Dubai received a boatload of oil money. Still, that boatload wasn’t quite enough to float the immense edifice that is the modern city. (I take a perverse delight in metaphor mixing.) It needed to be leveraged.
There were two ways to do that. The first was to leverage. More on that in a later post. The second was to build the city the same way the United States built the railroads: ahead of demand, and financed by land grants.
The idea was fairly simple. The emirate sat in a great location and had a first-mover advantage over its competitors. As of 1971, Abu Dhabi and Qatar had chosen to move slowly, Bahrain faced Iranian hostility, Oman had to fight off the Popular Front for the Liberation of the Occupied Arabian Gulf, and South Yemen had gone Communist. Everyone had been held back by the British, especially poor South Arabia ... geographically-speaking, Dubai (as a transshipment port) should probably be in Aden or Djibouti. So the government built the transportation infrastructure, which increased the value of the land around that infrastructure. It then started to rent land to ancilliary enterprises. The profits from land development went to build more infrastructure and subsidize the overhead costs of running the city. They also went to subsidies for international businesses, which received cheap rents and tax abatements.
The above chart shows the government’s income in constant 2009 dollars using UAE price deflators. (Since the UAE had a fixed exchange rate over the period, the calculation is fairly straightforward. The use of a deflator matters, however: UAE inflation has far outpaced American over the period.) The “other” category is made up primarily of land sales, rent taxes, user charges, and other fees. To give an example, in 2009 road tolls generated 17% of all government revenue, and airport charges an additional 6%.
What did the government spend it on? See below the fold.
In the early years, most went to subsidizing the cost of the federal government: e.g., the poorer emirates plus national defense. (Although defense was a little messy: the UAE didn’t unify its defense forces until 1996; it is still more of a confederation than a federation.) In addition, they spent a lot on electrification and water. Over time that shifted: “development” is the government’s term for its capital budget ... e.g., street paving, road building, and other muscly stuff. The subsidy line is deceiving: it consisted primarily of the expenses of state-run companies, like the Civil Aviation Authority, which were net revenue generators for the government of the Emirate.
Abu Dhabi took over more of the costs of the federation. Detailed regional breakdowns of federal spending are only available from 1997 on: by then, Dubai had become a net beneficiary to the tune of $1.5 billion, or 6.7% of the Emirate’s GDP ... and that number doesn’t account for the 37% of federal expenditure ($4.7 billion) that couldn’t be classified by geography! (Federal spending consisted mostly of transfers granted directly to Emirati citizens, with the remainder going to pay federal officials working on Dubai soil. No checks were directly cut to the Dubai government, but any functions carried out by the feds are one less function that needs to be done by Dubai.)
In short, part of the Dubai model consisted of using oil revenue to kick-start investments that triggered a virtuous circle of growth. Continuing flows of oil money, both from Dubai itself and from Abu Dhabi via the federation, plugged the gaps. The model, however, consisted of two other vital parts. First, state capitalism, big time, where “public” money went to invest in private businesses. Second, immigration, in massive amounts, of whatever type the companies operating in the city needed. Both of those facets of the development model had (and have) profound implications for the dry fiscal numbers discussed here.
Questions, thoughts, errors?
smart article. I am writing a research paper in my government class and I would like to quote you. I need to cite this website but I can not find your name anywhere..?
Posted by: Jimmy | February 03, 2011 at 02:32 PM
Noel Maurer.
Posted by: Noel Maurer | February 04, 2011 at 05:50 PM