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The United Arab Emirates (UAE) is a federation of seven Emirates, which are located on the Arabian Peninsula. They are Abu Dhabi, Dubai, Ajman, Sharjah, Umm Al Qaiwan, Fujairah, and Ras Al Khaimah. The political leadership has a sheikh ruling each Emirate. Abu Dhabi and Dubai do however; have a veto vote when it comes to certain development activities that affect all the Emirates. Huge economic power is vested in each Emirate that keeps the authority to regulate all the commercial activities.
Abu Dhabi is the wealthiest courtesy of having the largest oil reserves. Dubai is the second in rank in wealth and the federation’s business center (Gerth 89). The difference in the wealth among the Emirates arises from the unequal distribution of natural resources and especially oil.
Analysis of the Economy
Exploitation of oil deposits began in the 1960s after the wells were discovered in 1958 and 1966. This has transformed the country into a prosperous global economy with great significance. The economy of UAE is anchored and driven by oil production. Its GDP therefore, relies on the oil prices.
The economy from 1960 to date can be categorized into three faces. The first period ran from the mid 1970s to mid 1980s. During this era, the country saw very high performance in economic growth. The government used the income generated from the oil exports to invest in the social and physical infrastructure.
Oil was fetching very good prices on the international market. From the mid 1980s, there was a sharp decline in economic growth. This was caused by the fluctuation of oil prices on the international market. This state exerted pressure on the leaders to search for options to diversify the economy.
Such sectors that benefited include manufacturing and inducement of private investment. Dubai especially has experienced a decline in oil deposits (M o P 98). The government-diverted investments to the Capital expenditure because these other sectors of the economy had been catered for, and were doing well.
Revenue from oil accounted for 80 percent of the fiscal income during the first half of the 1990s providing 60 percent of the total export earnings. Currently the economy is big enough and accommodates most of the nation’s employment. The country also provides services to citizens at a highly subsidized rate.
The construction sector has grown immensely attracting foreigners who also benefit from the welfare system and account for almost 80 percent of the total population. Most of these people come from India and Arab countries (Muthoo 78). They offer relatively cheap and plenty labor.
The government’s initiative to invest in the physical infrastructure with proceeds from the oil income has helped boost the economic activities (Mushkin 130). The country has experienced a low inflation rate that has averaged slightly over two percent. This has kept the interest rates low with the government embarking on a welfare system that covers the entire lifetime of its citizens.
The GDP and Economy Drivers
UAE has an open economy with a high per capita income. This process has removed restrictions on movement of capital and has encouraged investment. This leads to a sizable surplus in trade balance. The GDP of this country has been on the rise from the 1960s when oil exploitation started (Cleiss 19).
In 1975, UAE’s GDP was14.7 billion US dollars and in 1999, 44 billion US dollars and rested at 380 billion US dollars in 2011. The first two periods saw the growth rate of the GDP stand at 5 percent. This tremendous growth indicates an economy that has a steady upward mobility.
The country’s per capita income has been on a decline irrespective of the population growth. In 1975, per capita income was 30161 billion US dollars. This reduced to 1600 billion US dollars in 1999. However, by 2011, it increased slightly to 2100 billion US dollars. The country has reduced reliance on oil to feed her economy.
The income from oil accounted for 70 percent of the total income share from mid 1970s to the mid 1980s. This was reduced to 40 percent in the 1990s and was at 25 percent by 2011. This was replaced by income from the service sector that by mid 1990s accounted for 50 percent of the total income.
During the last decade, the GDP growth rate of UAE has been inconsistent. This period has seen the country record an average growth of 4.6 percent. The lowest growth was reached in December 2009 at 4.8 percent and December 2006 recorded the highest at 9.8 percent. The country is modern with high living standards. Diversification has reduced reliance on oil and gas to 25 percent by 2011. The stability in the trade surplus has enabled the economy to support a low interest rate at one percent by 2008.
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Inflation and Unemployment
UAE has an inflation rate averaging 2.4 percent. By 2012, it was at 0.5 percent. January 20011 saw the country record the least inflation rate at negative 1.6 percent and December 2008 registered the highest rate reaching 12.3 percent. Unemployment rate is on average three percent from 1985 to 2011. In December 2011 its worst, level at 4.6 percent and the least in December 1985 at 1.2 percent. In the last decade 2002 was the year with the least at 2.6 percent and ever since none of the years has been less than that.
The Rise of Dubai
This is the business city of UAE with a veto political power. It is a cosmopolitan global city. Its economy was built on the oil industry. However, it has developed an economic model that has transformed this reliance (Cheney 34). The rise in revenue from the non-oil sectors has grown rapidly making it be confused for a country on its own. Diversification began in the mid 1980s (W E F 112). This was when oil prices became unreliable, and it was realized that oil deposits were declining (Sihab 157). This development has caused a major challenge to UAE.
Comparison with other Economies
The US inflation rate was 1.6 percent in 2010 and UK had 0.3 percent. These two nations had also shown an increase in the same. The GCC had a decline during this period ( Roy 77). Qatar for instance in 2010 had 2.4 percent down from 16.3 percent. Unemployment rate was 9.6 percent in the US at the same period, and UK had 10 percent. All these statistics were below UAE’s level. GCC’s GDP in 2010 grew by 5 percent up from two percent in 2009. Generally, UAE is doing better than her competitors are.
UAE fits to be a considered a first economy. This is guided by the way her economy is doing, the consistency of its policies that are open and do not restrict investment. The country’s political leadership is welcome and open to the world competition.
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