The UAE Avoiding Oil Curse Through Diversification – Free Essay Examples

The UAE Avoiding Oil Curse Through Diversification

The United Arab Emirates (UAE) is a league of seven distinct emirates, which jointly make the third biggest economy in the Gulf region. It is the second-largest economy in terms of per capita output. The country’s economic growth has averaged roughly 5 percent over the last decade but has wavered from positive to negative due to the global petroleum prices (Farouk 4). The UAE is among the leading producers of oil and gas in the world. In fact, it is ranked number seven globally based on its production capacity and reserves and is a member of the Organization of Petroleum Exporting Countries (OPEC). Abu Dhabi, the nation’s administrative capital and the biggest emirate in the league, has the bulk of oil and regular gas reserves; it is followed by Dubai, with Sharjah and Ras Al-Khaimah having the least reserves (Haouas and Heshmati 12).

The UAE keeps on driving territorial change with an economy that has remained buoyant over the recent past. The nation stands out as one of the most coordinated economies on the planet and has seen solid development. For this reason, the UAE continues to be ranked high by both regional and global financial institutions (Hvidt 22). Owing to an interest-driven increment in oil production, the UAE economy was relied upon to grow by 4.5 percent last year. The current volatility in the global market has reduced the expected rate of GDP growth to 3.5 percent. However, Dubai’s GDP has been slightly higher (over 4 percent) (Haouas and Heshmati 14).

The slow growth of the UAE’s economy has been largely attributed to the sharp drop in oil prices in the global market. In 2008, oil prices increased significantly, only to plunge in 2014 to the present time. Studies show that the volatility of oil prices in the global market has considerable macroeconomic side effects, especially in oil-dependent economies like the UAE. The UAE has started to embrace economic diversification and structural transformation in the wake of the falling oil prices in order to avert the situation. This paper tries to explore the impact of the new measures on the UAE’s economy (Matsumoto 65).

Economic Forecast Indicator Overview

As already been mentioned, UAE is the second biggest economy in the Gulf region, with a GDP of approximately $400 billion. The country’s GDP is expected to slump to $320 billion next year due to the falling oil prices. The country’s GDP per capita is around $25773, which corresponds to 204% of the world’s average. The non-petroleum industry has grown to over $330 billion. On the contrary, the GDP per capita is expected to increase owing to the current efforts by the government to transform the economy (IMF 3).UAE is ranked among the top 30 countries with the most favorable environment for doing business in terms of its economy and legal environment. Even though UAE is the most diversified and structurally transformed economy in the Gulf region, its economy still relies on oil. With the exclusion of Dubai, most of the emirates are over-reliant on petroleum and natural gas proceeds. Oil still plays a critical part in the UAE’s economy, particularly in Abu Dhabi (IMF 4).

Economic Forecast Indicator Overview

The country’s population is relatively small. The enormous wealth generated by petroleum and natural gas revenue has attracted a large number of expatriates. Therefore, the UAE population is characterized by a small native population and a large number of foreigners. Besides population size and profile, societal aspects also influence the size of the labor force. For instance, female participation is restricted. Women only constitute around 18 percent of the total workforce. However, the number is expected to go up due to the government’s effort to increase the number of indigenous labor forces (Eltony 67).

The employment pattern in the United Arab Emirates doesn’t replicate the output structure. The petroleum and gas industry employs less than 2 percent of the country’s labor force. The rest of the labor force is employed in the oil sector, with the majority being engaged in communal and social activities (Farouk 7). The unemployment rate (4.0%) is considerably low, which shows that the UAE’s labor force is fully engaged. The number is anticipated to rise to 4.5% by 2020. This is attributed to population increase and slow growth of public sector jobs. Public-sector employment of the indigenous population is common in the Gulf region. The private sector mainly employs foreigners despite the introduction of an employment quota that is aimed at increasing the number of locals in private-sector jobs (Farouk 8).

Economic Forecast Indicator Overview

Currently, the consumer price index (CPI) in UAE is around 127.58, which is an all-time high. Economic experts attribute this to the increase in the cost of housing and utilities, as well as the escalation in the general inflation rate. The consumer price index is expected to rise to 128 next year (IMF 56). The proposed budget for the year 2015/2016 is around AED 491billion, which is nearly a 7 percent increase from last year’s budget. About 50 percent of the funds have been allocated for projects targeting social development and citizen welfare, whereas 41 percent have been apportioned for state government services. The rest is allocated for infrastructure, financial assets, and federal spending. The sovereign fund also increased by 10 percent in 2015 despite the declining oil prices. The fund is influenced by global finances and is controlled by the Abu Dhabi Investment Authority (IMF 57).

The industrial sector contributes around $80.1 billion, which translates to 42 percent of the non-oil GDP. The construction industry leads with around $36.2 billion, followed by the fabrication industry ($30 billion), power, gas, and water ($8 billion), and mining at $400 million. One of the main enablers of industrialization in the UAE and a genuine impetus to industries is the availability of power. The accessibility of dependable and generally affordable energy makes the emirates an extremely engaging spot for industrial establishments. Besides, a significant number of the industrial zones provide energy incentives (Haouas and Heshmati 15).

Power generation in the UAE has expanded from 150,000 kilotons in the late 1990s to over 180,000 kilotons. This corresponds to 33 billion Kilowatts/hour to 53 billion Kilowatts/hour. Power consumption increased from 31 Kilowatts/hour to 48 Kilowatts/hour. Electrical utilization per capita climbed just insignificantly over the same period. In terms of export and imports, UAE is ranked number 16 and 19 in the Middle East and North Africa regions, respectively. According to the World Trade Organization (WTO), the UAE exports about $360bn, which is 2 percent of the global exports. On the other hand, the country’s imports are approximated at around $280bn, which results in a positive balance of trade.

Economic Forecast Indicator Overview

Major Economic Challenges Facing the Country

The UAE economy is powered by petroleum and natural gas proceeds. This unlimited measure of common asset riches is gotten from extensive scale creation and exports, for the most part of unrefined petroleum, which surpasses local consumption. The net measure of production and consumption gives incredible space for oil riches to aggregate (Haouas and Heshmati 18). In any case, the fortune riches from petroleum and natural gas do not generate effectual productivity for the economy in general. The negative effect of total factor productivity is a disturbing component that highlights the need to broaden the UAE economy.

UAE has been executing a number of strategies aimed at supporting economic diversification, which include changes to reinforce the business environment, infrastructural development, increasing access to credit facilities, and streamlining the education sector. While the percentage of non-oil GDP has expanded, non-oil exports are still limited. This means the country is still over-reliant on oil export. The economic volatility caused by dependence on oil proceeds restricted the diversification and transformation process owing to its effect on administration and exchange rates. In addition, UAE relies on oil revenue to fund nearly all of its projects and programs. As a result, the sharp decline in oil prices significantly affected the implementation of a number of key projects initiated by the government (IMF 77).

The growth of the non-oil sector has remained afloat, driven by development, prominently attributable to capital spending in Abu Dhabi and the ever-growing transport and hospitality industry. However, the recent data show that the non-oil sector has slowed down a little bit but still remains upbeat. Even though the sharp decline in oil prices is wearing down long-term goals, its impact on the economic activities in the country has been restricted (Farouk 21). The UAE has continued to gain from its status, as well as from its substantial financial and outer supports that have constrained negative overflows from the decline in oil prices, slow universal development, and financial instabilities in the emerging markets. Furthermore, solid development in the Dubai administration segment and expansionary monetary strategies helped to offset the impact of low oil prices (Farouk 22).

Over the previous decade, solid GDP development was bolstered by increased government expenditure, funded by quickly expanding oil proceeds. On the other hand, with the falling oil prices, this strategy may no longer be feasible. Besides, even with solid development, labor productivity has been feeble or negative, and aggregate factor productivity for the general economy and for the non-oil sector has been downbeat. Moreover, Human capital is one of the major challenges for organizations and institutions based in the UAE. The labor laws limit the number of expatriates that can be hired. In addition, the country produces a relatively low number of skilled and competent. What is more, their expertise does not match the requirements of the industry (Farouk 23).

The cost of hiring skilled labor in the UAE is also very expensive. The high cost of skilled labor is attributed to the high demand for labor in the country and the scarcity of skilled and competent domestic labor. The high demand for skilled labor has also led to the escalation in wages. Companies have been forced to introduce higher remunerative packages to attract highly skilled and competent workers (Rashid, 2007, p. 22). In addition, the rising wages are also attributed to the increasing cost of housing and cost of living. For the above reasons, most companies in the UAE have resorted to cost-cutting measures to reduce their wage bill and cost of staffing. The measures include hiring fresh graduates. Other measures include hiring expatriates from less developed economies who have less wage demand.

Employment relations in the United Arab Emirates are guided by the Federal Act No. 8 of 1980. The act is pretty based on the ILO model. The law governs nearly all aspects of personnel management. The law offers the first right of employment to the citizens. Noncitizens may be hired with requisite approval from the relevant authorities. The government initiative of giving locals the first right of employment is commonly known as “Emiratization.” Since many locals are employed in the public sector, a sharp decline in oil prices poses a big threat to the labor sector.

As already, been mentioned, the country’s GDP has been growing quite slowly over the past few years. This is also attributed to the decline in oil prices since major infrastructural developments are funded by oil revenue. In spite of these challenges, the country’s foreign direct investment (FDI) grew by AED 47000 million in 2014. The number is expected to exceed AED 50000 million this year owing to the fact that the UAE is among the countries with the most favorable environment for doing business in terms of its economy and legal environment. Nevertheless, the amount received in 2014 is still lower than what was received in 2007 (AED 52000 million).

The unemployment rate (4.0%) in the country is comparatively low compared to other GCC member states. However, it is expected to increase by 0.5% percent every year. The increase is linked to population increase, slow growth of public sector jobs, and an influx of foreigners. The slow growth of public sector jobs and a sluggish economy are all principally attributed to declining oil prices. The majority of emirates depend on oil revenue for public sector projects and infrastructural development (IMF 83). The continuous decline in oil prices weighs on open accounts, and so far, the administration has tended to the deficit in oil incomes through a mixture of austerity measures and endowment balance. The drop in oil prices is likewise influencing the financial sector, and a few banks have reduced their lending amid fears of loan defaulters. On the other hand, the UAE keeps on being a standout amongst the most enhanced economies in the region (IMF 85).

Late last year, the government allocated AED 300 billion for research and development to promote sustainable growth and expansion of the economy. The administration, be that as it may, didn’t clarify how long it would take to completely do the enormous venture. The inflation rate continues to escalate at an average of 3.9 percent. It is expected to hit 4.2 percent by 2016 as a result of an increase in the cost of housing and power and water tariffs. This means the cost of commodities is expected to increase. Fortunately, the exchange rate against the dollar has remained stable at 3.67 over the last year, which is attributable to petroleum and natural gas exports (IMF 91).

In terms of infrastructural development, UAE has invested a huge amount of resources in improving its infrastructure. Currently, there are six mega infrastructural projects in progress, which are anticipated to cost AED 202 billion. Most of these infrastructures are funded by oil revenues. The declining oil prices, experts fear, may slow the progress of these projects. However, the UAE government is very optimistic and has assured its citizen and other stakeholders that they will be completed in time (Matsumoto 41).

The UAE trade with the region and the rest of the world

In the last ten years, the United Arab Emirates (UAE) has been changed into one of the world’s most dynamic economies. The key to the UAE’s prosperity has been economic expansion (Hvidt 28). Currently, oil only constitutes a third of GDP. The non-oil sector has grown three times in the last four decades. Over 80 percent of non-oil exports are from Dubai. The UAE’s main trading partner in India. Other major trading partners are China, the U.S., and the GCC member states (except Saudi Arabia). The country exports over AED 140 billion and imports in excess of AED 511 billion.UAE imports from India are worth AED 30 billion and exports around AED 20 billion, whereas its imports from China are worth around AED 50 billion, and exports stand at AED 4 billion. The imports from Japan are worth AED 85 billion while exports stand at around AED1 billion. The imports from other Asian partners stand at AED 22 billion, whereas exports are worth about AED 2 billion. The country’s major Western partners include the U.S., Italy, Germany, Switzerland, and France. The country mainly exports crude oil to these countries. As a result, the exports are more than imports (Hvidt 29).

Recommendation for macroeconomic policies in a time of falling oil prices

In order to maintain a robust and sustainable economy, the policymakers in the UAE should assess and evaluate economic diversity when formulating policies. To be specific, they should diversify the economy based on the distribution of economic outputs and inputs. Depending on the measure taken, the public and private stakeholders should mainly focus on productive sectors that can sustain long-term growth, as well as investment research and technology. The diversification and transformation process must also foster the growth of peripheral sectors, for instance, the export of a variety of products to different markets. Last but not least, the policymakers should persistently and reliably upgrade the profitability and intensity levels of the monetary base by drawing on assets and taking vital interests in divisions, businesses, furthermore esteem chains where there is an upper hand and where there is a business sector opportunity and development potential. This exertion can include improving human capital, expanding instruction levels, and importing expatriates as required; enhancing money-related capital by growing new financing plans and instruments, improving the exploitation and utilization of natural resources; and upgrading innovation and learning with the point of enhancing novelty.

Conclusion

Diversification is one of the ways economies can spread risks. By investing in the non-oil sector, the country is able to maintain sustainable growth and stability. Even though UAE is regarded as one of the most dynamic economies, the drop in oil prices has considerably affected its expenditure on infrastructural development and expansion of the public sector jobs. For this reason, necessary measures need to be taken to avert the situation. This includes assessing and evaluating economic diversity when formulating policies. Depending on the measure taken, the public and private stakeholders should mainly focus on productive sectors that can sustain long-term growth.

Works Cited

Eltony, Nagy. Oil Price Fluctuations and their Impact o the Macroeconomic Variables of Kuwait: A Case Study Using VAR Model for Kuwait, New York: Oxford University Press, 2014. Print.

Farouk, Hisham. United Arab Emirates Economic Overview 2015, Dubai, UAE: Grant Thorton, 2015. Print.

Haouas, Ilham and Almas Heshmati. Can the UAE Avoid the Oil Curse by Economic Diversification? Abu Dhabi, UAE: Abu Dhabi University, 2014. Print.

Hvidt, Martin. Economic Diversification in GCC Countries: Past Record and Future Trends, London: London School of Economics and Political Science, 2013. Print.

IMF. United Arab Emirates: Selected Macroeconomic Indicators, 2012-20, Washington, D.C.: International Monetary Fund, 2015. Print.

Matsumoto, Takashi. Impact of Weak Oil Prices on Fiscal Conditions in the Middle East Oil-Producing Countries, Tokyo, Japan: Global Energy Group, 2015. Print.

Cite this paper

Reference

UniPapers. (2022, June 5). The UAE Avoiding Oil Curse Through Diversification. Retrieved from https://unipapers.org/free-essay-examples/the-uae-avoiding-oil-curse-through-diversification/

Work Cited

"The UAE Avoiding Oil Curse Through Diversification." UniPapers, 5 June 2022, unipapers.org/free-essay-examples/the-uae-avoiding-oil-curse-through-diversification/.

1. UniPapers. "The UAE Avoiding Oil Curse Through Diversification." June 5, 2022. https://unipapers.org/free-essay-examples/the-uae-avoiding-oil-curse-through-diversification/.


Bibliography


UniPapers. "The UAE Avoiding Oil Curse Through Diversification." June 5, 2022. https://unipapers.org/free-essay-examples/the-uae-avoiding-oil-curse-through-diversification/.

References

UniPapers. 2022. "The UAE Avoiding Oil Curse Through Diversification." June 5, 2022. https://unipapers.org/free-essay-examples/the-uae-avoiding-oil-curse-through-diversification/.

Reference

UniPapers. (2022, June 5). The UAE Avoiding Oil Curse Through Diversification. https://unipapers.org/free-essay-examples/the-uae-avoiding-oil-curse-through-diversification/

References

UniPapers. (2022) 'The UAE Avoiding Oil Curse Through Diversification'. 5 June.