Introduction
Many countries across the globe have felt the reverberations of an economic crisis that was initially felt in the United States. This perhaps illustrates the fact that economic globalization is fast catching with us; as several economies are merged; and the reality that even in a given economy; no aspect of relative independence can be seen in any sub-sector of its economy as they (economic sub-sectors) rely heavily on each other.
Quite interestingly, the genesis of the economic crisis in the United Arab Emirates notably in Dubai can be traced to the same property problems that have been experienced in the United States leading to an economic crisis there. Like in the United States, a boom in the property market that was driving the UAE and especially the Dubai economy has suddenly reversed creating an economic crisis in this region.
This has called for concerned parties notably governments to come up with appropriate policies thought to arrest the situation. In this report, I will look at how the economic problem in the United Arab Emirates is a direct function of the real estate sector of its economy, the effects of the economic crisis in the United Arab Emirates, and public policies that have been developed in this region to combat the economic crisis there.
The United Arab Emirates can be described as an area that has been modernizing and developing at a considerably high rate. This is evident in the infrastructural, social, and financial leaps that can be witnessed in this region. This kind of scenario immediately creates a problem of conflict between the existing traditional methods of handling issues and western ideologies underlying modernization and economic growth in the UAE.
This report on the economic crisis in this area about public policies is therefore of prime importance for some reasons. First, the question of whether economic development needs to parallel some dynamics in a society like the existence of necessary societal cultures, liberalization of economies for foreign investment among other factors can be studied more analytically by considering the UAE case study. Secondly, the rest of the world can learn from the effectiveness of the policies that have been implemented to salvage the economy of a region that is still developing. Moreover, investors and lending institutions are bound to learn positively from the UAE case study.
Background
Compared to other confederations in the United Arab Emirates, Dubai can be described as a region that has opened more to the world by allowing foreign investments and diversifying its economy. The UAE economic crisis can be directly traced to the property problems that have mostly been experienced in Dubai. While Dubai can be seen to have deviated a little bit in the aspects of economic diversification, in the encouragement of foreign investment, as well as other aspects when compared to the rest of the United Arab Emirates region, it has been important for the whole the UAE work together in handling the crisis.
This has seen the development and implementation of public policies intended to handle the economic crisis. Judging the effectiveness of public policies in addressing an issue like the economic crisis in the United Arab Emirates may be done from various angles. The most obvious way of determining the effectiveness of such policies may be to observe if the policies have been crucial in bringing the concerned economy back to growth. Doing this may require one to anticipate how such measures will in the end have a long-term effect on the economy.
Dubai has been an admiration of many countries in the world. This is because the country successfully endeavored to diversify its economy instead of just relying on oil like most economies in the United Arab Emirates. This saw the marketing of Dubai as financial capital, a tourist center, and a trading center. A hunger for properties was therefore created as the Dubai economy grew especially in service sectors. This saw vibrant activities in real estate where luxurious places, hotels, artificial islands, and other properties have been under construction in this area. Everything seemed to be going on well according to plan until the economic crisis with an origin in the property market came to the scene. (Euro fruit Magazine)
The origin of the economic crisis in the UAE can therefore be traced to real estate. Nakheel, a subsidiary company of Dubai World has been in control of most of the real estate sector in Dubai. Buoyed by some factors, this company undertook many construction projects in the booming Dubai property market. With the Dubai economy growing at a considerable rate, the prediction was that there will always be an increase in the property market especially with the encouragement of people outside Dubai to invest in these properties.
Moreover, considering that Dubai being one among other states that form the UAE some of which can be described as very wealthy like Abu Dhabi, many people and corporations invested directly and indirectly in the real estate. This was also because of the belief that in case any problems arose, Abu Dhabi, a sister state of Dubai would quickly step in. In General, many people and corporations investing in the Dubai property market were relying on several speculations. (Truman 1)
Things began going contrary to expectations when Nakheel announced that it was not able to handle its debts acquired while investing in the real estate. Meanwhile, the Abu Dhabi government did not step as fast and as was expected. Nakheel had found itself in a very difficult position that I suppose it had not anticipated. It had been over-ambitious by starting too many projects on debts which in the end overwhelmed the company. This suddenly brought construction activities in Dubai to a halt directly affecting a major driving ingredient in the UAE economy. Responsible lenders on the other hand were asking for their money, which could not be paid, creating a crisis. (Truman 1)
A direct result of this scenario is that banks operating in this region lacked money that could be lent to the public and individuals for economic investments and growth. With a lack of capital for expansion and sustenance of business activities and opportunities, the UAE economy was even affected further. This is especially considering that a substantial amount of money that had been lent to Nakheel came from banking institutions within the United Arab Emirates region.
With the scarcity of money in the economy, an immediate result of such circumstances was a substantial drop in the value of properties in the UAE. (Truman 3) Responsible banks and other financial institutions could not even recover their money by possessing Nakheel properties. The financial crisis in the UAE can therefore be related directly to real estate.
The economic crisis that evolved in the UAE as a result of problems in real estate has had adverse effects that have been felt in the UAE as well as in other parts of the world. The economic crisis effects have been more visible in Dubai compared to other states in the UAE. In this state, construction projects that stand incomplete dot its landscape together with luxurious hotels that do not have visitors. These stood out as physical evidence at the height of the crisis. (Euro fruit Magazine)
The failure of real estate in Dubai that in turn contributed to the economic crisis in UAE has led loss of many jobs. This has particularly occurred in Dubai as many workers that were involved in the massive construction projects around Dubai lost their jobs. Most of the workers in this region are from other parts of the world. Migrant workers have therefore been most affected by the economic crisis in the gulf region.
Apart from workers in the construction industry, other groups of workers particularly in the hotel and service industry and the financial industry as well have been most affected. This has mainly occurred in Dubai, a state that has been trying to diversify its economy by developing these industries (Construction, tourism, and financial). A substantial number of people that have been working in the booming Dubai economy have come from neighboring states in the United Arab Emirates. These have been affected by the massive layoffs in Dubai and have therefore been forced to return to their countries without Jobs. This has reduced the economic capacity of people in the UAE precipitating the economic crisis in this region further. (Behrendt et al. 15)
This unemployment is in contrast to what has been happening in UAE in recent years just before the economic crisis. Before the economic crisis, states in UAE have been experiencing good economic growths which have helped reduce unemployment. Employment in the UAE has increased by about 45 percent between the years 1998 and 2008. Moreover, unemployment reduced by almost two points to settle at around 9 points from 11 points during the same period. This progress has however reversed considerably due to the economic crisis. (Behrendt et al. 8)
Besides, financial markets operating in the United Arab Emirates have also been significantly affected by the economic crisis. The regional stock index had reduced by about 6 percent as of February 2009. This poor performance of the stock markets reflects reduced economic growth that has set in this region where economic growth has substantially reduced by more than two points from an average of about six percent in previous years. (Behrendt et al. 6)
This reduction in economic growth has also resulted from decreased oil prices in the global market. It has not helped that the UAE has been experiencing an economic crisis with the rest of the world leading to decreased fuel prices. This has directly decreased earnings in UAE states. While decreased fuel prices have contributed to reducing the rate of inflation locally in this region, the prices of major consumer items have significantly increased leading to high inflation levels in this region. As of 2009, inflation rates in this region were more than twice when compared to the average global inflation. The cost of living in this region has therefore gone upwards amid economic difficulties that are felt here. (Behrendt et al. 8)
The impacts of the economic crisis in Dubai have also been felt in other parts of the world. It also has the potential of adversely affecting other economies. This is especially considering that a good amount of debts that had been lent to Nakheel have been from financial institutions operating in the UK, Asia, and other regions. About 50 billion dollars of debts in the UAE are from banks that are operating in Britain.
As it can be widely expected, a significant portion of this debt totaling about 90 billion dollars is from banks operating in the rest of Europe. On the other hand, Japan and the United States account for about 10 billion each in debts. (Mark) With the current economic crisis that is being felt all across the globe, the default of these debts can adversely affect global economies. A very grave scenario can occur in cases of default since this can easily strain and lead to the collapse of companies responsible for ensuring banks as happened in the case of AIG in the United States. (Mark)
Moreover, the impact of the economic crisis in the UAE can easily spill over to the Asian economies considering the relationship between the Dubai economy and some Asian economies especially the Indian economy. Just to illustrate how these economies are interrelated, the total volume of trade from nonoil commodities stood at 29 billion dollars in 2008.
Moreover, Dubai world, whose sister and subsidiary company-Nakheel responsible for property investments in Dubai manages a total of five major container handling stations in Dubai which handle a total of about 40 percent of the total Indian traffic of containers volume. (Behrendt et al. 24) Several Indian companies have also invested jointly with Nakheel in the Dubai property market and are therefore feeling the negative effects of the economic crisis there. (Behrendt et al. 24)
Moreover, as a result of the vibrant UAE economy before the economic crisis, many migrants from Asian countries moved to the UAE in search of employment. For example, an estimate of more than one and a half million Indians reside in the United Arab Emirates. These have been instrumental in taking back home a significant amount of remittances which have been helping to build their home economy. (Islam 2)
The economic crisis in the UAE has seen a good number of these migrants lose their jobs due to hardships in key economic sectors found in the UAE. Consider for example the current scenario in Dubai, in this country, property construction contributes to about half of the total GDP, having an origin in the property market, the economic crisis in this state has led to the abandonment of construction activities. (Islam 2) This has left many migrants with no jobs. The loss of jobs by these migrants has negatively affected their home economies as a result. (Islam 3) In addition, as I had previously stated, financial institutions operating in Asian countries have likewise been affected some of which lent significant amounts of money to Dubai world.
The United Arab Emirates could moreover be affected in nondirect ways as a result of the economic crisis there. Take for example the model economy that was adopted by Dubai which in the end led to an economic crisis there. This is a state that chose to diversify its economy especially considering that it does not have substantial oil resources when compared to other states in the United Arab Emirates. This has seen an encouragement of foreign investment in this state. In contrast to other states in the UAE that rely heavily on oil, the important sectors that have been driving this economy include tourism, construction, financial and other service sectors.
The important question is whether the model economy that has been adopted by Dubai will be admired by other states in the UAE and also other Arabic countries. This may be considered unlikely especially with the consequences that have been felt in this region which can be greatly attributed to the Dubai economic model that has opened to the international economy. A possible consequence is that many countries that have not opened to the international economy in this region may take a lot of caution to prevent more integration of their economies with the rest of the world by encouraging and allowing foreign investment. In my opinion, this is will not be a very wise decision for some reason. (Business Monitor Online)
First, it is only possible to attain great economic growths by opening up to the rest of the world for foreign investment. This has been seen in countries Like China and India that are experiencing great economic growth which has followed the liberalization of their economies. Moreover, the fact that the economic crisis in the United States has also affected and may have led to the economic crisis in the UAE clearly illustrates that whether we like it or not, global economies are integrating.
More examples of how an economy in one part of the world immediately affects another are seen frequently. This shows that it is not wise and it may even be impossible to isolate an economy from the rest of the global economy. While opening up a local economy to the rest of the global economy has some immediate negative effects that may be felt in the short term, like the case of Dubai and Argentina for example, this trend is unavoidable.
Poor decisions in this respect may poorly affect the UAE in various respects in the long term. This will happen if states in the UAE will prefer caution and pursue every effort to preserve their economies which have not considerably integrated with the global economy as of present. (Behrendt et al. 12) Such a scenario may adversely affect the United Arab Emirates in the long term.
Another possible effect of the economic crisis in the UAE is the possible loss of considerable sovereignty by Dubai. The economic crisis in UAE with origins in Dubai real estate showed the incapacity of Dubai to handle this situation on its own. Without the help of its sister state in the UAE confederation-Abu Dhabi; the situation in Dubai and the rest of UAE could be graver. Although Abu Dhabi placed people in speculation before coming into action to aid Dubai world in paying debts, its help has and will be of prime importance in resolving the UAE economic crisis. The arrangement of a possible bailout, some of which has been paid by Abu Dhabi will increase the role of Abu Dhabi in the affairs of Dubai. It is easy to foresee a scenario where Abu Dhabi will play a more important role in the affairs of Dubai. (Business Monitor Online)
Faced with an economic crisis, concerned parties in the UAE have come up with public policies intended to solve problems that have developed due to the economic crisis as well as help in handling the economic crisis itself. Important factors that can help us understand the meaning of public policy as explained in this paper include players, who are responsible for developing the public policy; in this case, the players in the development of the public policy to deal with the economic crisis in UAE include relevant state governments and the private sector.
Another key factor in public policy development includes the existing challenge or difficulty that necessitates the development of public policy; it is easy to see that in this case, the challenge is the existing economic crisis in the UAE. Moreover, another important factor in the development of public policy is intended guideline and action that is intended to deal with the challenge. This can be referred to as policy. Public policy can therefore be considered as a set of measures undertaken by an overseeing authority like a national government to deal with an existing challenge. Several policies have been developed in the United Arab Emirates to deal with the financial crisis there.
As the economic crisis in the UAE was cooking, the Dubai government and possibly the governments of other states in the UAE are likely to have been aware of the problem at the time the fact that Nakheel was becoming overwhelmed in settling accrued debts. This is especially true because the Dubai government itself has considerable stakes in Dubai World and therefore Nakheel. It can be noted that the Dubai government preferred a policy of keeping the matter secret; possibly hoping to come up with a solution. Looking at the consequences of this policy, it can be seen that this was not the best approach, oh handling the scenario at the time. (Truman 4)
When the information came out that Dubai World was not in a position to handle its debt, negative ripples were immediately felt in Dubai as well as in other regions of the globe. This is because such a circumstance had not been foreseen and was not expected at all. (Truman 2) With a global financial crisis in place, many markets had become unpredictable, unstable, and could easily be moved by such sudden ripples. While the Dubai government had tried as much as possible to make things appear normal, it would have been better to prepare for the reality that would soon be faced in Dubai real estate. (Truman 1)
During the Argentinean financial crisis, an important lesson that was learned was the necessity of monitoring the financial position of players in an economy that had accumulated a considerable amount of debt. Arguably, the Argentinean financial crisis and the Dubai financial crisis would have been avoided with such measures in place. This is because important actors notably lenders would have prepared in advance instead of getting such information in surprise.
Moreover, this would have allowed for the implementation of alternative policies by the government considering the reality of the situation at hand. When the true picture of Dubai World’s financial position came out to the world, everyone was unprepared. It can now be seen that the policy of secrecy on the financial matters of Dubai World backfired and contributed more to the creation of the economic crisis in Dubai and the UAE. (Truman 4)
Dubai government has adopted a policy that has endeavored to diversify and grow its economy leading to the development of tourism, construction, and financial sectors of its economy and an encouragement of foreign investment. To achieve this goal, the Dubai government had to adopt other underlying policies some of which have played a significant role at the onset of the economic crisis. Such a policy that has come out either unconsciously or consciously from the Dubai government is that since it is involved in the activities of Dubai world, it can guarantee debts and that the debts can likewise be guaranteed by its rich sister neighbor-Abu Dhabi.
A direct result of this was increased lending to Dubai world by financial institutions without vigorously assessing the financial position and capacity of the company. Even as news came out that Dubai world was in a difficult financial position, there was still an impression that Abu Dhabi will quickly come to the rescue of Dubai World and that there was, therefore, no need for panic. (Truman 2)
While Abu Dhabi has already offered significant assistance to Dubai with a possibility of playing an important role throughout the financial crisis in the UAE, the notion that Abu Dhabi was more obliged to bail out Dubai World Company was misplaced. Once again, this assumption prevented Dubai from developing appropriate measures in time that could have helped from the onset to counteract the economic crisis in the UAE with an origin in its real estate industry. Several possibilities that would have helped arrest the situation could have been explored. This approach of relying on on without assurance and perhaps unwisely on Abu Dhabi was therefore unwise. (Business Monitor Online)
Faced with massive layoffs as a result of the economic crisis in the UAE, several states have come up with measures aimed at protecting their citizens from unemployment. This has been pursued by framing appropriate legislation to implement this. For example, the Kuwait government has set up legislation that requires private companies to maintain a certain quota of local employees. On the other hand, in early 2009, the United Arab Emirates government implemented legislation intended to monitor and control layoffs in the private sector. Under this legislation, UAE citizens can only lose their jobs if the companies that they work for can prove that they are inefficient and incapable of performing their roles. (Behrendt 26 )
While these regulations may be well-intended in especially protecting UAE citizens from unemployment, their long-term impact is speculative. This is especially because such measures may fail to bring about sustainable development and growth. With the economic difficulties that are currently faced by private companies in this region, it may be practically impossible to continue maintaining the same workforce that they had before the economic crisis.
These measures may therefore fail in the long term. It would be better for the UAE government to pursue appropriate policies that would ensure long-term economic development. This includes encouraging economic diversification for example and also working together with the private sector to help it overcome the current challenges that the sector is facing especially in the current economic crisis. (Behrendt et al. 26)
In tackling the economic crisis in the United Arab Emirates, a general policy adopted is the impression of a single center of control. This can for example be seen in the final intervention by Abu Dhabi which gave some bailouts intended to help Dubai World in settling debts. While the United Arab Emirates government has strived to create a unified impression in dealing with the crisis, it remains questionable whether this is the truth. For example, while Dubai has accepted this assistance from Abu Dhabi, like the recent ten billion bailouts, Abu Dhabi will likely play a more increasing role in the management of Dubai affairs. This may be seen in the limitation of massive project undertakings like those that had been pursued before. (Business Monitor Online)
A question may then be asked of the agreements that are made to facilitate these bailouts. A concern that may come up is whether Abu Dhabi is acquiring some projects in Dubai or entering into a partnership with Dubai. While such issues may be addressed by the fact that the United Arab Emirates is a single government and that confederation states cannot operate without each other, the fact that Abu Dhabi bailouts have not been given from the United Arab Emirates center may indicate that the public is once again hidden from mutual agreements between Abu Dhabi and Dubai.
The role of the United Arab Emirates government remains, therefore, less clear. The secrecy involved in these agreements may precipitate another round of problems that may be felt in the future.
Moreover, to deal with the economic crisis in the UAE, the UAE has developed some financial policies aimed at controlling the crisis. With a lack of capital for lending by banks in the UAE due to the weight of the financial crisis here, the UAE government has taken measures to inject more capital into the banking sector to strengthen its position and role. This is intended at strengthening liquidity in the UAE market for investments.
A total of 32.6 billion dollars was made available in 2009 to help in this endeavor. With increasing rates of default to some banks in the UAE, Abu Dhabi has preserved about three billion dollars that can be accessed by at least five banks operating in this state. While such measures have been adopted, the UAE has still maintained its traditional approach of minimizing budget deficits limiting its financial intervention in the UAE economic crisis. (Chaucer et al. 3)
While the financial interventions that have been undertaken by the UAE are commendable in dealing with the UAE economic crisis, an arising reality is that there is no unified response in dealing with the crisis. Some of the confederation states are for example implementing their policies in isolation; this has watered down the effectiveness of such policies in dealing with the economic crisis in the UAE as a whole. (Chaucer et al. 8)
Take for example the decision by Abu Dhabi to protect five of its major banking corporations from increased defaults as a result of the economic crisis when other states have not or are not able to implement the same due to varying financial capacities. It can therefore be seen that even when such policies could achieve much more, they are limited by non-uniformity in the whole of the United Arab Emirates.
Conclusions
- The United Arab Emirates is a region that has been experiencing great economic growth especially before the onset of the economic crisis. The study of the nature, effects, and response of the economic crisis are very important especially considering that while the region has been experiencing economic growth and modernization, it is still facing inherent problems some of which are a result of the fast pace at which modernization has been occurring here; bringing in values and lifestyles that may contradict the traditional way of doing things.
- The genesis of the economic crisis in the United Arab Emirates like in the United States can be traced to problems in real estate. Problems started when Dubai world was unable to pay its debts creating a chain reaction that has greatly contributed to the generation of the economic crisis in the UAE. Dubai is the state that has been mostly affected by the economic crisis in the UAE.
- Dubai has developed an economic model different from that of other states in the United Arab Emirates. While most states in this confederation rely heavily on oil, Dubai has strived to diversify its economy particularly by encouraging the development of the tourism industry, financial industry, and real estate among others. This has seen Dubai open its economy to the global economy by encouraging foreign investments making its economy more vulnerable.
- Noncareful consideration of the causes of the economic crisis in the UAE and lessons that can be learned can mislead other states in the UAE to shy away from adopting the Dubai economical model which integrates more with the global economy. If this happens, it is likely to affect the UAE negatively in the long term mainly because economic integration is unavoidable in the end.
- The policy of secrecy by Dubai created a more vulnerable situation especially with uncertainties in many economies as a result of the current global financial crisis. It would have been better if the financial position of Dubai World had been known earlier. This would have enabled players; especially lending corporations to prepare adequately and in advance.
- The effectiveness of some policies that have been developed in the United Arab Emirates has been limited by nonuniformity in the application. States in the UAE are implementing independent policies some of which will be more effective if implemented collectively by all states in the UAE.
- In general, to deal with unemployment and other economic problems faced in the UAE, there is a need to adopt policies that would enhance long-term solutions like economic diversification and the support of the private sector for example.
- Many economies apart from that of the UAE have been adversely affected by the UAE economic crisis. This especially includes countries whose economies are related to the UAE economy through lending institutions, joint investments, trade, and migrant workers among other ways.
- The management of the Dubai economic crisis by the rest of the UAE has not been open. Although some bailout has been paid by Abu Dhabi, the public is not aware of the agreements that have been reached. This has a likelihood of creating more problems and or misunderstandings in the future.
Works Cited
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