Economics of the United Arab Emirates - Term Paper Example

The Economics of the UAE The economic situation of the United Arab Emirates (UAE) has been hotly debated in recent times. Will oil continue to be a major component of the economy of this federation? Alternatively, will economic diversification be undwerway thus decreasing the reliance of this country on oil earnings? Seeking to address the future economic situation of the UAE, this essay will argue that the future stability of the United Arab Emirates rests with further regional integration and the economic interdependence of the Gulf Cooperation Council (GCC), is a multilateral organization which promotes the economic and social integration of six Arab countries in the Persian Gulf. A regional trade bloc with important economic objectives including the eventual establishment of a common currency, the Gulf Cooperation Council is a regional actor in the Middle East with increasing political leverage and diplomatic sway. Initially created to further the economic integration of Bahrain, Qatar, Kuwait, Oman, Saudi Arabia and the United Arab Emirates, the Gulf Cooperation Council fosters a sense of Arab community within the Gulf context and represents Arab multilateralism in the region. This analysis aims to be in-depth and comprehensive and will conclude with a concise analysis of the means through which the Gulf Cooperation Council will help the economic development of the UAE in the next 15 years and discuss important regional issues including the dream of a unified currency for the Arab states of the Persian Gulf region. History of the GCC A regional trade bloc which includes some of the fastest growing economies in the world, the Gulf Cooperation Council was devised and implemented in 1981 under the auspices of a unified economic agreement which established a unique social and economic bond between the Arab countries of the Persian Gulf region. The current six members of the GCC, Bahrain, Qatar, Kuwait, Oman, Saudi Arabia and the United Arab Emirates, were the original parties to the document creating the GCC and although expansion of this regional body may occur in the future, the membership of the GCC has remained unchanged for more than twenty seven years. During these years, the region has witnessed incredible growth, rising gross national product throughout the region and an undeniable boom in natural resources including oil and natural gas. The Gulf Cooperation Council was established as a multilateral organization almost thirty years ago with the intent of fostering economic and social integration among the Arab countries of the Gulf region. Accordingly, economic regional coherence within the bloc includes the formulation of similar regulations across the region with respect to financial transactions, trade, customs and tourism. A coherent economic strategy across the region is an important attributes of the GCC and this has been implemented with an eye to further economic and social integration in the region. Social integration for the countries of the GCC encourages regional cooperation with the aim of strengthening the ties between the Arab peoples of the Persian Gulf region through a variety of endeavors including joint ventures, multilateral scientific research centers and other social avenues for further growth. What explains the emergence of the GCC and what were the important antecedents to the creation of an Arab regional trade bloc in the Gulf region? The GCC emerged among the developing countries of the Gulf region to integrate the Arab countries socially and economically with the eventual aim of establishing a common currency throughout the region. The precedent for regional integration followed the lead established among the countries of Western Europe through the Economic Community. Importantly, the GCC was also created prior to the implementation of one of the most important regional trade blocs in the world today, the North American Free Trade Agreement (NAFTA) comprising the United States of America, Canada and Mexico. With respect to the combined Gross Domestic Product of this trilateral trade organization, NAFTA is the largest on the planet and an important multilateral actor promoting the economic integration of the major countries of North America. As a precursor to NAFTA, the GCC represents multilateral action on a variety of fronts and its member states act in unison to promote Arab Gulf interests. In addition to membership in the GCC, each member is also a party to the Greater Arab Free Trade Area, a pact devised by the Arab League to achieve an Arab economic bloc in the Middle East and North Africa (NAFTA, 2003). What is the Greater Arab Free Trade Area and how does the creation of a Greater Free Arab Trade Area (GAFTA) impact the countries of the GCC? At the initiative of the Arab League, GAFTA was established by the countries of this important political organization on January 1, 1998. Seeking to address the overall economic development of the Arab world, the objective of GAFTA is the elimination of barriers to trade including import duties and other barriers to free trade among Arab producers and consumers. At the outset, the goal of GAFTA was regional integration from Morocco in the West to Oman in the East through the elimination of tariffs or tariff-like barriers to trade. Attempting to implement widespread liberalization through the economically diverse Arab countries of the Middle East and North Africa, GAFTA sought an Arab-wide response to the growing need to diversify the economies of the community and lessen restrictions on inter-Arab trade. While all members of the GCC are party to GAFTA, the Gulf Cooperation Council differs in a variety of respects (Hoekman & Zarrouk 2000). As one of the wealthiest regions of the world in terms of annual revenue and gross national product, the countries which make up the Gulf Cooperation Council have very different economic situations relative to their Arab brethren in other parts of the Middle East. Accordingly, Qatar is described by the United States Central Intelligence Agency as having the “highest per capita income in the world”, which in 2007 was estimated at $87,600. While not all countries of the GCC can claim to have such a phenomenal GDP per capita, strong economic growth and high revenues derived from natural reserves are a unifying characteristic of the Gulf countries within the Gulf Cooperation Council. Accordingly, from an economic standpoint a country like Saudi Arabia with an annual GDP of $546 billion USD (2006 estimate) is in a very different economic situation from that of its southern neighbor and GAFTA member Yemen which has an estimated GDP of only $21.66 billion USD and a GDP per capita of $2,500 USD per annum. Compare that with Qatar which boasts a GDP per capita of $87,600 and the differences are staggering. Extensive oil and natural gas revenue is a near universal characteristic of the Gulf Cooperation Council countries and this is an important component which sets these countries apart from other GAFTA nations in a regional context (Qatar 2008; Saudi Arabia 2008; Yemen 2008). Current Issues As mentioned earlier, the Gulf Cooperation Council is a regional trade bloc composed of members in the Persian Gulf with traditional ties as well as the objective of promoting regional Arab prosperity (note that Iran is excluded by the GCC) through unified economic and social policy. The GCC Supreme Councils advisory body is based in the Omani capital of Muscat and the capital cities of each of the six countries comprising this important bilateral bloc host a wide array of official GCC functions. The section below will discuss the recent enactment of the GCC common market and the understanding by the GCC countries that they will eventually need to diversity the economic structure of their markets in order to remain competitive on an international scale and remain a viable economic trading bloc. The GCC common market, an inherent component of the Gulf Cooperation Council, and an important idea since the inception of the organization, came into effect on January 1, 2008 and aims to remove all barriers to cross-country investment, services and trade among member states. The GCC common market grants national treatment to all GCC firms and citizens in each and every country of the Gulf Cooperation Council and was enacted to facilitate the movement of goods and people throughout the bloc. An integral component of this common market is the dream of a unified Gulf currency. This aspect of incredible importance to the future of the GCC will be explored in depth in our section on the future of the Gulf Cooperation Council below. First, however, we turn to the diversification of the GCC economies and the drive to diversify through an investment in the untapped tourism sectors of most GCC countries (Ministry of Information, Sultanate of Oman 2008). Seeking to address the inherent problems with an extraction-based economy on the future economic situation of the countries of the GCC, the leaders of the Gulf Cooperation Council members have made a conscious effort to diversify their economies and prepare for a future in which the extraction of natural resources is not their primary economic engine. While it is undeniable that oil and natural gas production have been integral to the impressive economic growth of the countries of the GCC, its rulers have understood that an extraction-based economy is not viable in the long run and in order remain competitive on an international scale, the GCC members must diversify the economic underpinnings of their respective economies. With warm climates and an abundance of unspoiled and resource rich land, many GCC constituent members have taken a leading role in promoting the tourism sector as an important avenue for future growth. Tourism thus has been targeted as a potential catalyst for future growth and realizing that the region hosts a variety of comparative advantages for the tourist trade, GCC states have begun investing into their respective tourism sectors. The UAE provides an excellent example of a GCC country which has begun to embrace tourism and in an effort to diversify its economy and has begun to invest in this budding industry (Fasano & Iqbal 2003; Cheminguia & Roeb 2008). The UAE is committed to developing its tourism industry and capitalizing on renewed global interest in the Gulf region and Middle East. As the UAE continues to embrace foreign visitors, foreign capital and foreign investment, this important sector will continue to develop at an unparalleled pace. It is also expected to develop in tandem with governmental projects aimed at increasing the in-flow of tourists to this emerging tourist destination country. Accordingly, a focus on the tourism and the hospitality sector is just one of the ways in which the UAE has opened itself up to the international community while diversifying its future economic prospects (Peterson 2003). Undertaking an analysis of the emerging tourist markets of the GCC, a fascinating article entitled “The tourism industry as an alternative for the GCC oil-based rentier economies” discusses the future prospects as well as potential problems of host GCC countries seeking to expand their tourist sectors. Using Dubai as the example through which other GCC countries can diversify their economies and lessen the respective dependence on oil, Mansfeld and Winckler found that while tourism investment may be a catalyst for economic sustainability among the GCC countries in the log run, barriers exist within the present social and economic realms including domestic restrictions on mobility, potential political insecurity and an increased dependence on foreign labour. While the authors of this study praise attempts at diversifying the economy through increased tourism investment, they also warn of the inherent problems associated with this endeavor in a GCC-specific context (Mansfeld & Winckler, 2000). The UAE and the Future of the GCC The UAE’s economic future over the next 15 years is undeninably tied to the future of regional integration and the GCC. Currently made up of the original six Arab states of the Gulf region, the GCC is faces many issues at the dawn of a new millennium. Enlargement, through the inclusion of Yemen and the establishment of a unified GCC-wide currency, are two important issues facing the GCC as it looks to the future. Yemen is currently undergoing negotiations for GCC membership with the hope that it will join this organization by 2016. As mentioned earlier, Yemen has an estimated GDP of only $21.66 billion USD and a GDP per capita of $2,500 USD per annum. This puts the Arabian Peninsula country in sharp contrast with the strong economies of the current GCC members such as the UAE. In addition to weak economic performance, Yemen also hosts a variety of other problems including persistent social inequality which has bred an enduring security threat from Islamist extremists. While the inclusion of Yemen within the GCC appears to be on the backburner for now, we turn to the dream of a unified GCC currency as a potential future goal of the Gulf Cooperation Council (Yemen, 2008). Undertaking an analysis of the future for a unified currency within the GCC, Kuwaiti scholars Laabas and Limam analyzed whether or not the GCC would be an optimum currency area (OCA). While admitting that the GCC states were in a process of further economic diversification, these scholars determined that the GCC in fact was not ready for a unified currency. Accordingly, [b]ased on the traditional OCA criteria, we find that GCC countries are yet to fulfill the necessary pre-conditions for the establishment of Currency Union (CU). The structure of their economies remains dominated by the oil sector, intraregional trade is very limited and, unlike what many believe, there does not seem to be evidence of convergence in their main macroeconomic fundamentals nor synchronization of their business cycles….We argue that the main factors that are favorable for the establishment of CU are the commitment by all GCC countries to fixed exchange rate arrangements and a strong political resolve to achieve economic integration (Laabas and Limam, 2002). Economic integration through the promotion of one currency remains an important aspect of total GCC regional Arab coherence but these scholars point out that major impediments to the full implementation of a unified GCC currency exist. Accordingly, just earlier this year Oman opted out of a single currency, according to a Middle Eastern Intelligence report (Martin, 2008). For the UAE, as well as other members of the GCC, the future of this multilateral organization may include a developing country, Yemen, with weak economic growth and whole host of social, economic and security-related problems which may significantly effect the composition of the current Gulf Cooperation Council. A common market has recently been launched and it remains yet to be seen as to whether or not the reduction of trade barriers and the flow of people and goods will positively increase total integration of the Arab countries in the region. Attempts at diversification are underway and a reduction on the dependency on natural oil and gas bodes well for the future of this multilateral group. Finally, although a unified currency may one day be implemented among the countries of the Gulf Cooperation Council, it appears right now that this dream may not yet become a reality in the foreseeable future. The economic future of the UAE remains tied to increased interdependence with its Arab brethren and this essay has charted the economic future of the United Arab Emirates. REFERENCES Cheminguia, M.A. & Roeb, T (2008). Petroleum revenues in Gulf Cooperation Council countries and their labor market paradox. Journal of Policy Modeling, 30:3, 491-503. Fasano,U. & Iqbal, Z (2003). GCC Countries: From Oil Dependence to Diversification New York: International Monetary Fund. Foreign Affairs (2008). Ministry of Information, Sultanate of Oman. Retrieved May 16, 2009 http://www.omanet.om/english/government/foreign.asp?cat=gov Hoekman, B.M. & Zarrouk, J. (2002). Catching Up with the Competition: Trade Opportunities and Challenges for Arab Countries. Detroit: Published by University of Michigan Press. Laabas, B & Limam, I (2002). Are GCC countries ready for currency union? Arab Planning Institute. Retrieved November 1, 2008. Web site: http://www.arabapi.org/jodep/products/delivery/wps0203.pdf Mansfeld, Y. & Winckler, O (2007). The tourism industry as an alternative for the GCC oil-based rentier economies. Tourism Economics, 13:3, 333-360. Martin, M. (2008, February 04). Oman opts out of GCC single currency. Middle Eastern Intelligence. Retrieved November 1, 2008 http://www.meed.com/economy/gcc/news/2008/02/oman_drops_out_of_gcc_single_currency.html Peterson, J.E. (2004). Oman: three and a half decades of change and development. Middle East Policy, 11:2, 125-137. Qatar (2008). CIA World Fact Book. Retrieved May 16, 2009 https://www.cia.gov/library/publications/the-world-factbook/geos/qa.html Saudi Arabia (2008). CIA World Fact Book. Retrieved May 16, 2009 https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html United Arab Emirates (2008). CIA World Fact Book. Retrieved May 16, 2009: https://www.cia.gov/library/publications/the-world-factbook/geos/ae.html Yemen (2008). CIA World Fact Book. Retrieved May 16, 2009 https://www.cia.gov/library/publications/the-world-factbook/geos/ym.html Read More