Joining the dots

In this introduction to our special report on connectivity, Vision examines how Dubai has made the most of its geographical position to become a leading centre for logistics and trade – and what it will need to do in future to ensure it remains competitive and relevant in our rapidly changing world

Geography, natural resource endowments and location can be a blessing or a curse. For landlocked or remote countries, the lack of access to international trade routes by sea or land translates into a major barrier to trade, economic development and international economic integration. Similarly, countries with abundant and accessible natural resources can be damned by a natural resource curse or be blessed, where good governance of resources results in sustainable investment and economic development.

What can be done to overcome the economic barriers of an unfavourable geographic location or endowment? Is it possible to change economic geography to change outcomes? The answer is yes. Ancient trade routes crossed deserts and landlocked countries to carry high value items (gold, precious metals, salt and spices). The modern equivalents are less resource-based and more based on geography-changing infrastructure investments. The Panama and Suez Canals both changed global economic geography but remained passages, trade conduits.

In an increasingly global marketplace countries can overcome locational disadvantages or maximise the benefits of location to enter global supply chains and achieve international economic integration. Dubai is a leading example. Though comparatively poor in natural resources, Dubai can claim that it is connected to one-third of the global population within a four-hour plane ride from its airports and its integrated land-air-sea transport system.

‘Modern Dubai is an aerotropolis – a city whose main focus and infrastructure is centred on its airports’

Dubai has made decisions that have taken advantage of its location mid-way between Asia and Europe. Situated along the ancient Silk Route, Dubai’s ports are now among the most active and efficient in the world. The UNCTAD Liner Connectivity Index, a measure of sea-based trade connectivity, ranks Dubai the highest in the region. Meanwhile, Dubai has invested heavily in infrastructure and logistics to overcome its comparatively poor natural resource base and become a global business, trade and tourism hub.

Infrastructure and logistics facilities, two key factors for connectivity, contribute to economic growth – both directly and indirectly. At the heart of today’s logistics revolution are the information systems and the integration of different transport modes – air, land and sea, leading to improved transport productivity growth and the vast benefits of the economics of networks. Whether telecommunications, IT, payment or transport networks, these generate economies of scale in production and consumption.

With no infrastructure legacy, Dubai has been able to invest in state-of-the-art infrastructure and technology in its airports, ports and public utilities, in addition to the facilitating ‘soft infrastructure’ – the laws and regulations and institutions, including free economic zones (such as JAFZA, Jebel Ali Free Zone) that were business-enabling and private-sector-investment-facilitating. Importantly, infrastructure and logistics investments were designed to be accessible for both domestic and international users.

Dubai as an aerotropolis
Modern Dubai is an aerotropolis – a city whose main focus and infrastructure is centred on its airports. Passenger and cargo traffic at Dubai International Airport (DIA) as well as at other UAE airports grew even during the global recession and financial crisis of 2008–2010. This is because travel and tourism, trade in goods and services, financial and professional services, and logistics are linked to airports and their accessibility.

In addition to DIA, Dubai also hosts the Al-Maktoum International Airport at Dubai World Central (DWC) which, when completed, will be the world’s largest passenger and cargo hub. This new airport is linked seamlessly through a Dubai Logistics Corridor to Jebel Ali Port – including its Free Zone – and provides immediate access to a highway network extending from the Indian Ocean and the Arabian Gulf all the way to the Mediterranean. Containers will be moved from ships to cargo planes in less than one hour, faster than anywhere else in the world. Customers benefit from single window e-clearance services, including customs, and slashed transit time for their freight. Currently, there is no other sea-land-air logistic hub with comparable performance, size and available surrounding space, nor is there one planned for in the foreseeable future. These are transformational investments. The Dubai aerotropolis enhances interconnectedness, integrates logistics and facilitates trade, enabling businesses to enter the global supply chain.

A recent Oxford Analytics report on Dubai’s airport estimated that “connectivity” benefits contribute US$2.5bn to Dubai’s GDP. Frost & Sullivan estimates revenues from the UAE’s logistics market to reach US$9.4bn in 2014, an increase of 8.2 per cent over 2010’s revenue of US$7.03bn. These estimates would multiply once the Dubai Logistics Corridor’s platform for collaboration becomes more active. Once an Emirates railway system is established, the Dubai Logistics Corridor will be further connected and integrated with UAE transport systems, increasing the benefits of the integrated transport network.

Planning for the future
What should the UAE do to stay ahead of the curve given that its regional competitors have caught on and are investing heavily in infrastructure and logistics? As The Red Queen in Lewis Carroll’s Through the Looking Glass reminds us, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” With this in mind, the strategy should be based on four building blocks.

The first is to achieve national infrastructure integration, including common standards and regulatory consistency, between the different emirates, which would lead to economies of scale, lower costs, lower risks of failure, and generate greater network efficiency through better utilisation of facilities.

Second, the UAE’s infrastructure and logistics need to be integrated into an infrastructure network across the GCC (Gulf Cooperation Council). This is being undertaken for the electric power grid, but should be extended to pipelines for energy (oil and gas) and water, telecommunications, infostructure, payment networks and transport systems (road, rail and air). Regional investment should be supported by a GCC regional agreement on trade facilitation, streamlining and simplifying international trade procedures, customs and standards.

The third building block involves recognition of the changing global economic geography and the rise of emerging markets. The UAE needs to move to integration of its infrastructure with Southeast Asia and with China. China, the GCC’s most important trade partner, is currently extending its pipeline and road network into Central Asia. The UAE and GCC should actively plan to connect and integrate with China’s energy infrastructure and transport system to become part of an Asian-Chinese supply chain of goods and services.

Finally, there are the financial markets. Given the rise of emerging market economies, there have been profound changes in the global economic geography and international financial architecture. For more than 100 years, a hub and spoke financial architecture dominated and defined global capital markets – with London and New York being the hubs. This architecture may have been appropriate when most global output, savings and capital markets were located in the West, and later also in Japan. But global imbalances, budget deficits and the transformation of the US into a massive importer of capital has undermined the model. The ongoing sovereign debt and fiscal crises will lead to the demise of the hub-spoke model centred on London and New York and give impetus to a transition to a multi-polar model.

Such a new international financial architecture will prevent the enormous accumulation of savings in just one or two financial centres and move to an architecture of networked financial markets – the likes of Dubai, Mumbai and Shanghai, a more stable and sustainable ‘spider web’ model based on the new economic and financial geography. For policy makers and strategists, therefore, the building of a New Silk Road should encompass not only trade in goods and in services, but also these fibre optic threads of the spider web of financial centres.