David Kessler—Have you ever seen the film, Mission: Impossible – Ghost Protocol? If yes, then you may remember the scene when Ethan Hunt (Tom Cruise) scales an enormous tower hotel in Dubai to thwart Moreau from delivering the nuclear launch codes to Wistrom. Whether you have seen film or not, the hotel in the film is named Burj Khalifa and it is currently the tallest structure in the world. Since the opening ceremony in 2010, Burj Khalifa is symbolic of a trend that was started decades ago to diversify many Gulf Cooperation Council (GCC) countries away from their main export: fossil fuel.
When one thinks about the GCC nations (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) one cannot easily disassociate them from fossil fuels, the world’s most valuable resources. However upon closer observation, one can witness a changing environment. From the futuristic skyline of Dubai, to Bahrain’s strategic position in the world of finance, to the massive investments made by the Qatar Investment Authority, many of these states are global players in markets besides fossil fuels. These trends reflect different causes for diversification among which include: insulation from “oil shocks,” depleting oil reserves, threatening alternative energies, and the desire for more foreign investment. Ultimately, the basic need to reduce reliance upon fossil fuels is what drives these countries to diversify. Now lets take a brief look at this change in three dynamic countries: Bahrain, the UAE, and Qatar.
The Kingdom of Bahrain is perhaps the most threatened nation by reserve oil depletion. If production increases at the current rate, it is estimated that their reserves could be fully tapped out in as little as 10 years. Nevertheless, oil does account for 60% of all exports in the country. Thus, diversification is clearly necessary if Bahrain wishes to continue economic growth.
The capital city of Al-Manama (Manama) is the finance capital of the Gulf and competes with Malaysia for the title of “global capital” of Islamic Banking. Like Dubai, Manama’s skyline is as impressive as any advanced nation’s and reflects the construction investments made in Bahrain in recent years. Structures such as the iconic Bahrain World Trade Center and the massive development, “Bahrain Financial Harbour”, make Bahrain a hub for international business. Furthermore, these feats of architecture also make Bahrain an ascetically pleasing place for investment and tourism. Another reason for Bahrain’s privileged position as a center of finance can be attributed to having one of the most valuable currencies in the world. One Bahraini Dinar is worth $2.65.
Tourism is another big investment that Bahrain has made in recent years. The Ministry of Culture of Bahrain has proclaimed Manama as the “Tourist Capital of the Arab World,” dividing the tourist seasons into four categories: Culture tourism, Sports tourism, Leisure tourism, and ECO tourism. The annual Bahrain Grand Prix, is one of the premier tourist events in Bahrain and attracts (wealthy) Formula One enthusiasts from all over the world. Another enticement for tourists to visit Bahrain is its liberal views towards alcohol, where the substance is legal. As a result, multitudes of people from Saudi Arabia, where alcohol is not legal, flood into Bahrain on weekends to enjoy themselves.
Many know the State of Qatar as the richest nation, per capita, in the world. Unlike the other two countries, its main export is another familiar fossil fuel: liquefied natural gas. Qatar is making strategic investments into expanding non-fossil fuel sectors such as finance, tourism, construction, services, and manufacturing. Of the three countries, Qatar is the most reliant upon its fossil fuels which account for roughly 85% of its export earnings. Nevertheless, Qatar has capitalized on key investments such as ownership stakes in foreign firms, the global media outlet: “Al-Jazeera,” and being awarded the opportunity to host the 2022 FIFA World Cup.
The Qatar Investment Authority, which is responsible for economic diversification, is reported to have made, “investments in a number of high-profile real estate, hospitality, manufacturing, sporting and retail brands overseas, such as Harrods and the Shard building in London, the Raffles Hotel Group, locations in New York and Paris, Volkswagen, Credit Suisse, and Xstrata.” These strategic investments open up new methods of cash flow into the country that can be allocated to further diversifying the nation’s economic portfolio. Furthermore influencing global corporations can bring more foreign investment into Qatar.
One of the most recent (and more well known) acquisitions of the Qatar Investment Authority was the French Football Club, Paris Saint-Germain (PSG), purchased in 2011. The buyout costed the Qataris about $135 million. Since then, PSG has spent over $250 million, an outstanding spending binge, to recruit some of the best talent in the sport Zlatan Ibrahimović, Thiago Silva, Ezequiel Lavezzi, and David Beckham. The club’s latest acquisition, former Napoli world-class striker, Ednison Cavani was purchased for an astounding $84 million. QIA’s investment has yielded a championship in the French “Ligue 1” for the 2012-2013 season. So far, PSG has proven to be a profitable venture for Qatar and, more importantly, and interesting an unconventional way to promote the Emirate.
On the home front, Qatar plans to invest over $200 billion between construction projects and infrastructure. This includes building a bridge, the Bahrain-Qatar Causeway, which would connect Bahrain to Qatar over the astounding 40Km of water that divides the two states. The massive construction boom will no doubt be, at least in part, to prepare Qatar for the massive tourist influx as it hosts the 2022 FIFA World Cup. Stadiums, roads, housing, and other attractions must be constructed to service the global entourage. The event will bring tourists from around the world to visit the Arab state and will be an opportunity to display the richest nation in the world’s economic prosperity. Nevertheless, other than the World Cup Stadiums, Qatar has planned the construction of at least 19 “megaprojects” which include: a new international airport, city infrastructure, highway networks, education facilities, and state-of-the-art public transportation systems.
Like Qatar, The United Arab Emirates (UAE) is one of the richest countries in the Gulf and has, visibly, invested heavily in non-fossil fuel sectors. The Burj Khalifa is only a recent addition to the UAE’s construction boom in the past two decades. This growth, however, took a hit from a bursting credit bubble that seriously stalled development from 2008 – 2011. Nevertheless, the hard-times seem over as the Emirate of Dubai resumes incredible expansion of construction projects and foreign investment floods into the country.
Oil is still the UAE’s main commodity export with a 45% share with the profits from oil exports being funneled, with apparent success, into broadening: finance, tourism, construction, and manufacturing sectors. In particular, the economy of the UAE has expanded 4.4% last year however the tourist industry in Dubai grew at an astounding 18.7% the same year. Many incredible construction feats are still in the works such as the “Falconcity,” which will exhibit replicas of many great wonders of the world in one place; the “Hydropolis,” an underwater hotel; and the “Dubai Sports City,” a sports complex the size of… you guessed it, a small city!
Investors have been quick to jump on the opportunities in the UAE which include a stable political atmosphere to conduct business, free-trade zones for manufacturing, and a sizeable pool of consumers. Regarding manufacturing, many free trade zones have been established across the UAE. Large investments in Abu Dhabi’s heavy manufacturing industries and Dubai’s lighter manufactured goods have witnessed a boom in this sector. As a result, manufacturing in the UAE happens to be the second fastest expanding, non-oil, sector in the economy.
One of the more interesting accomplishments of the UAE is the expansion of the gold market in Dubai. Dubai is positioned strategically both geographically and economically to conduct trade of the precious metal. Dubai has acquired a substantial 29% of the global gold trade. Dubai has assumed this position thanks to low taxes, cheap labor, and low prices. Furthermore, the UAE’s location between Africa and Asia allows it to easily tap into rapidly growing markets. Not surprisingly, some refer to Dubai as the “City of Gold.”
Why does this matter?
At a time when the global economy is focused on the rapidly developing economies of the BRICs nations as well as the smaller “emerging markets” in Asia, Africa, and South America, the MENA region is mainly recognized as a region in upheaval. While this holds true for most nations in the region, the Gulf States (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) have managed to insulate themselves from the turmoil to varying degrees. In particular, Bahrain, UAE, and Qatar have made recent strides in diversifying their economies away from fossil fuels in an effort to prepare for more sustainable, long-term growth. The strategic geographical position at the crossroads of Europe, Asia, and Africa make the markets in the Gulf quite accessible and attractive. Moreover, these states have higher per capita incomes than many states in Europe, and all of the BRICs, securing a large consumer pool for foreign investment. This article simply scratches the surface taking a glance at three out of the six GCC nations that are all moving forward towards diversification. It will be exciting to see how the GCC countries develop as their economies continue to expand away from fossil fuels and achieve a deeper level of integration in other major industries.