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Making the best of resources.

UNLIKE ABU DHABI, Dubai is only too conscious that oil will not be able to guarantee its future prosperity. Discoveries came later to the emirate than to most Gulf states and since exploitation began in the late 1960s it has always been a producer in the small league. Moreover, its reserves, estimated at around 4bn barrels, will run out early in the next century at the current production rate of some 450,000 b/d. No-one holds out much hope of discovering important new fields on its territory.

The government of Dubai is therefore racing to diversify its sources of income as fast and as ambitiously as possible, using current oil revenues to lay the foundations for the future. Dubai pays little heed to Opec production quotas, and rather than conserve oil resources which are in any case limited, its policy is to reap the benefits now and invest them in development of the wider economy.

Dubai has always been at heart a trading centre. Even today, the emirate's oil sector accounts for about 60% of the gross national product (which reached DH123bn last year). Nonetheless, Dubai's oil income has always been disproportionately important as the means of carrying out its investment strategy. Basically this comes down to pouring money, marketing and imagination into making Dubai the major entrepot for Gulf trade and the best location for setting up manufacturing plants in the region.

Among the first major projects to be undertaken when oil came on stream were the building of Port Rashid (opened in 1972), the expansion of the airport and the construction of the deepwater harbour at Jebel Ali alongside the free trade zone created in 1985. In the zone, foreign companies are allowed to operate as 100% owners (until now, uniquely in the region), are not obliged to pay taxes, can repatriate all profits and benefit from cheap land, labour and power.

Japan is Dubai's biggest trading partner. It buys the largest portion of the emirate's oil and is its main supplier of automobiles and electronic goods. The key to Dubai's role is that most of these are promptly re-exported, many of them to Iran. Officially, Dubai accounts for between 60% and 70% of the UAE's re-exports, but the figure is probably an under-estimate since a good part of Dubai's imports are also sold in other member states of the UAE.

Dubai's consciousness of its importance as a trading transport and communications centre in the Gulf is exemplified by its insistence on setting up its own airline, Emirates, in 1985, even though Gulf Air -- jointly owned by Abu Dhabi, Oman, Qatar and Bahrain -- already serves all the members of the UAE. Its executives insist that Emirates is returning a healthy profit, even though no figures are published.

When the oil does finally run out, Dubai is well positioned to serve as a regional trading hub and a centre for services. More questionable are the prospects for its success as a location for manufacturing. Well-established are two of its earliest and biggest industrial ventures, Dubai Drydocks and the Dubai Aluminium (Dubal). Dubai Drydocks competes with Bahrain's Arab Shipbuilding and Repair Yard, while Dubal is one of several aluminium smelters in the Gulf using low cost energy and now in the process of completing capacity expansion to 240,000 tonnes per year.

The Jebel Ali free zone, in which the government has invested $2.5bn, has always been treated with somewhat unfair scepticism by foreign observers. It has, however, managed to attract about 450 companies and new entrants continue to flood in. Measured against its ambitions, it still has a long way to go since capacity is planned to provide a location for 8,000 companies. According to Sultan bin Sulayem, chairman of the Dubai Ports Authority, there should be at least 2,000 firms operating by the end of the century.

More worrying is the fact that the majority of companies setting up in Jebel Ali operate in distribution or packaging, or else allied light industries. Jebel Ali is still waiting for a major multinational investor to pick out the free zone as a manufacturing base.

One widely heard criticism is that Dubai may be trying to follow two conflicting paths. The emphasis on industrialisation could well clash with the aspiration towards promoting Dubai as an international tourist and resort centre. There are plans afoot -- though as yet far from materialising -- to build a refinery or a methyl tertiary butyl ether (MTBE) plant, the latter to take advantage of the Gulf oil producers' ability to exploit one of the fastest growing niches in the hydrocarbons product market.

Analysts doubt the wisdom of building energy-intensive industries in a small country where local oil and gas feedstocks are finite. It is also an open question whether such giant oil-related schemes would sit easily beside Dubai's leisure facilities. The government has set up a Commerce and Tourism Board with representation in seven cities to market the country's potential as a sophisticated resort. Great efforts have been made to establish Dubai on the international scene as host to world-class events in golf, motor car rallying and snooker.
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Title Annotation:Special Report; Dubai's economy
Publication:The Middle East
Date:Dec 1, 1992
Previous Article:Oil projects lead the market.
Next Article:Banks weather the crises.

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