The Impacts on the Business Services Sector of the United Arab Emirates resulting from...

ABSTRACT

The central purpose of this study is to evaluate the likely impact of the implementation of the General Agreement on Trade in Services (GATS) on the business services sector of the United Arab Emirates (UAE), as a particular example of the adjustment problems that may face

many Gulf States in the foreseeable future. It also seeks to diagnose the problems that may be involved for this sector of the UAE economy as the likely impact of the GATS intensifies. Some measures that may ease and speed the necessary process of adaptation to this latter scenario are, then, suggested for further consideration.

INTRODUCTION

The central purpose of this paper is to evaluate the likely impacts of the implementation of the General Agreement on Trade in Services (hereinafter GATS) on the business services sector of the United Arab Emirates (UAE). It also seeks to diagnose the problems that may be involved for this sector of the UAE economy as the likely impact of the GATS intensifies. Some measures that may ease and speed the necessary process of adaptation to this latter scenario are then suggested for further consideration.

The World Trade Organisation has the same international status as the World Bank and IMF institutions and it is charged with providing the framework within which its members conduct trade relationships. The WTO is an international market place where "trade negotiations are conducted to reduce barriers to trade, agree to rules of behaviour, and resolve disputes [between Member nations]" (Hoekman, Kostecki, 1995). The GATS, General Agreement of Trade in Services, is focused on the liberalisation of world trade in services.

The following sections seek to "set the scene "for the ensuing evaluation. Section 2 sets out some important general observations on the nature and role of business services, whilst section 3 briefly details some global and regional trends of relevance to this study. Section 4, then, elaborates on the GATS and its probable impact on the UAE's business services sector over the medium-to-long run. Section 5 explores some problems that may surface as this sector (and the UAE economy more generally) adjusts to full compliance with GATS, and its likely future evolution. Section 6, then, presents some possible policy steps that may aid in the active adjustment of the UAE economy generally, and its business services sector specifically, to the long run impacts of the implementation and development of the GATS framework. Section 7 specifies some of the further research that is required on these matters.

THE NATURE AND ROLE OF BUSINESS SERVICES

It is valuable, before proceeding to the central concerns of this paper, to consider first the general definition of "business services," and, also, their role in the economy and the process of economic development.

What are "Business Services?"

A commonly deployed distinction in the analysis of the services component of the economy is that between intermediate and final services (Braga et al, 1994: 3). The former category is also frequently subdivided into distributive services (such as the retail and wholesale trades, transportation, warehousing and communications) and producer services -- usually taken to include banking/finance, insurance, business services, and "other" producer services (such as leasing; contract cleaning). These categorisations are shown pictorially in Figure I.

FIGURE I

A Typology of Intermediate Services
Source: J. Burton (1998)

DISTRIBUTIVE SERVICES

* RETAIL AND WHOLESALE TRADES
* TRANSPORTATION
* STORAGE AND WAREHOUSING
* COMMUNICATIONS

PRODUCER SERVICES

* FINANCIAL SERVICES AND INSURANCE
* LEASING/COMMERCIAL PROPERTY MARKET SERVICES
* "ROUTINE" SERVICES FOR BUSINESS
(e.g. Contracted provision of CATERING, CLEANING, LAUNDRY, etc.)
* BUSINESS SERVICES

Seen from this perspective, the "business services" classification may seem like a rather small and somewhat residual category of economic endeavours as it does not include massive service industries such as telecoms, ports, the utilities, education, health [all of which are mainly in the UAE public sector]; neither does it include banking, finance and insurance. Indeed, until, recent decades, business services.

As discussed below, however, it is increasingly being argued in economic and managerial analyses that business services play a highly significant role in the process of economic development.

Reflecting this emerging concern, there has recently been greater attention to measuring and recording the dimensions and growth of business services in national income accounting procedures. In contemporary national accounting systems (e.g., in the EU), "business services" are more commonly taken to include (Illeris, 1996: 65):

* Management and Economics Consultancy

* Accounting and Auditing

* Advertising and Market Research

* Public Relations/Governmental Relations

* Computing, IT, and MIS Services

* R&D work (e.g., Applied Science; New Product Development)

* Engineering (and related) Consultancy

* Operational Services (e.g., Logistics; Facilities Management; Exim Management)

* Recruitment, Personnel and Training Services

* Design Consultancy

* Legal Services

* Architectural Firms

* Security Management

A question that needs to be asked is whether the above list of different service occupations share any underlying element of commonality -- i.e., constitute a related group in a truly economic sense -- or whether they

comprise merely a statistical aggregate that has been put together simply as a matter of convenience and convention in national accounting methodology.

Tordoir (1993) argues that there is an underlying economic similarity between the constituents of the above list, in that all of these business services function as mediators between individual enterprises and their complex outer environments.

The Tordoir approach may be rejected as an inadequate characterisation of business services. It is certainly appropriate to consider banks and insurance companies -- note, however, that these are conventionally not classified as business services -- as "intermediaries," operating to bring into co-ordination demands and supplies in financial and insurance markets, respectively. A business service enterprise, however, typically supplies not an intermediary function but, rather, complex types of advice and capabilities to other organisations, which are used as inputs by the purchasing concern (e.g., a biotechnology consultancy selling research on genetics to a pharmaceutical producer; an economics research outfit purveying industry or macro-economic forecasts to a client organisation).

The analytical approach adopted in this study is, therefore, different from that of the Tordoir position. Business services are here viewed as suppliers of complex capability-based services to other organisations. They are, relatedly, also to be distinguished from other types of producer services by their intensive utilisation of knowledge capital and human capital (which, of course, varies greatly in "disciplinary" content across the spectrum of business services e.g., from legal services to engineering advice). This perspective has important implications, both for our general understanding of the role of business services in the process of economic development and -- as elaborated below -- more specifically with the matters addressed in this study.

The Role and Significance of Business Services

Throughout much of the history of economic thought, services -- including business services -- have been viewed in a somewhat negative light. Even the Founding Father of economics, Adam Smith (1776) castigated services (including business services, such as those of lawyers) as `unproductive of any value.'

Whilst this erroneous position has been jettisoned in contemporary economic and business thought, some analysts (eg, Kaldor, 1966; Baumol, 1967) now visualise services as a source of slow (productivity) growth in any economy; whilst manufacturing is correspondingly vaunted as an "engine of growth" (Petit, 1986: 26-30).

That even this latter position is, at least, a naive -- and, more probably, a dangerously incorrect interpretation of the subtle nature of the process of economic development is revealed simply by a moment's reflection on the underlying, but changing, constituents of any typical manufactured good, over the course of this century. For example:

   The vast bulk of the production costs of Henry Ford's first cars consisted
   of the costs of labour and simple materials. The input of the research,
   accounting, marketing, finance and legal departments and the purchase of
   such services from outside firms constituted a small proportion of the
   total. Today, these same inputs represent a large and growing fraction of
   the total value of the [typical] car. (Grubel and Walker, 1989: 193).

More generally, it is obviously the case that modern manufactured products of absolutely all sorts embody very significant inputs of services of (what has been labelled above as) the complex-capability-based type. Indeed, the very linchpin of the contemporary Information Revolution -- the computer -- involves almost trivial expenditures upon materials and unskilled labour. The primary constituent of their cost represents payments, to science/engineering/design-based firms (such as Intel and Microsoft).

So, even if it were ever true to state -- as some allege -- that manufacturing constitutes the "engine of growth," we may also say that the "petrol feeding the engine" of contemporary economic development appears to be primarily that of complex capability-based services.

Viewed from another (complementary) angle, this line of thought suggests a central role for the accumulation of human capital and knowledge capital (as against traditional, physical capital) in the process of economic growth. This proposition first received some empirical confirmation in a pathbreaking study by Solow (1957), and subsequently in much other economic research. For example, Jorgenson and Fraumeni (1987) estimated that human capital accounts in recent times for over 70 per cent of the total capital stock of that veritable bastion of "capitalism" the U.S. of A. (Contra Karl Marx -- who viewed capital and capitalism solely in terms of physical capital -- it thus now appears that contemporary "capitalism" is predominantly to be appreciated in terms of the widening, and deepening, of stocks of both human capital and knowledge capital).

The foregoing conclusion is reinforced, and not overturned, by the conclusions of the so-called "New Growth Theory" which views technical change as essentially endogenous rather than exogenous in origin (eg, Grossman and Helpman, 1991). This New Growth Theory highlights four sources of endogenous growth-generating change:

* Returns to Increased Specialisation

* Returns to an Increased Stock of Human Capital

* Returns to Knowledge Accumulation via Learning-by-Doing, and

* Returns to Knowledge Accumulation via R&D/Innovation.

It has been argued above that the essential and common characteristic of all types of business services -- however different superficially they may appear to be -- is that they all involve the provision of complex capability-based services to other organisations (including, if not mainly, other private enterprises), drawing upon their differing but intensively-utilised core resources in the form of knowledge and associated human capital. It follows that the business services sector constitutes one of the main conduits whereby a society's stock of knowledge capital and human capital are formed, augmented and "injected" into the general process of value production within its economy. Thus, far from being a minor -- let alone "unproductive" -- component of a nation's overall accounts, they should properly be seen as a vital ingredient in both the business system and in the contemporary process of economic development. It is with these fundamental conclusions firmly in mind that we need to approach questions relating to the impacts of GATS on the business services sector of any economy.

SOME RELEVANT GLOBAL AND REGIONAL TRENDS

Before proceeding further, however, to an evaluation of the likely effects of GATS on the UAE's business services sector, it is necessary also to refer to some relevant global and regional trends. Four such matters are here briefly covered: The Growth of Services -- and Business Services in particular; the Trend to De-Integration in Value Production Processes; the Trend towards Liberalisation of Economies; and the Development Trends of Depletable Resource-Based Economies (DREB-type economies, hereinafter).

The Growth of Services in General -- and Business Services in Particular

International data suggest that the share of services in Gross Domestic Product (GDP) has risen in most countries over the past three decades (Braga et al 1994:4). This trend has been variable across countries and, indeed, a few developing countries (e.g., Mexico) have actually experienced a decline in the relative importance of services in their GDP over that time period.

In employment terms, the most "tertiarised" economy today is the USA, where over 70 per cent of jobs are now in the services sector (Illeris, 1996:3). Despite some contemporary dismissals of the USA's seemingly enviable employment situation as resting upon a large swathe of "Mcjobs" (ie, low-paying routinised service sector work), it appears from the World Bank's latest World Development Indicators that the USA still ranks as the country with the second-highest GDP per capita adjusted for differences in living costs, i.e. at "purchasing power parity." By comparison it is pertinent to note that the UAE stands at No. 23 in these GDP per person rankings, on 1996 figures -- with Qatar and Bahrain in the 26th and 28th positions, respectively (Economist, 1998b:152).

Employment data reveal that, within the general ranks of service industry, it has been the category of business services that has witnessed the most rapid growth in many nations over the last three decades or so. Illeris (1996:59) found that `in most countries [business services] have more or less trebled their share of total employment between 1960 and 1987.'

Of particular interest in regard to this study -- focusing on the UAE -- is the experience of Canada in the business services field. Whilst there are obviously many differences between Canada and the UAE -- e.g., geographical size; climate; sociology -- an underlying commonality resides in the fact that, historically, Canada has been (and still largely remains) -- like the UAE today -- a "DREB-type" economy (Porter, 1991). Despite this economic background -- and which plausibly might act as a drag on the development of a strong business services sector -- recent decades in Canada have witnessed `extraordinarily high growth rates' in business services generally (Grubel and Walker, 1989:56). Over the period 1978-84, for example, Canadian employment in computer services grew by 151 percent, in management consultancy by 63 percent, in legal services by 50 percent, and in advertising services by 47 percent. (Note, however, that the ranks of both architects and engineering/scientific services grew more slowly over this time period, at 3 and 4.8 percent respectively).

The trends reviewed above are suggestive, at best, only of a potential for the UAE and other (Gulf States) to harbour and husband a rapidly-growing business services sector in the post-2000 scenario. Whether or not this prospect comes about depends, obviously, on whether or not the conditions necessary to sustain such a development are in place (as discussed in Sections 4, 5, and 6 below).

The Trend to De-Integration

To observe a trend is not the same thing as explaining it. Why has the business services sector grown so rapidly in many countries in recent times? There are a number of possible drivers of this development, but one that is emphasised by many analysts (e.g. Porter, 1990:243) is an underlying trend in businesses around the world towards, what has variously been termed as, the "de-integration," "vertical disintegration," "unbundling," "dehiving," "contracting out" or "outsourcing" of many/some of their service functions. (McEstridge and Smith, 1988). Whatever the terminology, this refers to the fact that many businesses are increasingly employing other specialised business service providers to undertake service activities that were previously performed internally, within the firm.

The proximate causes of this underlying trend towards de-integration are multiple in number, and may include (Porter, 1990: 243-7):

i) Managerial desires to outsource noncritical activities (e.g., data processing), to free up their ability to concentrate on the firm's core activities;

(ii) A growth in the competitive advantage of specialised business service providers over within-firm service production, due to greater achievable economies of both scale and specialisation;

(iii) The emergence of specialised multi-unit business service vendors -- as a result of items (ii) and (iii) -- which, then, can afford to undertake both brand building and R & D to enhance their systemisation and competitive advantage over individual business service providers;

(iv) Specialised business providers are, also, driven to greater efficiency by the spur of open competition, whereas within-firm business service units may be more lax in this regard because they are treated as "overhead" costs.

Whilst this list of proximate causes for ongoing de-integration in business may seem diverse superficially, they may all be seen as elements of a general economic process, first diagnosed by Adam Smith (1776) -- namely, that `the division of labour is limited by the extent of the market.' In other words, economic growth (and the extension of markets) permits greater specialisation of endeavours. The contemporary emergence, development and specialisation of business service firms is but one aspect of this general process. (Note that the converse also generally holds, as Smith also observed: specialisation permits greater efficiency, and thus productivity growth).

Whilst there are limits to what firms may advisedly contract out -- for example commercially-successful knowledge creation requires knowledge protection, which is easier to mount internally (Burton, 1999) -- the prospects for the further general growth of specialised business services remain generally bright, because economic development will both cause, and be driven by, the possibilities of further specialisation. (For example, we may expect to see -- and are already witnessing -- the gradual replacement of broad consulting firms by specialists in fields such as executive recruitment; econometric forecasting; the management of intellectual capital; strategy; marketing; and industry-specific consultancies).

The Trend Towards Liberalisation

Since 1948, under the auspices of the General Agreement on Tariffs and Trade (GATT), there have been a number of successive "rounds" of negotiations that have succeeded in progressively liberalising international trade in industrial products, particularly on the tariff front. With, however, the growth over recent decades of the services sector generally (see above), pressure subsequently mounted -- particularly from the USA, the most "tertiarised" economy -- to extend liberalisation also to the sphere of international trade in services. The outcome of this has been the GATS: `a multilateral framework of concepts, rules and principles pertaining to international transactions in services' (Braga et al, 1994: 139), with the goal of reducing or eliminating barriers to trade in services.

Parties to the GATS -- which include the UAE -- have to undertake certain defined obligations and commitments in respect of their openness to international trade in services. Moreover, these are enforceable via a dispute settlement mechanism conducted under the auspices of the World Trade Organisation (WTO).

The framework agreement of the GATS, in fact, commits signatory countries to very little of a concrete nature -- the only real substantive elements are the specific commitments made by each member. Moreover, Article II (2) of the GATS allows signatories to maintain a domestic measure inconsistent with "most-favoured-nation" (mfn) treatment, provided that it "lists" this exemption specifically.

However, one condition for exemption is that the Council for Trade in Services (CTS) will, within the space of 5 years, assess all exemptions granted for more than 5 years, and consider `... whether the conditions which created the need for the exemption still prevail.' Moreover, the GATS requires of its members periodic rounds of negotiation to `improve' commitments and to attain `a progressively higher level of liberalisation' of international trade in services.

The UAE, in re-negotiating the terms of its implementation of the GATS, will need to take into consideration that the "pressure will be on" (see above) for it to adjust to the full liberalisation of its business (and other) services sector(s), including the equal treatment of domestic and foreign enterprises in this regard. Consequently, (in Section 4) this study explores a scenario for the UAE business services sector that assumes full liberalisation under the GATS framework. Whether this scenario emerges relatively swiftly, or in a more delayed fashion, it is -- due to the international political momentum described above -- the most likely eventual scenario.

The Ineluctable Trends of DREB Economies

There are a number of classification systems that one could use for different economies. For the purposes of this paper the Kotler, Jatusripitak and Maesincee (1997) classification acts as a useful starting point. They classify countries into 8 differing strategic groups based upon the two dimensions of their current level of wealth and underlying economic base. One such group identifies the term as Commodity-Nicher nations, which includes, primarily, the members of the Arab Gulf Cooperation Council (AGCC) plus Iran, Iraq and Syria. The present study employs an alternative terminology to refer to the same group -- Depletable Resource-Based (DREB) economies. This emphasises the obvious and inescapable fact that eventually "the oil will run out;" whether the price of oil is low (as for much of the 1990s) or relatively high (as for year 2000).

The central long-run economic policy questions facing any DREB economy (such as the UAE) are basically two-fold:

(a) Is the level of national savings and investment, out of the income from resource extraction, sufficiently high in principle to maintain future levels of consumption after the resources are depleted?

(b) Do the conditions necessary for the long-run diversification of the domestic economic base into productive and sustainable employments and assets in other sectors obtain, or are being put into place (at a sufficiently fast rate)?

The answer to question (a) above is sensitive to such factors as the contribution of oil to a country's GDP, the rate of return on (or "quality" of) its investment, the size of the nation's oil reserves and the projected rate of extraction. It appears, generally, from calculations (Askari, Bazzari and Tyler, 1998), however, that the UAE is "probably okay" (currently) in terms of the answer to question (a) -- whereas Bahrain and Oman (possibly also Qatar and Saudi Arabia) may not be, on this account.

This still leaves us with question (b). It would be economically possible, hypothetically, for the UAE to invest all of its savings from oil revenues abroad, and live in a post-oil future on the income flow from high rate-of-return foreign assets -- whilst ignoring entirely the development needs of its domestic economic base. Whilst this scenario might be theoretically possible for the UAE, it would also seem to represent a monumental political and economic folly, if carried to the extreme (although, of course, some -- and probably a substantial -- level of foreign investment by the UAE is a likely, and appropriate, component of its long-run national strategy also).

THE GATS AND THE PROSPECTS FOR UAE BUSINESS SERVICES

It has been argued above that long-run diversification into remunerative service and manufacturing (and even agricultural) employment is a virtual necessity for any (currently) DREB-type economy, such as the UAE. This goal is, moreover, one that is a central component of official governmental economic strategy in the UAE, at both the Federal and Emirate levels (see, for example, General Planning Department, 1996; Studies and Planning Division, 1996).

Business services are particularly attractive in this regard because the sector is generally highly remunerative compared to many other branches of intermediate services (e. g. the retail trade, much of transportation, warehousing, contract office cleaning and laundry work for companies).

It would be possible for the Emirates to achieve long-run diversification and economically sustainable growth by concentrating on the expansion of relatively "low-tech" and low-value-added manufacturing and services. This scenario, however, implies even more extensive immigration than at present from Third World countries (Judet and Chaponniere, 1995), and is, therefore, not recommended for the UAE (which is already very heavily reliant on this source of labour -- with resulting potential political and social tensions). Clearly, an alternative scenario dependent upon the expansion of high value added high-qualification services (such as business services) and manufacturing embodying complex capability-based services, would seem naturally preferable to the UAE, and which could draw more heavily upon its own citizens in this regard.

A basic question to be asked of this "preferred" scenario, however, is whether or not the UAE business services sector will survive the full liberalisation of international trade in services implied in the evolving GATS framework. Would all domestic business services providers be "knocked out" by intensified foreign competition? And, if survival under full liberalisation requires adaptation by UAE business services, what must these adjustments be?

It is useful at this point to indicate what full liberalisation under the GATS framework implies. This includes:

(a) Recognition of certificates (e.g., professional certificates) granted elsewhere;

(b) Equality of Market Access -- including abolition of restraints on the participation in terms of the maximum percentage limit on foreign shareholdings, and also abolition of specifications constraining how a foreign service supplier may supply a service.

(c) National Treatment -- that is, foreign service supplies be accorded treatment no less favourable than that granted to its own national service suppliers.

Item (a) above has implications for UAE professional associations (e.g., chartered accountants) which may be achieved by harmonisation (or otherwise).

Full liberalisation will involve far more profound adjustments for the UAE in respect of items (b) and (c) -- and especially item (b) -- as, currently, the UAE's Protocol of Accession to the Marrakesh Agreement of the WTO, in (1996) lists in its schedule (of exemptions) that:

   Commercial presence of foreign suppliers will be through either (i) a
   representative office or (ii) an incorporation as a company with a maximum
   foreign equity participation of 49% subject to UAE law.

It is to be noted also that item (i) requires -- except in the UAE's "free zones," such as Jebel Ali -- the appointment of a national agent (to effect licensing of the company) and a commercial agent (to conduct trading on behalf of the company). (For fuller accounts, see Clifford Chance, 1997; Cameron and O'Connor, 1997; and British Business Group of Dubai, 1997). Under full GATS liberalisation both of these requirements would go, and foreign service suppliers would be obliged to observe only the same conditions as domestic firms.

This in turn would, unquestionably:

(a) Encourage an ingress of (100%) foreign-owned business service suppliers; and

(b) threaten the (previously "automatic") position of national agents and commercial agents.

Neither of the effects, however, implies the prospect of a total substitution of present arrangements by new, 100 percent foreign, arrangements. As regards (a) above, it needs to be noted that the formation of strategic alliances and joint ventures (rather than outright acquisition or solo investment) is an entry mode to foreign markets increasingly favoured by many international firms (Burton, 1998). As regards (b), many global service providers are also distinctly aware of the need for a good understanding of national cultural differences and nuances -- involving considerable (including high-level) local employment (Mathe and Perras, 1994). In short, even major, systematised international business services suppliers, in contemplating expansion of their operations in the UAE (or other Gulf States) post full liberalisation under the GATS framework, are very likely to elect for a strategy of `glocalisation'(ie, global delivery, but with a strong local "touch" and input), rather than undifferentiated service supply (subject to considerations noted below).

It also needs to be remembered that, whilst full liberalisation of service provision under the GATS poses some threats (as well as opportunities) for producers of business services within the UAE, this scenario implies important general gains for the UAE users of these services. Liberalisation will tend to result in a lower price of, and greater variety in, business services in the UAE (Kakabadse, 1995), aiding the general development of the economy.

The analysis above suggests that full liberalisation of UAE business services under the evolving GATS framework would likely involve some alterations in the mixture of ownership of such services (away from the currently-imposed 51 percent UAE majority-ownership model) and in the mode of delivery of these services (with "some" probable reduction in the [currently-mandated] employment of local agents).

The latter conclusion (regarding the employment prospects of local agents under full liberalisation) is reinforced by the conditions surrounding the termination of agency contracts, as these matters currently stand in the UAE. Our research has revealed that foreign business services suppliers in the UAE find that the mandatory Local Agent may be of "truly great help" to the enterprise -- or not (or any point in between these extremes). Clearly, if the latter condition obtains, the foreign supplier would wish to terminate the contract with the appointed agent, and seek out a superior partner. This is where, it appears, a number of problems may arise in the UAE.

All current UAE agency contracts -- which usually contain a specified termination/renewal date -- are registered with the relevant Ministry, which is bound officially to supply a fair dispute resolution service. However, the reality appears to be that -- according to the observation made by some of our interviewees --once a UAE agency contract is entered into, then, regardless of the specified termination date, termination is nigh on "impossible." If a dispute in this regard is not resolved by the Ministry, then it must go to the Courts. It is suggested to us, however, that:

(a) The Courts tend to be very slow, and

(b) Almost invariably they find in favour of the Local Agent.

The actual operation of agency law in the UAE thus seems to grant a de facto indefinite distributorship monopoly to the initially appointed Local Agent. Clearly, under full liberalisation, if the situation so described above remains in place, foreign business service suppliers would have a strong incentive to avoid appointing a Local Agent -- lest the appointee proves to be inefficient or indifferent -- and to select some other mode of delivery, on risk-aversion grounds.

As an interim policy conclusion, we would, therefore, recommend that urgent consideration be given to both the content and operation of UAE agency law in order to:

(a) Make agency contracts terminable at the specified date (and thus end indefinite distributor monopolies);

(b) Make the working of the system (including the dispute resolution system/the Courts) be made perceptibly as impartial and speedy as possible (within the due processes of the arbitration/adjudication systems).

It should be emphasised that whilst these proposals may superficially seem to threaten the prospects of UAE Local Agents, the converse generally applies, because the measures recommended would improve the readiness of foreign business service suppliers to appoint a Local Agent, thereby utilising the agent's local expertise and contacts under full liberalisation, rather than to elect for a "go-it-alone" strategy. This would be because of the knowledge that if the local agent does not perform the contracted tasks efficiently and effectively the foreign firm can terminate the contract, and make arrangements with a more efficient local agent.

The Long-Run International Competitiveness of the UAE Business Services Sector

Whilst the analysis above indicates the need for some general adjustments in the UAE to accommodate to full liberalisation of international trade in services, a major question remains as to the prospective national competitiveness of the business services sector of the UAE in the long run. In this regard it needs to be remembered that, for any industry, competitive firms with genuine international advantage tend, on the evidence (Porter, 1990), to be based in only a few nations or even regions thereof (e.g. auctioneering in London and New York; chemicals in the UK and Germany; footwear in Italy; watches in Japan and Switzerland). Specifically, the US and UK have, probably, established international competitive advantage in business services whilst also, on a regional basis, Bahrain and Kuwait (especially) are competitors in this field also.

One major means of seeking to assess these matters is via the Porter (1990) analysis of national competitive advantage for an industry. In essence, the Porter framework presumes that the traditional economic analysis of the formation of comparative advantage (based upon the "factor endowments" of any country, in terms of the traditional triad of land, labour and capital) is insufficient. Based upon extensive empirical and case study evidence, this major international study argues that the existence of national competitive advantage for an industry depends upon four elements:

(A) Factor Conditions

(B) The Complex of Firm Strategy, Structure and Rivalry

(C) Demand Conditions, and

(D) The Pattern of Related and Supporting Industries

These may be represented pictorially as "the Diamond", shown in Fig II. Moreover, surrounding the "Diamond" are the general and specific policies of government (regarding, for example: education and training; infrastructure; R&D support; and competition policy; etc). Also, sheer "chance" plays some possible effect (e.g., via a dramatic change in the price of oil), by creating a discontinuity resulting in a major change in competitive position for an industry. This more general framework for analysis and the potential interaction between the elements involved is depicted in Fig. III.

[ILLUSTRATIONS OMITTED]

One difficulty in applying this framework to the "Business Services Industry" is that this sector -- although comprising a genuine group in the economic sense, in terms of its provision of complex capability-based services -- is segmented in a quite fundamental manner: all of its constituents represent different (disciplinary-based) branches of knowledge (e.g., legal services; architectural services; accounting; human resources management; etc). Consequently, it would be quite possible (for example) that the "extended Diamond" relating to, say Accountancy and Auditing is relatively strong in the UAE -- whilst that relating to Design Consultancy, or Security Management, is less so. To investigate these matters, on a segmental basis, would require some time and resources -- whereas this paper inevitably takes a "broad brush" approach. The prospects for related industries would therefore be of importance for the UAE Business Services Sector.

Nevertheless, there are important general implications of the Porter framework, which require mention in these regards:

(i) Whilst "basic" Factor Conditions (e.g., cheap fuel, cost of labour) are often important in commodity businesses, they are of low relevance to "sophisticated" industries such as Business Services, which are very dependent on knowledge capital and "disciplinary" human capital (see also below, Sections 5 and 6).

(ii) Firm Strategy, Structure and Rivalry -- it is important for the industry to be in a situation of strong competitive vibrancy. Full liberalisation of the UAE Business Services Sector under the GATS will help in this respect.

(iii) Demand Conditions -- it is beneficial, for the development of a sector, if there are "pushy" and demanding customers. The presence of the oil industry may be helpful in this respect in the UAE.

(iv) Related and Supporting Industries -- most internationally competitive industries are clustered, sometimes in regions or cities, with the links between the elements of the cluster being an important factor in the creation and growth of competitive advantage. For example, financial and insurance markets typically require a wide array of Business Services -- lawyers, accountants, management/economic consultants, IT specialists.

Government policy will be important in the UAE in enhancing (i) above through factor creation mechanisms in particular. We turn to these and other relevant policy matters below, in Sections 5 and 6.

SOME UNDERLYING POLICY PROVISIONS

The business services sector (plus real estate) accounted for 8.3 percent of UAE GDP in 1995 (General Planning Department, 1996), and official government economic strategy is to see the further expansion of the sector in the future over the long run. There are, however, a number of underlying problems in the path of this scenario, and which require consideration.

The Skills Gap and Motivation Problems

Business services rely intensively on knowledge capital and relevant human capital. Recent years, however, have witnessed a `glaring skills gap' in the UAE in this regard (Jobbins, 1998) and which, if this continues, will inevitably act as a major brake on the expansion of UAE business services sector.

This problem is reinforced by deeper problems in the UAE educational system, for example:

* The high drop-out rate at the school level (about half of all students do not complete 12 years of schooling;

* Relatively low entry of students into business, technical and engineering subjects (public administration being favoured as a university subject);

* A lack of vocational training opportunities at the middle level;

* Poor knowledge of English (the "common" language of international business); maths; and computer skills;

* Teaching strategies emphasising memorisation rather than analysis.

A further problem relates to historically ingrained attitudes/incentive structures relating to the public sector -- which accounts for a significant share of nationals' employment in the UAE. This has (naturally!) has been the "preferred" employment/career route for highly-educated UAE personnel, and is bolstered by generous benefits (e.g., vacations; housing allowances; salaries; security of employment) compared to those obtained generally in the private sector.

The welfare system in the UAE may also be seen as a barrier to the growth and expansion of business services (and the private sector more generally). All adult UAE nationals have access to free land, houses built to their specification, and receipts of government money. Whilst this may be justified in terms of the high cost of dowries for marriage, it does divert economic activity -- as nationals have a strong incentive to build/rent out accommodation and business space to nonnationals (debarred from the ownership of land). It has been indicated to us that this acts as a disincentive to study/work towards the professional qualifications, degrees, and training that are as necessary for business services employment -- or, for nationals to expect an immediate high-paying managerial job upon professional entry. Consequently, the private sector often prefers to employ expatriates, who generally command lower salaries (and who, moreover, can be fired more easily).

Emiritisation

Currently there are no Federal or Local laws enshrining Emiritisation -- i.e., quotas on the employment of nationals -- which has, rather, been an-"implied" development strategy (naturally enough, given the very high dependence of the UAE, as with many other Gulf States, upon foreign labour). It appears, however, that it is the intention of the government to introduce a limit of a maximum of 50 percent on the number of foreign managers/executives/specialists in each service supplier (subject to renegotiations in year 2000). Combined with the other factors noted in this Section, this would appear to be a tough constraint on the further growth, and efficiency, of the UAE Business Services sector.

Some Possible Policy Measures to Aid Adjustment

Section 5 has diagnosed some underlying problems in the path of the further growth and prosperity of the UAE's business services sector. This section proposes some policy measures for discussion that may aid to ameliorate those problems.

The looming skills gap calls for long run measures to increase the supply of UAE nationals training in business skills and cat, abilities. This is proceeding apace, with the opening of Dubai Polytechnic (in 1997) and expansion of the Higher Colleges of Technology. Nevertheless, much of this expanded provision is at the intermediate, rather than higher, level. Consideration should also be given, therefore, to the creation of one (or more) high-level Business Schools, perhaps in collaboration with established Business Schools elsewhere, or through the aegis of the AGCC.

To restructure the incentives facing UAE nationals, it will be necessary to considering reining back public sector compensation and the size of the public sector workforce (ideally, through natural wastage).

The generous welfare system also has deleterious impacts upon the prospective growth of UAE business services sector. Consideration might be given to making such grants conditional (e.g., upon obtaining professional qualifications).

Whilst Emiritisation (or indigenisation) has obvious political attractions to a country such as the UAE, so heavily dependent upon expatriate labour, the intended 50 percent rule (see above) also involves potentially serious difficulties for business services operating in the UAE, raising the cost of doing business c.f. other locations. There is a strong economic case for the deregulation of the hiring and firing of nationals in AGCC states in general (Askari, Bazzari and Tyler, 1998).

Easing further the constraints on female labor market participation would also reduce the need for expatriate labor: although, of course, this involves, potentially, some awkward cultural questions to be discussed.

It would seem that over the past 30 years the educated elite of UAE society has been strongly inclined towards public sector employment, and imbued with a "public administration" mentality. Whilst this is, of course, a necessary element in any advanced society, so also is the "entrepreneurial attitude" and a willingness to engage in private enterprise and commerce. A re-orientation of the formal education system in this regard could be helpful, but this needs to be backed by wider measures of "re-education" through the agencies of government and, for example, via the UEA's Chambers of Commerce (Al-Midfa, 1997a, 1997b).

FURTHER RESEARCH REQUIRED

In the light of the foregoing further research into the specific areas detailed below are recommended:

* The current status of the UAE Business Services sector. Such a report should consider each segment identifying the numbers of participants, turnover, training and growth prospects, so as to develop an overview of the UAE Business Services sector;

* Reports detailing each segment or service. Each report should consider the current status, development needs and mechanisms for engendering growth in each segment;

* Reports analysing the role of the education system and professional associations in engendering the development, retention and application of knowledge capital in the context of complex-capability based services;

* Reports considering the mechanisms necessary, in the UAE context, to protect the rights of knowledge capital holders;

* Reports considering the mechanisms required to recognise certificates gained elsewhere;

* Reports considering the impact of equality of market access and national treatment;

* A review of the impact of terminable UAE Agency contracts and the resulting impact on the growth and development of UAE Business Services;

* A detailed review of potential policy measures to engender growth with particular reference to the UAE, other AGCC members, and the wider region.

Whilst this paper has been specifically concerned with the UAE context it may provide insights which may have more general applicability and would assist other Gulf nations entering into the WTO and GATS.

REFERENCES AVAILABLE ON REQUEST

We wish to thank UNCTAD and UNDP for funding and The Ministry of Economy and Commerce of the Federal Government of the United Arab Emirates for facilitating this research. We also thank the people and firms that we met on the fact finding mission. Any errors remaining are, of course, the responsibility of the authors.