Oil and Non-Oil Economy of the UAE Essay

The general dichotomization of the economy of the United Arab Emirates is into the oil and non-oil sectors. While the aggregate output remains dependent on oil production, the United Arab Emirates is focusing on the development of its non-oil sector as part of its diversification plan. However, its ability to develop fully its non-oil sector depends on the performance of its oil sector. One consideration is the relative contribution of the oil and non-oil sectors to the economy. The other consideration is the ability to the oil-sector to support the diversification plan in the non-oil sector. Abed and Hellyer (2001) explained that in 1998 the production of crude oil accounted for less than a quarter or 22 percent of gross domestic product. However, even if the contribution of crude oil production to aggregate output is less than a quarter, the impact of the sector on the economy is much bigger. Oil exports contributed 37 percent of earnings in foreign exchange and 60 percent of public sector revenue. The oil sector contributes to the aggregate economy in four fronts, which are business investment, household income and consumption, public spending, and net exports. This substantiates the claim that the oil sector comprises the backbone of the UAE economy. Further growth occurred in the oil sector in 2006 with the Ministry of Information and Culture (2006) reporting that the oil and gas sector contributed 28 percent to aggregate output. Concurrently, there is also growth in the non-oil sector, particularly in manufacturing and financial sectors. The UAE Federal Government (2008) further reported that oil and gas production experienced further growth by contributing one third to gross domestic product. This is primarily due to programs intending to optimize oil and gas production in the different emirates. At the same time, there is also solid growth in the non-oil sector. In the next years, the contribution of the oil sector should stabilize at one third of the economy and the non-oil sector becoming a stronger contributor to economic growth. This would allow the UAE to maximize returns from the oil and gas sector to boost growth in the non-oil sector. UAE Economic Developments to Achieve Diversification The United Arab Emirates is already on its way towards economic diversification. Although, the oil and gas sector remains as an important sector, the UAE has achieved developments in the non-oil sector. There are areas of economic developments that the UAE has to focus on to achieve diversification. Dunning (2005) identified the optimization of resource base as a means of achieving diversification. The UAE has to hone the potential of its key resources to establish different industries. The country has already done this by continuously developing its oil and gas sector. However, it also needs to optimize the resource base for the non-oil sector such as the development of land through urban planning or the urbanization of peripheral lands to provide venues for manufacturing and services sectors or the maintenance of natural resources for tourism. Another economic development needed to support diversification encompasses structural changes. According to Shihab (2006), the economic structure needs to support the needs of the non-oil sector. One way of achieving this is influencing employment patterns to develop labor force for the non-oil sector. This means investing in human services such as education and health to ensure labor productivity. Muysken and Nour (2006) stressed on the deficiencies in the educational system and low level of skills of the labor force as areas for improvement if the UAE wants to succeed in diversifying its economy. Another way is the establishment of different industries to broaden the economic base and create employment. A third economic development is integration of infrastructure and social structures to support diversification. DeNicola (2005) explained that infrastructure developments are necessary to attract investments and create employment opportunities for non-oil industries. Shihab (2006) explained that social factors such as the development of a culture of consumerism and calm co-existence among local minorities and expatriates support growth in the non-oil sector. Justification for Diversifying the UAE Economy Imbs and Wacziarg (2003) explained that the overall justification for economic diversification is sustainable growth by spreading economic risk across different industries. Economies reliant on a single sector such as the reliance of the member countries of the Gulf Cooperating Council on the oil sector also face high risks in the long-term because oil is a non-renewable resource (Fasano & Iqbal 2003). There are also specific reasons for the goal of the UAE for diversifying its economy. One is avoidance of the effect of the oil curse theory, which explains that dependence on oil has long-term negative effects on the economy. Oil exporting countries gain revenue by relying on price fluctuations in the global market alone, which does not require investments or efficiency that in turn precludes long-term development of economic capabilities or competencies. Revenue generated from oil is sufficient to support welfare services, placing focus on allocation instead of production. (HSBC Middle East 2003; DeNicola 2005) Another justification is the maximization of revenue generation through resource development. Diversification would enable an oil dependent economy such as the UAE to gain revenue from its other resources. Sole reliance on oil limits the revenue generating potential of the economy and hampers economic efficiency by idling resources. (Shihab 2006) Another related reason is resolving revenue volatility. Dependence on oil involves the downside of volatility in the long-term because oil is non-renewable, which means oil reserves will eventually run out in the future. Oil dependent countries need to develop other sources of revenue to ensure continuity of revenue generation even after oil reserves have dwindled. (Gylfason 2004) Still another justification is human development by creating employment opportunities for the young population. The UAE has a predominantly young population, which means a pool of intellectual and skill resource able to support the development of non-oil industries. Diversification enables the economy to develop its human resources to increase quality of life and sustain productivity. (HSBC Middle East, 2003; Muysken & Nour 2006) Non-Oil Sector in Economic Diversification for Sustainable Economic Development The Ministry of Information and Culture (2006) explained that the non-oil sector contributed 72 percent of the GDP of the UAE. This reflects the potential of developing the non-oil sector to achieve economic diversification and ensure sustainable economic development. The non-oil sector comprises goods manufacturing and services, with the former contributing 57. 9 percent and the latter contributing 42. 1 percent to GDP from the non-oil sector. Industries under goods manufacturing are agriculture, livestock and fisheries, mining, manufacturing, construction, and electricity, gas and water. Industries under services include restaurants and hotels, transportation, storage and communication, real estate and business, and social and private services. Diversification is already apparent in these various industries and there is still wide room for the development of these industries and the establishment of new industries. Hejmadi (2004) explained that development of the economic free zones were crucial to the development of different industries in goods manufacturing and services. These zones provided a venue and incentives for the flow of both domestic and foreign investments into diverse industries to create employment opportunities and contribute to the growth in aggregate output. Apart from the continuous development of these industries, a potential industry for diversification in the non-oil sector is tourism. Sharpley (2002) explained that tourism is becoming a ubiquitous means of achieving economic diversification for many countries seeking to secure long-term economic growth. Tourism fits the resource approach to sustainable growth since the UAE has many tourism destinations to attract tourists and its cultural openness also comprise an impetus for foreign tourists. Blanke and Mia (2006) reported that travel and tourism already exist as an industry in the UAE and contributing 1. 1 percent to GDP. There is wide potential for development. However, there are challenges to tourism development requiring investments in destination development and promotions (Sharpley, 2002; Henderson 2006) References Abed, I. & Hellyer, P. (Eds. ), 2001. United Arab Emirates: a new perspective. London: Trident Press Ltd. Blanke, J. & Mia, I. , 2006. Chapter 22 assessing travel & tourism competitiveness in the Arab world. [Online] Available at: http://www. weforum. org/pdf/Global_Competitiveness_Reports/Reports/chapters/2_2. pdf [Accessed 25 January 2009] DeNicola, C. , 2005. Dubai’s political and economic development: an oasis in the desert?. Williamstown, MA: Williams College. Dunning, T. , 2005. Resource dependence, economic performance, and political stability. Journal of Conflict Resolution, 49(4), pp. 451-482. Fasano, U. & Iqbal, Z. , 2003. GCC countries from oil dependence to diversification. Washington, DC: International Monetary Fund.