Download References

ECON1311
Introduction to Macroeconomics
UAE Macro project
Ali Abdullah Shwaiheen
201000046
Hussain AL-shaikh
200901473
Saud Al-Arrak
200901473
Dr: SIFEDDIN AL IMAMY
December 25/2012
Section (102)and (104)
2
UAE Macro project
The GDP of the United Arabs Emirates ranks second within the CCASG and third in the
MENA region, only coming second after that of Saudi Arabia in the Middle East and third after
Iran and Saudi Arabia in the MENA region. It is also ranked as among the top thirty countries
within the planet in terms of GDP. The UAE is therefore termed as among the top developing
countries in the world (Shihab, 1996). This paper is about the macro economy of the UAE. It
tackles the macroeconomic issue of the countries and starts with a background of the country’s
economy, the country’s demography, its GDP, the exchange rate within the country, as well as
the business cycles and its effects on consumer spending, the government expenditure, and the
country’s investment patterns.
The UAE has currently be a center of interest for many global investors. UAE is a
country whose economy is getting better with time through both human efforts and economic
advantages. Its location favors its economic growth and considering the availability of natural
resources such as natural oil and gas (Forstenlechner, 2010). The advancement in technology in
the United Arabs Emirates could as well be a good reason for its advancement in economic
grounds.
Economic Background of the Country
The UAE or the United Arab Emirates happens to be a federation consisting of seven
monarchies. The monarchies are Abu Dhabi, Dubai, Ajman, Fujairah, Sharjah, Umm al-Qaiwan,
and Ras Al-Khaimah. Abu Dhabi has the most oil and gas resources accounting for hardly less
than 90 percent of these resources (Mellahi, 1983). The fact that it holds most of the country’s
natural resources and wealth make it take a significant role in the country’s political and
economic roles. It makes decisions concerning the way or the manner in which the country has to
3
UAE Macro project
be run and the direct the economic planning and implementations will lead. Each of the
monarchies has its own roles. While some play roles with similarities, others are unique by the
way they contribute to the economic growth of the United Arab Emirates. Dubai has been known
to be the center of commerce, finance, tourism, as well as transportation activities for a long
time. The monarchy is known to support free trade zones, where full opportunities are made
available for foreign ownership with any taxation. This has been one of the major diversification
aspects of the economy.
Sometimes, back, the UAE significantly relied on its natural resources for its economic
growth and stability. This has however changed and the country hardly relies on its natural
resources for economic stability (Mellahi, 1983). Evidence from its statistics indicates that the
country has been one of the fastest mounting economies on the planet. An instance is the
evidence given by the county’s ministry of finance, which provides that the country’s GDP had
risen to about $360 billion in the year 2012 from the 2011’s figure of $298 billion. This trend is
equivalent to about 20.8% increase in GDP. This is a significant increase in GDP given that the
GDP for many other countries is usually less than 20% or even less than 10% for the developing
countries (Shihab, 1996).
Demography of the UAE
Demography involves the study of the characteristics of human populations. The UAE
has a population that is characterized by many factors that include cultures, population size,
population density, population growth rate, racial aspects, as well as the age of the population.
The demography of the UAE plays a signi8ficant role on its economic position and economic
development. Every aspect of the population has its role to play as far as economic development
UAE Macro project
4
of the United Arab Emirates is concerned. The population of the UAE goes hand in hand with
the availability of human resources or workforce in various economic sectors. The country has
an essentially small population but this could be because of the county’s size (Mellahi, 1983).
Other factors make the population to be small and include the influence of education and
technology on population growth. People who get highly educated focused more on having a
small family in order to specialize more in their careers, work, and education.
The problem of low population as well happens to be caused by the earlier bad economic
trends and low income among the people of the UAE. The reason for the poor economic trends
being a major cause of low population growth is seen when low population growth turns out to
be high once oil and natural gas were discovered. This change happened in the last forty years
and lead to an increase in population growth rate among the indigenous people. There was as
well an inward migration from the same effect of natural resource availability and export.
Natural resources especially oil led to a restructure in the population such as changing the social
economic structure of many families. There are the rich, the middle class people, and the poor
group of people. Today the country is one of the leading countries in high population growth in
the world (Mellahi, 1983). The country has all age groups that could be thought of within any
other economy. The age composition of the population plays a great role in the economy. The
combination of population size and the age composition as well as the social factors of the
population determine the country’s size of its labor force.
Other than the age composition, gender is a major aspect of the UAE population whereby
campaigns for female participation in the economy persists. The participation of females in the
economic and political pillars of the country was very small in 1999 going as low as 16.3
percent. Today however, things have improved as incentives and legislation were put in place to
UAE Macro project
5
increase female participation in economic, social, and political development. As far as foreign
labor is concerned, the country relied much on this kind of labor but improvements have been
done through intensive training and skill provision to the indigenous population. At the same
time, as more and more females were encouraged to take part in the country’s development
projects, the reliance on foreign labor was as well being reduced. The indigenous is still low at
about 10 percent of the entire work force in UAE. The UAE is a country that is free of racial
discrimination as evident by its ability to higher more foreign workers than the indigenous
workers are (Christensen, 2010). The aim of the government in this case is to ensures that there
is quality and high skilled work force rather than relying on the indigenous labor force that has
no the required skills for the country to climb the ladder of economic development.
UAE as an economy as benefited much from foreign labor, which has participated in
various sectors including the government, social aspect, and the community sectors. A good
number of individuals are also engaged in community and personal services (Forstenlechner,
2010). Despite the existence of petroleum resources, the oil sector employs a very small
percentage of the population reaching only1.6 percent. Most of the foreign invention is due to
immigration.
In terms of the ages and gender structure of the population, young children of 14 year of
age and below make up to 20.4 percent of the population. The age of from 15 to 64 year make up
the working group and make up 78.7 of the population. Those individuals who are above 64 year
old make up a percentage of 0.9. The male to female ratio in this group is 183:100. The male to
female ration in the age of 0-14 year is 26:25 while the age group, 15-64 has a ratio of male to
female of 27:10. This means that in all categories, females are lower in number (Forstenlechner,
2010).
6
UAE Macro project
The GDP
GDP or Gross Domestic Product refers to the total amount of out that a country produces
every year within a predefined financial period. The GDP estimates are every increasing in the
UAE. In the year 2011, the GDP was found to have increased by about 4.1 percent. This trend is
expected to reach 4.5 percent by the end of the current financial year. Projections are usually
made in line with the country’s central bank. A good analysis of the GDP can be done based on
each of the seven monarchies. Every monarchy in the UAE has its own economic trends and
productivity. This makes the projection unique in every monarchy.
The projections for the GDP in the UAE are highest in Abu Dhabi. This monarchy is
estimated to have a GDP growth of at least 5.7 percent by the year 2013. This rate is estimated to
remain as an average for the period between 2013 and 2016. Currently, the region has a GDP
growth rate of 3.9 percent from oil resources only. A combination of this and the non-oil
resources brings the GDP to more than 5% on average (Forstenlechner, 2010). It is also argued
that in the year 2011, the GDP growth rate for the same region was 6.8, implying that an average
of 5.7 Percent is feasible. In 2007, the region alone had a GDP growth from Dh567.8 billion to
Dh606.6 billion for 2011. This growth marked the argued 6.8 percentage GDP growth. Abu
Dhabi is the leading monarchy in the UAE as far as economic, political, and social development
is concerned.
On average, the country’s real economy is estimated to grow by 3.5 percent given that
currently the growth stands at 3.1percent. This happen while Dubai falls second after Abu Dhabi
by having an average real economic growth rate of 4 percent. The growth in GDP is associated
with estimated increase in oil prices (Christensen, 2010). The 3.1 percent is a drop from the
7
UAE Macro project
2011’s percentage figure of 3.2. Real economic growth is the rate of GDP growth with respect to
the prevailing price level of goods and services. It is usually lower than the GDP, a reason why
GDP estimate for the country stands as 3.7 percent against 3.5 percent in real economic growth.
Al Suwaidi like Dubai is predicted to have a GDP growth rate of 4 percent, Sharjah GDP growth
rate to grow by 1.1 percent, and the rest to depict a growth rate lower than 3.5 percent.
Unemployment Rate
Unemployment rate is the percentage rate of the people who are actively look for jobs
with the necessary qualification but they cannot get any employment. The UAE has a significant
level of unemployment but the trend keeps on changing from one year to another. The country
has a system of unemployment that could be partly caused by the non-reflection of the output
structure. There is a lot of underutilized resources and opportunities such as in the oil sector that
employs less than 2 percent of the work force (Kerr, 2009). The oil industry makes use of more
capital than turning to labor intensity programs that would create employment opportunities for
more people. However, the unemployment rate is currently about 0.5 percent as opposed to what
could be implied by employing more capital intensity programs. This small unemployment rate
can be faded out through increasing the labor intensity in the oil sector.
Exchange Rate
The UAE has revenue sources from petroleum as well as from natural gases significant to
its economy despite the fact that it no longer relies on such natural resources. These resources are
manly exported to provide the country with a significant level of foreign exchange (Kerr, 2009).
The export sector has been playing a significant role on its current economic position. Abu Dhabi
is one of the major locations in the country that benefits much from the export sector of the
8
UAE Macro project
country. The region and other regions within the country has recently been experiencing
significant construction booms, expanding manufacturing bases, as well as emerging service
sector. The combination of all the three or more sectors among other sectors of the economy
assists in diversification of the country’s economy for better exchange rates.
The country’s exchange rate is highly affected by the foreign sector. It has a stable
exchange rate due to its high petroleum exports against its lower imports. Lower imports by
UAE than its exports always lead to accumulation of more foreign currency that in turn
strengthens the local currency.
Business Cycle
Business cycles are characterized by economic changes that could be a boom, a
depression, or economic recession. The UAE economy usually experience all these cycles just
like any other country of the world (Christensen, 2010). During the economic boom period, the
economy grows steadily favoring all aspects of the county’s development. The business cycle is
affected by the global economic trends through exports and imports in the foreign sector of the
economy. Once other countries trading with the UAE such as the US have poor economic trends,
they may reduce their importation of oil for the UAE and this could lead to declined oil prices.
The revenue obtained from the foreign sector would decline and further affect the development
and employment structures of the UAE economy.
The recession period is associated with creation of more job opportunities and increasing
economic production and developments. This gives way to the boom period when the economy
is almost at full employment level (Christensen, 2010). The fact that current the UAE has a less
than 1 percent as unemployment rate can be termed as an economic boom for the country.
9
UAE Macro project
Consumer Spending Patterns
Currently, the UAE has an insignificant level of unemployment. The power of consumer
is derived from his or her ability to spend. This spending ability is obtained from constant
sources of income that is enough to achieve the consumer’s desires and utility. The utility level
of a consumer is usually based on his or budget constraint. At the same time, the consumer
achieves his or her maximum utility from consuming alongside the highest utility level that is
just tangent to his or her budget constraint/ line (Mellahi, 1983).
If the consumer’s income is enough to reach the highest utility level possible, he or she
can buy as much good and services as possible. The UAE has almost all its people employed
with the unemployed being less than 1 percent of the potential work force. This means that
consumers are able to purchase as many goods and services as possible and thereby creating a
local market for the countries local industries.
Investment patterns
Like the consumer buying behavior or power, the thought to save or invest comes after a
consumer has had enough of his or income. Investing means that there is excess income by the
person who indents to save (Forstenlechner, 2010). There are large banks in the UAE that
encourage saving by offering attractive rates. The country is economically oriented since it
encourages the establishment of the private sector. In order to encourage saving, the returns on
savings are encouraged by offering high interests on saving. The central bank of UAE on the
other hand encourages borrowing through low interest rates on loans and other similar products.
Government expenditures
10
UAE Macro project
The UAE government is usually high and this is caused by the high GDP of the country.
Government expenditure is usually adjusted to accommodate the revenue obtained by the
country within a given economic period. The UAE national budget is constructed based on the
previous trend. The projections in the GDP size and its growth rate also help in developing a
budget so that the budget is designed before allocating any funds to the economy. Government
expenditure in the UAE is characterized by construction activities, community work funding,
project funding, paying civil servants, and settling the country’s debts (Forstenlechner, 2010).
The county also spends by purchasing bonds and securities.
Net Exports
The UAE is ranked seventh in terms of natural reserves for crude oil and natural gases. The
country is one the leading countries in the production and exportation of crude oil, natural gases,
and petroleum products. These resources account for over 90% of the government’s sources of
revenue. Since this is the case, the net exports in the United Arab Emirates yield more than what
is spend on imports. There are other exports other than crude oil and natural gases as evident
from the decreased reliance of such resources by the government for its revenue (Kerr, 2009).
UAE is great country that benefits more in exports and the foreign sector that its local production
projects or sectors.
Conclusion and Suggestion on UAE for improved Economic growth
Given that the private sector exist and is broad in scope, people should avoid relying on
the public sector for employment as the only option. The government offers subsidies to its
citizens using funds that could be used in f enhancing development projects within the country. It
UAE Macro project
11
also seems that the government does not tax its citizens adequately nor does it tax the foreign
investors accordingly.
If it has to generate more revenue for better economic planning, it should avoid relying
only on revenue from hydrocarbons. The effect of this natural resources reliance is seen when it
was once heavily hit by low prices of such oil and gas products. The price fall happened between
the years of 2008 and 2009. During the same period, there was the collapsing of the real estate
bubble, as well as significant crises in the global banking, which could be minimized through
economic diversification. It is the only way to avoid economic crisis within the United Arab
Emirates. The oil sector is capital intensified thus resulting to a certain unemployment rate. High
unemployment rate depresses the economy by causing low saving, low borrowing, and
consequently low investment rate. The UAE government should employ more people in the oil
sector to create employment switch to more labor intensity and adjusting from the capital
intensity structure.
12
UAE Macro project
References
Christensen, S. (2010). Frommer's Dubai. John Wiley & Sons ISBN 978-0470711781.
Forstenlechner, I. (2010). Workforce localization in emerging Gulf economies: the need to finetune
HRM.". Personnel Review Vol.39 No.1 , 135-152.
Kerr, S. a. (2009). UAE to safeguard jobs of nationals. London: Financial Times.
Mellahi, K. (1983). The effect of regulations on HRM: private sector firms in UAE.
International Journal of Human Resource Management, Vol.18 No.1 , 85-99.
Shihab, M. (1996). Human Development in the United Arab Emirates. Economic Horizons,
vol.17, No.66 , 9–31.