The economic success of Dubai and Abu Dhabi over the past two decades has undoubtedly been impressive – not least in recent months when economic activity has continued to accelerate in spite of weak oil prices.
Despite the diversification that has helped boost the cities' economic recovery, the question of whether they now have the fundamentals for sustainability to weather another economic crisis requires a more thoughtful response.
It seems fair to project that the next decade will be characterised by instability in the region, oil price fluctuations and revitalised competitive cycles of innovation in the East and West.
These forces will all provide a healthy test for Dubai and Abu Dhabi's economic resilience.
In a recent World Economic Forum report, Dubai featured among a few cities that can lay decent claim to setting an example for best practice. The incredible speed of development and the ambition of Dubai's vision have amazed the world, spurring other cities in the region to greater ambitions and, if not to copy the model, than to differentiate themselves by referring to it.
Both Dubai and Abu Dhabi have achieved success with smart and often long term, strategic thinking. This has seen them match, and even supercede, the requirements of competitiveness – institutions, policies and regulations of the business environment, hard and soft connectivity, which in turn has helped bring foreign investment.
Such measures provide a bedrock upon which future competitiveness can be built. However, challenges remain. Dubai, in particular, faces risks caused by several factors, such as the pace of growth, a possible property bubble and dependence on Arabian Gulf oil-based economies.
Dubai has recovered from the downturn of 2009 but sharp property price rises are making the IMF nervous about the speed at which recovery is taking place.
Because Dubai's debt has continued to rise, it might have difficulty coping with fresh instability. The IMF estimates that about US$64 billion of debt held by Dubai and the government-affiliated enterprises will come due between 2014 and 2016. The heated situation in parts of the region may be the source of indirect risks to the UAE, as oil prices may fluctuate and markets in the region may become unstable. These risks are beyond the control of Dubai or Abu Dhabi as cities. Mitigating them by reducing other risk factors is what matters.
Away from macroeconomics, the two cities have no doubt positioned themselves as the seat of global companies and local ones who want to become global.
However, the race for this position has limited the opportunity for home-grown innovation that is commensurate with the global status of the two cities. While both have adopted innovation enthusiastically and large companies have been able to operate efficiently from that base, small firms, which usually fuel innovation and are a key determinant of future competitiveness, still find it hard and expensive to establish themselves and grow.
Administrative complexities and costs may be a barrier for small innovative companies, especially those in the e-commerce space. Venture capital and exit potential for start-ups are also limited as financial risks and banking regulations may hamper start-ups.
This may be one of the most critical challenges facing innovation, and it is one the authorities appear to be taking seriously. One of the aims of a recently announced innovation strategy for Dubai is to address this issue.
The recent appointment of a world-class regulator from Singapore to oversee Abu Dhabi's development as a financial centre also shows that the direction of travel is a positive one.
Both cities will face competition from others regionally and globally. But Dubai has built a remarkably resilient economic diversity in a short period of time and one detects a bit of envy in both the admirers and critics of it and its neighbour's model of growth.
Ghassan Hasbani is author of Oasis Economies, The Middle East in 2030 and is a member of the Global Agenda Council on Competitiveness
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