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UAE Freezones Biz News Updates
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Gulf’s free zones help spur economic diversification
The Middle East has propelled the development of free zones in recent
decades. In a region where red tape and complicated regulations deter
investors, free zones, offering respite from usual tax regimes and operating
under their own laws, have transformed trade and investment, spawning new
industries and diversifying economies.
Dubai, in the United Arab Emirates, is home to 22 free zones, more than
anywhere else in the region, if not the world. The sector-specific enclaves
have become hubs attracting 19,000 companies, from multinational banks to
global media, creating some 200,000 jobs. Cementing its leadership in the
sector, the UAE has established the World Free Zones Organisation to bring
all free zones under one roof.
“Free zones play a positive role in the economies of their country, but
there is no channel for dialogue, to share best practice, provide technical
support,” says Mohammed Alzarooni, the organisation’s chairman. “We don’t
even know how many free zones exist – maybe 3,500, but there are no official
statistics.”
The Middle East’s first major free zone opened at Jebel Ali port in Dubai in
1985. It is now the world’s largest, accommodating more than a fifth of
Dubai’s foreign direct investment and responsible for more than half its
total exports. Following its success, media and internet zones were created,
then a financial centre, attracting the biggest companies in their
industries. Dubai’s free zones contributed $24bn to the city’s GDP in 2012,
more than a quarter of total economic output.
Dubai Design District is the city’s newest, dedicated to luxury, art,
fashion and design. It will open its first building in January.
“Dubai is always looking at industries that need help coming together,” says
Lindsay Miller, the District’s managing director. “In fashion, retailers
were reporting that their Dubai sales were the highest globally, while Dubai
designers were dressing global celebrities. On the interiors side, Dubai
hosting Expo 2020 offers incredible growth opportunities. The macro trends
show lots of cross-pollination – luxury goods makers involved in the art
world, for example. Creatives, like any other industry, need catalysts to
achieve the next level.”
The District will be a hybrid “onshore” and “offshore” area, as some
companies – those seeking permits to build, for example – need to operate
under onshore rules. The aim is to connect tourists with the “soul of
Dubai”, Ms Miller says, attracting them with its 2km-long waterfront and
craftsmen, artisans and galleries and in turn providing exposure for the
city’s creative community.
“Free zones encourage the development of clusters. Having those centres of
gravity encourages a broader build-out of specialised infrastructure and
creates a focus for regional activity, producing goods and services that the
rest of the region wants,” says Simon Williams, chief economist at HSBC
Middle East.
“They also become places where you can offshore best practice in terms of
ownership, taxation and regulation. Media isn’t subjected to the same
controls in Dubai Media City. Dubai’s financial centre has legal structures
that approximate the rules firms work with around the world.”
Dubai’s neighbours have followed in its footsteps, offering similar
incentives that are seldom available onshore, such as full foreign
ownership, and 100 per cent repatriation of profits. Qatar and Bahrain also
have financial centres; down the road from Dubai, Abu Dhabi has established
industrial, airport and media free zones.
While free zones are prompting economic diversification, their aim in many
Middle Eastern nations is also to spur local employment. Saudi Arabia, which
has a population of nearly 30m, is extending the concept to build entire
urban centres housing industries such as pharmaceuticals, logistics and
manufacturing. One example is King Abdullah Economic City, a $27bn
development spread over 173 sq km on the Red Sea.
Such cities, expected to create more than 1m jobs and add $150bn to GDP by
2020, are taking far longer to come to fruition than was originally
envisaged, revealing the shortcomings of adopting a one-size fits all
approach.
“The problem is bigger than the economic cities – it’s the structure of the
labour market,” says John Sfakianakis, a Riyadh-based economist. “Companies
traditionally use cheap foreign labour in manufacturing: for every four jobs
that go to expats in the sector, less than one goes to a Saudi. The
government is trying to change the output mix and become more selective and
higher value added-oriented. The Dubai model cannot be acceptable to Saudi
Arabia, to simply create jobs willy-nilly. Saudi Arabia needs to create jobs
for its own population.”
This may explain why such zones have not blossomed elsewhere in the region.
Countries in north Africa, which, unlike the Gulf, impose taxes on their
populations, may be cautious about foregoing tax revenue in support of
industries that do not generate jobs for their constituents.
For Dubai, in which Emiratis make up less than a fifth of the 2m-strong
population, the free zone model is working.
“The UAE is a one-stop shop,” says Dubai-based Mr Alzarooni. “Some
incentives are outside [the free zones] – roads, airports, ports. It’s one
thing to be near an airport, but not many have the number of flights Dubai
has, allowing companies to import and re-export on the same day.”
Still, Qatar, Abu Dhabi and Saudi Arabia are expanding their own airlines,
airports, and ports to boost competitiveness and enhance trade.
“Free zones will continue to prosper, accelerating the diversification of
economies that might otherwise be held back by rigid rules governing the
market onshore,” HSBC’s Mr Williams says.
June 29, 2014 |
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Courtesy The Financial Times Limited
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