Understanding Economic Diversification in the UAE - Research Paper Example

? Understanding Economic Diversification in the UAE Table of Contents The UAE economy 4 Concept of Economic Diversification 5 Growth of the Oil and Non-Oil Sectors over the Last Ten Years 6 Contribution of the Following to the Growth of the Non-Oil Sector in the UAE 7 Labor 8 Free Zones 9 The Stock Market 9 Summary and Recommendation 10 References 11 Abstract This paper will explore the economy of UAE by discussing strength and weakness in a way that facilitates the understanding of the topic in the context of Abu Dhabi. The paper will also focus on the concept of the economic diversification by identifying ways through which diversity contributes to the economy. Growth of the oil and non-oil sector for a period of ten years will be discussed, in way that facilitates understanding of contribution made by these sectors to the economy of UAE. Various issues related to labor, free zone and stock market are discussed in way that depicts their contribution to growth of non-oil sectors in Abu Dhabi. In this section, the paper seeks to identify ways through which labor, free zone and stock markets are supporting the diversification from the oil sector. Therefore, this gives an illustration of the ways in which Abu Dhabi is reducing the dependence on oil. The paper concludes with a summary and recommendations of the issues that will be explored. Understanding Economic Diversification in the UAE The UAE economy The economy of United Arab Emirates has been ranked the thirty-fifth freest economy in the 2012 index with a freedom score of 6.9, and it has experienced a growth of 1.5 using last year as the base year (Heritage foundation, 2012). This growth has been attributed to improvements in the property rights, monetary freedom and labor freedom. Moreover, the economy is ranked fourth in a list of seventeen countries in Africa and Middle East due to its overall score that is higher than the averages on various regions in the world (Heritage foundation, 2012). Registration of the best twenty enhancements in 2012 index has made a substantial contribution to improving economic independence (Heritage foundation, 2012). The business environments and conditions boosting investments have contributed to restructuring of the economic systems; thereby facilitating the establishment of pulsating private sector. Furthermore, sustenance of momentum growth has been facilitated by the open trade regime with cost controls. Therefore, the UAE has been focusing on being a regional financial hub with a banking sector dealing with the financial problems moderately well. However, there are deficiencies in legal systems and investment framework, which are restraining the entire economic freedom of UAE. There are judicial systems that intimidate foreign investors by increasing their vulnerability to political influence. However, corruption is deteriorating compared to other economies in the region. Abu Dhabi makes significant contribution to the oil yields resulting in a principal role in political and economic decision-making (The government of Abu Dhabi, 2008). Of late, the focus of the government has shifted towards alternate and non-oil resources, a process termed as diversification. This paper purports to discuss the concept of economic diversification, growth of the oil and non-oil sectors over the last ten years, contribution of labor, free zone and stock market to the growth of the non-oil sector in the UAE. Concept of Economic Diversification The concept of economic diversification is associated with the process of risk reduction through division of the assets among various securities or forms of investment (Fridson & Alvarez, 2002). Therefore, diversification of income sources based on different and unrelated exposures to risk increases the chances of being compensated to the incidence of potential loss. Moreover, this is used in selection of a portfolio, fields of financial economics. Understanding this concept clarifies the reason behind government expenditure in UAE along with allocation of various income sectors, in the GDP of the country. This attracts foreign investors and support local investments by supporting export of capital via besieged venture with global associates. Economic diversification has made a significant contribution in the process of prioritizing various areas and policy agendas by the government. The government aims to increase the value of employment opportunities for the citizens and facilitate involvement of women in the workforce. The government plans improvement of business environment to support the activities of entrepreneurs and investors via legislative reforms, and formulation of economic policy. Integration of Abu Dhabi with the global economy has been facilitated by improvements of the economy and business conditions. Diversification of the economy in UAE is aimed at decreasing the relative dependence on oil and cyclical swings involved. One of the most valuable steps by the government in this direction is to provide employment opportunities to the young demographic of the country, though it is associated with merits and demerits. Some of the merits are related to the value added employment opportunities for the growing population. However, the demerits revolve around the difficulties associated with escalating population, especially as it relates to the training and skill-development of that population for the said jobs. Growth of the Oil and Non-Oil Sectors over the Last Ten Years The oil industry has made a significant contribution to economic development in UAE since it has sixth world largest oil reserves, which has a capacity of producing approximately ninety eight billion barrels (The government of Abu Dhabi, 2008). According to the government of Abu Dhabi (2008), UAE are ranked tenth largest producers of oil due to their daily production of approximately 2.5 million barrels, which is exported to other countries. The Abu Dhabi generates more than ninety billion dollars in revenue for current prices, which is invested in other development areas of the economy and provision of services needed by the modern society. In this case, the oil sector makes a substantial contribution to the development of the local and the global economy. Furthermore, the oil sector has made UAE a global exporter of goods and services that are associated with large economies via trade. The Economic growth of UAE is attributed to the oil prices and the developments, which have been experienced in non-oil sectors, leading to diversification. Moreover, this has contributed to rise in productivity in an approach focused on the competitive advantages in Abu Dhabi. The GDP growth from the non-oil sectors has greatly assisted the government’s efforts to diversify the economy of the country. For the last ten years, UAE has been focused on attaining an equilibrium state in the non-oil trade and capability of instilling extra depth in their economic structure. Abu Dhabi has had significant consideration over the non-oil fiscal deficit that is set to have a substantial fall over the target period through the economic stability (The government of Abu Dhabi, 2008). Moreover, there have been policies aimed at checking inflation in order to ensure that it is not negating the benefits of growth. The UAE economy depends heavily on the oil sector, though the increase in the prices of oil indicates that UAE highly concentrates on the Gulf Cooperation Council (GCC) countries. Therefore, the oil sector can be considered a significant contributor of activities in Cooperation Council (GCC) countries. On the other hand, non-oil sector in Abu Dhabi provides employment opportunities in areas such as manufacturing, construction, and government services, which account for more than fifty percent of the entire employment (The government of Abu Dhabi, 2008). The other non-oil sectors such as trade, restaurant, and hotels constitute thirteen percent of the labor force, and illustrate a high level of growth volatility and dual concentration of GDP and employment. However, non-oil sector increases the vulnerability of Abu Dhabi to the economic fluctuations, due to increased vulnerability of employment concentration to shocks. A substantial interrelationship prevail between the sustainability and diversification since the latter initiates the former. Moreover, Abu Dhabi has extended the diversification of their economy through stimulation of non-oil sector, such as the export-oriented business, which leads to a reduction of precariousness associated with economic growth. Nevertheless, the non-oil sector has been depicting a form of sensitivity to the prices of oil due to their inward looking and orientation of the domestic market. Consequently, this sensitivity leads to reliance on the domestic liquidity; in fact, there are difficulties when money used in facilitating growth in these sectors reduces. This reduction causes clutched liquidity, which hinders the growth of slower rates in the non-oil sectors. Contribution of the Following to the Growth of the Non-Oil Sector in the UAE a) Labor Abu Dhabi has established a business environment attributed to openness, efficiency and global integration through streamlined government processes, which facilitate business investment. This environment has made a significant contribution to improvement of efficiency in the labor market through adaptation of fiscal policies and monetary systems, which are responsive to the economic systems and management of inflation levels. Productivity of labor in UAE is computed in terms of income earned by each worker under the influence of increased oil prices, especially those of the oil and the manufacturing sector. However, the high yield and profits from these sectors have compensated for the declining yields in other sectors. Other gains in the oil and manufacture sector are combined to give yield increased by almost sixty percent over the past ten years. Productivity of labor has been facilitated by the oil sector due to domination by large companies that are higher in number in the UAE compared to other countries. In fact, this is an indication of small companies that are less competitive in Abu Dhabi as compared to other countries. Moreover, employment is experiencing a shift from a level of low productivity sector like in the government and construction sector. There is increased productivity in the workforce to that makes this sector more productive, thus adding economic value to it. Labor productivity has undergone some improvement due to the investment in training, technology, and improvement of product methods. Improvements of productivity in various sectors of Abu Dhabi economy have benefits associated with the competition in the economy through enhancement of economic well-being; thus reducing the exposure to fluctuation of the oil prices. b) Free Zones One of the intentions of Abu Dhabi government is to review the limits of the foreign ownership. Free zones in the Abu Dhabi are attributed to an experience of flexible and interconnected ownership rights, which are considered primary tools encouraging the investments from foreigners. In fact, these zones have been assisting and attracting the foreign expertise and technology; thus, stimulating the trade and investment. Some of the free zones established in the Abu Dhabi are Khalif Port and Industrial Zone, which is seeking innovative ways of attracting investors and companies. In relation to the property and rights, there are resent legislation that has been passed in the process of formalizing foreigner’s rights to their real estate; thus, seeking to safeguard the property rights in the Emirates. The foreigners are allowed to possess their own real estate in certain areas of Abu Dhabi. This involves intentions by the government to expand the property rights for the foreign investors for enhancement of an attractive environment for the foreign investors. c) The Stock Market Investors in the stock market are individual people and not institutions, and they have a high vulnerability to speculations. There are significant levels of stability established by the capital formation markets by the process of attracting various institutions. This takes a long-term perception of the companies making investment in terms of the possibility of attaining higher gains. In the stock markets, larger sections of private stock are attracted by the UAE market in MENA region. However, there is an opportunity for development of IPO in practice and performance in the equity market parameters and complexity. This stability in the stock market would indirectly result in more investment and foreign interest in the development of the non-oil sector, thus helping the government in the diversification projects. Summary and Recommendation The paper began with a discussion of the UAE economy, whereby the paper identifies the growth of economy that has been attributed to improvements in the property rights, monetary freedom, and labor freedom. On the other hand, there are some deficiencies identified in legal systems and investment framework. These deficiencies are restraining the entire economic freedom of Abu Dhabi along with the judicial systems that are faced by foreign investors; thus, increasing the vulnerability to the political influence. The concepts of economic diversification in Abu Dhabi have been identified as a significant contribution in the process of prioritizing various areas and policy agendas by the government. Growth of the Oil and non-oil sectors over the last ten years has been discussed and the contribution made by the labor, free zones and stock market to the Abu Dhabi. Therefore, some of the recommendations that can be made to the Abu Dhabi relate to the need to focus on the agricultural sector in order to increase their food security and sovereignty. The other recommendations relate to the support, which should be offered by the legal system in a way that supports the economic growth. The legal systems should focus on reforming the existing policies and establish other policies that foster favorable environment for investment. On the other hand, the government should encourage development by offering necessary infrastructure and initiatives that assist foreign investors in UAE. References Fridson, M., & Alvarez, F. (2002). Financial Statement Analysis-A Practitioner’s Guide (Ed.3). New York: Jown Wiley and Sons, Inc Heritage foundation (2012). United Arab Emirates. 2012 Index of Economic freedom. Retrieved on 26 December 2012 from The government of Abu Dhabi. (2008). The Abu Dhabi Economic Vision 2030. The Abu Dhabi Economic Vision 2030. Retrieved on 26 December 2012 from: Read More