai's economy.
Without them, a number of the country's various economic sectors, would not have been as successful as they have been today.
From the free zones, the government benefits through fees, levies and the use of utilities, which the businesses and their employees pay for, on a commercial basis.
Lessons for Zimbabwe
Learning from Dubai, Zimbabwe needs to be encouraged that its own infrastructural projects are not in vain. In the course of time, the road rehabilitation of the major highways, bypasses (fly overs), dams, airport expansions, power station developments, clinics and borders which are being expanded, will add to the country's economic growth.
As a matter of fact, if it were possible, the country should have assigned more expenditure to those projects.
This is, however, dependent on the fact that the costs surrounding the projects are not inflated, they are completed on time and are of an acceptable standard or quality.
Free trade zones will also be crucial in order to attract foreign investments to the country and grow overall export volumes. The surge in investments will result in higher employment levels and flourishing local businesses, as some of the firms operating in the free zones will use local content in their final products.
Free zones will particularly be important if they pertain to businesses involved in import substitution, exports, or those which offer services which were altogether non-existent in Zimbabwe.
For example, a Multi Commodities Centre, as a free zone, would encourage miners from the Sadc region (including the Democratic Republic of Congo and South Africa), to offload their products in Zimbabwe, instead of shipping them to Dubai, London, or other far-off commodities centres.
The resultant trade will attract high-value investors, who will ultimately develop more investments, in the country, some of which may even be unrelated to commodities trading.
In the same manner, the influx of “executive visitors” to the country, will result in a growth in demand for tourism and hospitality services (hotel rooms, etc).
An interesting idea, in the quest to develop the proposed new city in Mt. Hampden, would be to turn it into a kind of a free trade zone, so that construction projects in the area, are accelerated.
For instance, the government may determine to charge 4% less, in corporate tax, to firms, which set up their head offices and main operations in in the area (Mt. Hampden).
This would encourage rapid developments of office, residential and industrial space, since the value of the real estate in the area, would immediately increase, based on the free zone benefits.
Nevertheless, the benefits should not be such that, other businesses, which operate outside of the free zones, would be outcompeted by the ones in the free zone.
On that note, the existing Special Economic Zones (SEZs) in the country also need to be revisited, as several of them are still non-operational.
Some experts may argue that, Zimbabwe currently needs more SEZs within or just outside of the major cities (Harare, Bulawayo, Mutare, Gweru) since that is also where other benefits such as modern infrastructure (electricity, tap water, roads and telecommunications) are already available.
The lack of such infrastructure in the outskirts of the country, will continue to limit the number of businesses, which will choose to operate in the designated SEZs, most of which are in relatively isolated regions.
- Tutani is a political economy analyst. — [email protected]
