Factors behind The economic and social development of UAE

Introduction

Four decades ago, the economy of the Trucial States or United Arab Emirates (UAE) was a simple subsistence economy dependant on agriculture, nomadic animal husbandry, fishing, seafaring and extraction and trade in pearls and ranked among the least developed countries of the world (Library of Congress 18). This reflected the limited natural resources the country had. Today, UAE ranks among the most industrialized nations. The process of industrialization for this country started in 1970s after the discovery of oil.

The country realizes enormous revenues from oil and natural gas which has transformed it into a high mass consumption nation within a short period of time. Unlike other developed nations which have passed through lengthy and difficult process of saving and building up capital resources for development, UAE reaped into this status without much difficult due to the large revenues brought in by oil and natural gas (UNDP 10).

The country embarked on a resource-based industries strategy for economic growth and a huge deployment of income to ‘once-and-for-all’ social and economic development projects which have made it grow within a short time frame (Nourallah 19).

The country has further become one of the most prosperous in the world with high GDP per capita and living standards (UNDP 45). The diversification of the economy from one driven by oil to a strong service sector which includes logistics, tourism, and financial services and recently committed focus on knowledge capital have made the country very competitive.

The World Economic Forum ranked the country position 25 out of 139 nations in Global competitiveness Index in 2010-2011 period. This has been enabled by remarkable political stability and a government that is committed to economic development and prosperity (Emirates Competitiveness Council 18).

UAE had a small population of about 4,975,593 people in 2005 national census which has grown from the estimated eighty six thousand people in 1961 according to Abed and Hellyer. The population increase was a result of mainly due to improvements in diet, health care and general living standards and from importation of foreign labor.

This later factor has led the country to become expatriate labor dependent and the Emirati population account for only 20%. The other 80% of the population is mainly made up of immigrants from Asian countries; which take the biggest chunk, Arabs, Europeans, and Americans (UNDP 25).

The purpose of this paper is to analyze the factors that led to the economic and social development in UAE so as to give the reader an insight into the features of UAE as they appear, experience and live in this country. This analysis is important in overall knowledge as well as in advising on what a country needs to do so as to realize economic and social development.

The paper covers the stages in which UAE economic and social development passed and the historical developments that are related to them. The factors that led to this phenomenal development are outlined and discussed as well as their importance and origin. The paper is concluded by giving a summary of the discussion and the writer’s expectations of the future of UAE

Stages of economic and social development

The UAE’s economy has come a long way from the simple subsistence economy relaying on limited natural resources to what it is today. The UAE has a robust economy that competes with the world’s most developed nations that are supported by natural resources (oil and gas), service sector and excellent infrastructure and its main focus recently, knowledge capital.

The UAE leadership according to UNDP has declared a need to base its long-term growth on knowledge as it is stipulated in the Vision 2021. Policies and institutions have been put in place to support the country’s move to a knowledge based economy and results of this are shown by its competitiveness as outlined in the Global Competitiveness Index (GCI).

UAE’s economy is also grouped with other highly developed nations such as USA, UK, Switzerland, Singapore and Ireland as an innovation-driven economy (Emirates Competitiveness Council 19). To illustrate just where the economy of this country has reached so far is the 2009 World Bank Institute’s Knowledge Economy Index (KEI) which ranked it together with Qatar as countries with the highest KEI score in the GCC region (Emirates Competitiveness Council 16)

The stages of economic development are based on theoretical economic models of Michael Porter. These evaluate a country’s competitiveness along twelve pillars that match up with three major stages of development according to Emirates Competitiveness Council.

The twelve pillars include institutions, infrastructure, macroeconomic conditions, health and primary education, higher education and training, goods and labor market efficiency, development of financial markets, technology, market size, business complexity and innovation. In relation to these pillars, UAE has undergone three major economic development stages which are discussed below (Emirates Competitiveness Council 12)

Factor-driven economy

This is the first stage where the economy is driven by factors and competitiveness of the country is based primarily on unskilled labor and natural resources. The main source of income for a country in this stage is from exploitation of natural resources as Abed and Hellyer adds. On the companies’ level, basic products or commodities are produced and sold, and competition is based on prices.

The production is generally low, and this results in low wages. In order to maintain competitiveness at this level, the country only requires functioning public and private institutions, a fairly developed infrastructure and healthy and plentiful workforce. The first four pillars in Porter’s model which are institutions, infrastructure, macroeconomic stability and health and primary education, characterize the first stage of development.

Efficiency-driven economy

As development advances and wages increase, a country goes to the second stage where the production processes are efficiently run resulting into quality products. The competitiveness of the economy and the wealth generate are driven by the higher education and training.

Efficient goods markets, well functioning labor market, sophisticated financial markets, increased domestic and foreign markets for goods and commodities and a high level of use of existing technology are things that characterize the second stage of development. These are factors are described by Porter in the fifth to tenth pillars (Abed and Hellyer 30).

Innovation-driven economies

This stage characterizes very highly developed economies which are able to afford its residents sustained higher wages and standards of living. The economies compete with new and unique products through innovation.

Companies produce new and diverse products with production, design, management, financing and commercialization processes being highly sophisticated. The country at this stage has an economy that is characterized by Porter’s eleventh and twelfth pillars; business sophistication and innovation (Emirates Competitiveness Council 28).

In summary, the country in the first stage gets an income from exploitation of natural resources and moves to the second stage as development and increase in business sophistication makes it more efficient and income comes from the ability to produce and trade goods and services.

In the third stage, the country is able to grow its economy and earn income from utilization of human talent. From here, the country transitions to the fourth stage as outlined by UNDP which is the knowledge-based innovation economy, which is not discussed in Porter’s stages, but a trend that is being witnessed in the most advanced economies.

This means that companies place their production as unique and offers restricted value propositions while basing their growth on the potential of limitless creativity and talents of their human capital to create economic value as compared to finite natural resources. This transition has been necessitated by the cost pressures these economies are facing from emerging markets which have manufacturing industries enjoying cheap labor (Nourallah 17).

In the case, of UAE (Abed and Hellyer) says that the country did not pass through these hypothetical stages that most developed nations passed through. From the simple subsistence, economy reliant on exploitation of natural resources such as fishing, pearl trade, nomadic animal husbandry and seafaring the country experienced before 1970, various factors such as the discovery of oil and formation of the federation in the early 1970s fueled the phenomenal growth of the country.

It reaped from this stage to high mass consumption as a result of large oil revenues. Instead of the difficult and long process of saving and capital accumulation most advanced nations experienced in the process of development, UAE used these windfall incomes to put up industrial growth based on natural resources utilization and huge ‘once-and-for-all’ social and economic infrastructure within a short period of time.

The country has put policies and efforts towards the diversification of its economy to avoid reliance on the oil to other sectors such as tourism, financial services, logistics, information technology and other infrastructural development. This has seen the country transition to a knowledge driven economy (Abed and Hellyer 13).

In the knowledge driven economy, the country has made major steps become competitive. This is characterized by an existing ecosystem of interconnected elements and networks that will enable the country to create, adopt, adapt, disseminate, and commercialize knowledge intensive products eventually.

The World Bank Institute has outlined four basic pillars that characterize a knowledge based economy and which must be accompanied by appropriate policies, institutions, investments, and coordination among them. UAE has made some attempts to realize these pillars and has outlined this in the Vision 2021(Emirates Competitiveness Council 41).

Historical events that accompanies the stages of development

The emergence of the Dubai as a successful sea port in the 20th century began the economic development of the UAE though then they were separate sheikdoms. This began when 8000 members of a Bani Yas tribe settled at the creek mouth which formed a natural harbor in 1833.

The harbor was then transformed into a fishing, pearling and merchant center which supported the early economy together with nomadic animal husbandly at the interior. Dubai, has today become a very important trade center in the gulf region which by 1930 had attracted 20,000 expatriates who now constitute 80% of the total population and the country heavily depends on it for labor needs (Nourallah 25).

Before attainment of independence from Britain in 1971, the seven Sheikdoms that form UAE had been meeting twice a year to draft a way forward in adoption of common policies administrative matters. After the formation of the federation, a provisional constitution was adopted which served until 1996 when it was declared permanent. This provided a structure of government conducive for economic development as well as maintained political stability for the same (UNDP 35).

This was realized in 1971 when they formed the UAE. In 1958 petroleum was discovered beneath the coastal waters of Abu Dhabi, which was followed by commercial exploitation in 1962, has contributed to the economic growth of the country and possibly the power structure of the country and prestige of emirates.

During the time of commercialization of petroleum, Abu Dhabi was under the rule of Sheikh Shakhbut ibn Sultan Al Nuhayyan who was unable to utilize the revenues from oils to develop his state and was replaced by a development minded Sheikh Zayid ibn Sultan Al Nuhayyan.

He used the income to develop public works and provision of welfare services which transformed his state and inspired the same in the whole country when he was appointed as the president of the federation in 1971 and served until 2004 when he died (Nourallah 15).

In the industrial development, radical events which have shaped the economy of the country happened in 1977 which Nourallahconsiders as a golden year for the country as 84 new industrial establishments were witnessed. From here on the rate of industrial growth though not this high was maintained, but more diversification of exports was witnessed. This is shown by the growth of industrial exports from Dh 11 million in 1975 to Dh 539 million in 1980 and again from Dh 4825 million in 1985 to Dh 8070 in 1990 (Abed and Hellyer). This signifies a country whose economy was growing in reaps and bounds.

In another accompaniment to growth, UNDP report in 1995 indicated that 99% of the population of this country had access to health services, 95% had access to safe water and 77% had access to sanitation. All these were accounts of the development on these services from 1985 to 1993 period (Abed and Hellyer 6).

In information and communication technology, the establishment of the Dubai Internet City in 2000 has greatly contributed to economic development of the country as well as being a vehicle for transforming it into a knowledge based economy. This business park provide a free zone where ICT value chain companies are located helping them to develop, innovate and grow and support other sectors of the economy (Library of Congress 48).

All these historical developments that have seen the rapid development of UAE has differences and similarities in what is happening in other parts of Gulf region. The commonalities include the discovery of oil and the huge revenue from it and similarities in the early economic activates. However, UAE has achieved its rapid development owing to its political stability, unity and government efforts to provide business enabling environment and visionary leadership which are lacking in other gulf region countries (Library of Congress 57).

Factors behind UAE Economic and social development

Political and social stability

The country has enjoyed political stability since its formation in 1971. The political unites are comprised of seven semiautonomous states which are Abu Dhabi, Ajman, Al Fujayrah, Dubai, Sharjah, Umm al Qaywayn and Ras al khaym ah. The political structures put in place to govern the country seem to serve the diverse tribal society in the country.

The distribution of the large revenues accrued from oil is channeled to social and economic infrastructure resulting in high salaries, high standards of social services such as education and health and generally high standards of living for its citizens. This, Library of Congress say has minimized greatly the likelihood of internal political and social conflicts.

In addition to this, government has been able to maintain a relatively clean record of human rights since the country was established as noted by UNDP, this further cements the political and social stability. Nourallah says that though UAE cannot be considered democratic; there is a system of checks and balances. This has seen administrative system working without much friction and pays a lot of attention to improving government effectiveness and performance.

On the regional and international front, UAE has joined associations that have facilitated economic development of the country. Right after independence and federation formation the country joined the United Nations and the Arab League. It later joined the Non-Aligned Movement and the Arab Gulf Cooperation Council, also the Organization of the Islamic Conference.

The country also maintains cordial relations with western democratic countries which have positioned it as a liberal Arab country that is open to the world for trade and other relations (Library of Congress 43).

Together with political and social stability, the country has been able to formulate and implement liberal trade policies that have opened the way for both domestic and international investment in its industrial and services sector (Nourallah 11).

Oil and mineral resources

UAE possesses huge oil reserves which are both onshore and offshore. Gas reserves from crude oil production and from non-associated gas is also major resources. Oil was first discovered in 1958 and commercialization began in 1962. Since then, the country has grown at a phenomenal speed. The exploitation of these resources is well managed by the government by use of the latest technology which is regularly upgraded to increase production efficiency (Emirates Competitiveness Council 34).

Nourallah says that, in 2000, UAE had the third largest proven oil reserves in the world coming after Saudi Arabia and Iraq which makes up almost 10% of all proven world oil reserves.

The country’s ministry of Petroleum and Mineral Resources say that the country maximum sustainable daily capacity of oil production is 2 million barrels but, the daily production capacity is slightly over 3 million barrels a day. This is quite unsustainable since it is estimated that, at the rate of 2.2 million barrels a day of production, the 98.8 billion barrels in proven reserves as of 2002 will last for around 122 years (Library of Congress 21).

In 2002 also, proven gas reserves stood at 6 trillion cubic meters which are estimated to be about 4% of the world’s natural gas reserves and the fourth largest known reserves in the world (Library of Congress 24). The country produced an estimated 2940 million cubic feet daily in 1999 and, at this rate, the reserves will for another 60 years.

These large reserves of oil and gas have fueled rapid growth as revenues gotten from them are efficiently channeled into development of other sectors of the economy. Abed and Hellyer says that the country has made attempts to diversify the economy and move away from the reliance of oil as the source of the country’s revenue. This has been achieved to a certain degree since the country has become a trading and tourism hub and has attracted foreign investment but still it relies heavily on oil revenues.

Population and labor force

Before the discovery, of oil, the population of UAE was very small but in the last four decades, rapid population increase has been recorded as a result of high natural rates increase among the indigenous people and massive immigration of expatriates that now comprises about 80% of the total population according to UNDP.

The population was estimated to be around eighty six thousand people in 1961and by 1995 it had grown to over 2 million. In the period between 1995 and 2005, the population increased by 75% to reach 4,975,593. The annual growth rate is estimated to be 6.9% with the non-nationals increasing at a much faster rate than the indigenous people. In this regard, it is estimated that, by 2020, the nationals will be less than 10% of the total population (Emirates Competitiveness Council 8).

The population is comprised of mostly young people where the U.S. government report said that 75% of the country’s population, or 3.4 million, is made up of people between the age of 15 and 64 years of age, about 20% of this are below 14 years and less than 1% are above 65 years of age (UNDP 3).

This shows the potential the country hold in labor force. Another factor affecting labor in this country is female participation in labor which remains low and legislation and incentives are in place to encourage women to participate more. However, they make a minority part of the population since the population is mainly male dominated with 3 million males and 1.4 females (Emirates Competitiveness Council 12).

Another dynamic in the labor force in UAE is the structure of the market. At the top of this market is indigenous labor force which comprise of 10% of the total labor and below it is the boundless supply of foreign labor. UAE economy has benefited greatly from skilled and unskilled labor from foreign immigrants since 1970s who have contributed to the rapid economic development of the country and its sustenance up to now (Emirates Competitiveness Council 16).

Information and communication technology

UAE has proved itself as one of the most prosperous country of the world economically according to UNDP report. This has come as a result of wealth derived from oil exploitation and export mainly and other factors such as unlimited labor and political stability. However, development in other sectors of the economy such as tourism, logistics and financial services has been great owing to its world class infrastructure development one of which is information and communication technology (Emirates Competitiveness Council 5).

This is the reason the vision 2021 outlined by the government is focused on the knowledge based innovative technology, which has ICT as one of its anchors to enable effective communication, dissemination and processing of knowledge. This plays a role in scientific and technical information as well as in social and civic development in areas of education, healthcare and e-governance as the Emirates Competitiveness Council report adds.

The country has invested in a remarkable ICT sector which has made its economy very competitive in the world. This was sealed in 2000 when the Dubai Internet City was opened. This has made the business park Middle East and North Africa’s largest ICT cluster where global and regional companies are hosted.

The park has attracted ICT value chain companies from all over the world and provides other incentives such as 100% ownership of business, exemption from taxes, networking opportunities, government services and industry building programs. In recognition of the UAE ICT development, the country was named the leader in MENA region in ICT and the World Economic Forum’s Global Information Technology Report for 2009 and 2010 placed it position 23rd in the world’s most networked economies (Library of Congress 24).

Conclusion

Four decades ago, the UAE economy was a simple subsistence economy dependent on exploitation of natural resources. However, it has become among the most prosperous and advanced economies. Discovery of petroleum and natural gas in 1958 and its subsequent exploitation and exportation and the subsequent formation of the UAE federation signaled another phase in the development of the country.

Rapid development has been recorded with revenue from oil being invested in social services, infrastructural development and other sectors of the economy.

The country did not go through the Michael Porter’s stages of development as other developed nations did due to the windfall incomes and their subsequent investment in ambitious industrial, social and infrastructural development strategies. UAE today is an advanced economy that is transitioning to knowledge based innovation economy and among the most competitive in the world.

There are several factors that have fueled this speedy development. Political stability of the country, endowment with huge oil and gas reserves, presence of unlimited skilled and unskilled labor mainly from foreign workers and investment in information and communication technology are some of these factors. Ties with the western world have to some extent contributed to some of these factors.

The future of UAE’s economy looks very promising, and, at this rate, it will be the most advanced nation in the world. This will be mainly due to its major resource which is oil as other developed nations continue to have challenges in their energy sector, and as the developing world continues to demand oil more and more. This economy will also attain long-term high growth sustainability by becoming the knowledge based innovative economy.

This will be made possible by the visionary and committed leadership it currently enjoys and active involvement of different stakeholders. Owing to the high number of immigrants into the country and the decreasing number of nationals, the country is likely to start naturalizing some of the immigrants which if an effort made, the country will look like the ‘United States’ of Middle East, where diversity is the strength and is embraced.

However, in order to become a globally innovation-driven knowledge economy, UAE needs to put a lot of effort in its education system. This will provide opportunities for development of skills and creativity and encourage self employment and employment in order to participate in the economy for both men and women. Besides partnering with world class universities to develop the high quality skills it requires, the country should start reforms from primary school level through secondary schools and universities in the country.

They should consider a system of education that develops academic as well as technical skills by introducing technical universities. Investing in cutting edge research centers that partner with universities, firms and other stakeholders will support their vision of an innovative knowledge based economy. An area that the country should be laying a solid foundation is in a democratic process that ensures the participation of the citizens and their representation.

The current system, though effective this far, has no future in a country that is welcoming people from diverse cultures and who constitutes the majority of the residents and labor force. This has the potential to culminate to conflicts which threatens the economic growth the country enjoys and the future plans for the economy. The country should consider separating the monarchy or the ruling families from the political system.

Works Cited

Abed, Ibrahim and Peter Hellyer. United Arab Emirates; A New Perspective. USA: Trident Press, 2001.

Emirates Competitiveness Council. Policy in action: the UAE in the Global Knowledge Economy; Fast-Forwarding the Nation. Policy Awareness Series. Dubai: Emirates Competitiveness Council, 2011.

Library of Congress. Country Profile; United Arab Emirates. Country profile. Washington, D.C: Library of Congress, 2007.

Nourallah, Riad. Beyond the Arab disease: new perspective on politics and culture. London: Routledge, 2006.

UNDP. Human Development Report, 2009 Country Report. Geneva: UNDP, 2009.