The United Arab Emirates Economic: Theories and Trends

Introduction

The United Arab Emirates is an economy of the Arab world that has recently been receiving a lot of global attention due to its rapid economic development and other unique fiscal factors that define it. According to Young (9), since the UAE began attracting global attention, analysts have wanted to understand the kind of economy that the UAE remains categorized in the global economic ranks. Most international business economists understand the UAE as an economy that relies extremely on the oil reserves for fiscal stability. With its engagement and value for the bilateral trade increasing, the UAE economy has been expanding rapidly and the economists have prospected that in 2020, this economy may rank among the global economic giants (Young 3). Fundamental to such facts, this essay describes the UAE economy in terms of the type of economy it is, concerning the relevant theories that describe the UAE, it’s micro and macro economy choices, and the householder’s spending trends.

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The UAE Economy Type: A Communist or a Capitalist Economy

The UAE is an expanding economy that is still relying extremely on the oil reserves, international trade, and the real estate sector to generate national revenue (Young 12). However, since the era of the global economic crises in 2007-2020 when the oil prices fell and the Arab economies suffered serious economic shortages, the UAE has been serving on two forms of economic systems, socialism, and capitalism. According to Young (7), the socialism economic theory is an economic theory that describes a state that has a form of economy where the government largely intervenes on the matters of economic growth and stabilization. Socialism is a way of organizing a state in a manner in which there is social or public ownership of the national economic revenues or the national means of production (Young 10). In this theory, the UAE government and the UAE public controls most of the national economic assets including the trade and the major public industries.

Another theory that can explain the UAE economy when one considers its current economic structure that is shifting from economic specialization to economic diversification is the theory of capitalism. A capitalist state is a nation with an economic system that relies on the private sector to control the economic factors of production such as trade, industries, and other production resources (Staveren 45). Capitalist economies normally have privately owned properties, most industries pay on wage transactions, and the markets are fully competitive. With its current focus aimed towards establishing a strong economic platform that will stabilize its agendas of none reliance on oil reserves, the UAE is generally a capitalist economy (Staveren 17). Since the tragic economic downfalls of the 2007-2010 that had troubled the economic stability of the Arab countries including the UAE, the United Arab Emirates has shifted towards various economic opportunities. One of its major economic opportunities is the actively growing private sector that largely affects the UAE.

UAE as a Mixed Economy

Combined from an economic perspective and considering the characteristics of capitalism and socialism of states, the UAE is presently a mixed economy given its present economic status (Staveren 27). The theory of mixed economy postulates that sometimes nations have the opportunity to maximize the economic chances available in the public and private sectors to stabilize their economic growth (Staveren 29). In the broadest view, the UAE currently stands out as a mixed socialist and a capitalist state as its current state of economic statistics provides some significant evidence. The current economic statistics of the UAE economy reveal that the national economy is on a shared economic contribution between the public sector and the private sector (Staveren 18). According to Young (33), although the private sector currently contributes to approximately 70% of the national, Gross Domestic Product (GDP), the state-owned industries especially the oil and the gas sectors contribute to over a quarter of the entire UAE gross domestic product.

In the recent UAE economic statistics, the contribution of the private sector in the national growth has increased due to the UAE’s economic diversification approach that has allowed the private sector to contribute to the national economic growth (Staveren 29). As a mixed free-market economy, the latest 2015 Abu Dhabi economic reports indicate that the manufacturing industry contributes 12.6% to the UAE’s GDP, hotels contributes 11.4%, the real estate gives 9.1%, construction gives 8.6%, transportation gives 7.3%, while finance and insurance provides 6.4% to the UAE’s GDP (Staveren 31). Given the fact that the two major industries that make UAE seem to be a socialist state are the oil and the gas sectors, it is important to see the economic essence of the non-oil sector that in total contributes to 71% of the UAE’s gross domestic product (Staveren 25). Despite leading a political lifestyle that is more of a communist system, the UAE has provided the private sector with a pleasant atmosphere to contribute to the national economic growth.

UAE’s Macroeconomic Assets

From an economic perspective, there are macroeconomic elements of the national economy and there are microeconomic elements of the national economy. Macro generally means major or main. Hence, macroeconomic assets of the UAE are the main economic assets or elements that the economic stability of the UAE depends upon (Staveren 9). The United Arab Emirates is an oil-reliant economy and a giant oil producer across the world, with statistics ranking Dubai as the eighth largest global oil producer. Oil and Gas are the topmost or the major macroeconomic elements that contribute to almost a quarter of the UAE’s gross domestic product. Almost a third of the national development agendas are still relying on oil and gas for economic growth. Staveren (26) states that about 94% of the globally proven oil reserves are within the Abu Dhabi region, thus making the UAE to become the world’s sixth established oil reserve and the world’s seventh-biggest natural gas reserve.

As their macroeconomic assets that have boosted the national economy for decades, the Emirati governments are steadily increasing their investment in the oil and gas industries. Young (23) states that the UAE government is a capitalist economy based on how it controls the macroeconomic elements of production such as the oil and the gas sectors. In terms of exportation value, the UAE oil and natural gas exports account for about $103 billion of the national exports on annual basis, making oil and gas to contribute to approximately 65% of its national total revenues (Young 15). The Dubai’s investment portfolio indicates that the UAE has its economic interest on the oil and gas reserves, which the oil-producing giants have estimated them to be approximately 97.8 billion barrels worth of oil. Large oil exports are the macroeconomic factors that the UAE largely depends on providing national services, infrastructural development, and other government businesses.

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UAEs Microeconomic Assets

Due to its reduced reliance on the oil and gas economic resources, the UAE has encouraged Foreign Direct Investment (FDI) that has supported the development of the UAE’s microeconomic assets. Young (27) states that although the non-oil sector is still economically immature, a large part of the microeconomic elements of production in the UAE comes from this economic sector. Another significant microeconomic asset of the UAE economy is the manufacturing sector that contributes to about 12.4% of the UAE gross domestic product (Staveren 24). The manufacturing industry is growing and the private sector is largely dominating the manufacturing department due to the FDI policies that have allowed the European and Asian investors to join the free market. The UAE is growing rapidly in its manufacturing industry with the technology department motivated by the bilateral trades between the United States and the UAE fueling this advancement (Staveren 36). Another microeconomic sector that is slowly improving the UAE economy is the hotel industry.

The hotel department is another microeconomic sector of the UAE that generates quite a lot of revenue for the UAE economy, with its contribution estimated to 11.4% of the national GDP. The UAE hospitality sector is contributing so much to the rapid tourism development witnessed across the Emirati economies. The UAE’s business and investment environment revolves around the hotels as the microeconomic sector that economists have projected it to a 67% revenue growth in 2016 (Young 18). This percentage amounts to $7.5 billion in monetary value. The real estate business is another important microeconomic production sector that generates roughly 9.1 of the UAE’s gross domestic product. Together with hotels, the real estate sector has put the UAE on the global map on issues concerning the property market. The payable municipal property tax that comes from the commercial and residential tenants often boosts the UAE economy (Staveren 15). In 2014, the total real estate transactions surpassed Dh218 billion in cash value.

In its fiscal first-quarter report of 2015, the UAE real estate business transactions totaled $17.4 billion in monetary value. Such values show that the real estate is another significant microeconomic preference of the UAE economy. As a mixed free-trade economy, the UAE’s free trade zones have also allowed the construction sector to stand out as an important microeconomic sector that offers 8.6% of the UAE’s gross domestic market (Staveren 19). As a microeconomic option, the construction sector is increasing its economic influence across the UAE and its net value currently stands at $315 billion according to the 2014-2015 economic reports. These planned projects of this amount have a direct influence on the economic elements of municipal tax, financial value, monetary exchange rates, and other relevant financial aspects. The transportation sector of the UAE is another significant microeconomic sector that most of the Emirati governments have decided to boost as an economic option.

The airline transportation, the pipeline transportation, and rail transportation systems are some of the significant microeconomic units of production that the UAE enjoys their economic influence of a net value of $27 billion. The transport and logistics sector contributes to about 7.3% of the gross domestic product of the UAE economy. Together with the construction and the real estate sectors that are growing concomitantly, the transport and logistics sector has a considerable economic impact. The last and another significantly important microeconomic unit of production in the UAE economy is the banking and finance economic department that generates about 6.4% of the total GDP of the Emirati economies (Staveren 23). The finance and banking sector is continually promoting the public and private investment efforts that are in turn promoting sustainable economic growth. The total assets of the UAE banks and financial systems currently stand at a value estimated to $49 billion in monetary value.

UAE’s expenditure is another significant economic component that is determining the current state of the economy of the Emirati governments. The unstable oil prices that stagnate and sometimes fluctuate have put the Emirati governments into a sharp focus on how to control the expenditures of the governments (Young 30). The spending of the Emirati governments is increasing with the recent federal budget estimated at 49.1 billion dirham, which translates to $13.4 billion. However, the price fluctuations in the global oil and gas exports are the primary factors that determine the spending trends in the UAE economy (Young 21). The UAE has however been shifting from relying on gas and natural oil and the rapidly developing non-oil sector seems to demand a higher economic expenditure than the oil and gas sector. The government expenditure on the current UAE’s gross domestic product stands at 27.3% from 23.2% in 2013, and 21.8% in 2012 (Young 19). This expenditure growth is due to the growing numbers of large-scale development projects in the non-oil sector.

Due to the witness of the economic changes in the recent days, the 2014 federal government expenditure contained a 4.5 percent increase in the national total spending. The emerging industries such as the technology department, the food processing industry, the electronic industry, and the retail market industry have shown a considerable expenditure growth due to the increasing demand for technology, food, electronic products, and the retail goods (Young 25). The latest reports indicate that spending on Information Technology in the business sector stands at $4.6 Billion, while spending on consumer products and retail goods stands at 7.3 billion Dirham. Expenditure on the oil production and oil consumption has reduced significantly due to the extensive attention given to the non-oil sector (Young 31). The UAE economy currently spends less money on investing in the extraction and production of oil and gas due to the prospected oil and gas prices that were to plunge in this year.

Conclusion

The UAE economy is increasingly becoming a complicated state due to its involvement in several oil and non-oil units of the economy. From an economic perspective, the UAE is a mixed free-market economy since its reliance on the oil sector began declining and the free trade markets began getting the economic influence they deserved. When a nation combines the socialism and capitalism means of controlling its economy, it automatically becomes a mixed economy because there is the interplay between the capitalist economic ideas and the socialist economic ideas. Since the economic downturns began frustrating the UAE economy, the Emirati governments have seen to need to adopt a mixed free-market economy that would provide investors with a chance to create an independent non-oil sector. Even though oil and gas remain to be the macroeconomic units of production, the UAE still relies on the stability of the non-oil sector that offers several microeconomic options.

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Works Cited

Staveren, Irene. Economics after the Crisis: An Introduction to Economics from a Pluralist and Global Perspective. United Kingdom, London: Rutledge Publishers, 2014. Print.

Young, Karen. The Political Economy of Energy, Finance and Security in the United Arab Emirates: Between the Majilis and the Market, United Kingdom, London: Palgrave Macmillan, 2014. Print.

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