UAE Economic Development, Challenges, and Strategies

Abstract

Before the discovery of oil in the UAE, the country fully depended on the subsistence agriculture, fishing, extraction of pearls, and nomadic animal keeping. This paper seeks to explain the development of the UAE economy, the challenges the economy experiences and the proposed strategies to solve the challenges. This research draws mostly on such secondary sources as books and journals, and other documentary sources. The information from the primary sources, such as interviews, has clearly demonstrated how the citizens of the UAE have worked together in order to boost the economy of their country. From the findings, it is evident that the discovery of oil in the UAE has greatly influenced the economy of the country by improving the living standard of people. In order to solve the economic challenges, the government has implemented the major strategy that has meant to last for a longer period by modifying the national economy and developing the non-oil areas. This paper sums up the development, challenges, and strategies of the UAE in improving the economy of their country.

Development, Challenges, and Strategies of the UAE

The independent states in the Gulf region represent a group of oil-exporting countries, which use the resource factor in their development; hence, they have succeeded in terms of economic progress. Among the oil-exporting countries, the United Arab Emirates (UAE) occupies a prominent place. In fact, the country faced numerous problems that failed in a number of socio-economic indicators in order to circumvent other countries in the region. An important feature of the UAE economy at the present stage of its development is the use of oil revenues not only to diversify the national production but also to transform the country into a major international center of services, primarily, in the financial, credit and tourist areas.

Nowadays the UAE represents one of the most successful societies of the Middle East, which was able to make rational use of the oil revenues. Therefore, the consideration of changes in the UAE and the use of oil factor income aim at transition from the traditional to the modern type of economy, specialization in the manufacture and the export of the finished products. Hence, it is relevant not only for the UAE, but also for other resource-exporting countries in the region. Therefore, the paper proves the fact that the UAE represents a successful country, which is actively engaged in the creation of better conditions of the economic environment regardless of the certain economic challenges.

Research Question for this Review

In order to prove the thesis statement, the paper is going to respond to the following research questions:

1. How has the discovery of oil helped in boosting the UAE economy?

2. How have the citizens of the UAE helped in developing the economy of their country?

3. What challenges are present for the UAE economy?

4. What are the strategies needed to put forward in order to solve economic challenges?

The Current Situation in the UAE’s Economy

Currently, the participation patterns of UAE in the world economic relations are changing. The process of the country’s involvement in a single world economic development represents a difficult system. In fact, it is known that oil is one of the most important factors in the development of the UAE economy, which largely determines its place in the world economy and specialization in the international division of labor (Gonzalez, 2008). However, the importance of this factor varies due to several reasons. Actually, the presence of significant natural resources (primarily, energy, oil and natural gas) in the country can have negative consequences and can cause the ‘light’ form of the country’s integration into the global economy. At the same time, the mobilization of the following resources is probably more important and promising in modern environment: human factors, innovation, intensification of production, and others. One of the prominent factors that determine the position of the country in the world economy has long represented the engagement in domestic and international markets (Gonzalez, 2008). What is important, the world market is the most significant body in determining the conditions and the intensity of competition in the national markets and on a global stage. Therefore, it is expedient to identify and exploit new opportunities, and to create new ways to strengthen the country’s position in foreign markets.

Previously, only the UAE was specialized in the export of oil. Although, the qualitative changes and structural shifts in the economy and in foreign trade are recorded, the UAE’s economy is still dependent on the world prices of fuel at present (mainly oil and gas) (Gonzalez, 2008). Considering the direction of strengthening the position of the United Arab Emirates in the global economy, it is appropriate to state that the country is already connected to such sectors as modern means of communication and information, international trade, business services, international finance, ICT and tourism.

The UAE Economic Development

In fact, the UAE possesses significant potential. Until recently, it was possible to talk about the destructive impact of the global reproduction and External Economic Relations on the UAE economy (including the main resource of the economy, which is oil), which highly hindered the transformation of the national economy by causing it to remain in the position of the export-oriented commodity segment of the global economy. Such a model of foreign economic relations focused only on the world market for many years and was not conducive for the changes in the sectoral structure of the economy; however, the model has strengthened the international competitive position of the country. In other words, the country was in need of changes that soon began to occur.

Currently, the goal of the UAE public policy is directed to the introduction of the progressive economic development model. First of all, the state seeks to harmonize their standards and trade facilitation. In the area of ??fiscal and monetary policy, the state aims at creating favorable conditions for investors (Gonzalez, 2008). Moreover, the UAE has focused on the development of the trade policy, which simplifies the management of commercial activities at different levels and contributes to the development of companies and their profits (Pacione, 2005). A particular stage of development and economic transformation of the country represented the creation of the first free economic zones (FEZ), which were committed to deepening the integration into the world economy, on the territory of the country in 1980 (Alfawaz, Hilal, & Alghannam, 2014). In fact, the discovery of numerous free zones has turned the United Arab Emirates into the third largest re-export center in the world. Currently, the country generates almost one-third of the revenues of the state economy and provides strong connections with many countries.

The integration of this powerful tool into the global economy deserves a special attention, as it influences the development of services, communications and telecommunications systems, and the development of tourist business (Rubin, 2002). Furthermore, the movement of foreign and regional capital is one of the main external factors of development. Initially, the development of the oil and gas industry contributed to the influx of foreign funds that came from investments in the large oil companies. In subsequent years, foreign capital began to penetrate into other sectors of the economy (Gonzalez, 2008). In fact, the accumulated foreign capital is the most active in the UAE nowadays.

Currently, there is still a focus on the search for the investors and strategic partners, who can help to implement different projects. However, after the global financial and economic crisis, the foreign direct investment (FDI) of the UAE declined from $ 13.7 million in 2008 (in 2009, it amounted to 4.0 billion in total, but then it experienced growth) to $ 10.5 billion in 2013 (Alfawaz et al., 2014). In addition, the export of capital has been reduced from $ 15.8 billion in 2008 to $ 2.9 billion in 2013 (Alfawaz et al., 2014). However, the volume of accumulated investments of the UAE economy grew significantly from 1990 to 2013 (Alfawaz et al., 2014). Hence, the volume of accumulated investments in 1990 amounted only to $ 751 million, but the volume was at the level of $ 105.5 billion in 2013 (it increased by 140 times) (Alfawaz et al., 2014). Such a development has also increased the volume of accumulated investments taken out of the country that has increased to $ 1.9 billion by 1990 and has amounted to $ 63.2 billion in 2013 (Alfawaz et al., 2014). In other words, a distinctive feature of the United Arab Emirates and other oil-exporting countries is the fact that the financial structure of the Arab Gulf countries has invested significant capital – ‘petrodollars’– mainly in loan form beyond its region. Such investments represent another channel of involvement in the world economy – the connection of the ‘petrodollars’ to the global financial system (Mosesov & Sahawneh, 2005). The prospects of country development also depend on the rational use of the advantages of geographic location between two civilizations – Atlantic (mainly European) and the Pacific.

In fact, the UAE actively interacts about the integration associations of the West and the East. The problem of many countries, which are rich in natural resources, particularly oil (Venezuela, Nigeria and some other OPEC member countries), is that the governments have not been able to provide a sustainable long-term economic growth and high living standards from the use of the natural resources (Alfawaz et al., 2014). Actually, this phenomenon is known as ‘the curse of natural resources’. The essence of the phenomenon lies in the fact that there is correlation between the availability of natural resources and the economic growth (Alfawaz et al., 2014). Similar to any extractive industry, the pricing system in the oil sector is based on the existence of a category of rent (Gonzalez, 2008). Until recently, the world oil market has represented a market of seller; therefore, the oil price has been determined based on the costs of production on the worst deposits, the exploitation of which is necessary to meet the demand, i.e. according to the principle of cost plus profit.

Since the oil of the Middle East was the cheapest in terms of the costs of production, there was a continuous struggle between the owners of the countries’ mineral resources and oil mining companies regarding the distribution of income (Alfawaz et al., 2014). In the early years of the oil-production, the countries received only a charge for the utilization of the nonrenewable natural resources and a part of the revenues taxation (Gonzalez, 2008). Subsequently, the countries were able to achieve the realization of the principle of ‘fifty-fifty’ (Alfawaz et al., 2014). Actually, the transformation from the sellers’ oil market into a buyers’ market has changed the pricing principles. The price of oil in the UAE began to be constructed on the principle of ‘netback’, i.e. the prices ‘countdown’: the processing costs, crude oil transportation to the factory, indemnity costs and other types of prices and payments, which are mainly associated with the hauling and processing stages, were excluded from the prices of gasoline products (Alfawaz et al., 2014). In fact, such a method of pricing aims at linking the prices of interchangeable energy (coal, gas, fuel oil).

Currently, the United Arab Emirates (UAE) can be characterized as a country with an open economy, high income per capita and a positive annual balance of trade. Today, the UAE represents the global economic and trade center between East and West. The international experts recognize the transport and logistics infrastructure of the UAE to be one of the best in the world. Actually, one of the highest levels of income per capita in the world is recorded in the UAE (Alfawaz et al., 2014). In 2012, the GDP per capita amounted to $ 6002.9 (Alfawaz et al., 2014). Moreover, the UAE held a fairly high place in the world ranking in terms of the GDP per capita (Alfawaz et al., 2014). In contrast, the US GDP per capita amounted to 52 400 dollars, while the GDP per capita was equal to 29 900 dollars in the UAE (Alfawaz et al., 2014).

At the present stage of economic development, the goal of the UAE is the diversification of the economy (Alfawaz, Hilal,&Alghannam, 2014). Actually, the country is actively developing various economic sectors at present: metallurgy, water treatment, chemical and process industry, power generation, financial sector, transport and logistics, the sector of information and communication technologies, and others (Alfawaz et al., 2014). In 2012, the share of oil and gas production fell to 25% of the GDP (Alfawaz et al., 2014). However, the oil sector of the UAE still represents the backbone of the economy.

According to the forecasts of the International Monetary Fund, a decrease in the volume of oil exports will be expected by 2017. Currently, alternative energy technologies are gaining popularity in the UAE (Alfawaz et al., 2014). In fact, the sector of the alternative energy sources, including solar cells that could materially affect the approaches to the production of energy in the future, is actively developing today. In the UAE, many properties derive their energy from alternative sources nowadays. In turn, such a situation may also indicate the diversification of the UAE economy (Alfawaz et al., 2014). The role of the external factors that influence the development of national economies in a globalized world is increasing steadily.

Actually, it is necessary to address the history of the country’s development, when concerning the economic development, challenges, and the strategies of the UAE. The strongest impulse that contributed to the large-scale integration of the UAE in the world economy took place 40 years ago, when the first oil deposits were found on the territory of the United Arab Emirates. In fact, the beginning of the economic development coincide with the period of the oil boom (Alfawaz et al., 2014). Since 1970, the country has been gradually transformed into a modern state with a high standard of living (Alfawaz et al., 2014). Despite the fact that the model of economic development of the UAE represents a typical example of a country with a large public sector, the economic role of the state is currently subjected to revision (Alfawaz et al., 2014). Since March 1994, the privatization program was launched in the UAE in response to the fall in oil prices on world markets (Alfawaz et al., 2014). The government has made the decision to refuse the monopoly of the infrastructure by transferring the communications, ports and port facilities, electricity and water supply facilities in the hands of private companies. In addition to the development of the competitiveness of the private sector, the privatization program has helped the country’s public finances to improve by reducing non-productive government spending (Alfawaz et al., 2014). Each year, the government of the UAE has been increasing spending on job creation and the development of the infrastructure of the country that has created favorable conditions for investment and the private sector. In order to develop foreign trade and attract investment in the United Arab Emirates, a free economic zone (FEZ) was established with the optimal conditions for business development in the region.

Actually, it is highly important to establish favorable conditions for development in order to achieve sustainable socio-economic development of the country and promote the potential of the extensive use of natural resources (Alfawaz et al., 2014). Although favorable conditions are crucial, the country has also needed the development in the area of human activity, where the product of intellectual work becomes the most important. The discovery of numerous free zones has placed the United Arab Emirates in the position of the third largest re-export center in the world (Alfawaz et al., 2014). In fact, this article of income generates almost one-third of the revenues in the economy of the state and provides strong links with India, Iran and other thirty-five countries. Moreover, Dubai and Sharjah are extremely active in this area of operation.

Aircraft represents another application of oil and an additional way of income for the UAE. Actually, most of the traffic of the re-exported goods account for air transport. Six airports connect the United Arab Emirates to the outside world (Alfawaz et al., 2014). The coast accommodates dozens of seaports, including the eight largest seaports. Thus, the diversification of the structure of the UAE economy will play an increasingly important role in the world economy.

The analysis of the investigations has demonstrated that the implementation of the national development strategies largely determine the foreign trade of the United Arab Emirates. Without a doubt, the economy is dependent on exports of oil and oil products; however, the economic complex of the United Arab Emirates has been developing a new scenario in recent decades (Alfawaz et al., 2014). The scholars are convinced that the diversification of the structure of the foreign trade of the UAE will play an increasingly important role in the further development of the country and it will strengthen the position of the country in the world’s economy. What concerns the export structure, the country occupies the most high-tech products. However, the country is still largely dependent on the exports of oil and oil products, while is has not been able to collect sufficient amount of financial assets needed for the development of other market segments. The analysis of the rate of GDP growth and the dynamics of foreign trade, and the study of the main features of the internal market conclude that the economy of the United Arab Emirates will actively develop in the future; so, the foreign investment will continue to flow in the region.

The UAE Policies and Strategies in Economy

Currently, the UAE represents the third largest oil producer in the Gulf region with an average production of about 2.2 million barrels of oil per day. In fact, the oil and gas industry occupies the share of 33% in the GDP (Alfawaz et al., 2014). The biggest oil producer is the Emirate of Abu Dhabi and Dubai and Sharjah (Alfawaz et al., 2014). Actually, the oil and gas sector of the economy has provided the UAE with one of the highest incomes per capita in the world. Moreover, the revenues of the sector have been invested in the UAE tourism, trade, industry, agriculture and the social sector for many years. Such a pattern has led to the active development of infrastructure and the attraction of foreign investment. Moreover, the communication system with 700,000 phone lines and fast growing computer data system represent the indicators that demonstrate high level of development of the national economy (Alfawaz et al., 2014).

In recent years, the share of oil and petrochemical industry in the GDP has gradually decreased by providing the way for development of other sectors such as tourism, real estate development, trade and agriculture. In addition, investment funds have been increasingly held recently. At first, the investment flows into the construction of desalination plants in order to provide fresh water not only to the fields and gardens but also to the green spaces activists. The agricultural sector, which amounts to 2.5% of the GDP, is the traditional part of any economy; however, it is difficult to develop this sector due to lack of fresh water and the specific characteristics of the natural conditions ( only 0.5% of the UAE is cultivated) (Alfawaz et al., 2014). The following are the industries that are highly developed in the UAE: the energy -38.7 billion kWh in 2000; the desalination of water – more than 900 thousand m3 per day; the aluminum industry – about 370 thousand tons in 1997( the 2nd place in the Middle East); the industry of building materials, textile, food (including fish processing); certain types of shipbuilding; handicraft and others (Alfawaz et al., 2014).

One of the problems that cause a negative assessment of a number of economists is the rental nature of the economy of the Cooperation Council States. In fact, it is significant to keep in mind that the negative assessment is caused by objective features (Alfawaz et al.,). Hence, it is able to result in several visions of the researchers on the topic. One view consists in the difficulty of the leasing model that lies in the continuous receipt of the state revenues from the trade of natural resources. The rental earnings represent a possible tool that helps to abstain from the most significant economic mechanisms and the restructuring process of the state political system.

In fact, the pressure of certain economic problems increases the role of democratic mechanisms, as these factors enhance public understanding of the complexity of development issues. At the same time, the nature of the rental business system is believed to allow softening of the promotion of the development of a market economy in the UAE, Kuwait and other countries of GCC (Abed, 2000). Moreover, such attempts are believed to be performed without forcing an increase of the tax burden and reducing the public sector, but by addressing the specific issues of social politicians.

The formation of a new model of the state system of the UAE, which is balanced with the existing economic model, combines the participation in the power of the Emir, the Government and Parliament. According to the Constitution of the UAE, the government has no right to execute large projects in oil development without the approval of the National Assembly that has frequently rejected the development projects of oil production with a concession of equity participation of foreign capital. In 2008, the Supreme Petroleum Council of the UAE, which was responsible for the process of the functioning of the oil industry, was required to steer clear of a disagreement with the Parliament to abandon the premeditated multi-billion dollar concord with the “Dow Chemical” company (Alfawaz et al., 2014). The same factors represented the reasons for the rejection of the projects in the oil sector worth about 15 billion dollars (Alfawaz et al., 2014). In this regard, the public in the UAE can be argued to have the direct leverage due to the governmental branch on strategic issues of development and the use of the natural resources of the nation. In the reliable environment provided by oil revenues, the UAE and other GCC countries continue to implement various policies in order to increase the role of the private sector, to diversify the economy and to introduce the elements of the free market (Alfawaz et al., 2014). However, the implementation of the strategy seems to be more difficult for the UAE than for other countries of the Cooperation Council due to narrow base of resources (Abed, 2000). In contrast to Qatar, Kuweit, and Saudi Arabia, the reserves of natural gas of the UAE are not significant; however, a relatively small coastline would allow building a large tourist infrastructure (Alfawaz et al., 2014).

The Non-Oil Sectors of UAE Economy and their Challenges

In fact, the UAE has managed to overcome all the recent financial, military and political crises in the region thanks to the rapid growth of the national economy and the dynamic social development of the country. Thus, the country’s president, Sheikh Khalifa bin Zayed Al Nahyan, restructured the Office of Ministers in December 2009 in order to be able to implement a strategy of further development. The newly appointed minister identified the targets of the program (Alfawaz et al., 2014). For example, the UAE Minister of Justice, DrHadif bin Giovanni al Dhahiri, has claimed that the future promises to bring significant progress that depends on the creation of a new foundation of the state, which is able to unleash the potential of a new generation of activity, and that is more developed, civilized and dynamic (Alfawaz et al., 2014). In addition, the Social Development Minister, Mariam Al Roumi, has stressed that the government has to put huge effort to the development, prosperity and progress of the nation, which are the main objectives the government is committed to implement in the best and right way (Alfawaz et al., 2014).

In April 2010, the UAE Minister of Economy, Sultan bin Saeed Al Mansouri, announced that the growth rate of the UAE economy could reach about 2.5% in 2010, while the inflation was about 2% (Alfawaz et al., 2014). Moreover, the Minister called for a positive dynamics of oil prices for all the oil-exporting countries in the Gulf region, which should bring the income necessary for the investments in economic infrastructure and the revival of the economy after the global financial crisis.

Despite the fact that in 2009 the UAE accumulated substantial financial reserves thanks to several years of high prices, the government of Abu Dhabi implemented a program of debt issuance of the state in the amount of about 10 billion dollars (Alfawaz et al., 2014). According to the experts, such tools aimed at bringing the resources of the international capital market to the UAE (El Mallakh, 2014). Similarly, other emirates of the UAE also received them. In particular, Dubai has launched a program of action and has released the public debt instruments in the amount of about 20 billion dollars (Alfawaz et al., 2014).

The UAE Minister of Economy had a strong conviction that the economic strategy of the UAE involved the strengthening of the development not only in the real estate sector but also in the sectors of trade, processing of cargo flows and logistics, and tourism. As noted by Sultan Bin Saeed Al Mansouri, the UAE depends on the world economy, the situation in China, the United States and other countries (Alfawaz et al., 2014). An important economic control unit represents the development program in the UAE, which acts as a legislative reform, including the adoption of new legislation in many areas (Abed, 2000): the competition laws on foreign investment, the certificate of the origin of goods, the arbitration legislation on the regulation of the industry, the amendments to the law on industrial property, laws audit and the company. In fact, the reforms require the efforts of many ministries and federal agencies of the United Arab Emirates. While the projects of industrial laws and company were ready in April of 2010, the development of the company law took more time, because the document contained more than 400 articles (Alfawaz et al., 2014). Actually, the company law is now regarded to be highly important for the development of the UAE, as it frames the economic development, challenges, and the strategies of the UAE.

The largest ventures, which are carried out in the free zones and Dubai, represent steel projects that found their application in the building and usage of the real estate, transportation and some other factors, which exists under the state’s auspices (Alfawaz et al., 2014). Certainly, the infrastructure of the economy belongs to one of the authentic ways to produce the starting point for the non-oil sector of the economic functioning (Alfawaz et al., 2014). First off, the development in the service sector is necessary, which is tightly related to the contemporary directions of the world economy.

Actually, Dubai has fused the majority of national and international projects in the framework of two property companies, “Dubai World” and “Dubai Holding”, which are extensively popular in the United States and other foreign countries, as the holders of huge cash income. In fact, the companies have gained control of more than 130 different companies; moreover, they continue to manage the major development projects and to finance their implementation nowadays (Alfawaz et al., 2014). The major projects also represent such projects as the “Dubailand”, the development of the man-made island “Jumeirah Palm”, and the development of “World of Emaar” company (Abed, 2000). The most recent venture acts as a joint-stock endeavor with a public donation for shares. Hence, the venture manages the achievement of communications and the profit-making use of the “Burj Dubai” skyscraper. Therefore, the contributions of this project achieved huge trading volume and the largest share on the Dubai stock exchange.

A typical example of the development and diversification of the non-oil sector of the GCC economies, consists in the absence of significant energy resources in Dubai (El Mallakh, 2014). At the same time, the state remains to be the driving force behind the development of Dubai, despite the desire to weaken the leadership, the UAE depend on the state aid in the development of private sector.

The tangible progress brought by the development of the Emirate of Dubai has brought the strategy of creating free economic zones, which allowed full ownership by the founders of the foreign capital enterprises and the shareholders with tax exemption (Alfawaz et al., 2014). Such strategic direction has attracted a huge variety of branches of foreign companies and the representative offices of the free zones (Abed, 2000). In order to control the free zones of Dubai, the government of the UAE has established special bodies that engage in the implementation of targeted programs for the development of free economic zones. The exceptional legal basis has been approved with the intention to normalize the manner of functioning of each zone.

Conclusion

To sum up, the oil and oil-related industries are slightly declining in proportion of the gross national income. In fact, the price of oil has helped to explain the rising share of GDP in other sectors of the economy, including the construction of trade, real estate, tourism and agriculture. The reserves in farming have aided to construct a number of the desalination plants by turning the sector of the economy into more self-regulating and miscellaneous regardless of the fact that the most part of the country is infertile and dry accompanied by a low probability of a rainfall probability and the lack of rivers. In fact, such crops as strawberries are even exported to Europe. The largest trading partner is Japan, which represents the largest share of the UAE oil and gas exports; it is also the major supplier of imported vehicles, electronics, and a variety of consumer products.