The Gulf Special

Will the desert rose bloom again?

Dubai is banking top dollar on Expo 2020. Will the event transform its economic geography?

The United Arab Emirates (UAE), like other countries in the GCC, faces a very challenging inhospitable desert environment but has strategically transformed itself into an economic and financial platform for a wide region spanning Africa, west and central Asia. The UAE has dealt with the natural resource curse and high dependence on oil through economic diversification, liberal economic policies (notably on labour mobility and foreign investment in the free zones), good governance, investing the proceeds of oil revenue in sovereign wealth funds and undertaking reforms to lower the cost of doing business.

Dubai has demonstrated that 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 through outward-looking institutional reforms and infrastructure investments. 

Dubai Expo 2020

The selection of Dubai to host the Expo in 2020 is an international confirmation of the UAE and Dubai’s achievements over the past three decades. But what does Expo 2020 add to Dubai and the UAE? What could be its legacy? Why is the UAE — the first Arab country to have been selected — venturing into these internationally challenging waters? The UAE has a distinct geographical comparative advantage, located as it is between Europe and the Americas on one side and the Indian subcontinent and east Asia on the other, opening doors to adjacent Africa in addition to its GCC counterparts and the Arab world. Some two-thirds of the world’s population lives within an eight-hour flight from Dubai and one-third — including India — within four hours.

This locational factor sets Dubai Expo 2020 apart from previous Expos: it is expected to attract 25 million visitors in the six months between October 2020 and April 2021 and, for the first time in Expo history, 71% of the traffic would originate from outside the host nation. By contrast, the Shanghai Expo attracted 73 million visitors, of whom only 5.8% were foreign. But geography without infrastructure and logistics is insufficient. It is the UAE’s roads, ports, airports, open-sky policies and airlines — notably Emirates, Etihad and Sky Dubai — that provide regional and international connectivity, while hotels and hospitality will help host visitors. The fundamental enabler is that Dubai has invested in both soft and hard infrastructure — transport and logistics assets that are designed and oriented to serve trade, tourism and investment.

The economics of expos 

Expos are short-duration events that last up to six months but involve substantial investment in preparation: suitably located land — some 438 hectare for Dubai Expo 2020 — has to be appropriated and prepared and transport and communications, infrastructure, buildings and structures set up. How it all adds up shows the breakdown of the anticipated Expo 2020 investment spending, amounting to about $43 billion. This is substantial compared to the size of the Dubai economy, a projected $113 billion in 2015. This poses an economic and financial challenge: will the revenues and benefits outweigh the costs and investments? What will Dubai do with the added capacity? How does one avoid white camels in the desert?

To answer this, we need to distinguish short-term and medium-/long-term effects on economic growth (see: Potential impact of Expo 2020...). The Expo bid document projects a gross value addition of about $24 billion from the Expo to Dubai’s economy. Successive rounds of spending generate a multiplier effect: every dollar spent by Dubai towards the Expo could result in six times the value in Dubai’s economy. Potentially, Dubai Expo 2020 could add 0.5% to GDP growth from 2016 to 2019 and a 2% boost during the event in 2020-2021 before growth reverts to trend. We can also expect a positive stock market effect for sectors/companies benefiting from Expo 2020, including construction, transport and logistics, hospitality and tourism, among others.

The Dubai Expo is expected to generate some 277,000 jobs from 2013 to 2021, 40% of which will be within the hotel and restaurant sector. The bulk (90%) of the projected employment opportunities will occur from 2018 to 2021, with the ramp-up to Expo 2020 and the demand generated by the projected 25 million visitors. Of the 90%, 147,000 jobs would be created in the travel and tourism sector. The challenge will be to convert the temporary increase in employment into permanent jobs to serve the expanded economy in the post-Expo period. Clearly, the build-up of transport, communications and logistics infrastructure will provide a stream of services beyond the limited duration of the Expo. The main lesson here is to build infrastructure that serves international economic integration.

The olympic effect

Economists have examined the economic impact of hosting mega events such as the Olympics or Expos. It turns out that there is a large permanent increase in trade levels of over 30% for countries that host Olympics and some 20% for countries that host Expos. How does this happen? The effect on trade can be attributed to the signal a country sends when bidding to host the games, rather than the act of actually holding a mega event: the message is that the host country is on a path of opening up and greater economic liberalisation. This translates into greater international economic integration through increased trade and investment.

 Growing the Dubai brand

There will also be intangible gains. One of the largest gains for Dubai can come from an increase of its brand valuation. It is projected that Dubai’s hosting of World Expo 2020 will increase the brand value of the city by $8 billion to $257 billion. Dubai’s businesses and institutions will benefit from being in Dubai; products and services gain a positive reputation and, therefore, will sell at a premium from being Made in Dubai. By doing business with Dubai and being linked to the emiratecity, the UAE and the wider region will benefit from the Dubai brand. 

Avoiding expophoria burden 

Typically, international events of big stature — mega events — lead to bulky capital expenditures for a specific purpose and limited duration utilisation, meaning that these projects are unlikely to recoup investments. The potential for budget overruns is a major risk. While no systematic studies have yet tracked Expo expenditures, a study of Olympic games by Oxford University researchers concluded that, over the past 50 years, the games have gone over-budget by 179% on average. Even considering just the period between the 2000 and 2010 games (when governments became more fiscally aware), the average overrun was 47% and that does not include the recent splurge and wastage at the Sochi Olympics.  

 Mega events lead to excitement: Dubai can be led into irrational exuberance about the Expo, or Expophoria. Avoiding and mitigating the risks of Expophoria involves two major elements. One, it is imperative to create a risk register that tracks both macro (global, regional and local economic, financial, geopolitical, security, governance and business environment issues) and project (cost overruns, engineering risks, investment environment, demand risks in terms of usage and revenue) costs and practice good risk management to minimise risks. Two, financing of Dubai Expo 2020 should be carefully planned. How Dubai government plans to finance Expo 2020 matters for fiscal sustainability, given Dubai’s outstanding debt and repayment pipeline. Dubai needs to avoid additional indebtedness that can become a burden post-Expo. 

To alleviate these concerns, the state should ensure local and international private sector participation in Dubai Expo 2020 through public-private partnerships in building infrastructure and facilities. Given the scale and scope of required investments, UAE can pass public-private partnership legislation and set a policy framework to encourage private sector engagement in Dubai Expo. 

Post-expo facto

World cups, Olympics and Expos all face the major risk of a post-event slowdown: you invest in infrastructure and facilities to accommodate millions of users that may subsequently lie empty or under-utilised. Typically, this is reflected in lower post-event tourist arrivals, hotel occupancy and retail spending. Hotel occupancy during the 2010 football World Cup in South Africa surged to 84% and then fell to 55.4% due to fewer visitors coupled with greater supply. 

Dubai will need to plan the post-Expo use of infrastructure and facilities and think by backward induction: what will be the usefulness of post-Expo assets and investments? What is their value?  

Transforming the city

Dubai will undoubtedly make a mark for itself by hosting the Expo and cement its reputation as a successful builder. It is more important to be known as the nation that generates opportunities both for itself and its regional stakeholders before and after the Expo. 

Dubai Expo 2020 is an opportunity and framework to engage the 182 participating countries, China, India and the neighbouring COMESA countries through free trade and investment agreements to ease investment and business establishment. The soft and hard infrastructure built for the Expo should be used to link and pave the way for the region and emerging economies to be integrated in new global value chains.

Aerotropolis and spaceport

The Expo is an opportunity to systematically build Dubai as an Aerotropolis, a city revolving around its airports, its trade and investment facilitating infrastructure, logistics and supply chain services. Dubai Expo 2020 and Dubai World Central (DWC) should be integrated along with Jebel Ali Free Zone (Jafza) into the Dubai Aerotropolis conurbation. 

The Dubai Aerotropolis concept could be further expanded by the development of a new complex: Dubai Spaceport could harbour commercial space-related activities and the launching and servicing of satellites and spacecraft, including the UAE Mars 2021 spacecraft. The Dubai Spaceport would enable UAE to be an active participant in the fast-growing global space economy, and extend its existing transport and telecommunications infrastructure. The UAE could become a major player in the growing commercialisation of space: commercial remote sensing, space transportation and production, satellite services (including media and communications) and navigation as well as private space programmes.

Creating human capital

Economic transformations are made by people with the requisite skills and knowledge. Specialised human resources will be required to design, build, operate, maintain, manage and develop the increasingly complex logistics and supply chain systems. There is huge potential in the establishment of a logistics and supply chain management institute that would educate, train and supply graduates to support the growth of the logistics and supply chain services cluster. 

Using local markets

Last but not the least, using the UAE’s local currency bond and Sukuk market to provide financing for the Expo would also leave a legacy of financial deepening. Dubai can finance Expo infrastructure and facilities by issuing bonds and Sukuk backed by the assets and future cash flows from infrastructure and related services, as is typical of project financing schemes. A series of local government and corporate bonds and Sukuk issues could be raised to finance Expo projects, thereby ensuring that projects are economically and financially viable, and by the same token help build local bond and Sukuk markets. 

A major opportunity is for Dubai to become the global home for financing clean energy and technology, building on the sustainability theme of  the Expo. Currently, no international centre plays this role. With the build-up of the financial sector in the DIFC and Abu Dhabi Global Market, resources are available for Dubai to become a global renewable energy
financing hub. 

Transforming economic geography

Globally, nations are adjusting to increased globalisation and planet-wide complex connectivity and linkages. Deep structural change is occurring through the creation of new global supply chains anchored in emerging market economies. These changes in economic geography underscore the importance of focusing on infrastructure, transport and logistics, labour mobility and migration and trade facilitation. Economic development strategies can no longer be inward-looking; resources should be oriented toward international integration in new global value chains. For emerging economies, two implications are clear: one, focus on human capital investments and market-related science and technology skills. Two, re-orient trade and investment strategies, policies and agreements toward Asia, Africa and emerging market economies in order to integrate into the New Silk Economic Road. Dubai’s hosting of Expo 2020 is both a consecration of the UAE’s spectacular achievements over the past three decades and a potential transformational moment for the region.