The New Financial Architecture and the Role of the DIFC

In the wake of the economic crisis, there has been an acceleration of the economic landscape shift which has been taking place around the world. The rising prominence of China, Brazil, India and the Middle East will define the future of international economics and finance, with each of these rapidly emerging markets playing an increasingly prominent role in facilitating the flow of international capital.

With emerging markets wielding more influence over the interconnected global economy in the post-crisis era, it will eventually lead to developing countries likely accounting for six of the world's seven largest economies and dominating world trade within a generation, according to Carnegie. Economic predictions for the year 2050 suggest that relatively poor countries will make up the bulk of world trade, with the centre of global trade shifting from the US and EU to China.

With respect to financial centres, this shift will result in more hubs emerging around the world; supporting the shift in capital and trade flows and preventing the enormous accumulation of savings in just one or two financial centres. Instead of a small number of financial centres intermediating and reallocating the entire world's savings, there will be numerous international financial centres across the globe that have the capital market depth and regulatory sophistication to absorb excess capital from their own regions and elsewhere. These financial centres will include relatively new hubs such as Dubai, Mumbai and Shanghai, as well as the more traditional economic powerhouses like London, New York and Tokyo.

However, if these emerging markets are to stake their claim effectively on the international stage and support the acceleration of the global economic power shift, it does require them to implement a number of national and international policies and measures. These countries need to promote governmental and economic openness, institutional strength, sustainable environmental performance, and anti-corruption to help manage their global economic transition.

Developing countries and regions must invest in their financial services capacity in order to manage and control locally their rapidly growing financial wealth. They also need to continue developing their own local currency, capital and financial markets with the capacity, technological infrastructure and regulatory sophistication necessary to continue to attract global capital and support regional trade and investment flows. Importantly, we are already seeing this happen in a number of developing hubs, such as the Dubai International Financial Centre, but more can be done to achieve these targets around the world.

With a significant portion of the world’s hydrocarbon reserves and massive infrastructure investment plans, the Middle East will only see its influence and responsibility on the global stage increase.

A region of particular importance is the six-nation bloc, the Gulf Cooperation Council (GCC). The GCC was established in 1981 by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). Between them they control over 40 per cent of the world’s proven crude-oil reserves and nearly 25 per cent of the world’s proven natural gas reserves. The real GDP growth for the GCC has risen from 5.2 per cent in 2010 to a forecasted 7.8 per cent in 2011, being one of the fastest growing economic regions in the world.

The GCC economies, with the UAE Emirate of Dubai as a strong example, used their natural resources to embark on a major economic diversification and infrastructure programme to build sustainable economies for the future. The development of a financial centre was an important part of Dubai’s diversification plan, and in less than a decade, DIFC has established itself as the Middle East’s leading financial centre, as ranked by the Global Financial Centres Index 2011.

Since 2005 DIFC has grown as the financial gateway between the emerging markets of the region and the world. As it focused on developing and implementing its new business strategy, which centred on growing existing client partnerships, DIFC has also built upon its stature as the regional hub of choice for the world’s leading companies, which is underlined by the geographical diversity of regulated firms operating out of the Centre with 30 per cent from the Middle East, 10 per cent from Asia, 41 per cent from Europe; 16 per cent from North America and three per cent from the rest of the world, reinforcing its position as the business and financial gateway connecting East and West. DIFC is also home to 18 of the top 25 global banks, six of the world’s 10 largest insurers, six out of the 10 top law firms and eight of the top asset managers in the world.

To support its growth, DIFC is equipped with a modern infrastructure, free zone status and self-governing laws and courts, which make it a major contributor to the UAE and wider region economies. This is supported by its world class independent regulatory body and its civil and commercial laws and regulations, and independent code of law governing financial services regulation. DIFC also supports the business and economic growth in the region through its commitment to sharing knowledge, thought leadership through its regular economic workshops, economic reports and white papers.

DIFC has also contributed significantly to the local economy. Total value added from the DIFC sub-economy in 2010 was US$2.92 billion (2009: US$2.77 billion), or approximately 3.6 per cent of Dubai’s GDP and one per cent of the UAE GDP. This further illustrates the importance of such financial hubs, that the DIFC is not just a cornerstone of the local economy, but is also a conduit for investment and supporting the growth of economies across the entire region.

The future for capital markets is truly global, we are moving away from a unipolar to a polycentric world order and it is imperative that traditional financial markets, such as London and New York, work ever closer with the new financial centres from emerging and frontier markets – the likes of Shanghai, Mumbai and Dubai. DIFC plays an important role in this; providing a comprehensive financial platform for organisations from across the globe, and serving as a meeting point for developed economies and emerging markets.