x Abu Dhabi, UAEFriday 28 July 2017

Small Gulf states have advantage of location

The greatest economic opportunities for the region come from the ability, geographically and culturally, to bridge East and West.

DIFC hub: the Gulf region is a natural waypoint between Europe and East Asia, as well as between Africa and Central and East Asia. Jaime Puebla / The National
DIFC hub: the Gulf region is a natural waypoint between Europe and East Asia, as well as between Africa and Central and East Asia. Jaime Puebla / The National

Whether it was the Roman Empire, the Caliphates, the British Empire or, most recently, what has been called the American Century, history records long cycles when a dominant economic centre defined much about the world.

In such times, a hub-and-spoke pattern of trade develops, and from the hub a dominant business culture, even a dominant language, sets the norms to which others default.

But when looking back, we tend to pay less attention to what happens during the intervals between periods of hegemony, which is unfortunate on two counts. First, these interregnums can last a long time and, for those living in them, they are not an interregnum but simply the way the world is. Second, we are entering such a time.

East Asia, Japan, China and South Korea have already risen to contest the 20th century's western economic centre, and others will soon follow, likely including the usual suspects India, Russia and Brazil. Africa will too, maybe sooner than most anyone expects.

Who are the winners in a multipolar world? The answer can be everyone. Such periods have often been a time of great creativity and development, even if the lack of a hegemon means there will be no hagiographic cultural production to memorialise the age.

But some benefit more than others. As patterns of trade shift from hub-and-spoke to a more complex network structure, these are times when being at the crossroads, able to create a bridge between many others, becomes a more valuable asset.

The transitions that challenge the small Gulf countries also define these countries' potential. While oil and gas have been the drivers of growth and wealth, transportation and logistics have already become central to these economies. The Gulf is a natural waypoint between Europe and East Asia, as well as between Africa and Central and East Asia.

This geographical reality reaches farther than the present logistical advantages it confers. A tradition that comes from being in this position, a crossroads for sea trade and desert routes, has allowed for cultures that are open to outsiders, with an understanding that we can work with those who are different from us without having to become like them or expecting them to become like us.

The Gulf does have many challenges to overcome to fully capture the value from being a link between many places in a multipolar world. The greatest economic opportunities come from the ability, geographically and culturally, to bridge East and West.

However, while cultural and economic links to Pakistan and India run deep, ties are much weaker when looking farther east. When, beginning in the 1960s, the region was racing to catch up, its development took place in a world where the West, especially the United States, had uncontested dominance.

This made the West the default choice not just for technology and business practices, but also for education. In the education received by the native-born as well as in the national make-up of highly skilled expatriates in the Gulf, this imbalance is evident. Government and private business can now be expected to look for balance, cultivating economic and educational ties to China and Asia more broadly.

It was not inevitable that a hub would develop in the Gulf, and competition between the small Gulf states has played a key role. In the UAE, this dynamic extends to the governments of each emirate that have substantial autonomy. The diversity allows for experimentation, innovation and emulation.

In the race to be the broker, logistically and financially, between Europe, Asia and Africa, all Gulf countries have similar geographic advantages. Good legal and regulatory frameworks are then the key competitive advantages.

For many private businesses the stability of the cosmopolitan talent that the region has attracted and nurtured is still a concern. Short-term visa regimes create uncertainty about the long-term commitment of staff, which reduces incentives to invest in training and development, putting at risk the ability to remain competitive. This particular piece of the legal framework is unlikely to change, as it reflects the reality that government policy operates within the rigid constraints defined by political legitimacy and social stability.

Will such concerns remain just constraints, or will they come to dominate policy? With the end of American hegemony, the security envelope it provided continues to erode. Recognition of the strategic security risks in the region has been a central motivation for the leadership of small Gulf countries to create an environment conducive to growth and attractive to international investors.

Economic development is considered a precondition for long-term security and political autonomy. Since the strategic realities of the Middle East are unlikely to change for some time, this pragmatic motivation will remain. We can expect governments of the small Gulf states to continue to build on the advantages of geography and openness to the world to drive economic growth.

 

Miguel Lobo is an associate professor of decision sciences and the director of Insead's Abu Dhabi campus