Economists have long debated the effectiveness of laws enacted to spur economic development. But cities continue to try to create jobs and wealth, and some like Abu Dhabi seem to be doing something right.
The capital of the United Arab Emirates in 2015 created a financial district where it relaxed tax and regulatory requirements to attract foreign investment. In three years, the Abu Dhabi Global Market has emerged as a vibrant business community featuring financial services companies and professional advisers.
Writing laws conducive to growth has secured Abu Dhabi's place as a global financial center. It's ranked 25th in the Global Financial Centres Index, just behind better known European financial hubs Frankfurt, Luxembourg and Paris.
Governance and law in the Abu Dhabi Global Market was modeled after its UAE neighbor, Dubai. Using its newfound oil wealth in the 1970s, Dubai started upgrading its infrastructure to become a commercial center in the Middle East. The fundamentalism of Gulf Coast countries, though, was a deterrent to foreign investment in the Middle East. Leveraging a concept called "free zones," Dubai developed economic areas that waived corporate taxes, allowed 100 percent foreign ownership and simplified start-up processes.
It took the idea a step further in 2004 by opening a free zone called the Dubai International Finance Centre with its own legal structure, financial regulator and courts. The DIFC, as it's known, is governed by British common law rather than Sharia law. A transparent legal regime aligned with international best practices offered certainty and familiarity to global financial institutions and foreign investors.
The legal changes combined with business-friendly regulations, political stability and modern infrastructure have turned Dubai into a favored city for business in the Middle East and Africa. It's also at the center of trade between the East and West, connecting the region to the economies of Europe, Asia and the Americas. The DIFC has a working population of more than 22,000 people and 2,000 companies, according to its website. It has attracted many of the world's largest banks, as well as multinational corporations.
The DIFC now has healthy competition from within the UAE. Abu Dhabi seeks to exploit its oil wealth –estimated at 6 percent of the world's proven oil reserves – to transform its economy and global competitiveness.
The Abu Dhabi Global Market is in the capital's shiny new Al Maryah Island, a half square-mile piece of land being developed by Mubadala, one of the world's largest sovereign wealth funds. Taking a page from the Disney corporate playbook, Abu Dhabi has carefully planned the growth and development of the island. The first phase was the financial district, a shopping mall, a luxury hotel and the world-class Cleveland Clinic hospital. Another shopping center, featuring department stores Macy's and Bloomingdales, is expected to open later this year. Al Maryah is poised to become one of the world's most luxurious neighborhoods.
The financial center, known as ADGM, is housed in glistening new towers and a low-lying central building shaped like an upside-down trapezoid. Like its Dubai counterpart, it has an independent financial services regulator and a court system built on English law.
The ADGM's legal approach is more progressive than the DIFC's by adopting specified English laws and related jurisprudence. It also reaches out to its community or to experienced advisers on new considerations or initiatives before launching white papers for public comment. This allows any new laws or regulations to be carefully considered, which is unique in the market.
The ADGM has also reduced the need for laborious notarization and legalization processes, which add time and significant cost for any new company entering the market or expanding. It is the only jurisdiction in the Middle East offering this.
While ADGM permits a range of financial services, from banking to insurance to wealth management, it has also launched several firsts in the region, including a private real estate investment trust regime, a new venture capital framework for fund managers and an aviation financing scheme.
The existence and interaction of federal laws, individual emirate laws and free zone laws can be quite complex and confusing, making it essential to seek out a local expert. For example, a foreigner wishing to conduct business outside the free zone must have a local partner owning 51 percent of the business. Other challenges include a small domestic market, risks of speculative bubbles, geopolitical instability in the Middle East and dependence on oil.
Foreign investment in Abu Dhabi and Dubai allowed the UAE to weather the slump in oil prices that began in 2014. UAE saw the inflows of foreign direct investment increase by nearly 8 percent last year, to $10.3 billion, according to the United Nations Conference on Trade and Development. In sharp contrast, inflows of foreign direct investment to the region, excluding Israel, fell by 16 percent in 2017.
The UAE's favorable business climate, led by the ADGM, had a lot to do with that.
This article was originally published in Global Trade Magazine.
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