Abu Dhabi prepares for economic transition

As the emirate looks to transform from a planned economy to one driven by the private sector, it has drafted in a legion of experts to advise it on the process. Tom Gara reports Government-led capitalism is an economic model that may not be unique to the Gulf, but it is in the GCC where it has reached its most user-friendly state. Planned economies, such as that of the former Soviet Union, often conjure up images of bread queues, ration cards and badly made tractors. As the Soviet Union was collapsing, the system became so unbalanced and shortages so common that people could queue for hours to buy basic consumer products, and manufacturing suffered.

However, the Gulf has demonstrated that a planned economy can also produce great airlines, decent banks and first-rate hotels. But what history shows, and what regional governments are keenly aware of, is that the decentralisation of an economy is inevitable. The process can be extremely painful, and often ends disastrously. So in Abu Dhabi, where social and economic transformation is being led almost entirely by the Government and government-linked companies, the move to a decentralised economy is - like almost everything else - being carefully managed by the Government, aided by a legion of international specialists.

One of those helpers is Insead, the French business school that is consistently ranked among the world's best. Its Abu Dhabi campus has been transferring leadership and management thinking to the Government and its many businesses, working to build the corporate capability of the emirate. It will not happen overnight. Moving from an economy driven by an extremely wealthy government to one whose momentum comes from its entrepreneurs and private businesses is something that will take time, says Subi Rangan, the professor of strategy and management at Insead.

"I'd rather build something slow and endurable rather than fast and fragile," he says. "There are plenty of examples of things going wrong when they are done in haste. There is a wisdom in knowing the right time horizon - it is one or two generations, not a decade." Prof Rangan is in Abu Dhabi today, along with a host of corporate and government leaders, to discuss how leadership and management will transform the emirate.

The Insead Leadership Summit, held to coincide with the university's 50th birthday, is one of a growing number of conferences convened to ask big questions about the future economies of the emirate and the region. For big questions about how a government should interact with its economy, there are worse people to ask than Prof Rangan, who took a PhD in political economy from Harvard in 1994. In the same year he co-taught a course at the university on the relationship between public policy and multinational companies.

Aside from the core role of maintaining law and order, he sees governments as economic architects, designing the institutions and systems that make an economy work. He says institutions that guarantee property rights, sustain a predictable environment for doing business and ensure accountability in the form of laws and governance standards are the most important of these architecture challenges.

"The end role of a government as an architect is to oversee the architecture and leave the components to the firms, the businesses and the families," he says. "What you are seeing in Abu Dhabi is an evolution to a future where there is a larger private sector. This is not at the expense of the public sector but alongside it, because the economic pie is getting bigger and the private sector will be responsible for much of that."

Globally, that evolutionary process is not guaranteed, as the example of many resource-rich countries has shown. Cases of "Dutch Disease", where resource wealth leads to a dearth of local entrepreneurs, a reliance on imports and an undiversified economy has been observed across the resource-rich world. Strengthening the argument are examples such as Singapore, Hong Kong and Dubai, which managed to become business centres despite little or no natural resources.

"The lesson," Prof Rangan says, "is that we are not limited by our physical endowments. Sometimes they are large and valuable, but they can cause limitations. And we know that they are neither necessary nor sufficient." It is necessary, in the professor's view, to tell the world convincingly that you stand for something. If that something is compelling, and businesses trust that you will follow through on your words with action, then the emergence of a thriving private economy becomes far more likely.

"I cannot emphasise enough how much ambition and aspiration matter; how much they matter when you are looking out to the world," he says. He sees Abu Dhabi aspiring to become "a pole of energy", much like the North and South Poles, and looking to become a driving force for the future economy in fields such as renewable energy, advanced technology and culture. "This creates the context in which business can prosper, because when they see that you want to become a pole, business will line up," Prof Rangan says.

"The overarching theme to all of this is that leadership can influence and shape our world. It is not just a bunch of physical endowments, but it is a game of human capital, ideas and aspirations." The aspirations he speaks of are being expressed most strongly in the high-profile joint ventures that are aimed at bringing private industry to the emirate. One example among many is General Electric, which is creating a state-of-the-art aircraft servicing facility in Abu Dhabi in a multibillion-dollar joint venture.

John Rice, the head of the General Electric technology infrastructure group that is behind the deal, said the aspirations of the Government and its strategic investor, Mubadala, mattered as much as its willingness to finance the venture or its geographic location. "Knowing that we are doing business with a partner that wants to be a strategic player, that is in it for the long run and plans on becoming a real force in the industry, that really makes the difference for us," he said during a visit to Abu Dhabi last week.

"The smartest emerging countries are transforming their commercial relationships from transactions to partnerships," he added. "What we have here is something that will ultimately benefit us and our shareholders, but really it is helping the country in so many ways. "For everyone involved, this is about much more than just selling an engine." @Email:[e-mail]