International Economy. The UAE’s Business Profile

Economic Overview

The UAE is a major player in the world energy markets and it has third rank in world’s largest conventional oil reserves and fifth rank in largest natural gas reserves. It is the Middle East’s second largest economy after Saudi Arabia. The UAE economy is relying on its huge oil and gas reserves and it contributes 1/3 of country’s GDP and 40 per cent of exports. The source of state revenue is largely from oil exports. The income from oil exports contributes to the entire economic development of the country. New economic sources such as tourism has introduced in the country with the financial assistance from oil revenues. Steps for making the country as an ICT, re-export and financial hub are also carried out with the financial and technical support of Government. Infrastructure development is carried on by government with the intension to attract foreign business investment. The massive port facilities and creation of free trade zone areas are suitable for attracting both manufacturing and service industries. Better export opportunities for business firms are available in UAE with excellent growth prospects. (United Arab Emirates Country Brief).

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High per capita income with sizable annual growth is the main feature of UAE economy. Even though diversification policy has implemented in the economy, nearly 40% of the GDP is from oil and gas industries. In April 2004, they formed a trade and investment frame work alliance with Washington and thus negotiations towards a Free Trade Agreement with the US has started. Free Trade Zone areas are arranged with 100% foreign ownership and zero taxes for attracting foreign investors. (Economy Overview, p.14).

Political conditions

The prevailing political conditions of UAE are adequate for business firms as it is stable. In the central government, each emirate has its own political and financial influential power. There are no political parties in UAE but limited election has carried on in certain positions. Due to the stable political conditions in UAE, the government policies also stable for certain extend and thus there is no need to business firms to change their business policies corresponding to the changing government policies as like in other countries. (Political Conditions, p.25).

The business condition of UAE is going through a boom period. It is resulted from the economic prosperity in tourism, financial services, and construction areas with the financial support from their developed oil industry. To encourage private sector growth and diversification, reform measures has introduced in the country. The fast diminishing oil reserves necessitates developments in other financial areas. Together with this the country is facing provision of employment opportunity for their rapidly increasing populations. (More than Oil: Economic Developments in Bahrain, Kuwait, Oman, Qatar and The United Arab Emirates).

The financial outcomes from oil exports are channelled to new economic development projects and developing new sectors for attracting foreign business investment. In recent years, they have achieved impressive economic growth through the export of oil and natural gas resources. Diversification policy has introduced in the economy through actively encouraging new industries. Thus tourism and financial services are selected as the key investment area and developmental activities are started in these areas. The energy intensive industries are also improved.

Major economic challenge of the UAE is its oil export based economy. Due to the fluctuating oil prices with a diminishing trend in current period restricts further economic growth of the country. A stable economic growth cannot be predicted for a longer period. Dominant part of country’s investment fund is from oil and gas revenues and thus significant downturns in oil price would affect industrial development in the country. National populations are expanding rapidly instead the private sector labour markets of the country are dominated by foreign, deportee employees. This put a challenge to the government to create new avenues of employment for the national citizens.

In order to overcome demographic challenges, government puts restrictions on immigration of foreign employees. For involving the private sector in the economy development, privatization strategy is also followed by the government. Restrictions on foreign investors are reduced to a greater extend. Thus greater levels of foreign investment are attracted to the country. The GCC now has implemented a common external tariff with a number of exceptions with the aim of setting up a monetary union by the year 2010. The council also takes steps to reduce barriers in regional trade and harmonize regulations in the region. Import licensing restrictions are also gets diluted. Reforms for encouraging private business investment are carried on rapidly, but competition, both within the UAE and from other economies, is increasing. To varying extents, county focusing on new development paths for rely less heavily on oil revenues to provide growth and employment opportunity in the economy. As an alternative to oil dominated economy, further business opportunities such as those in education and construction, are likely to emerge in the country. (Executive Summary).

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In UAE, brand value is an important factor of business growth. Growth rates of highly accepted brands are in greater level. Brand value is necessary for getting customer acceptance and thus brand equity creation is the first step for creating a successful business in UAE.

Greater level government involvement is a feature of UAE economy. The Government is the primary employer and the major source of investment for business. The UAE demography consists younger population under 30 years of about half of the total population. Even though increasing trend in job opportunities in the country, expatriates are the main beneficiary of this trend and they constitute over 90 per cent of the total workforce in the country.

Average nominal GDP growth of UAE was 8.1 per cent per year from 1993 to 2001. The non-oil sectors growth rate average was of 9.6 per cent per year. Although the economy shows strong growth rate, the inflation rate over the years shows minimum level. The currency exchange rate of UAE have been fixed and it very closely pegged to the US$. As a result, a stable monetary policy has followed by the economy. The UAE occupies large oil reserves which likely to continue production at current levels for over 100 years. Most of the revenue from oil exports is transferred to other sectors of the economy for infrastructure development. Diversification strategies implemented by the country in its economy have achieved authentic growth. The growth rate of non-oil sectors seems to be at least four times of the growth rate in the oil and gas sector.

Due to the fluctuating oil price and population explosion, the UAE economy wants to attract foreign investment in technology and skilled industries which are currently not developed.

Availability of expatriate labour force is high in UAE which has certain advantages for business firms. Features of lower wage levels, specific skills and experience, higher productivity and willingness to work longer hours and shorter holidays related to foreign helps the employers get free from competition for worker force and they are required to pay only normal rate for employees. Thus the works cost will be lowering in UAE.

Demographic features

The main feature of UAE demography is its high population growth rate. The average annual population growth rates of UAE between 1975 and 2002 were 6.5 per cent. Over a third of the population is expatriate workers and over half of the population is under 30 years old. The problem of rising unemployment of national citizen forced government to allow more private sector firms for national employment growth. “Between 1996 and 2000, employment growth the United Arab Emirates has been driven by the private sector which accounted for over 80 per cent of new jobs”. (Unemployment of Nations a Growing Concern, p.17).

Education

Government has recognized the importance of investment in education for reducing the unemployment problems of citizens. Even though free education is provided by government, the courses offered are not adequate to requirements of the market.

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By recognizing the importance of private sector involvement in diversified economic growth and employment opportunity for nationals, the government takes steps to create better business environment. Both internal and foreign investors are attracted by giving them incentives and business support services with higher level industrial facilities. Policy regulations for new investors are also diluted with several exceptions.

“The reduction of red tape and streamlining of administrative procedures, as well as the updating of commercial laws and regulations to meet international obligations, increase transparency and ensure effective protection for investors. Favorable tax laws and political stability also assist in making the UAE a prime business location.” (Business Environment: Introduction).

The Economic Data of UAE:

Key indicators 2007 2008 2009 2010 2011 2012
Real GDP growth (%) 7.5 8.5 7.5 7.2 6.6 6.1
Consumer price inflation (av; %) 13.3 15.2 13.0 9.0 6.0 5.5
Budget balance (% of GDP) 14.2 16.5 10.3 11.2 10.7 9.9
Current-account balance (% of GDP) 18.3 16.4 6.0 3.3 6.4 8.7
Exchange rate Dh:US$ (av) 3.67 3.67 3.67 3.67 3.67 3.67
Exchange rate Dh:€(av) 5.03 5.66 5.58 5.33 5.03 4.85

It is expected that the UAE government will go on with their attracting strategy for foreign investment through liberal tax laws and reducing their trade and exchange controls. Provision of standardized infrastructure will also ensured as it is necessary for creating a positive approach to private-sector investment. It is also expected that government will spend their surplus fund in the creation of better facilities for investors during 2008-12 period. “Their monetary policy will continue to be constrained by the UAE dirham’s peg to the US dollar” The forecasted GDP average in 2008-12 is an average of 7.2% a year. It is estimated that the consumer price inflation will diminish gradually after 2008, with the global food and commodity prices ease.

Conclusion

From the analysis of different economic factors of the UAE, it is derived that the country is ideal for starting the new business. The political stability, economic growth rate, and demographic features constitute a better business environment and thus the new business can be profitably launched in the UAE. The government support by way of Special Economic Zones and other services are reliable for the new business.

Works Cited

Economy Overview. Doing Business and Investing in United Arab Emirates Guide. 2007. 2008. Web.

Executive Summary. More than Oil Economic Developments in Bahrain, Kuwait, Oman, Qatar and The United Arab Emirates. 2008. Web.

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More than Oil: Economic Developments in Bahrain, Kuwait, Oman, Qatar and The United Arab Emirates. Australian Government: Department of Foreign Affairs and Trade. 2005. 2008. Web.

United Arab Emirates Country Brief. Australian Government: Department of Foreign Affairs and Trade. 2008. Web.

Unemployment of Nations a Growing Concern. More than Oil: Economic Developments in Bahrain, Kuwait, Oman, Qatar and The United Arab Emirates. 2005. 2008. Web.

Business Environment: Introduction. Government.ae. 2006. 2008. Web.

Economic Data. Country Briefings: United Arab Emirates. 2008. Web.

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