The Discovery of Oil and Economics of the United Arab Emirates - Research Paper Example

Macro & Micro economics 14th January Economics of the UAE Introduction A few decades ago, the United Arab Emirates wasamong the least developed nations in the world. In recent times, the nation has achieved high income levels that can be compared to those of industrialized nations. This can be attributed to the great concentration of expatriate labor, which has helped in advancing various sectors of the UAE economy. The nation is known for its large oil production in the world. According to Al- Abed and Hellyer, “the UAE was established on 2 December 1971, is a federation of the seven emirates: Abu Dhabi, Dubai, Sharjan, Umm al-Qaiwain, Ras al-Khaimah and Fujairah….has a total area of approximately 84,000 sq. km…..population of three million inhabitants in 2000” (202). However, out of the total population of the UAE, over half are non-nationals. With the discovery of oil, the economy of the United Arab Emirates was transformed from an unreliable economy that relied on agriculture, pearling, and fishing, to a high income economy based mainly on oil production. Although there were challenges and opportunities that came with the transformation of the United Arab Emirates economy, its government has succeed in utilizing the opportunities and confronting challenges. President Sheikh Khalifa Bin Zayed Al Nahyan of the United Arab Emirates is working hard to maintain the economic progress that was established by the nation’s first president (Al-Abed, Hellyer, and Vine 71). The first president of the UAE established an economic reform and liberalization programme, which was high approved by principal international bodies. According to Al-Abed, Hellyer, and Vine, due to the development of the UAE oil sector, and growth in other sectors of the nation’s economy, there is continued advancement in the real Gross Domestic Product growth of the UAE (71). Liberal economic policies have helped in maintaining sustained economic growth in the UAE, and the UAE government continues to focus on these policies for future sustained growth. Apart from the oil industry, the UAE government has continued to pay attention to the shipping, tourism, media, financial and commercial services, industries, and the manufacturing sectors of the UAE economy that have contributed to economic growth in the emirates. 2. United Arab Emirates Economy: 1991-2000 The economic development of the United Arab Emirates began in the 1970’s. In 1989, the real GDP growth was 11%, standing at 33.7 billion US dollars (Federal Research Division 74). In 1991, crude oil production increased, consequently increasing oil and gas exports. The level of imports for food, transportation equipment, live animals, machinery, and manufactured goods also increased. The following table highlights the main economic indicators of the United Arab Emirates from 1990 to 1999: Economic Indicators 1990 1991 1992 1993 1994 1995 1999 GDP at current prices (Dh billion) 125.3 126.0 128.4 131.7 135.0 143.9 181.5 Real GDP growth (%) 11.9 -2.4 -0.9 -0.6 -2.4 -0.8 6.7 Population (million) 1.84 1.91 2.01 2.09 2.23 2.37 2.93 Total Exports (fob) $ billion 21.25 22.15 23.37 23.31 21.78 23.44 32.28 Imports (fob) $ billion 11.69 13.92 15.83 17.75 18.25 18.98 28.33 Current Account ($ billion) 5.09 1.53 3.00 0.18 -0.72 0.36 3.94 Reserves excluding gold ($ billion) 4.58 5.37 5.71 6.10 Total external debt ($ billion) 11.05 10.20 10.80 11.07 Oil production mnb/d 2.12 2.42 2.29 2.22 2.17 2.22 2.28 Oil price (average) $/barrel 18.5 16.4 14.3 15.5 18.2 Crude oil exports ($ billion) 14.10 12.10 10.28 11.44 16.62 Exchange rate Dh: US $ (average) 3.671 3.671 3.671 3.671 3.671 3.671 3.671 Inflation (%) 5.5 3.2 5.0 5.5 3.1 Source: Al- Abed, Ibrahim and Hellyer, Peter. United Arab Emirates: A New Perspective. Abu Dhabi: Trident Press Ltd, 1997, Print, table 1. The highlights of this era from 1990 to1999 are that; UAE got a permanent income that was based on the most important resource, which is the long-term oil production. During the 1990s the non-oil fiscal deficit had become a long-run sustainable path by permanent income estimate. It was during this period that the economy was peaking from the success of oil production. 3. United Arab Emirates Economy: 2000-2007 As the United Arab Emirates continued exporting oil and promoting other sectors of the economy, its economy experienced accelerated growth. According to Al Abed, Hellyer, and Vine “a report by the World Bank…highlighted the UAE’s ‘marked success’ in reducing its dependence on oil,” (Al-Abed, Hellyer, and Vine 2006, P. 84). The UAE`s exports for non-oil products were estimated to 52.3% for the first five years 2000-2004. In 2005 the tourism and aviation sectors continued to boost the economy in the country. “Another economic think-tank, Business Monitor International issued a report in August 2005 stating that the UAE’s real GDP would 6.2 per cent in 2005” (Al-Abed, Hellyer, and Vine 85). The real GDP growth was however expected to slow down in 2006 and 2007, due to ease in oil prices. During the same period the population of the United Arab Emirates continued to grow, mainly as a result of the growth of the economy and increase in the number of inhabitants. In 2005, Zayed housing program approved a 50% application for housing and loans, the president built 1709 low-cost housing and 2450 residential plots (Al-Abed, Hellyer and Vine, 85). In 2006, the private employment sector had risen by 52.1%, the education sector had increased the people graduating in secondary schools and universities. 4. United Arab Emirates Economy: 2008-2012 With the increase in population, that had mostly concentrated in the urban areas and it was at this place that the maximum activity had been taking place (Al-Abed, Hellyer, and Vine, 220).During this time a lot of economic activities had changed, in the education sector there was an increase, the housing and the employment sectors had grown, and life had become easier. Due to the discovery of oil, the country’s economy has grown rapidly. By 2008, the country was threatened by the global economic downturn, at this time it seemed that the Gulf region wouldn’t hiccup from this global financial crisis (Gorgenlander 26). During the last quarter of 2008, mega constructions were stopped; this is because UAE had been hit hard by the global crisis. Nevertheless, in 2008 the UAE economy had grown by 7.4% as compared to previous years. In 2009-2010, the global competitiveness report stated that “the UAE is one of the most competitive economies in the world” (Gorgenlander 26). 5. Comparison between the United Arab Emirates and other GCC Countries The GCC is formed by a number of Arab Gulf States. The nations of the GCC include Bahrain, Saudi Arabia, Kuwait, Oman, the United Arab Emirates, and Quatar. The political systems of all the GCC nations are based on Islamic beliefs and common objectives. GCC was established to coordinate and merge the Gulf States in different aspects; having low incomes that are similar in different fields economically, financially, trading, and legislation. All the GCC have very limited supply of domestic labor and skills and thus have to rely on expatriate labor. In fact, expatriate workers form over half of the total workforce in all the GCC nations. According to Fasano and Iqbal, the GCC countries have soft policies on expatriate labor, which has played a big role in developing the economies of the States (5). Consequently the sectors of the economy have experienced a lot of development. The manufacturing sector of the GCC nations is controlled by Saudi Arabia followed by oman (Ramady 442). In 2005, Saudi Arabia had the largest population among the GCC countries; the ratio of countries like Kuwait, Qatar and UAE is at the ratio of 35, 27 and 22% respectively, as compared to Bahrain, Oman and Saudi Arabia, which are at 62, 78 and 72% respectively. The economies of the UAE, Bahrain, and Qatar have been growing steadily since 1990, with Oman economy growing faster between 2000 and 2002 (Fasano-Filho and Schaechter 5). From 1991 to 2002, Bahrain, Saudi Arabia and Oman experienced the least consumer price inflation among the other GCC members, while UAE experienced the highest consumer price inflation. 6. Comparison between the United Arab Emirates and other Nations outside the GCC China`s relation with the GCC countries are not as extensive. China has nevertheless made memories in developing agreements with Arab nations (Kemp n.p.). The trade between china and Oman has been very important. The Arab culture has continued to grow in China, as Muslim conquerors traded in the region. China and UAE established a diplomatic relation through a bilateral relation, and a number of high-level exchanges and accords. Iran has had an experience of lack of bilateral economic ties. This is because the government has no control over its economy. Several GCC countries have invested in Iran`s economy, but lack of economic pragmatism has placed limits to this success (Seznec and Kirk 55). 7. The Central Bank of the United Arab Emirates UAE central bank was started in 1980, to take over after the UAE currency board that had been established in 1973 (Al-Abed and Hellyer 222). It was established to manage the country`s monetary and credit policy. Some of its major roles include “issuing currencies, advising the Government on monetary and financial matters, managing the country`s foreign reserves and supervising the banking sector,” (Al-Abed and Hellyer 222). The bank has had to overcome several problems on how to apply a uniform federal law throughout the whole country. With the production of oil, many banks were attracted to move their operations to the UAE. The central bank has maintained the Dirham`s exchange rate fixed at Dh. 3.671, which is equivalent to one dollar. Several measures and decisions have been established by the United Arab Emirates Central Bank. Through this control in the amount and cost of credit is ensured. Credit facilities are applying the use of influential procedures and an associated group of loan receivers. This has played a major role in ensuring safety in financial operations. Measures taken by the Central Bank cover “all banks, moneychangers, finance companies and other financial institutions operating in the country, as well as their respective board members and employees” (Shoult and Terterov 51). 8. Key Observations The recession that occurred during the mid-1980s had a great effect on the economy of the UAE. This is because it forced a serious reassessment of the economic development strategy, which led to a rational and effective utilization of resources. This recession promoted the use of local industries for production of goods and services (Peck 117). The 1986 recession in the UAE was caused by the drop in oil prices, greatly affecting the economy of the UAE, which hugely relied on the oil industry. Loans were difficult to acquire due to the losses incurred by the banks, when the customers didn’t pay off their debts (Rabinovich 387). As a result of the recent recession of 2008, public and private sector leaders in the UAE to evaluated the impacts of oil prices, and considered global market players. The UAE population is small, but after the discovery of oil and its major exports in the last four decades, the population has increased (Al-Abed and Hellyer 251). In addition, the UAE is composed of 88% of heterogeneous population being foreigners, who work to enhance the economy. There are two minority groups in UAE; Indians and Iranians (Levinson 3). The UAE National Bureau of statistics in 2010 reported that the population was estimated to be 8.26 million people, and have a demographic of 88.5% comprising expatriates, and 11.5% comprising nationals (Bharne 255). 9. The United Arab Emirates Outlook for the Future Economic vision 2030 has identified a number of areas as government’s main focus, such as promotion of an open, effective, efficient, and globally integrated business environment, by adapting to fiscal policies. The Government of the United Arab Emirates has come up with measures to ensure a stable economy, and has come up with a diverse strategy to reduce the dependence on oil and gas (Smith 32). The Government has committed itself to strengthen and develop economic development, social and human resource development, Infrastructure development and environmental sustainability, and optimize Government operations (Brebbia and Beriatos 34). The UAE`s diversification programs are focused on a number of sectors. These include tourism, finance, and telecommunication. These sectors have worked hard to purse various trade and investment agreements at the Gulf zone, and the rest of the world. Tourism and construction have continued to gear up the UAE`s economy, the service sector has greatly been influenced by the growth in the tourism sector (Al-Abed, Hellyer and Vine 158). The financial sector has placed UAE on top of the Middle Eastern countries, with a score of 86.1%. The confidence built in the financial regulation has helped to boom the UAE economy, with the active stock market. 10. Suggestions for the improvement of the United Arab Emirates Economic Performance The future of the United Arab Emirates lies on two critical issues. These include education and innovation, and leadership and governance. The nation needs to ensure that its nationals get the education and skills required in the key sectors of its economy. This will solve the problem of imbalance in its workforce and help in diversification of the nation’s industries. Innovation will also be ensured through education and as a result the nation can enjoy long term economic stability. The future development of the United Arab Emirates on the other hand relies on leadership and governance. The present leaders and government have done a good job in improving the nation at both local and federal levels. However, there is need for further improvement especially in openness on the part of the government and its operations, and improvement in bureaucratic management. If this is done, government programmes in the UAE will be more effective and efficient, and consequently this will attract more foreign investment. 11. Conclusion Despite the fact that UAE was among the least developed nations a few decades ago, the nation has made huge steps in promotion of economic growth and development. Development in the UAE can be mainly attributed to the discovery of oil that led to the development of the oil industry, and the openness of the UAE government to labor form other nations. After experiencing a number of problems due to overreliance on the oil industry, the government of the United Arab Emirates took a positive step by promoting other sectors of its economy. As a result of this the nation has experienced huge economic growth. However, there is need for various improvements in order for the nation to achieve long term economic stability, as discussed in the paper. Works Cited Al- Abed, I. and Hellyer, P. United Arab Emirates: A New Perspective. Abu Dhabi: Trident Press Ltd, 1997. Print. Al Abed, I., Hellyer, P., and Vine, P. The United Arab Emirates Yearbook 2006. Abu Dhabi: Trident Press Ltd, 2006. Print. Bharne,Vinayak. The Emerging Asian City: Concomitant Urbanities & Urbanisms. Abington: Routledge, 2013. Print. Brebbia, C. and Beriatos, E. Sustainable Development and Planning Southampton: WIT Press, 2011. Print. Fasano-Filho, U. and Schaechter. Monetary Union Among Members countries of the Gulf Cooperation Council. Washington D.C: International Monetary Fund Publication Service, 2003. Print. Gorgenländer, Viktor. A Strategic Analysis of the Construction Industry in the United Arab Emirates. Hamburg: Verlag GmbH, 2011. Print. Kemp, Geoffrey. The East Moves West: India, China, and Asias Growing Presence in the MiddleEast. Washington DC: Brookings Institution Press, 2010. Print. Levinson, David. Ethnic Groups Worldwide: A Ready Reference Group. Arizona: The Oryx Press, 1998. Print. Peck, Malcom. The United Arab Emirates: A Venture in Unity. Colorado: Westview Press, Inc, 1986.Print. Rabinovich, Itamar. Middle East Contemporary Survey, 1987: 1985.London: Westview Press, 1987. Print. Ramady, Mohamed. The Saudi Arabian Economy: Policies, Achievements, and Challenges. New York: Springer Science+Business Media, LLC, 2005. Print. Seznec Jean-Francois and Kirk, Mimi. Industrialization in the Gulf: A Socioeconomic Revolution. New York: Routledge, 2011. Print. Shoult, A. and Terterov, M. Doing Business with the United Arab Emirates. London: GMB Publishing Ltd, 2006.  Print. Smith, Rupert. The Oil & Gas Year Abu Dhabi 2010.Abu Dhabi: Wildcat Publishing, 2010. Print. Trading Economics. “United Arab Emirate Government Budget”. tradingeconomies. com. 2012. Retrieved January 14, 2013. Read More