State capitalism is an interesting term. What does it mean? Some definitions, like Rothbard’s, include everything outside perfect laissez-faire. Most Marxist definitions include everything other than complete Soviet-style central planning. Finally, others effectively define it as a synonym for crony capitalism or resource nationalism. None of these definitions strike me as particularly useful.
But state capitalism exists. When I parse the Potter Stewart definition inside my head, I wind up with a a system in which profit-maximizing state-owned companies operate in ostensibly competitive markets. I say “ostensibly,” because both profit-maximization and competition exist mostly in the eye of the beholder.
The Emirate of Dubai is the epitomy of state capitalism. The state’s investments run through three holding companies: Dubai Holding, Dubai World, and the Investment Corporation of Dubai (ICD). Sheikh Maktoum directly owns Dubai Holding, while the latter two are formally owned by the government of Dubai … of whom Sheikh Maktoum is the absolute ruler. All three holding companies have real estate arms charged with developing land granted to them by the emirate. ICD’s Emaar Properties developed the Burj Khalifa, while Nakheel created the offshore Palm and World developments on reclaimed land.
Dubai built its airport in 1960 — over the objections of the emirate’s British advisors — and then borrowed against oil revenues to expand it to handle jumbo jets in 1968. The airport (separately from the airline) directly generates a lot of ancilliary economic activity: landing fees, retail sales, warehousing, maintenance, etcetera. The airport generates even more indirectly … not least the tourist industry. Things like the Burj Khalifa might seem like wasteful ego-driven expenditures. And they are. But they’re also the sort of over-the-top more-Vegas-than-Vegas kind of thing that draws in the tourists, along with the indoor ski slopes and the “seven-star” hotel. Visitor expenditures made up another 8% of GDP.
In 1985, Dubai established Emirates Airlines. At the time most air travel between the Gulf and other points was handled by Gulf Air. Mohammed Al-Maktoum worked secretly with Maurice Flanagan, a former British Airways executive who had run the Dubai National Air Travel Agency, to launch the airline with $10 million in seed capital. The Sheikh supplemented that with subsidies Flanagan estimated at $90 million, including two barely-used Boeing 727s, help with aircraft purchases, a training building, and $64.7 million in other off-the-books investments. As you all probably know, the investment paid off: by 2007, Emirates flew 119 aircraft to 101 destinations in 61 countries, earning a profit of $1.4 billion. Think about that number for a second. In 2007, the profits from that one enterprise alone contributed 2% of Dubai’s GDP. And 2% is a minimum estimate: Emirates’ total turnover came to $9.6 billion … 15% of GDP. (Obviously, not all of that number accrued to Dubai — but even a quarter would put the airline’s direct contribution at 4%.)
And then there are the free zones. I’ve already mentioned Jebel Ali, but there’s also the Dubai International Financial Center (DIFC). The DIFC has a special legal regime modeled on the United Kingdom, allows for 100% foreign ownership, and guarantees no taxes on profits or income for fifty years. (Inasmuch as that guarantee means anything in an absolute dictatorship.) Then there’s Dubai Media City, which offers a similar deal to firms in media and marketing services, printing and publishing, music, film, internet-related activities, video games, leisure and entertainment, broadcasting and information agencies. Running free zones has become an export industry. The Orangeburg Industrial and Logistics Park in Santee, South Carolina, won’t be able to offer the same range of tax breaks as the Dubai zones, but it will offer whatever the State of South Carolina can provide over two square miles. Ditto, Economic Zones World is neck deep in the Indian government’s attempt to emulate China’s “special economic zones” and has sunk a lot of capital into trying to turn Djibouti into a second Dubai.
So what’s the catch? Simple. The Emirate leveraged the oil money into the financial center, the port, the free zones, and the tourists in part by real estate profits ... but mostly by actual leverage. As the cost of running the government inescapably grew, taxes + profits generated from real estate provided the necessary income. Unfortunately, once the rate of growth in the value of real estate slowed — reversed, actually — the system became unsustainable.
That said, Dubai Incorporated has one advantage over other places that have tried similar development models (everywhere from Singapore to, well, the State of California), which is that it can treat most of its labor force the same way that a real company would. That, however, brings us to Barry Cotter’s question (and eventually Randy’s) and another post.
Questions, comments, requests? I am going to make a strong effort to get around to them.
Fascinating place, so count me as a vote in favor of more. The whole concept of the Singaporean Model and its benefits & pitfalls is very interesting, particularly when seen in multiple settings.
Posted by: Bernard Guerrero | March 10, 2010 at 10:50 AM
Hello,
Yes I has become very common that companies hire the persons on assignment or temporary basis as well as after contract finishing they fire them.
It is become very common in UAE/Dubai that people are coming from all over the World in order to explore their future but they mostly hire on contract basis or temporary and then immediately so how they can survive hee for a long time.
Posted by: Taimoor | August 05, 2015 at 01:44 AM