Dubai as a model for Singapore

Singapore's Prime Minister Goh Chok Tong led a delegation to Iran - the first visit by a Singaporean leader for 30 years.

He held talks with Iran's President Mohammed Khatami, as well as a series of meetings with Iranian political and business leaders. His goal: to build diplomatic ties with Tehran in the hope that economic ties will blossom and business then follow.

In part, the landmark visit reflects Tehran's recent attempts to liberalize its economy, but the implications stretch way beyond the Islamic Republic. Goh's trip was one of a series of Middle East visits by senior Singapore officials in recent months. Collectively, they bear witness to the fact that the Middle East is now at the center of Singapore's investment radar.

'In the Singapore government, we are now reviewing our policy on the Middle East and will give the region greater importance in the future,' says George Yeo, Singapore's minister for trade and industry. Evidence of this increased priority is everywhere. Take Jordan.

Earlier this year, Singapore signed a free-trade agreement (FTA) with the Amman administration, Singapore's first with a Middle East country. Minister of State for Foreign Affairs and Trade and Industry Raymond Lim could barely contain his joy when he announced the deal.

'What we have built is a virtual superhighway,' said Lim. 'Our private sector is encouraged to travel on it - to leverage on the FTA and the good relationship between the two countries, and explore new opportunities in Jordan and the rest of the Middle East.'

Negotiations have already begun on an FTA with Bahrain, with Qatar and Egypt also keen to open FTA talks. Lower-level discussions are underway with all the other Gulf Cooperation Council states (Kuwait, Oman, Saudi Arabia and the UAE). These government initiatives are clearly welcome. But are they translating into business deals and investment on the ground?

Officials admit that trade and investment ties between Singapore and the Arab world are modest. In 2003, the Middle East accounted for just five percent of Singapore's international trade, the majority of which was oil-related. Singapore has S$130 billion ($76 billion) of foreign direct investment overseas. Just three percent is in the Middle East.

However, there is evidence - statistical and anecdotal - that business is picking up. Between 1998-2003, Singapore's trade with Iran grew from S$1 billion to S$2 billion. Over the same period, the city-state's trade with the UAE grew from S$3.5 billion to S$5.8billion. Higher oil prices account for some of the increase, but much has come as a result of non-oil trade and investment.

'Visiting Iran in April this year, I was surprised to discover that a Singapore-based company owned and managed one of the largest non-oil foreign investments in the country,' says Yeo.

Sanden International Singapore (SIS) began operations in Iran in 2001, with a small 15-man assembly line and minimal expectations. Three years down the road, the company has captured 80 percent of the automotive air conditioner market in Iran and has a workforce of 500. A small Singapore contingent of five managers oversees the company's operations in Iran.

Sanden went to Iran because, during the global economic downturn, business was down and the company was forced to look for new opportunities. The Iranian facility is a joint venture between SIS and Iranian businessman Farhad Shariat. SIS invested $6 million, leading technology and management. That investment is already paying off: last year, the venture generated revenues of $100 million.

'There was a lot of red tape,' recalls SIS deputy managing director Robert Kheng. 'It was a hassle trying to get approval from the local authorities. Thankfully, our local partner understood the regulations very well. He took care of the administration and government regulation issues while we brought in our technology.'

In 2003, Iran produced 700,000 cars. Leading manufacturers include Peugeot and Kia, alongside domestic producers such as Khodro. Government officials from all sides hope the Sanden story will act as blueprint for similar projects.

'Sanden's success should encourage other Singapore companies to explore opportunities in the Middle East,' says Yeo. 'And indeed there are many new opportunities.'

Clearly, Singapore companies hope to benefit from additional export revenues. Singapore firms are also active in sectors such as telecoms, infrastructure, finance and fashion. But what's in it for the Middle East?

For most Arab countries, knowledge transfer is the main goal, alongside the job-creation prospects that a venture such as Sanden in Iran presents. Success story. Daniel Hanna, international economist with Standard Chartered bank, says Middle East countries can use Singapore's economic success as a model for their own development.

'In terms of what the Middle East can learn from Singapore, it really has turned nothing into something. It has no natural resources. It is surrounded by very large and aggressive neighbors. It has managed to turn that into a thriving city-state with a per capita income of $24,000 per year. It is quite an interesting story to tell.'

Hanna is currently based in Dubai, but has previously worked in Singapore. He points to several specific steps that Middle East countries can take to emulate Singapore. 'The central importance of investment in human capital: that is, good education. And the importance of good infrastructure - not just physical infrastructure, but regulation.

The Middle East can take a lot from that, particularly the importance of human capital.' At the same time, Singapore benefits from liberal labor laws that allow companies to hire leading expatriate talent, a key factor in its success. Middle East governments must remember this when considering tough employment legislation such as quota systems aimed at reducing unemployment among their national populations.

Hanna stresses the central role of strong regulation in propelling Singapore as a regional financial and business hub. 'Regulation is important because it inspires trust. The more trust, the more people will invest. One of the reasons why Singapore is the hub for Southeast Asia is because it has arguably the best regulation in Southeast Asia. People have to do business under Singapore laws.'

Some Middle East states are already employing some of Singapore's lessons, notably Dubai. 'Singapore has a different development model as opposed to Hong Kong or Taiwan,' says Hanna. 'Hong Kong is very laissez-faire, driven by SMEs [small and medium-sized enterprises] and entrepreneurs. Singapore is at the other end. It is state-led. The state decides where to invest.'

Singapore developed business 'champions,' such as Singapore Airlines and DBS Bank. Dubai has followed a similar route, developing its own champions in Emirates airline and Dubai Aluminum. Earlier this year, neighboring Abu Dhabi hired Linda Low, an economist from the National University of Singapore, as an adviser to on its industrialization program.

The parallels between Singapore and Dubai extend to strong, visionary leadership. Singapore's economic miracle was kickstarted by Lee Kuan Yew, whose son Lee Hsien Loong was due to become prime minister in August 2004. Dubai's modernization was launched by Sheikh Rashid bin Saeed Al Maktoum in the 1970s.

In 1994, his son Sheikh Mohammed bin Rashid Al Maktoum became Crown Prince and has since run the emirate like a dynamic CEO. Dubai may just have the best of both worlds. As well as state-backed organizations, it is home to a thriving entrepreneurial culture, particularly in its free zones.

As such, Singapore can begin to learn lessons from Dubai - particularly in tourism, where Dubai has succeeded in making the transition from being a two-day stopover destination to becoming a major destination in its own right. Singapore's Yeo recognizes the recent successes of some Gulf states.

'Early movers like the UAE, Bahrain and Qatar are already benefiting from this new outward-looking strategy. Dubai has already overtaken Singapore in some areas. Bahrain has achieved great success as an offshore banking center.'

In particular, Standard Chartered's Hanna says Dubai has emerged as a role model in destination marketing. 'Dubai at the moment is a great brand. It has a reputation for being tax-free, liberal, business-friendly. Singapore at the moment doesn't seem to be selling itself to the world as a place to come and do business.

'Talking to colleagues in Singapore, they feel there is a lot Singapore can learn from Dubai. The Singapore model also has drawbacks. Because it is state-led, it can stifle competition and also entrepreneurship. That is a criticism from within Singapore. Perhaps Singapore has gone as far as is can with the current development model. It needs to be more entrepreneurial. It needs more creative flair. The Middle East needs to take that on board. You can only go so far with government initiatives.'

Successive economic studies have shown that the biggest creator of jobs is not large corporations, but SMEs. The Middle East must pick the best elements from Singapore's successful economic model, but ignore the mistakes that Singapore is now trying to redress. For all these reasons, Singapore has never been keener to penetrate Middle East markets - and the Middle East to welcome Singapore companies with open arms.