International and United Arab Emirates Economics - Report Example

International and UAE Economics With a diversified and expanding economy, UAE has experienced economic expansion and become the second largest economy in Middle East. The economy of UAE has been affected just like other economies by the global economic crisis (Devlin 76). Expansion and growth of the various sectors is supported by the increasing population size. Statistics show that UAE is one of the fastest growing economies and their dependence on natural resources is rapidly declining. Other sectors like tourism and housing have seen great increase (World Bank 43). UAE Main Challenge The main challenge that faces the UAE is the rising cost of food. The population of UAE is fast growing compared to the ratio at which the food production is increasing (McGinley 01). After the economic downtown, the food prices declined as the level of demand declined. UAE realized this major gain in 2009. In fact, the inflation rate declined from 13% to almost 0.9% (McGinley 01). The agricultural sector has not expanded rapidly as the economy depends on the extraction of oil and other gases. Political turbulence in the region further escalated the food crisis as the period was marked with deterrence on other economic activity and the interruption of imports from other economies (Gardner 95). The neighboring nations like Saudi Arabia and Iran all experience turmoil that as well negatively affect the economy of UAE. As a measure to mitigate the problem, the government has increased the subsidy that is aimed at reducing the cost of food to the citizens. The government has also continued to reduce the taxation that is imposed on food products and remove import duty on the same to reduce the economic impact (Devlin 112). It must be observed that the recession that saw the slow economic down turn reduced inflation significantly making the food prices decline in 2008 (McGinley 01). It is after this experienced declining food prices that the prices began soaring caused by the increased demand for food to sustain the surging economy. The government efforts to subsidies the food prices cannot be sufficient as there are no enough resources to sustain such action. The imported food was also expensive because of the rising food cost from the exporting countries. Reasons for Flat Consumer Price Index Consumer price index is the measure of the variation in the prices of goods and services of consumers. The consumer price index in UAE is expected to remain flat and therefore not posing an economic challenge. There are several reasons as to why the price index would remain flat. To begin with, the price of houses is expected to remain unchanged because of the expected prices of the raw materials that are used in building (Gorgenländer 148). Expenditure on housing constitutes about 39% of the basket of goods that is used in the calculation of the price index. Increasing housing supply will keep the prices stable and reduce the overall cost on rent (McGinley 01). The cost of labor and inputs that is ussed in the construction has also remained stable hence making the cost be flat. The fact that this element will remain flat significantly account for the flat consumer price index. The second reason as to why the consumer price index would remain flat is the government efforts to promote low inflation effects. For instance, the government has ensured that the price of fuel remains low irrespective of the soaring cost in the international markets (USA International Business Publications 83). At the same time, the government of UAE gave out subsidy to make sure that the cost of food remains unaffected with. Since these are some of the major contributors of CPI, the will be a flat CPI. Type of Unemployment in UAE UAE has been characterized by increasing rate of unemployment that has seen many youths remain jobless. The type of unemployment that is being experienced is the structural unemployment. This kind of unemployment is where the supply and demand forces in the labor market mismatch. The graduates from the universities are all trained and the skills imparted on them are meant for employment majorly in the public sector (Shaheen 164). They thus the skills that are needed in managing entrepreneurial businesses that would lead to growth in the private sector of the economy (Budhwar and Mellahi 75). Skills and training in UAE should be adjusted to be in line with the market requirement and geared towards self-employment creation through entrepreneurial venture. The rate at which the economy has increased is higher compared to the rate at which the economy has expanded. At the same time, majority of the graduates from the universities have knowledge that is irrelevant to those of the market needs. Moreover, the rate of unemployment has been worsened by the fact that majority of the youths prefer government jobs to those of the private sector. This is because in the public sector, the number of hours is little and the remunerations are better compared to those of the private sector. Preference is also given to the government jobs because of the security of tenure i.e. one cannot be easily sacked from the job hence causing job security. This has created a problem for the government since the number of applications that are received for job positions cannot be matched by the labor. The form of unemployment that is experienced can also be referred to as involuntary unemployment since there are no existing job opportunity and it is not the interest of the unemployed to remain so. There are no opportunities that can sustain the increasing population entering the job market. UAE Labor Force 2003 Total Male % Female % Nationals Male % Female % population 4,041,000 2,745,000 67.9 1,296,000 32.1 788,210 397,950 50.5 390,260 49.5 Labor force 2,485,000 2,120,000 85.3 365000 14.7 205410 153830 74.9 51580 25.1 SOURCE: UAE Ministry of Planning, Central Statistical Department, 2003 Population Census. From the data it is evident that the unemployed population is a big proportion and the government must therefore strive to mitigate the crisis to ensure that the conditions of living must improve. Economic Solutions to UAE Unemployment Because of the rising rate of unemployment, the government of UAE needs to formulate and come up with policies that are intended to increase the employment opportunities. The first strategy that the government needs to pursue is to reduce the cost of finance and to ensure availability of money to potential investors (McGinley 01). The high cost of finance and the inaccessibility of finance to most youths has made them fully peg their hopes on the government jobs. This has caused the unemployment rate high. A reduction in the cost of loan will make the cost of doing business low and hence expansion of the economy to absorb more unemployed population. The government can also reduce the unemployment rate by encouraging individuals to seek engagement in the private sector (McGinley 01). The government should reduce the red tape in doing business and make the procedures of operating businesses simpler to encourage entry of more entrepreneurs. Notwithstanding, there is need for the government to increase expansion of sectors that can absorb many people like the solar energy, health care and education sectors. These sectors if well encouraged and an enabling environment created to expand them, there will be increased absorption and reduced unemployment. In conclusion, the government of UAE just like other governments must consider the economic factors that affect their population. The effect of the economic cycles should be made as low as possible if the economy is to realize stable growth. At the same time, the high rate of unemployment should be reduced, as this will increase the rate of economic growth if factors of production are put into work. Works Cited Budhwar, Pawan S. and Kamel Mellahi. Managing Human Resources in the Middle East. 2006: Routledge, New York. Devlin, Julia. Challenges of economic development in the Middle East and North Africa region. Singapore: World Scientific, 2010. Gardner, Edward Hudson. Creating employment in the Middle East and North Africa. Washington DC: nternational Monetary Fund, 2003. Gorgenländer, Viktor. A Strategic Analysis of the Construction Industry in the United Arab Emirates: Opportunities and Threats in the Construction Business. Diplomica Verlag, 2007. McGinley, Shane. "GCC unemployment forecast to hit 10.5% in 2010 ." Arabuian business.com (2010). Retrieved from http://www.arabianbusiness.com/gcc-unemployment-forecast-hit-10- 5-in-2010-151126.html McGinley,Shane. "Youth preference for govt jobs is a disaster - official ." Arabian Business .com (2010). Retrieved from http://www.arabianbusiness.com/youth-preference-for-gov-t- jobs-is-disaster-official-90413.html Ministry of Planning (Central Statistical Department), 2000 UAE in Figures, July 2001, Dubai Shaheen, Kareem. "Unemployment among nationals at 14% in Abu Dhabi." The National (2010). USA International Business Publications. Doing Business and Investing in United Arab Emirates Guide. Intl Business Publications, 2007. World Bank. Unlocking the employment potential in the Middle East and North Africa: toward a new social contract. Washington DC: World Bank Publications, 2004. Read More