Report on Economic Diverisification in UAE


Contents
Economic Overview of UAE 2
Economic Diversification 3
Growth of Oil and Non-Oil Sectors in the last Decade 5
Contribution of Labor in Growth of Non-oil Sectors 6
Contribution of Free Zones in Growth of Non-oil Sectors 7
Contribution of the Stock Market in Growth of Non-oil Sectors 8
Conclusion and Recommendations 9
Bibliography 10

Economic Overview of UAE

This report sheds a light on the economic scenario of UAE and how the current scenario of the GCC economies have led them to diversify their economy in order to generate revenues from non-oil sectors in order to sustain GDP growth for the future. This requires a brief economic overview of UAE and regarding UAE’s economic growth. The economic contribution of oil and non-oil related sectors will be analyzed to depict the significance of economic diversification in UAE due to the future projections of oil prices by OPEC.
The economic scenario of UAE was mostly based on fishing industry and a weakening pearl industry. The economy of UAE was finally kick-started through oil exports which began with the oil industry of Abu Dhabi. The revenue generated through oil industry was diverted towards the development of sectors like infrastructure, education and healthcare under guidance of the late Sheikh Zayed. A profound transformation has been witnessed in the economy of UAE after the discovery of oil leading UAE to become an ultra-modern state which reflects an alpine standard of living. (Central Intelligence Agency, 2015) Abu Dhabi contributes to 90% of UAE’s oil generated income whereas Dubai is a hub of infrastructure, commerce, finance, and tourism.

Figure 1 Contribution of sectors in UAE’s GDP in the year 2009
All of the GCC countries project a heavy reliance on oil for revenue generation and economic growth. The GDPs of GCC countries have been increasing for the past years due to increased government expenditure and a swift increase in oil revenues. The organization of petroleum exporting companies (OPEC) originated to coordinate policies regarding petroleum for managing the supply of oil from the OPEC regulated countries and setting oil prices at a global scale. Regarding the oil reserves which the OPEC manages, 52% of them is obtained from the GCC countries. Considering this factor, the significant role of OPEC in the economic growth of UAE as a GCC country can be perceived. (GulfBase, 2015)
Economic Diversification

Economic diversification can be taken as the transformation process of the economy in which the revenues in the economy are generated through many different sectors. This term is primarily associated with export diversification of a country. When a specific nation or group of nations rely on one particular commodity for economic growth, there are very good chances that when the prices of that particular commodity decrease or turn volatile, the nation’s economy can be adversely affected by a very high magnitude affected the financial and economic condition of the country. These kind of problems can affect least developed countries and also the countries which exclusively rely on oil exports for economic growth and sustainability. In case of oil exporting countries, fluctuations in the primary commodity can cause the market to become extremely vulnerable to price change. (Shediac, Moujaes, Abouchakra, & Najjar, 2008)
If a country does not diversify its economy then it cannot effectively grow in a sustainable manner through long term prospects. In case of oil dependent economies, it is an even concerned factors because of the depletion in natural resources. The underlying issue is that diversification alone cannot alleviate the economic issues in a long term perspective and the country needs to focus on sectors which can provide sustainable growth and development.
Focusing on UAE as an oil dependent country which is a part of GCC countries, its heavy reliance on oil for economic growth can be observed as a hindrance for sustainable development. Diversification of a country can be witnessed by observing the distribution of GDP over different economic sectors. This activity leads to the formation of a concentration ratio again leading to the formation of a diversification quotient. (Hesse, 2008)

Figure 2 Concentration Ratio and Diversification Quotient in GCC Countries
Growth of Oil and Non-Oil Sectors in the last Decade

UAE has been endowed with both offshore and onshore oil resources. Since the 1970’s, UAE has been largely dependent on oil resources and growth of oil sector industries. In the last decade, UAE’s oil production capacity has been 3 million barrels for each day and has been increasing. In 2000, the quantity of gas reserves amounted to 6 trillion cubic meters which accounted for 4% of the total world gas resources. The maximum growth was observed in the manufacturing sector at the beginning of the decade and the GDP contribution of oil related industries accounted for 12.8% of the total GDP of UAE and was increasing further.
Around ten years back in 2006, the GDP of UAE had increased to 599.3 billion AED which was a phenomenal increase of 23.9 percent compared to 2005. Due to production cuts regulated by OPEC, oil prices surged and economy of UAE kept growing due to the growth in oil industry and its related exports. However due to an increasing revenue generation and development observed in the non-oil sectors in 2007, the GDP contribution of oil related sectors decreased by 2.3% and became 35%. The earlier surge recorded in the oil prices in the year 2006 led to an increase in trade balance surplus and value addition to UAE’s exports and re-exports. (Economy Watch, 2015)
After 2007, the contribution of non-oil sectors began increasing and the growth in banking sector was the most noteworthy among the non-oil sectors. Increase in the total amount of assets was 43.4% making UAE the leading country in the banking sector among the GCC countries. Simultaneously, the sector project the highest amount of growth after banking among the non-oil sectors was the construction sector due to the increased investment in the area of infrastructure by the UAE government. (Hvidt, 2013)
Excellent market conditions due to free trade zones led non-oil private sector to grow. Due to the reduction in oil prices caused by the global financial crisis in 2008-2009 decreasing the GDP growth to a negative of 1.6%. This led the OPEC advising oil dependent economies to consider diversifying their economies and aim for sustainable economic development through non-oil sectors. (John, 2014)After the oil price sink of 2008-09, GCC sectors have projected development in non-oil related sectors till date, especially UAE with it’s all round development in building trade zones, enhancing tourism, aviation and hospitality sector while also growing through non-oil foreign trade which has been steady for the last decade despite global economic crisis. (World Trade Organization, 2012)
Contribution of Labor in Growth of Non-oil Sectors

Inefficient labor and inefficient use of the industrial labor force hinder diversification of the economy. The labor force of UAE has been too reliant on the government projects for employment. Challenges lie ahead on the road to economic diversification for UAE as GDP growth takes labor growth also into account. The structural growth of UAE as a diversified economy requires skilled labor. The growth in UAE for the last 5 years in non-oil sectors is remarkable but UAE has been hiring expatriates also in all these sectors. For UAE to increase their GDP, they need emiratization, advancements in education and skilled Emirati laborers for overall growth in all sectors and a sustainable economic growth.
As foreign labor is cheap, UAE’s private sector has been hiring skilled foreign labor to sustain high productive growth. It is normal for a short run of development but long term sustainability in high productive labor requires skilled Emirati laborers. Effective labor distribution along with development of human capital is necessary for successful. Higher pay from growing private sector can only be possible if there is higher skilled labor force. Determining sector concentration for measuring diversification utilizes Normalized-Hirschman Index (NH index) which has been decreasing in UAE due to human capital investment. This factor has been taken into account in the UAE’s vision for the future. (Haouas & Heshmati, 2014)
Contribution of Free Zones in Growth of Non-oil Sectors

Dubai as an emirate initiated the free zone model in UAE which was an effort to attract foreign businesses to establish subsidiaries. The free zones allowed foreign businesses to establish subsidiaries with 100% ownership and operate without the factor of taxes. With a presence of 22 free zones, it has projected an availability to foreign businesses for business expansion in Dubai. The Jebel Ali port in Dubai is regarded as one of the largest free zones in the world. Free zones have contributed to the economic growth of UAE by providing 160,000 jobs and attracting foreign direct investment inflows which amount to 20% of the total inflow into UAE. (Government of Dubai, 2015)
This has been possible due to a strong economic development model which is feasible for expanding business sector and it also promotes globalization making it an epitome of the “Dubai model” for the future. This factor also brings attention to the fact that Dubai as a city has been pro-active in diversification as compared to Abu Dhabi which still relies more on Oil industry sector for GDP. (Hesse, 2008)
Contribution of the Stock Market in Growth of Non-oil Sectors

The UAE stock markets have been projecting a high level of performance compared to other regional or emerging stock markets. UAE stock market has been growing along with the economic growth of UAE. There was a downward stride in the UAE stock markets post 2008 continuing till 2013 which reflects the fact that low diversification led to a slow growth increase after the global financial crisis.

Figure 3UAE Stock Market Activity in the last Decade
As the oil reliant economy took a long time to bounce back after the crisis, it signifies how economic diversification is necessary for sustainable economic growth. Diversification in UAE economy will also lead to a stable stock market which is essential for healthy trading activities. The Dubai stock market projects the highest amount of activity in the Saudi Stock Exchange. The Dubai Financial Market was initiated in the year 2003 and saw a very exponential boom in the years 2004 and 2005 as majority of the financial activities and investments in projects occurred in that year. (SABRI, 2008)
Conclusion and Recommendations

UAE’s economy has projected a steady growth in GDP and GDP growth taking the exception of the Financial Crisis. But the financial crisis has been a wake-up call for UAE and all other GCC economies to diversify their economy by developing and investing in non-oil sectors for long term economic growth. The economic growth in the last decade showed that UAE as a country has been striving towards a diversified economy through their vision for the future through investment in infrastructure, tourism, hospitality, aviation and education.
For UAE to achieve diversification and sustainable growth, it should focus on developing human capital, emiratization, and investment in non-conventional energy sources and also focus on the field of agreements with other economically developing economies for investment and partnership in business activities for having a diversified economy.

Bibliography
Central Intelligence Agency. (2015). World Factbook – UAE. Retrieved from www.cia.gov: https://www.cia.gov/library/publications/the-world-factbook/geos/ae.html
Economy Watch. (2015, 4 15). United Arab Emirates (The UAE) Economic Statistics and Indicators. Retrieved from www.economywatch.com: http://www.economywatch.com/economic-statistics/country/United-Arab-Emirates/
Government of Dubai. (2015). Economic freezones in Dubai. Retrieved from www.dubaided.gov.ae: http://www.dubaided.gov.ae/en/pages/economic-freezones-in-dubai.aspx
GulfBase. (2015, 4 14). GCC ECONOMIC OVERVIEW. Retrieved from www.gulfbase.com: http://www.gulfbase.com/gcc/aboutgcc?pageid=93
Haouas, I., & Heshmati, A. (2014). Can the UAE Avoid the Oil Curse by Economic Diversification? Bonn: Institute for the Study of Labor.
Hesse, H. (2008). Export Diversification and Economic Growth. Retrieved from siteresources.worldbank.org: http://siteresources.worldbank.org/EXTPREMNET/Resources/489960-1338997241035/Growth_Commission_Working_Paper_21_Export_Diversification_Economic_Growth.pdf
Hvidt, M. (2013). Economic Diversification in GCC Countries: Past Record and Future Trends. London School of Economics and Political Science.
John, I. (2014, 12 15). Opec chief calls GCC to adopt economic diversification. Retrieved from www.khaleejtimes.com: http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/uaebusiness/2014/December/uaebusiness_December183.xml&section=uaebusiness&type=desktop
SABRI, D. N. (2008). Financial Markets and Institutions In the Arab Economy. New York: Nova Science Publishers, Inc.
Shediac, R., Moujaes, C. N., Abouchakra, R., & Najjar, M. R. (2008). Economic Diversification: The Road to Sustainable Development. Retrieved from www.strategyand.pwc.com: http://www.strategyand.pwc.com/media/uploads/Economic-Diversification.pdf
World Trade Organization. (2012). Trade Policy Review Report – United Arab Emirates. World Trade Organization.

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March 7, 2018

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