Economic Challenges of UAE - Essay Example

Economic Challenges of UAE Introduction In 1971, six of the Trucial s of the Persian Gulf merged to form the United Arab Emirates. These states included: Abu Dhabi, Ash Sharigah, Dubayy, Ajman, Umm al Qaywayn and Al Fujayrah. The per capita GDP of UAE is at par with that of western countries. The main strength of the country is oil revenues and moderate foreign policy that have allowed the country to play a crucial role in the region’s affairs. Before oil was discovered and exploited in the country 30 years ago, it was an impoverished country with desert principalities and low standards of living. After the discovery of oil, the country improved to a moderate nation with high standards of living and a rising GDP (The World Factbook, 2013). However, the country still has certain economic challenges that need to be addressed in order to maintain the economic performance of the country. Those challenges can be addressed in terms of GDP, Growth of the economy, labour force and unemployment rate, foreign relations and CPI and inflation. The major economic challenges of the country are: large expatriate workforce, growing inflation and over-dependence on oil. 2. GDP The World Factbook (2013) suggests that UAE’s GDP has improved since the discovery of oil in the country 30 years ago. However, efforts of diversification of the economy have reduced the proportion of GDP attributable to oil to 25%. This may have a negative impact on the size of GDP of the country if the other sectors of the economy fail to live up to the expected standards of the economy. The country’s GDP was also affected by the global financial crisis of 2009. Tight international credit and deflated asset prices also led to a restrained economy in 2009. Dubai was affected the most by the financial crisis (Dargin & Lim, 2012). It encountered serious depressed real estate prices. Dubai and UAE in general lacked enough money to meet their financial debts; resulting in world concern about its solvency. The total GDP measured in purchasing power parity was measured at $275.8 billion in 2012, ranking the country in position 50 in the world. Per capita GDP of the country in 2012 was $48,400 and the country was ranked 15th in the world. This size of GDP is mainly affected by dependence on oil. In terms of GDP, UAE is ranked behind other oil producing countries in the Middle East such as Saudi Arabia and Iran. This indicates that the GDP performance in the country is poor compared to equally resource-endowed neighbors. To improve this economic performance, the country intends to develop a diversification strategic plan and creation of more opportunities for UAE’s nationals through increased employment in the private sector and improved education. 3. Growth of the Economy The growth of UAE’s economy has also been influenced by the dependence on oil. A country that depends solely on one major economic activity may face a stunted growth, especially in the current world where globalisation has caused increased competition. Although the economy has one of the fastest growing economies in the world, that growth can be reduced by the dependence on oil products. However, the recent diversification strategic plan developed by the country may lead to that constant growth. Growth of the economy was also affected by the financial crisis of 2009. Increased debts which amounted to $142 billion in June 2009 led to a decrease in economic growth in the following year (2010). However, the economic growth has peaked and has reached 3.9% growth in GDP compared to 1.3% growth in 2010. This indicates that economic growth of the country, which largely depends on oil, may be affected even in future if the economy will face another financial crisis. As a result, the UAE should develop a buffer strategy or an uncertainty plan to deal with such occurrences in future. It seems that Dubai was not prepared in 2009 to deal with any likely occurrence of financial crisis. The government may establish a strong foreign exchange reserve in order to deal with rising national debts in future. Foreign investment policy of the country has also affected the growth of UAE’s economy. The private sector is currently employing only 0.34% of UAE’s citizens. Most of the employees in UAE are foreigners. These expatriates earn income in UAE and transfer them to their home country, leaving the economy of UAE in stagnation. Foreign investors bring in technologies to exploit the resources of UAE, which is advantageous to the economy in some way. However, the fact that most employees are non-UAEs is something to worry about. The foreign companies take a percentage of their earnings to their home countries while their employees also do the same. If UAE nationals would be employed in the companies, they would earn income and invest in other sectors of UAE’s economy. One factor that has led to the employment of foreigners on UAE is low education levels of UAE’s nationals. That is the reason why the government has now started plans to improve the level of education in UAE. This plan needs to be fast-tracked to ensure that the economy grows at higher levels. 4. Labour force and Unemployment rate In every economy, various factors in the economy interact and influence each other. In the earlier section, it was established that employment of foreigners in UAE cause slow economic growth. In this section, labour force and unemployment rate is also considered as an economic challenge. It not only leads to slow economic growth but also affects the size of GDP and inflation rates. Concerning labour force, UAE does not allow trade unions to exist. Collective bargaining power and the right to demonstrate or strike does not exist. The ministry of labour is also given the power to force workers to go back to work. Migrant workers who hold strikes are forced to go back to their countries because the government may cancel their work permits. There are also few anti-discrimination laws in relation to employment. Emiratis are given priorities in the labour force even though they do not show interest of work. These labour issues affect the economy of UAE because they lead to de-motivation at work and workers with special abilities to improve the economy are left out of the labour force. The size of labour force participation in UAE was 4.337 million in 2012. This ranks UAE in position 87 in the world in labor force. Interestingly, or rather unfortunately, 85% of the workforce is expatriates (Low, 2012). This composition shows that UAE’s nationals participate in a very small way to the economy of the country. However, unemployment rate is just 2.4%, and this mainly represents members of the population with low levels of education or absolute illiteracy. With many opportunities in tourism, oil, agriculture, industry and service; this proportion of the unemployed can get jobs if the government fastens its plan to improve education in the country. 5. Foreign relations The free trade policy adopted by the country in 2004 has led to many foreign investments in the country and good relations with other countries of the world. This has also led to an influx of foreign workers into the country where demand for skilled labour is high. UAE’s foreign relations are guided by a balance foreign policy which involves dialogue and commitment to international trade conventions. The country is also bound by UN charter. The country entered a free trade with USA in 2004 (Pollack, 2011). It is also a member of Arab league and UN, and has good economic relations with 60 countries of the world including most Western European countries and USA. The country also plays a crucial role in OPEC, OAPEC, UN and GCC. All these organisations encourage free trade in its member countries; hence leading to foreign investment and improved economic performance in UAE. However, this foreign policy has also led to certain economic challenges. For instance, free trade has encouraged foreign workers to enter the country’s labour markets, taking over job opportunities for the nationals. International relations of the country have also been influenced by disputes arising between the country and its neighbors. For instance, UAE is engaged in a boundary dispute with Iran regarding the ownership of the Islands of Tunb and Abu Musa (Pollack, 2011). UAE is also a transshipment point for illicit drug trafficking. These foreign relations problems affect the economy of UAE, especially in terms of foreign exchange reserves and economic relations with foreign countries. 6. CPI and Inflation The inflation rate of UAE in terms of Consumer Price Index (CPI) in 2012 was 1.4%. This reflected an increase from the inflation rate of 0.9% in 2011 (MarketResearch.com, 2012). This increase in inflation rate has can be attributed to the decrease in favourable base effects in the country. Other possible causes of the increase in inflation rates include increase in wages and loosening of monetary policies. High inflation rates leads to devaluation of the country’s currency and higher consumer prices in the economy. References list Dargin, J., & Lim, T.-W. (2012). Energy, trade and finance in Asia: A political and economic analysis. London: Pickering & Chatto. Low, L. (2012). Abu Dhabis Vision 2030: An Ongoing Journey of Economic Development. Singapore: World Scientific. MarketResearch.com (2012). UAE: Country Economic Forecast. Accessed December 5, 2013 from http://www.marketresearch.com/Oxford-Economics-v3791/UAE-Country- Economic-Forecast-Feb-6824030/ Pollack, K. M. (2011). The Arab awakening: America and the transformation of the Middle East. Washington, DC: Brookings Institution. The World Factbook (2013). Middle East: United Arab Emirates. Accessed December 5, 2013 from https://www.cia.gov/library/publications/the-world-factbook/geos/ae.html. Read More