The United Arab Emirates’ became independent in 1971; it records an economic freedom score of above 70. This has made the economy of UAE appear in 28th position among the freest in the 2014 index. It has increased its rating and this year it has reordered a 0.3 point higher than last year. This has been made possible by improvements in labor freedom, business freedom, and monetary freedom which have outweighed the control of government spending. The first assessment of UAE was made in 1996 index and since then it has been a regional leader in economic freedom, this is the reason the UAE has been ranked in the second place in the Arab economy. The improvements in freedom’s score this year has been due to the advancements in the management of public spending and market openness as the Dubai Expo.
The goal of this country is different compared to many other countries, because the UAE did not pass through the whole stage that most developed countries pass. The massive oil revenues have enabled the UAE to shortcut the usual difficult and lengthy and difficult journey of capital accumulation and later economic development, which is the case with most of the nations around the world.
The GDP Growth and Sources of GDP on United Arab Emirates Economy
On average since 2012, the GDP of UAE has grown to about 4.7 percent which has been viewed as a good performance as compared to the year 2009 when the country was under severe global economic crisis. In addition to that, the UAE has witnessed economic growth of about 4 percent despite the many challenged posed by the Euro zone and the negative global perspective. Most of the economic sectors have shifted noticeably over the past years (Sergi, 2008). It is true that the UEA economy largely depend on the oil sector and its related industries. This is because; non-oil sectors like labor, capital, knowledge and technology have not fully matured and still have pervasive structural gaps (Yousef, 2004). The UAE as many other economies like Qatar and Kuwait they have been very susceptible to changes in oil prices.
The GDP of UAE is divided into oil and non oil sector. The non oil sectors include the tourism, trade, transport, manufacturing and the real estate. These sectors have enabled the GDP to increase growth by 4.4 percent; this is according to a recent report by the IMF. The openness and ease of doing business have helped this development. This has seen the country increase its ranking to position 19, the total number of countries that were competing in the world economic forum was 148. This has made it the second most competitive country in the Middle East. The oil sector which has been the backbone of the UAE economy has relatively weakened over the past years, according to a recent research it is estimated that the oil sector has lost its market globally by more than 3% (Yousef, 2004). Even with the current reduction in demand due to the stiff completion from other oil producers, the UAE to a greater percentage largely dependent on the hydrocarbon mining which contributes a significant portion of the country’s GDP estimated to be 40 percent. The proven gas and oil reserves account for 138 billion barrels of oil equivalent which is expected to last for about 88 years at the current state. The GDP has been supported by the significant growth experienced in money the supply. This has helped in boosting the flow of capital during which a significant expansion in net foreign assets, tangible growth in the central bank reserves holdings. The real estate sector GDP growth has been reported to be at 4.0 percent (Yousef, 2004). Property prices have further been pushed up as a result of Dubai expectation to winning the Expo bid. In addition to that, the launching of huge new real estate has added optimism towards the scheme in 2013. The UAE has invested more of its resources on transport infrastructure; the government has identified the potential the country has and the contribution it will have to the country’s economy. The country is also favored by the transport links it has with other regions. This move has been considered to be the best and it is likely to contribute a significant amount of income to the economy.
The UAE budget and the sources of income
The UAE federal budget accounts for approximately 25 percent of total federation fiscal transactions. The remainder which is 75 percent is contributed by individuals; combined expenditure constitutes a consolidated account. UAE depends highly on income from oil which contributes significant amount government revenue and to the economy as a whole. Therefore, the government has been very cautious in investing in other sectors of the economy which will help reduce over reliance on the oil sector. The way the government spend or saves its income will always have an effect on the entire economy (Shihab, 2001).
The UAE has experienced a real GDP growth which has increased and changed the living standards of UAE citizens. The growth in non oil sector is about 7 percent, this has considered to a great achievement to the UAE economy because more people can be absorbed in employment. With the arising of non oil sectors, they have reduced the level of dependence among the UAE citizens thus improving their living standards because everyone is dependent. The UAE has been following a successful diversification away from oil dependency to other sectors such as logistics and has been equally committed to its outward orientated growth. The UAE’s economy was defined as a regional financial center and an international trading hub (Shihab, 2001).
The government can only invest on non oil sector; this move has been welcomed by most of the analysts because the government has limited ways of raising revenue. Attracting more investors into the economy has not been an easy ride; the government has been forced to make hard decisions by abolishing income tax and corporate tax though in some emirates. Though there are some corporate taxes which still exists for certain business activates (Yousef, 2004).
With the limited sources of income, the government spending has been reduced to 24 percent of gross domestic output. While on the other side, the rate of borrowing and the entire debt has been reduced to about 18 percent of GDP. The oil and gas contribute a significant amount of public spending. The government is well structured and there is huge transparency in the entire system. This is so because, UAE is considered to be the least corrupt countries in the Middle East, because the judicial system in the country is not independent (Yousef, 2004). There are several measured which a have been put into place to curb corruption which is considered to be a form of wastage.
How the UAE Government spends its income
Much of the government spending goes into humanitarian aid in the country this has been the development into foreign policy instrument. The government has championed this move because of the Islamic faith of helping those who are in need. They also believe that, the country’s wealth should be shared equally to assist those who are less fortunate both the individuals and the countries. The UAE governments disbursed billion of money in the form of grants to development, humanitarian and charitable programmes in more than 130 countries. This has made UAE be ranked among the world the world’s most generous donors of foreign aid.
Part of UAE receipts are channeled to the economy via public sector wage bill, improve access to education and health care services, the money goes to supporting research, innovation and infrastructure development. The money is also used to provide relief during times of emergency and subsidies for industries. The government has also extended its generosity to other parts of the world. Recently the UAE has been a major donor in support of the health sector in most of the African countries. The UAE government has also been a major funder of immunization this initiative is there to help the unfortunate to increase access to immunization in developing countries; it also has the aim of rolling back the malaria programme with a dedication in the heart to combat the spread of diseases.
The UAE has continuously consolidated itself as a major donor on the international stage. The government has shown much dedication and it has increased its spending to support energy intensive industries, real estate development, infrastructure and tourism.
The fundamental factors for the country's economy
The UAE government is doing all that is within its means to attract more investors into the country. This dream is slowly coming into reality, today there are massive investments which are being made by large industries. The industrial sector in the country has made significant achievements by increasing the number of enterprises (Dubai Municipality.2003). This has enabled the economy to grow at double digit rate thus reducing over reliance on the oil sector.
For many years, the hydrocarbon industry has been the main pillar in the UAE’s economy. This is because the sector has a high capital intensive. The sector also creates employment to a number of workers thus employing a small fraction of the labor force. In addition to that, oil wealth creates few jobs directly. This is the reason non oil private sector has to address the challenges of unemployment (Dubai Municipality.2003).
The high capital productivity experienced as a result of more investment in the country, it has made the country enjoy significant growth. This is despite the low productivity in labor which resulted to negligible contribution to the economic growth. Due to lack of sufficient workforce in the country, the UAE has aimed and acquired foreign technology from high industrialized countries instead of generating its own technology. These are a few challenges that the country has had over a period of time. For example, in the year 2006 the rate of growth in the country was 9.8% which was way above the previous years. The condition was worsening over time and in 2008, the country achieved a drop in GDP percentage, that year GDP was recorded to be 3.2 percent. The non oil sector experienced a high rate growth of 9.3 which was a very good percentage in 2008. The major drivers of non-oil sector have become trade, tourism, logistics and manufacturing. Looking to the future, the emerging markets are expected to produce 70 percent of world’s GDP growth. The UAE has already designed a vision and designed a well defined path towards a diversified knowledge economy (Dubai Municipality.2003).
Foreign Income on UAE Economy
Entrepreneurship has also been considered to be a fundamental factor for the country’s economy. Though this has changed over time causing a huge shift of the economy, technology has made it easy for people to trade even without startup capital one can be an entrepreneur. Technological change has determined generational gap which is another unforeseen aspect of the knowledge economy.
The UAE is shifting its focus from other sectors and paying close attention to the tourism industry. The country is surrounded by various features such as the desert that can be exploited and become sources of tourist destinations. It has not taken long to start ripping the benefits and in 2012, alone 8.2 million visitors chose Dubai as their holiday destination (Vij M., Vij A, 2012). Contribution of Hotel and Restaurant sector will increase the rate of GDP by two percent. Of late Dubai authorities have for a long time assumed the tourism industry. This was contributed by its strategic location and the mentality of the leaders that, it did not have much of its natural resources. This has changed over time and they have capitalized on the features they have, which have successfully worked. Tourism in Dubai has been a big achievement over the past years and it has enabled the country to reduce over reliance on the oil sector for its growth (Vij M., Vij A, 2012).
Measures are in place to invest more on tourism this will help increase growth of touristic attraction and to be the most preferred tourist destination. The government together with vital industry players must make it more afforded for most of the people to enjoy. More hotels and more leisure venues should be developed to absorb the high numbers of tourist visiting the region. The government, on the other hand, should invest more on security thus making it more attractive than its neighboring countries. (Vij M., Vij A, 2012).
Another important aspect of diversified knowledge economy is that, knowledge. It is true that, knowledge is not only produced, but it is also imported. This has been among the factors considered to be the pillars of the UAE economy. The government has gone further and made it free to all UAE citizens because wealth and knowledge go hand in hand.
Major projects Contribute to the Growth of the UAE economy
The Transport sector
The UAE has dominated its position in the transport sector and made the region as a trade destination hub. Trade in the country has boosted growth and economic development and diversification. Trade is a crucial importance aspect of Dubai, is considering increasing its investments to boost the trade and transport infrastructure. Dubai’s Emirates Airline continues expand to other regions and to gain more as the best and leading airline (Shediac, 2008). Dubai international Airport has also been on the headlines as the busiest Airport. Further plans are under way to increase its capacity to 160 million passengers.
Today UAE has achieved an income level same as the most industrialized nations. The country is considered to be among the nations that easily took off because it did not evolve through the hypothetical development as most of the nations. It is because of large oil revenues that have allowed the country to leap big. Given the abundance of natural resources endowments, the UAE has embraced resource based industries. The country has been favored economically and over the past years there has been the deployment of windfall income. The government has directed the windfall income towards boosting the economic infrastructure (Shediac, 2008). The move has been beneficial to the UAE and made it achieve a significant degree of economic development. Other important factors are taken into account both as goals and sources of economic development.
Since the formation of UAE it has enjoyed political stability, the existences of the current political structures have enabled the country to be run smoothly without many political issues. The UAE government has maintained a good relationship with human rights since its formation. In addition to that, the country have been favored by distribution of huge oil revenues and this has lead to the development of social and economic infrastructure, high salaries, high standards of social services such as healthcare and education has raised the living standards for UAE citizens. This has reduced the likelihood of internal political and social unrest. The UAE is considered to be at peace with many regions in the world because of large oil deposits it holds. This relationship has been contributed more by political and social stability that is in the country (Abu, Dhabi, 2012).
Oil and mineral Resources
The country endowed with oil reserves it has also been associated with gas from crude oil production and in addition to that, non associated gas is also produced. The UAE has for long depended largely on the discovery and exploitation of oil. The government has ensured that the oil fields in the country are well managed and they have gone ahead and invested in the latest technology to harness in order to efficiently increase oil productivity. The government has made it possible to produce two million barrels of petroleum mineral a day (Abu, Dhabi, 2012). The UAE is said to have natural gas reserves which are equivalent to over four percent of the known world gas making. Other minerals in the UAE are divided into three categories; there are the rocks, the sand, and soils and metals (Abu, Dhabi, 2012). The government has placed appropriate measures on mineral extraction; the extraction of minerals is primarily restricted to rocks and sand. The government uses the rocks and gravel is used for construction. The limestone, sand, marl and gypsum are used to manufacture cement. With these minerals in, place they have transformed the GDP of UAE because government is able to export the finished products such as the cement thus increasing its income (Abu, Dhabi, 2012).
The total land under agriculture in the country is considered to be 1.5 percent of the entire land. Agriculture has only made a small contribution to GDP. The government has championed the increase in land coverage that is to be used for agriculture and forestry. The UAE government has come up with several incentives which are considered to be very effective in promoting agriculture in the area. The government has launched the free land and set is aside for agriculture, the UAE citizens have been given priority over the land to develop it with production of food and vegetation cover (Abu, Dhabi, 2012). The government has gone ahead and offered machinery for free to those who are willing to practice agriculture. This is done to reduce the rate of import on agriculture products. The government has a vision that, agriculture will help boost the GDP in the country. To encourage more people towards that sector, the government has provided its citizens with seed and quality fertilizers, the farmers are also educated on the best method of farming. Most of the UAE land is arid and semi arid, the government had dug wells thus providing the farmers with adequate water for irrigation. An agricultural credit has been introduced for startup farmers to graft farmer’s loans for water pumps, fence wires, fishing boats and drip irrigation systems. There are no interests on these agricultural credits (Abu, Dhabi, 2012).
The government has protected the local market, such that the small farmers are protected from foreign competition by policy of buying the farmers’ products at favorable prices. Agricultural production increased more than at an average of annual growth rate of 12.6 percent. This consistent increase in the agriculture output is attributed to be sustained efforts of the UAE’s government to produce agricultural development with generous agricultural incentives and subsidies. The agriculture sector comprised about 3.6 percent of GDP.
Structural Changes in the UAE’s Economy
The manufacturing value has increased considerably from Dh 472 million to DH 9443 million. Its contribution to GDP has increased significantly from 0.9 percent to 3.8 percent. The increased value of manufacturing has made a significant contribution to the UAE’s total output growth. A conspicuous sector shift and contribution to GDP is evident in the service sector, commerce. The service sector comprises of the real estates, and community, social and personal services. The service sector increased from 51.91 percent.
Major contributors of employment in UAE
The service sector has been considered to value add value to the economy and has comprised the second largest value asset in the UAE’s GDP. The agricultural sector employs about 7.4 percent of the UAE labor force is the fourth ranking sector in the labor force. The Major focus by the government has been on industrialization sector, it has been considered to be the process of economic development (Shihab, 2001). Agricultural sector has been considered crucial to the transition and stimulation into the country’s economy. Industrialization creates new opportunities. The main factor which has constrained the UAE industry development is limitation of raw materials and this has acted as the bottle neck.
On the other hand, the country has taken advantage of the abundance of natural mineral resources it has the availability of financial capital, a well established infrastructure, availability of cheap energy and social stability have been the main resources and incentives for UAE industrialization(Shihab, 2001).
In today’s world, education is power, and in addition to that, there is always a positive relationship between education and economic growth, and there after growth would be diffused. It is the reason the government is investing heavily on education to develop the required skills for growth and modernization in the UAE (Shihab, 1996). The government has developed a program that will see most of UAE citizens and children of expatriates employed in the public sector have access to education at a subsidized cost. Education is the process of accumulating capital, which could increase worker’s productivity and income. Education and income are highly related; most people recognize this fact and try to become more educated. The desire for well paying jobs has created a demand for education as a means of economic improvement (Shihab, 1996).
The government spending on new projects will help to sustain non oil growth in the years to come. This will be through the construction and manufacturing sectors. The service sector will be buoyant, helped by trends in private consumption and strong dynamic trade, tourism and transportation sector.
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