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The For-Profit State October 24, 2006

Posted by David Bookstaber in Economic Policy, Government, Regulation.

Dubai is turning itself into a marvelous experiment: A totalitarian for-profit state.

This article is worth reading in its entirety.  Highlights:

‘People refer to our crown prince as the chief executive officer of Dubai. It’s because, genuinely, he runs government as a private business for the sake of the private sector, not for the sake of the state’, says Saeed al-Muntafiq, head of the Dubai Development and Investment Authority. Moreover, if the country is a single business, as al-Maktoum maintains, then ‘representative government’ is besides the point: after all, General Electric and Exxon are not democracies and no one—except for raving socialists—expects either to be so.

And how does a state handle its diplomatic responsibilities?  By contracting them out:

Dubai is able to dispense with most of the sales, customs and income taxes essential to governments elsewhere. … Oil-rich Abu Dhabi, meanwhile, subsidizes the residual state functions, including foreign relations and defence, entrusted to the Emirates’ federal administration—itself a condominium of the interests of the ruling sheikhs and their relatives.

Even though it is a totalitarian state, Dubai is generating economic rents by building business districts with laws custom-tailored to the desires and needs of global free enterprises:

Although tourist development and its excesses generate most of the ‘buzz’ about Dubai, the city-state has extraordinary ambitions to capture as much value-added as possible through a series of specialized free-trade zones and high-tech clusters. ‘One of the ways that this trading town along a creek has reformulated itself into a megalopolis’, writes an abc News commentator, ‘is by throwing in everything and the kitchen sink as incentives for companies to invest in and relocate to Dubai. There are free-trade zones where 100 per cent foreign ownership is allowed, with no individual or corporate taxes or import/export duties whatsoever.’ The original free-trade zone in the port district of Jebel Ali now has several thousand resident trading and industrial firms, and is the major base for American corporations selling to the Saudi and Gulf markets.

Most future growth, however, is expected to be generated within an archipelago of specialized ‘clusters’. The largest of these cities-within-the-city are Internet City, already the Arab world’s principal information technology hub, with local subsidiaries of Dell, Hewlett-Packard, Microsoft, and others; Media City, home to the Al Arabiya satellite network and various international news organizations; and the Dubai International Financial Centre, whose DFIX al-Maktoum hopes will grow into the largest stock exchange between Europe and East Asia as foreign investors rush to tap the Gulf’s vast reservoir of oil earnings. In addition to these mega-enclaves, each with tens of thousands of employees, Dubai also hosts or is planning to build a Humanitarian Aid City, as a base for disaster relief; a free-trade zone dedicated to the sale of used cars; a Dubai Metals and Commodities Centre; … and a $6 billion Healthcare Village, in collaboration with the Harvard Medical School, that will offer the wealthy classes of the Gulf region state-of-the-art American medical technology.

Other cities in the region, of course, have free-trade zones and high-tech clusters, but only Dubai has allowed each enclave to operate under regulatory and legal bubble-domes tailored to the specific needs of foreign capital and expat professionals. ‘Carving out lucrative niches with their own special rules’, claims the Financial Times, ‘has been at the heart of Dubai’s development strategy’.  Thus press censorship (flagrant in the rest of Dubai) is largely suspended inside Media City, while internet access (regulated for content elsewhere) is absolutely unfettered inside Internet City. The uae has permitted Dubai to set up ‘an entirely separate, Western-based commercial system for its financial district that would do business in dollars, and in English’. Although not without ensuing controversy, Dubai even imported British financial regulators and retired judges to bolster confidence that dfix plays by the same rules as Zurich, London and New York.


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