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The Performance of the UAE Economy Research Paper

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The UAE is considered to be one of the most quickly developing economies of the world. With the GDP per capita of about 40,450 USD, it is the second largest economy in the Arab World (Schwab, “The Global Competitiveness Report 2015-2016”). The country has been known to widely endorse innovation. This tendency was evidenced by numerous marvels of modern engineering, such as Burj Khalifa and other architectural wonders.

Despite being a country naturally rich with oil, UAE is also known for its policies towards business and high levels of entrepreneurial ventures. In the past decade, the UAE government has put a great effort into diversifying the economy by promoting a collaborative effort among small and medium-sized enterprises. This helped move the country towards a new phase of growth. Its tendencies towards innovation are well-illustrated in its Vision 2021 economic strategy, and the more contemporary National Innovation Strategy, adopted in late 2014.

In so doing, the country is dedicated to a more long-term plan for pursuing and achieving its national competitive advantage. The purpose of this paper is to analyze the development of UAE’s economy in the past 10 – 15 years through the lens of Porter’s Pillars of Competitiveness, microeconomic foundations of prosperity, macroeconomic environment, education and training, and innovative practices adopted in the region.

Porter’s Views on Competitive Advantage

According to the article written by Michael E. Porter in 1990, titled “The Competitive Advantage of Nations,” what defines the advantage of the countries is not the vast labor pool or impressive amounts of natural resources, its currency rates or its federal reserve funds, but rather it is the willingness of the government and the businesses to adopt innovative strategies and promote change coupled with the intensity of the competitive environment within the local market. Porter identifies 12 pillars, upon which resides the economic dominance of certain countries, when compared to the low economy countries that are not doing so well. These pillars are (Porter, “The Competitive Advantages”):

  • Institutions: the institutional environment determines the legal and administrative frameworks within which the individuals and companies conduct business.
  • Infrastructure: roads, railroads, ports, airports, etc.
  • Macroeconomic environment: events happening in the region and the world that can influence the economy.
  • Health and primary education: helps maintain a healthy and efficient workforce.
  • Higher education and training: provides a steady supply of highly-qualified personnel, which is necessary for advanced industries.
  • Goods market efficiency: provides healthy market competitions.
  • Labor market efficiency: no excess of unemployed citizens due to the rigidness of the labor market.
  • Financial market development: the evolution of the banking sphere goes hand in hand with economic progress, as banks provide funding for industrial ventures.
  • Technological readiness: advances in technology are necessary for companies to be able to compete outside the country.
  • Market size: a large internal market contributes to economic growth, as more customers give companies more reach. However, due to the globalization of local economies, companies now have much larger external markets to appeal to.
  • Business sophistication: advanced business practices allow many companies gain a competitive edge. This links with other pillars related to innovation.
  • Innovation: the main criteria for long-term economic growth. The ability to stay on the technological curve and adapt to the changing economic and technological realities of the modern world is critical to sustaining competitive advantage.

When analyzing microeconomic conditions that contribute to the increase in national economic competitiveness and increase in productivity, Porter proposes a diamond diagram of interconnected factors (Porter, “Building the Microeconomic Foundations,” 23):

Productivity and the Microeconomic Business Environment

Observing the UAE through the Lens Porter’s Three Pillars of Competitiveness

For this part of the analysis, the economic system of the UAE will be perceived through three factors mentioned in the previous section:

  • Macroeconomic environment;
  • Higher education and training;
  • Innovation.

These three factors are considered to be the key to UAE’s economic dominance in the region, and the reason that it is one of the most successful and powerful economies in the Arab world when other countries have failed and degenerated into lands ravaged by poverty, disease, and civil war.

Macroeconomic Environment

One of the largest reasons why the UAE achieved its economic dominance is through its stable and peaceful government. It managed to keep the country away from wars and ventures that have been the cause of collapse for many other prominent Arab states such as Iraq, Syria, Libya, and Yemen. The countries of GCC have remained stable both financially and politically throughout the years, which contributed to the region’s economic prosperity in the last decade.

However, the effects of the macroeconomic environment affected the economy of UAE and other gulf countries negatively as well. The oil price collapse, which occurred in 2014, hit many oil-exporting countries such as Saudi Arabia, Russia, Venezuela, and others. It had an effect on UAE as well, although marginal – the total GDP since 2014 had fallen from 399 billion USD to 370 billion USD, due to the loss of oil profits (Schwab, “The Global Competitiveness Report 2014-2015”). However, UAE did a great job diversifying its own economy, so by the time the crisis struck, its oil industry accounted for only 30% of its GDP, with the majority of it coming from the trading sector, banking sector, and production sector.

Another factor that is affecting the country’s economy in a negative way and undermining its stability is the interference in Yemen. Since 2015, Yemen has been in the state of open rebellion, with the Houthi rebels fighting the government forces. ISIS and Al-Qaeda were also involved in the conflict. Since 2016, UAE military has been engaged in combat against the Houthi, and prolonged intervention will eventually weight down its economy (Schwab, “The Global Competitiveness Report 2015-2016”).

To summarize, UAE economy has taken advantage of the profitable macroeconomic situation in the region to gain competitive advantage and prepared for certain macroeconomic crises such as the oil crisis of 2014 by diversifying its economy, something that other countries in GCC did not do as efficiently. Saudi Arabia was the one to take greatest losses from the oil market shift, as its economy remained based on oil revenues, and its growth rates slowed down to 2-3% ever since the beginning of the crisis (Schwab, “The Global Competitiveness Report 2014-2015”). Qatar, Bahrain, and other GCC countries have also taken a significant hit, as up to 60% of their entire GDP came from oil prices remaining high and stable around the 100 dollar mark (Schwab, “The Global Competitiveness Report 2014-2015”).

Higher Education and Training

In its commitment to innovation and progress in all spheres of its economic and social life, UAE is known for its high education opportunities. The country managed to construct a highly-diversified and efficient system of higher education, both public and private, in a very short amount of time. In 23 years, the number of higher educational facilities in the country increased from 5 to 76 in 2013.

The government provides free education to all of its citizens, with 80% of boys and 95% of girls attending universities (“Education in UAE”). The country’s educational policies are promulgated under the patronage of the CAA, or the Commission for Academic Accreditation, formed by the country’s Ministry of Education. This commission enforces a very strict set of standards in order to ensure that the institutions under private and government control remain competitive and provide educational services of the highest standard.

Total yearly enrollment in UAE universities is at around 130,000 students per year (“Education in UAE”). The majority of the students tend to attend business administration, engineering, and IT technology classes, which corresponds to the overall economic strategy of the country – with its economy diversified, these three studies form the core for the job demands within the country, and outside of it. The total number of programs provided by the Abu Dhabi universities are (“Education in UAE”):

  • 140 programs in business studies;
  • 93 programs in engineering;
  • 52 programs in information technology.

This trend is similar to most other GCC countries like Qatar, Saudi Arabia, and Bahrain. All of these states developed their education system around the same time, with the educational boom happening between 2000 and 2010. This is especially true for Qatar, as its educational system underwent a massive reform when they invited the RAND Corporation to analyze and rework its educational system, due to being unsure of how effective it was (“Education in UAE”). In general, all countries of the GCC are aiming to provide high-quality and diverse education in order to help further diversify the economy – something that became apparent after the crises of 2008 and 2014.

Innovation

As it was mentioned already, the countries of GCC are very similar one to another in regards to innovative economic practices and the adoption of new technology. UAE, in particular, has adopted two programs (Dutto et al.):

  • The National Innovation Program of 2014.
  • The innovation Plan 2021.

Both of these documents are interconnected and recognize the purpose of innovation in building a sustainable, advanced, and competitive economy. The National Innovation Program identifies 8 areas of interest, which in many ways are similar to Porter’s 12 pillars of competitiveness. The key constituents of innovation are (Dutto et al.):

  • Human capital and Research;
  • Institutions and regulatory environment;
  • Innovative products and services;
  • Knowledge and technology;
  • Competitive environment;
  • Funding and Investment;
  • Human Capital and Research;
  • Infrastructure.

UAE innovation strategy is aimed at all areas of living, giving particular attention to renewable energy research, transportation, technology, education, health, water, and space. This strategy resonates with Porter’s statements that innovation is driven by need rather than abundance. In accordance with Porter’s statements that potential advantages have to be discarded in order to learn to work and innovate from a disadvantage, UAE does so by diversifying its economy, despite the fact that its fuel reserves are on par with those of other countries in the GCC.

This innovative approach proved to be the key to success, as UAE remained calm and steady under pressure of several consecutive economic and resource crises that managed to topple the dominance of Saudi Arabia as the primary economic power in the region. The UAE innovation program is aimed at the primary agents of change and innovative thinking (Dutto et al.):

  • Innovative Individuals.
  • Innovative companies.
  • Innovative government.

The program puts an emphasis on the development of new products and services, implementing the Internet and computerized technology in educational, financial, and medical systems, developing first-rate educational facilities and investing into high-tech research that has to do with energy conservation and exploitation of green energy. In this, UAE is similar to Saudi Arabia, Qatar, and Bahrain, as these countries are competing one with another due to being similar in nature and equally rich with resources, meaning that in order to stay successful, they constantly compete with one another in providing the world best services, prices, and economic opportunities (Dutto et al.).

Government Influence on Innovative Policies

Many changes propagated throughout the UAE are coming directly from the government, as they are government initiatives. This tendency shows that the understanding of statesmanship in the country is very developed and that all priorities in regards to holding and retaining competitive advantage are understood at the highest level and are promoted from top to bottom and from bottom to the top at the same time.

The government promotes innovation by protecting the local businesses from foreign dominance, but not overly so. Instead, they promote competition between companies located in the UAE and letting them grow strong, prior to allowing foreign interest in the region through the creation of free market zones. This allowed the local businesses and especially the banking sector to adapt to the foreign competition, adopt all innovative practices from them and incorporate them into their own business. This is the reason why European and American economic giants and banking trusts never managed to set a firm foothold in UAE and other countries of the GCC and were forced to withdraw from the economic situation in the world went into recession after 2012 (Dutto et al.). As it stands, the majority of operations in UAE banking sector are done via local banks, Saudi Banks, and Qatar financial sector (Dutto et al.).

Recommendations

As it stands, UAE leads the way in innovative practices and remains on top of the competition within the GCC region. This tendency proves that their current strategies at innovation are effective and will help ensure dominance of the UAE in the Arab world and the surrounding regions for at least half of a decade. After the Innovation Program of 2021 reaches its end, it will be time to develop a new program and set new goals for the country to strive towards.

The world becomes a place less and less reliant on fossil fuels. In order to secure a prosperous future, UAE will need to diversify its economy further and reduce the influence of fossil fuel extraction on its GDP even further. Oil prices rely on external macroeconomic factors much more than any other industry. Investments in green energy products and power plants would serve UAE well in the long run. In addition, it would be a priority to study the innovations coming not only from Europe, but from Asia as well – countries like Japan, Singapore, and South Korea are all endorsing innovation and can be learned from. Ultimately, UAE should aim at becoming the country that establishes new trends in technology and product innovations, rather than being the one that follows.

Works Cited

Dutto, Somitra et al. “Global Innovation Index. Web.

UAECD. Web.

Porter, Michael E. “Building the Microeconomic Foundations of Prosperity: Findings from the Business Competitiveness Index.” Global Competitiveness Report, 2005, pp. 19-51.

—. “HBR. 1990. Web.

Schwab, Klaus, editor. “World Economic Forum. Web.

—. “World Economic Forum. Web.

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