Download Analytical report on economic and social dimensions in the united

UNITED ARAB EMIRATES
NATIONAL BUREAU OF STATISTICS
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ANALYTICAL REPORT
on
ECONOMIC AND SOCIAL DIMENSIONS
in the
UNITED ARAB EMIRATES
2009
1
uaestatistics.gov.ae
UNITED ARAB EMIRATES
National Bureau of Statistics
ANALYTICAL REPORT
on
ECONOMIC AND SOCIAL DIMENSIONS
in the
UNITED ARAB EMIRATES
2009
April 2010
3
Preface
The United Arab Emirates has experienced considerable improvements at both the economic and social levels since its establishment. It has
also been regarded as an ideal model for countries to follow and a source of
great pride and inspiration. Apart from the many achievements in the past
few years, the UAE was also able to create a highly business enabling environment to attract foreign investment, and is characterized by political and
security stability and modern legislations which are in-line with advances
in its economy and what are known as the new economic sectors. But the
crisis that hit the global economy in mid 2008 had adverse effects on the
economy of the UAE which follows an open and free trade policy and which
was subsequently hit by the aftershocks of the global crisis in 2009.
This first report published by the National Bureau of Statistics illustrates the most important events in 2009 at both the economic and social
levels starting from a global and then a regional perspective, and moving
into macroeconomic indicators, contribution of its various sectors to GDP,
its diversification strategy, international trade, and the special case of Dubai.
It also talks about the UAE population, its labor force, health and educational services, social welfare and the quality of life, inflation expectations,
the future outlook on oil prices, forecasts of the rate of growth of real GDP,
and various economic policies prescribed at the Federal level such as stabilization policies (both monetary and fiscal policies), industrial policies, labor
policies, and trade policies with the rest of the world.
This first issue of the report was prepared in April 2010 as one indicator of the many achievements of the National Bureau of Statistics which was
established in 2009. We hope that we have achieved one of the most important objectives of the report as a vital source of information and analysis for
various academic and private sector entities in the UAE and internationally
which contributes towards the sustainable development of the economy.
Eng. Sultan bin Saeed Al Mansouri
Chairman of the Board of Directors.
3
Table of Contents
pages
Preface...................................................................................................
Table of Contents...............................................................................
List of Tables........................................................................................
List of Figures.....................................................................................
Working Team....................................................................................
Executive Summary...........................................................................
1. GLOBAL AND REGIONAL ECONOMIC DEVELOPMENTS...
1.1 Global economic developments..........................................................
1.2 Regional developments.............................................................................
2. ECONOMIC DEVELOPMENTS IN THE UAE............................
2.1 Macroeconomic indicators....................................................................
2.2 Sectoral contribution to GDP................................................................
2.3 Diversification strategy.............................................................................
2.4 Foreign trade and foreign assistance....................................
2.5 The special case of Dubai........................................................................
3. SOCIAL DEVELOPMENTS IN THE UAE...................................
3.1 Population and labor market................................................................
3.1.1 Population....................................................................................................
3.1.2 Labor force...................................................................................................
3.2 Healthcare........................................................................................................
3.3 Education.........................................................................................................
3.4 Quality-of-life and social welfare........................................................
3.4.1 Quality of life..............................................................................................
3.4.2 Social welfare..............................................................................................
4. FUTURE OUTLOOK......................................................................
4.1 Price of oil.........................................................................................................
4.2 Real GDP growth forecasts.....................................................................
4.3 Inflation expectations................................................................................
5. POLICY ISSUES AND RECOMMENDATIONS..........................
5.1 Stabilization policy......................................................................................
5.2 Industrial policy............................................................................................
5.3 Labor policy....................................................................................................
5.4 Trade policy.....................................................................................................
REFERENCES........................................................................................
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List of Tables
pages
Table 2.10 Selected Macroeconomic Indicators 2005-2009
($ billion)..................................................................................................................
17
Table 2.20 Sectoral contribution to GDP (%) 2005 - 2009..............
22
Table 2.40 Aggregate indicators of non-oil trade 2008, 2009
(AED billion)............................................................................................................
25
Table 2.41 Value of imports from major sources 2009
(AED billion)............................................................................................................
26
Table 2.42 Value (AED billion) and % of non-oil exports by
destination 2009....................................................................................................
27
Table 2.43 Value of non-oil re-exports by destination 2009
(AED billion)............................................................................................................
29
Table 3.10 Distribution of UAE population by age-group 2008,
2009..............................................................................................................................
33
Table 3.20 Healthcare indicators 2007, 2008........................................
38
Table 3.30 Number of schools, students, and teachers in
2007/2008 and 2008/2009...............................................................................
40
Table 3.40 Public social organizations for the 2004-2009 period
43
Table 3.41 Number of cases and value of social assistance 20052009...............................................................................................................................
43
5
List of Figures
pages
Figure 2.20 Sectoral contribution to GDP 2005 - 2009..................
22
Figure 2.41 Percentage of imports from major sources 2009......
26
Figure 2.42 Value of non-oil exports to major destinations
2009 (AED billion)...............................................................................................
28
Figure 2.43 Value of re-exports by destination 2009.......................
30
Figure 4.10 Total final world consumption by fuel 2007 (%).......
46
Figure 4.11 Crude oil production by region 2008 (%).....................
47
Figure 4.20 Real GDP growth forecasts by various entities for
2010..............................................................................................................................
48
6
Working Team
General supervisor:
His Excellency Rashed Al Suwaidi Director General
Authors:
Dr. Ohan Balian
Economic Analysis Expert
Dr. Ahmad Qassem Bani Malhem Economic Expert
Review and inspection committee:
Abdelqader Al Musawi
Ma’moun Kassab
Dr. Ali Al Shehi
Rashed Al Nuaimi
Sufyan Awad
Vidya Prakash
Zeinaldin Salmah
Dr. Ali Tafour
Abdelshafi Al Ashmawi
Abdalafu Jomaa
Mohammad Al Bahi
Abdullah Al Abdullah
Suha Abu Diyah
Design team:
Nesreen Tahoun
Osama Ababneh
Note: The analytical opinions on the databases and indicators in this report
are the opinions of the authors.
7
Executive Summary
The global financial crisis that erupted in 2008 had severe repercussions on the world rate of growth with disproportionate effects on the economies of industrialized countries. The global rate of growth of GDP fell from
5.2% in 2007 to 3.2% in 2008 and to -2.2% in 2009 associated with dramatic
falls in industrial production and global trade. Governments responded to
the crisis by using expansionary fiscal and monetary policies to stimulate
aggregate demand, with some success, as OECD countries have begun to
show signs of economic recovery. The International Monetary Fund has estimated that world output is expected to increase by 4% and will be primarily
driven by internal domestic demand. GCC economies were also adversely
affected by the fall in the price of oil in 2009 although the price of oil has
shown strong signs of an upward trend in recent months.
Global and regional economic developments in 2009 have had profound effects on the UAE economy due to its open nature and as an important supplier of oil to the rest of the world. In terms of macroeconomic performance, consumption expenditure in the UAE has traditionally been the
largest component of GDP at 47% followed by investment at 27% reflecting
the highly conducive investment environment. Government purchases in
2009 were 19% of total aggregate demand which demonstrates the deep involvement of the government in the economy, and net exports were down
by 45% reflecting the slowdown in global trade. The slowdown in economic
activity in the UAE in 2009 was also reflected in deflationary pressures as
evidenced by the fall in the rate of inflation from 12.3% in 2008 to 1.56% in
2009.
Despite the slowdown in economic activity in 2009, the UAE government aggressively pursued its diversification strategy into non-oil high-value manufacturing and service sectors. Non-oil foreign trade, on the other
hand, fell by 16.3% in 2009 reflecting the slowdown in global trade as both
non-oil merchandise re-exports and imports fell by 9.3% and 20.9% respectively. The UAE has also provided both material and financial support at the
international level through its foreign assistance programs such as devel-
8
opmental and humanitarian aid, and charitable contributions to more than
140 countries worldwide through 25 foreign assistance organizations. The
value of this foreign assistance reached AED 132.6 billion (or $36.1 billion)
for the 1971 – 2009 period of which over AED 32 billion (or $8.7 billion) was
for the 2000 -2008 period alone. The Middle East region received the highest share of aid at 46.7% followed by the North Africa region at 22.3%.
The slowdown in the Dubai property market during the same period was caused by a phenomenon known as Dutch Disease – a situation
in which capital outflows caused a dramatic fall in the profitability of the
previously booming real estate sector and thus causing resources (labor and
capital) to move out of this sector as evidenced by the slowdown in the
Dubai real estate market. Nevertheless, the case of Dubai can be considered
as a special case in the sense that large investments have been made in its
infrastructure such as the Dubai Metro, Burj Khalifa, the Al Maktoum International Airport, new roads and bridges, and much more which will have
positive effects on economic growth in the long-run.
Despite the global financial crisis, the population of the UAE was estimated at 8.2 million in 2009 according to preliminary administrative record estimates. The results of the 2009 Labor Force Survey conducted by
the National Bureau of Statistics showed that 24.8% of the population was
below the age of 15 and that workers constituted 53% of the total population. The percentage who was not willing to work was about 19.9%, and
the rate of unemployment was 4.2%. The UAE was again one of the most
advanced countries in terms of its healthcare services. It has pursued a strategy of increasing longevity, strived to eradicate all types of diseases, and has
established an effective mechanism of an early detection system of chronic
diseases. The Ministry of Health also continues to develop primary healthcare services through the establishment of an extended network of worldclass clinics all over the country. The UAE also continued to provide equal
educational opportunities to all its residents, nationals and expatriates alike,
and continues to tackle unique challenges in its education system given its
highly diverse population. All of these social achievements have enabled
the UAE to be ranked as the No.1 country with the best Quality of Life in
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the Middle East and North Africa region as ranked by the highly prestigious
Economist Intelligence Unit (EIU) Survey in 2009, and No.15 in the world
out of 160 countries surveyed.
The future outlook of the UAE economy depends on the future price
of oil and the success of its diversification strategy into non-oil high-value
manufacturing and service sectors. The current price of oil is in the $75-$85
price range with strong upward pressures caused by the recovery in the US
and global economy. Real GDP growth forecasts for the UAE economy have
ranged from a high of 3.2% to a low of 0.6% with an average estimated rate
of growth of 2.25% as reported by the IMF, the UAE Central Bank, and by
various local and international banks and financial institutions. As for the
rate of inflation in 2009, it eased to 1.56% with expectations that it will fall
further to 1.1% at the end of 2010, and will gradually increase to 2-2.5% in
2011 as the global economic recovery gains strength.
The UAE government in 2009 also intervened through aggressive expansionary monetary and fiscal policies to cushion the adverse effects of
the global slowdown by adopting counter-cyclical stabilization policies to
generate aggregate demand and ensure that the banking system has enough
liquidity to finance the economic recovery. The UAE Central Bank thus created an AED 70 billion (about $19 billion) facility for banks in the UAE and
began to monitor bank liquidity more closely. Bank deposits reached AED
950 billion ($259 billion) at the end of the first quarter 2009 and revenues
increased by 18% from September 2008 to March 2009. The UAE government also increased its expenditure using expansionary fiscal policies to
make-up for the shortfall in aggregate demand. As a result, the consolidated
expenditure of the UAE government increased from AED 254 billion ($69.2
billion) in 2008 to AED 289 billion ($78.8 billion) in 2009, an increase of 14%.
Both of these expansionary monetary and fiscal policies were successful
in stimulating aggregate demand by increasing consumption, investment,
and government expenditure as drivers of economic growth. In addition to
these policies to stabilize the economy in the short-run, the government
continued to adopt various industrial policies for sustainable development
in the long-run for a more diversified economy in the future.
10
Perhaps the most significant labor policy implemented in 2009 was
the Wage Protection System (WPS) which was considered as a breakthrough
in monitoring payments to unskilled construction workers. Inspections increased from 45,000 in 2008 to 75,000 in 2009, and 677 companies were
fined for non-compliance of which 436 were first-time offenders, and penalties for 241 repeat offenders were doubled. The UAE government in 2009
also continued to develop trade agreements with its trading partners especially within a more dynamic and globalized economy which requires much
more aggressive policies to enable it to compete in a more hostile global
trading environment in the face of protectionist policies by the rest of the
world. The free trade policies pursued by the UAE in 2009 will undoubtedly
increase domestic productivity and equip its new and budding high-value
industries to better compete internationally.
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1. GLOBAL AND REGIONAL ECONOMIC DEVELOPMENTS
1.1 Global economic developments
The global financial crisis that began in late 2007 and extended into
the 2008-2009 period was perhaps the most severe crisis since the Great
Depression of 1929-1933. Global GDP fell by at least 2.2% in 2009 associated
with dramatic falls in industrial production and global trade1 . The primary
cause of the crisis was the simultaneous bursting of the real estate and stock
market bubbles which were fuelled by low interest rates and easy credit.
The crisis was expectedly accompanied by high unemployment rates which
will take well into 2011 for a full recovery into its pre-crisis levels due to
permanent structural changes as certain industries have been completely
relocated. The most visible effect of the crisis has been a global shortage of
liquidity and a vertiginous loss in the appetite for risk. The crisis could be
characterized as a ‘liquidity trap’ – a situation in which the rate of interest is
so low that neither financial intermediaries nor the public desire to engage
actively in lending and borrowing activities.
Governments have responded to the crisis by adopting expansionary
fiscal and monetary policies to stimulate aggregate demand and offset the
large declines in global consumer demand. Moreover, large countries, notably in Asia, have relied on their large domestic markets to maintain their
previous high rates of growth and consequently were not affected as severely as high-income countries in North America and Europe. Governments
have also injected large amounts of liquidity into the global financial system
and enacted new regulations to better regulate and supervise the activities
of commercial and investment banks2 . Although these policies have had
considerable success in reversing the declining trend in global GDP in re1 World Bank (2010).
2 In the aftermath of the Great Depression in 1933, Congress passed the Glass-Steagall Act
which regulated the activities of commercial banks to prevent them from engaging in risky
activities. This made banks ‘boring’ in the sense that they were primarily engaged in granting
consumer and corporate loans based on strict collateral requirements. In 1999, Congress
repealed this Act and the demarcation line between commercial and investment banks became blurred. Consequently, commercial banks began to enter into activities by issuing various debt instruments which were beyond their expertise and core competencies.
12
cent months, there is a looming fear that the recent upward trend in global
stock and real estate markets might be a sign of renewed bubbles fuelled by
government stimulus packages instead of economic activity being fuelled
by genuine consumer demand3 .
In its latest World Economic Outlook Update4 in January 2010, the
International Monetary Fund (IMF) estimated that world output is expected to increase by 4% which represents an upward revision of 0.75% from
its October 2009 Word Economic Outlook estimate5 . But this recovery is
expected to remain weak for high-income countries and will be primarily
driven by internal domestic demand in the rest of the world. Moreover, high
global unemployment rates, high government debt, and weak household
balance sheets will present considerable challenges. Despite high inventories, commodity prices are also expected to increase during the early phase
of the recovery. This is primarily due to the relatively strong recovery in Asia
although it is expected to be modest by previous standards given the substantial excess capacity of oil producing countries. Accordingly, the IMF’s
baseline oil price projection for the 2010-2011 period is $ 82 per barrel excluding any severe supply shocks to the global oil market.
1.2 Regional developments
Economies in the Arab world are generally considered as ‘open’ economies in which global economic developments have a direct effect, especially
in the economies of the Gulf Cooperation Council (GCC) countries. As for
regional growth rates, which include most Arab countries in addition to the
GCC countries, economic performance was at a relatively high level despite
the decline in the rate of growth from 6.3% in 2007 to 5.9% in 2008 and 3.2 %
in 20096 . Regional authorities exerted considerable effort in cushioning the
effects of the global financial crisis by pumping liquidity into the financial
3 Consumer demand in high-income countries can be as high as 70% of total demand compared to the share of investment demand or foreign trade.
4 See IMF (January 2010).
5 See IMF (October 2009).
6 See General Secretariat of the Arab League (2009), United Arab Economic Report, pp 13-18.
13
system to support the loan making capabilities of financial intermediaries
and re-establishing confidence. In addition, these governments formulated
economic plans and policies to increase government investment and support economic activities that were adversely affected by the crisis.
GCC economies were also adversely affected by the fall in the world
price of oil which fell from an average of $96 per barrel in 2008 to an average price of $60 in 2009. OPEC countries, specifically GCC countries, played
an important role in preventing further falls in the price of oil by cutting oil
production which caused a 30% decline in the nominal GDP of GCC economies in 2009 compared to 2008, or from $1.2 trillion in 2008 to $835 billion
in 2009. Consequently, GCC countries experienced a consolidated budget
deficit of $5 billion in 2009 compared to a surplus of $225 billion in 2008,
and inflation rates during the same period fell sharply to an average of 1.5%
in the UAE and 6% in Qatar in 2009 from 12.3% and 13.1% respectively. Arab
countries are expected to experience a rate of growth of 5.2% in 2010 which
should considerably increase transfers and remittances to countries such
as Jordan, Syria, Lebanon, Morocco, Sudan, and Egypt with positive effects
on the labor market. This higher rate of growth will directly and indirectly
affect economic activity and trade between the GCC and other economies
in the region. GCC countries were not affected as severely as other countries
due to their huge oil revenues and which will witness tangible and strong
growth in 2010 based on their large oil revenues, relatively small size, small
populations, increases in income, and the completion of large and highquality infrastructure projects. Moreover, GCC countries enjoy political and
security stability and are considered as open economies with very low tax
rates compared to tax rates in the rest of the world.
14
2. ECONOMIC DEVELOPMENTS IN THE UAE
2.1 Macroeconomic indicators
Global and regional economic developments during 2009 have had
profound effects on the UAE economy due to its ‘open’ nature, and as an
important supplier of oil to the rest of the world. Macroeconomic indicators in the UAE are therefore closely influenced by changes in the price of oil
and by changes in aggregate demand in the rest of the world. Both of these
changes are clearly reflected in changes in rates of growth of GDP. Specifically, the fall in the price of oil in 2009 from its peak in mid 2008 reduced
hydrocarbon revenues by 32% to $69.9 billion which led to the decline in
UAE’s GDP and was associated with the fall in real estate prices and the slowdown in foreign trade. Nevertheless, according to provisional data compiled
by the National Bureau of Statistics (Table 2.10), real GDP was estimated to
have increased by 1.3% in 2009.
For a more comprehensive description of macroeconomic performance in 2009, it is useful to look more closely at the different components
of GDP, namely, consumption expenditure, private investment, government
purchases, and net exports. Consumption expenditure7 is typically the largest component of GDP representing between 50%-80% of total expenditure
in demand-driven economies. As shown in Table 2.10, consumption expenditure in the UAE in 2009 was about 47% of total expenditure reflecting the
strong influence of consumer demand as an important source of economic
growth in the UAE. This macroeconomic indicator has increased by as much
as 72% from its 2005 level reflecting the transformation of the country from
an oil driven economy to a consumer driven one. The second component
of aggregate demand is private investment8 which has also increased by a
very large amount over its level in 2005, approximately by 360%, and constitutes about 27% of total final demand in the UAE reflecting the highly
7 Consumption expenditure is defined as the expenditure of households on durable and nondurable goods, and expenditure on various types of services.
8 Private investment is the sum of business investment on plant and equipment, residential
investment (new housing) by households, and inventory investment.
15
conducive investment environment. Government purchases9 constitute
about 19% of total final demand which is on par with percentages in other
high-income countries. The importance of this component of aggregate demand has been increasing in recent years due to the deeper involvement of
the government in the economy in the form of expansionary fiscal policies
in short-run stabilization policies to offset reductions in consumer expenditure and investment as a source of aggregate demand to boost GDP. The
final component of aggregate demand in the UAE economy is net exports10
which was at a relatively small trade surplus of $16 billion, down by 45%
over its 2008 level. This was primarily due to the large decline in the price of
oil from about $145 in mid 2008 to about $70 in 200911 .
9 Government purchases include all non-defense expenditures by the Federal government
including expenditure on infrastructure.
10 Net exports are defined as the difference between exports and imports (also known as the
trade balance). If this difference is positive, the country is in a trade surplus. If it is negative,
then it is in a trade deficit.
11Note that the income-expenditure equation, GDP = C + I + G + (X-M) holds, where C is
consumption, I investment, G government purchases, and X and M are exports and imports
respectively. Using the values in Table 2.10, we calculate that 249 = 118.1 + 66.8 + 48 + (209.6
– 193.5) = 249.
16
Table 2.10 Selected Macroeconomic Indicators 2005-2009 ($ billion)
2005 2006 2007 2008 2009*
GDP and prices
Nominal GDP (billion AED)
506.8
643.5
758.0
934.3
914.3
Nominal GDP
138.0
175.2
206.4
254.4
249.0
Real GDP
107.3
121.2
128.7
138.3
140.1
Real GDP (% change)
13.1
13.0
6.2
7.4
1.3
Real Hydrocarbon GDP
34.4
39.2
42.3
46.4
40.5
Real non-hydrocarbon GDP
72.9
82.0
86.4
91.9
99.6
CPI inflation (average % change)
6.2
9.3
11.1
12.3
1.56
68.7
85.2
95.4
115.8
118.1
14.5
19.9
52.2
63.3
66.8
Private fixed capital formation
12.9
18.1
50.2
59.2
62.7
Change in stocks
1.6
1.8
2.0
4.1
4.1
26.7
307
38.2
46.2
48.0
Government consumption expenditure 14.0
15.8
20.7
23.6
24.0
Government fixed capital formation
12.7
14.9
17.5
22.6
24.0
Gross savings
42.6
59.3
72.8
92.4
82.9
Savings-investment balance
28.1
39.4
20.6
29.1
16.1
Exports and re-exports of goods & services 122.1
152.4
186.7
248.8
209.6
Consumption expenditure
Private consumption expenditure
Investment
Private investment
Government purchases
Total Government Purchases
Gross savings
External sector
Hydrocarbon
55.1
70.1
73.8
102.1
69.9
Non-hydrocarbon
67.0
82.3
112.9
146.7
139.7
Imports of goods & services
93.9
112.9
166.1
219.7
193.5
Net exports (Exports – Imports)
28.2
39.5
20.6
29.1
16.1
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
* Provisional data.
17
Net exports are also closely related to the savings and investment
balance in the sense that the flow of goods and services and the flow of
capital are basically two sides of the same coin. In other words, the implicit
relationship between the domestic economy and the external sector is
represented by the equality between the difference between savings and
investment, and net exports. If savings are greater than investment, then
net exports are positive by the same amount. If investment is greater than
savings, then net exports are negative by the same amount. In the former
case, the country will experience a net capital outflow to enable foreigners to
buy more of UAE products, and in the latter case the country will experience
a capital inflow to finance the excess of investment over savings. We note
from Table 2.10 that in 2009 this difference between savings and investment
was $16.1 billion which is exactly matched by net exports of $16.1 billion
(the difference between exports and imports). This net capital outflow
of $16.1 billion is evidenced by the outflow of capital in the wake of the
economic slowdown, especially in the real estate sector in Dubai, causing
a fall in wages and moving resources out of non-tradable service sectors
as reflected in the UAE in 2009, and the associated decline in the rate of
inflation from 12.3% in 2008 to 1.56% in 2009.
For this reason, another important macroeconomic indicator is the
Consumer Price Index (CPI) which is used for making cost of living allowances
especially in a highly flexible labor market such as in the UAE12 . Most of
the standard causes of increases in the CPI (inflation) such as demand-pull
inflation, cost-push inflation, and imported inflation are clearly absent during
recessionary periods primarily because there is slack or excess capacity in the
economy caused by a ‘deflationary gap’ – a situation in which the economy
is operating below its potential (below full-employment). This situation in
the global economy has rendered the ‘threat’ of inflation less plausible in
which consumer and investment demand are subdued both domestically
and globally. But oil exporting countries have traditionally experienced
high rates of inflation in periods of high oil prices. This phenomenon –
known as Dutch Disease – increases the GDP contribution of non-tradable
12 Note that the CPI by itself does not measure the rate of inflation. Inflation is measured by
changes in the CPI from one period to another.
18
service sectors such as real estate, banking, and tourism at the expense of
traditional tradable sectors such as manufacturing. This phenomenon was
clearly visible in the 2006-2008 period in the UAE during which large capital
inflows, caused by abnormally high oil prices, increased the cost of living,
especially in Dubai where the rate of inflation hovered around 10%. The
global financial crisis and the relatively low price of oil have placed downward
pressure on the CPI with estimates of inflation ranging from 1 to 2%13 . Thus,
it is very useful to look at the sectoral contribution of GDP to determine the
changing influence of various sectors on aggregate economic activity.
13 These estimates were calculated by the Price Indices Department at the National Bureau
of Statistics.
19
2.2 Sectoral contribution to GDP
The oil sector in 2009 contributed about 29% to GDP with the
rest accounted for by the non-oil sector14 . As outlined in the economic
development plans of both Abu Dhabi and Dubai15, the long-term economic
development strategy of the UAE is to diversify the economy away from oil
into non-oil service sectors such as trade, logistics, tourism, and finance,
and high-value manufacturing, to name just a few. As shown in Table
2.20, the GDP contribution of the non-oil sector in 2009 was 71% with the
share of manufacturing the highest at 16.2% followed by the construction
sector at 10.7% and wholesale and retail trade and repairing services at
9.0%. Although the real estate & business services sector experienced a
considerable slowdown in 2009, it still contributed a relatively large share
of 8.2% to GDP with some large infrastructure projects in Abu Dhabi
offsetting the decline in Dubai. The role of the government in the provision
of various types of government services has traditionally been high in the
UAE at 8% which reflects the heavy involvement of the public sector in the
provision of health and education services to both its nationals and the
expatriate population. Although the financial sector has been identified as
an important driver of growth in the diversification strategies of both Dubai
and Abu Dhabi, financial corporations contributed about 5.8% to GDP in
2009 with considerable improvements in their sophistication, although
their lending abilities were considerably constrained by the global financial
crisis and the consequent shortages in liquidity especially their ability and
willingness to give out loans to small and medium enterprises, an important
contributing factor in the general slowdown in economic activity in 2009
compared to previous years. Tourism was also adversely affected by the
global financial crisis although this is not evident from the data in Table 2.20
since the tourism sector is considered as a ‘satellite’ account in the System
of National Accounts (SNA)16 .
14 The oil sector includes oil and natural gas and is sometimes referred to as the ‘hydrocarbon’ sector.
15 For the economic development plan of Dubai, see Dubai Strategic Plan (2015); and for the
Abu Dhabi plan, see Abu Dhabi Economic Vision (2030).
16 See European Commission et al (2009), System of National Accounts (SNA 2008), pp 531534.
20
The country has also made important advances in new sectors with
high expected rates of growth in the medium and long-terms. Both Dubai and
Abu Dhabi have the required infrastructure to propel a successful aerospace
sector by developing capabilities in the manufacturing and maintenance of
civil and military aerospace equipment and parts, defense electronics, and
other related equipment. In promoting a pharmaceutical, biotech, and life
sciences sector, the UAE has also started to develop capabilities in key areas
such as Intellectual Property Rights (IPRs), international trade agreements,
Foreign Direct Investment (FDI) attraction mechanisms, and world class
marketing and distribution capabilities. The country’s geographical
position in the Middle East and its advanced telecommunications network
will also enable it to compete effectively in this high growth sector. The
telecommunications sector is a high-tech fast-paced capital-intensive
(and expensive) business that requires constant investments in new and
upgraded infrastructure, an undertaking that can only be carried out by
wealthy countries such as the UAE to drive its diversification strategy into
these new sectors17 .
17 For a comprehensive description of these new sectors for the case of Abu Dhabi, see Abu
Dhabi Economic Vision (2030), pp 113 – 120.
21
Table 2.20 Sectoral contribution to GDP (%) 2005 - 2009
Sector
Agriculture, livestock and fishing
Mining and quarrying
Crude oil and natural gas
Quarrying
Manufacturing
Electricity, gas, and water
Construction
Wholesale and retail trade, and
repairing services
Restaurants and hotels
Transport, storage, and
communications
Real estate and business services
Social and personal services
Financial corporations
Government services
Domestic services of households
Less: Imputed bank services
2005
2006
2007
2008
2009
2.2
32.4
32.1
0.3
14.5
1.8
9
1.9
32.6
32.3
0.3
15.9
1.6
9.7
1.7
33.2
32.9
0.3
15.4
1.5
9.6
1.6
33.8
33.5
0.3
15.1
1.5
9.7
1.7
29.2
28.9
0.3
16.2
1.6
10.7
9.2
8.8
8.8
8.6
9.0
1.8
1.7
1.7
1.6
1.8
6.8
6.7
6.7
6.5
7.1
7.7
1.8
5.7
8
0.6
1.5
7.3
1.7
5.5
7.5
0.6
1.4
7.3
1.7
5.4
7.8
0.6
1.3
7.7
1.7
5.3
7.5
0.5
1.3
8.2
1.9
5.8
8.0
0.5
1.4
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
Figure 2.20 Sectoral contribution to GDP 2005 - 2009
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
22
2.3 Diversification strategy
Although the oil sector will continue to play a leading role in the
economy of the UAE, other non-oil sectors are planned to grow at an annual
average rate exceeding 7% in Abu Dhabi, and 11% in Dubai, with lower growth
rates in the other emirates18. The diversification strategy of Abu Dhabi
focuses on 12 sectors, namely, energy (oil and gas); petrochemicals; metals;
aviation, aerospace, and defense; pharmaceuticals, biotechnology, and life
sciences; tourism; healthcare equipment and services; transportation, trade,
and logistics; education; media; financial services; and telecommunication
services19. In Dubai, six ‘strategic thrusts’ were identified, namely, travel
and tourism; financial services; professional services; transport and logistics
services; trade and storage; and construction, thus maintaining the focus on
high-value sectors that boost overall economic growth.
One can deduce from this above brief description of the UAE’s
diversification strategy that ‘service’ sectors are expected to play increasingly
important roles in the foreseeable future20. The question that needs to be
asked is does this strategy work to offset or reinforce dominant market forces
especially within an increasingly globalized world? To answer this question,
we need to identify the market forces that allocate resources between
tradable (manufacturing) and non-tradable (service) sectors21. Given that
the UAE is an important supplier of oil to the global economy, capital flows
(both inflows and outflows), fuelled by changes in the world price of oil,
will affect the domestic economy. Specifically, as the global price of oil
increases, the domestic manufacturing sector will lose its competitiveness
and resources will begin to move from the tradable manufacturing sector
18 See Abu Dhabi Economic Vision 2030 and Dubai Strategic Plan 2015.
19 See page 113 in Abu Dhabi Economic Vision 2030.
20 Service sectors are also sometimes known as non-tradables in the sense that they cannot
be ‘traded’ internationally, the classic example being ‘haircuts’ which cannot be exported or
imported. Non-tradables are formally defined as goods and services that are produced domestically and are used only for domestic consumption, construction and real estate being
good examples.
21 Although the strategic thrust of the UAE is towards service sectors, support to manufacturing is not neglected especially by Abu Dhabi as demonstrated in the establishment of
capital intensive manufacturing plants for petrochemicals, pharmaceuticals, and the like.
23
to the non-tradable service sector. In other words, a diversification strategy
during periods of high oil prices (above $50) will reinforce the strategic
thrusts into the service sectors. Conversely, a diversification strategy during
periods of low oil prices (below $50) will offset the movement of resources
into service sectors22.
Another important consideration in the successful diversification
strategy of the UAE is to determine if the current level of GDP is in-line with a
level that is consistent with supporting the on-going diversification strategy.
In an important article published in the American Economic Review in
200323 , the authors provide very strong evidence to suggest that countries
diversify during most of their growth paths until they reach a certain level
of income (comparable to Ireland’s level of income) after which they begin
to specialize in specific sectors. This finding suggests that whatever it is that
drives economic growth, it cannot be the forces of comparative advantage
(specialization) as commonly understood. The secret of economic growth
seems to be to diversify over a wide range of sectors instead of specializing
in what one does best on the basis of comparative advantage. The question
is then why some countries are successful in their diversification strategies
while others are not? The reason seems to be the effectiveness of a country’s
industrial policy, both its depth and the institutional framework within
which it is conducted, which is discussed in greater detail in section 5.2 for
the case of the UAE.
22 This phenomenon is known as Dutch Disease (or de-industrialization). For a more detailed
examination of this phenomenon, see de Silva (1994).
23 See Imbs, J. and Romain Wacziarg (2003).
24
2.4 Foreign trade and foreign assistance
The total value of non-oil merchandise trade (exports and imports)
reached AED 660.4 billion in 2009 compared to AED 788.9 billion in 2008
representing a fall of 16.3%. Merchandise imports reached AED 447.4
billion in 2009 compared to AED 565.7 billion in 2008 or a decline of 20.9%.
Merchandise exports reached AED 65.3 billion in 2009 compared to AED
60.4 billion in 2008 or an increase of 8.1% compared to 2008. Merchandise
re-exports reached AED 147.7 billion in 2009 compared to AED 162.8 billion in 2008 or a fall of 9.3%. The merchandise trade balance (the difference
between exports and imports) reached AED -234.9 billion in 2009 compared
to AED -342.5 billion in 2008 representing a fall in the merchandise trade
deficit by some 31.4%. Finally, the ratio of total non-oil merchandise exports
and re-exports to total imports was 47.6% in 2009. Table 2.40 shows the
main indicators of foreign merchandise trade in the UAE for 2009.
Table 2.40 Aggregate indicators of non-oil trade 2008, 2009
(AED billion)
Description
Imports
Non-oil exports
Re-exports
2008
2009
change %
565.7
60.4
162.8
447.4
65.3
147.7
-20.9%
8.1 %
-9.3%
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
As for sources of imports, Table 2.41 and Figure 2.41 show that imports
from India grabbed first place, followed by imports from China and the US.
Imports from Germany were at fourth place at AED 30 billion, followed by
imports from Japan, the UK, Republic of Korea, Italy, France, Saudi Arabia,
and from the rest of the world with a total value of merchandise imports at
AED 447.4 billion for 2009.
25
Table 2.41 Value of imports from major sources 2009 (AED billion)
Country
Imports
%
India
61.7
13.8
China
47.8
10.7
United States
41.5
9.3
Germany
30.0
6.7
Japan
26.9
6.0
United Kingdom
18.8
4.2
Republic of Korea
16.9
3.9
Italy
17.5
3.8
France
14.0
3.1
Saudi Arabia (KSA)
12.2
2.7
Other countries
160.2
35.8
447.4
100
Total
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
Figure 2.41 Percentage of imports from major sources 2009
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
26
Non-oil merchandise exports totaled about AED 66 billion in 2009
destined to various countries most prominently to India, Switzerland and
Qatar, followed by Saudi Arabia, Iran, Oman, Pakistan, Nigeria, Iraq, and
Kuwait as shown in Table 2.42 and Figure 2.42.
Table 2.42 Value (AED billion) and percentage of non-oil merchandise
exports by destination 2009
Imports
(AED billion)
21.9
33.5
Switzerland
8.7
13.3
Qatar
4.9
7.5
Saudi Arabia
3.0
4.6
Iran
2.0
3.1
Oman
1.9
2.9
Pakistan
1.8
2.8
Nigeria
1.4
2.1
Iraq
1.1
1.7
Kuwait
1.2
1.8
Other countries
17.4
26.6
65.3
100
Country
India
Total
%
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
27
Figure 2.42 Value of non-oil exports to major destinations 2009
(AED billion)
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
28
As for re-exports, Table 2.43 and Figure 2.43 show that Iran, India, and
Iraq grabbed the highest shares followed by Saudi Arabia, Qatar, Switzerland
and other countries, reaching slightly over $40 billion in 2009.
Table 2.43 Value of non-oil merchandise re-exports by destination
2009 (AED billion)
Country
Re-exports
%
Iran
26.0
17.6
India
24.6
16.6
Iraq
14.3
9.7
Saudi Arabia
6.3
4.3
Qatar
4.9
3.3
Switzerland
4.1
2.8
Bahrain
4.0
2.7
Afghanistan
3.9
2.6
Hong Kong
3.9
2.6
Oman
3.3
2.2
Other countries
52.4
35.5
Total
147.7
100
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
29
Figure 2.43 Value of re-exports by destination 2009
Source: National Bureau of Statistics, Abu-Dhabi, United Arab Emirates.
The UAE has also provided substantial material and financial support
at the international level that reached over $ 8.7 billion (AED 32 billion)
during the 2000 – 2008 period which is considered as a very high amount
compared to the contributions of countries such as Australia at $14.7 billion,
Turkey at $ 3.3 billion, Norway at $21.8 billion, and which have higher national
incomes and much larger populations compared to the UAE24. The UAE
has also provided both material and financial support at the international
level through its foreign assistance programs such as developmental and
humanitarian aid, and charitable contributions to more than 140 countries
worldwide through 25 foreign assistance organizations. The value of this
foreign assistance reached AED 132.6 billion (or $36.1 billion) for the 1971 –
2009 period of which over AED 32 billion (or $8.7 billion) was for the 2000
- 2008 period alone. The Middle East region received the highest share of aid
at 46.7% followed by the North Africa region at 22.3%.
24 See UAE Office for the Coordination of Foreign Aid (OCFA).
30
2.5 The special case of Dubai
The slowdown in Dubai can be characterized as a ‘special case’ since it
was caused by the global slowdown in trade which had nothing to do with the
endogenous productive capacity of the domestic economy. This slowdown
was recently reflected in the financial difficulties faced by Dubai World in
meeting its obligations to its creditors25. The economic development plan
of Dubai that began in 2005 and was outlined in the Dubai Strategic Plan
2015 was clearly aware of the fact that since much of the debt had relatively
short maturities (3-5 years), and cash flows from property development
would fully accrue with a longer time-horizon (because it takes considerable
time to complete building structures), the risk from the maturity mismatch
was always present. The global financial crisis highlighted these risks and
accelerated the timing of their realization. But it must also be realized that
the financial crisis, to a large extent, contributed to the bursting of the real
estate bubble as liquidity dried up and there were severe capital outflows
caused by reductions in foreign direct investments.
The slowdown in the Dubai property market was also caused by
what is known as Dutch Disease26. Starting in early 2000, the Dubai
economy experienced large capital inflows which had nothing to do with
the endogenous productive capacity of the domestic economy. These large
capital inflows were primarily the result of the creation of a highly attractive
and tax-free business enabling environment and subsequently by issuing an
‘expatriate friendly’ property law through which foreigners could purchase
and own freehold property in designated areas. The outcome of these large
capital inflows was to raise the economy-wide wage rate due to increases
in domestic spending and the money supply. As wages rose, producers
increased their prices to maintain their previous levels of profit. Producers
could increase prices in the non-tradable service sectors but they could not
do so in tradable sectors since prices in these sectors are determined in
25 These obligations have amounted to about $24.8 billion as estimated by the Dubai Department of Finance which are currently being negotiated for more favorable terms.
26 Named after a phenomenon that occurred in the Netherlands in the early 1970s where
large inflows of natural gas export revenues unexpectedly caused an increase in unemployment and inflation.
31
international markets. Hence, because of these higher profitability levels
in the non-tradable service sectors (such as real estate, business services,
banking, transportation, etc) resources (both labor and capital) began
to move into these sectors as evidenced by the booming real estate and
construction sectors. The global financial crisis that erupted in mid 2008
caused a ‘reverse’ Dutch Disease effect and reduced the profitability of the
real estate sector as reflected in the slowdown in economic activity. In other
words, the global financial crisis caused large capital outflows which in turn
caused prices to drop as reflected in a low rate of inflation of 1.56% in 200927
compared to an inflation rate of 12.3 % in 2008.
The case of Dubai is ‘special’ also because very large investments have
been made in its soft infrastructure, in both industry and government, which
will have highly positive effects on the long-run development of the emirate.
When economic commentators speak of productivity, they normally imply
labor productivity. But labor productivity also depends on the amount of
capital that is ‘mixed’ with labor, on his or her level of education, on his or her
health, and on many ‘other’ factors which influence the overall productivity
of an economy – what is known as total factor productivity. But perhaps the
biggest improvement in the overall productivity of the UAE in general, and
specifically in Dubai, is the high efficiency of Dubai government agencies and
departments which adopt first-best policies and international best practices
in the smooth operations of a truly business enabling environment28 . One
is caught by surprise to notice that in the IMF’s Article IV Consultations
with the UAE Federal Government, both of these issues - the phenomenon
of Dutch Disease and the improvements in total factor productivity – are
not even mentioned as contributing factors to the slowdown in the Dubai
real estate sector and the long-term improvements in overall productivity
respectively, which will position Dubai as truly one of the most competitive
cities in the long-run, although the IMF’s Consultations acknowledge a
gradual and sustainable economic recovery in the medium-term29.
27 See National Bureau of Statistics (2010).
28 See Balian, O. (2009).
29 See IMF (2010).
32
3. SOCIAL DEVELOPMENTS IN THE UAE
3.1 Population and labor market
3.1.1 Population
Estimates based on administrative records show that the population
of the UAE in 2009 reached about 8.19 million compared to 8.07 million in
2008 (See Table 3.10). Despite the global financial crisis which contributed
to the slowdown in economic activity and the associated decline in the
demand for labor in various projects throughout the GCC region, there are
indications that expatriates continued to arrive in the various emirates with
males constituting a larger share than females due to the large number of
male expatriate workers pouring into the various emirates in search of work.
The proportion of workers in the 15-59 age group was also the highest at
81.9 % of the total population in both 2008 and 2009 as shown in Table 3.10.
Table 3.10 Distribution of UAE population by age-group 2008, 2009
Age Group
2008
2009 *
Pop
%
Pop
%
0 -14
1,354,707
16.8
1,375,913
16.8
15 - 59
6,616,027
81.9
6,719,580
81.9
60 +
102,892
1.3
104,503
1.3
Total
8,073,626
100
8,199,996
100
Source: Internal estimates using administrative records, National Bureau of Statistics,
United Arab Emirates.
* Preliminary estimates, National Bureau of Statistics, United Arab Emirates.
Data from the Labor Force Survey conducted by the National Bureau of
Statistics in May 2009 also show a natural growth of the population pyramid
in the 20-44 age group, for both males and females, with a larger increase
for males due to greater activity in migration and expatriates of this group.
This is due to the larger immigration of expatriates in this group to attract
working age employees. The results of the survey show that the percentage
33
type of nationals reached 103% meaning that for each 100 females, there
were 103 males with a country average of 5.3 individuals per household
and an average of slightly over 8 individuals per household for nationals.
The survey also showed that the share of the population with secondary
degrees and higher reached 54% with an illiteracy rate of 5% in the country
as a whole. As for nationals, it was shown that the share of nationals with
secondary degrees and higher reached 47% with an illiteracy rate of 7%. As
for the educational status of nationals for both males and females, illiteracy
rates and the share with university degrees rose concurrently between
males and females with females preferring to pursue their higher levels of
education.
3.1.2 Labor force
The results of the 2009 Labor Force Survey conducted by the National
Bureau of Statistics showed that 24.8% of the population was below the
age of 15 and that workers constituted 53% of the total population. The
percentage who was not willing to work was about 19.9%, and those who
were not working but looking for work was 2.3% of the total population of
the UAE. There was also an increase in the percentage of economically active workers among men and the young in the 25-54 age group compared
to other age groups. The percentage of economically active men was about
twice as high as that for women at 89% and 42% respectively. As for nationals,
the percentage of economically active nationals was 45% compared to the
percentage of expatriates at 79% which may be due to the larger number of
collective households, the majority of which are expatriates, relatively large
family sizes of nationals compared to non-nationals, and many other reasons. The survey results also showed that the proportion of the employed
was 69% with a high of 74% in Dubai. Male employment was at 87% of the
population with female employment at 38%, and 77% for expatriates and
39% for nationals.
The survey also revealed that male employees working in scientific
and technical specializations rank at the highest level, followed by ‘simple’
occupations and sales and service occupations. As for females, occupations
in sales and services were ranked at the highest level, followed by scientific
34
and technical occupations, and finally clerical occupations. Nationals were
primarily employed in service and sales occupations followed by military
services and scientific and technical occupations. Male nationals were
primarily employed in military services (25.6%), followed by services and
sales occupations (24.3%), and finally technical and scientific occupations
(17%). National females were mainly employed in technical and scientific
occupations (33.8%), followed by clerical occupations (27.7%), and as
technicians in scientific and technical fields (21.3%). The survey also
showed that the private sector was the biggest employer (58.4%), followed
by employment at local and Federal Government entities for nationals at
39.1% and 45.8% respectively for both males and females.
The survey results also showed that there was considerable
employment stability as 98% of workers held permanent jobs for both
males and females and for nationals and expatriates alike. As for the length
of looking for a job, it averaged about 9 months with aslightly higher
duration for Nationals compared to expatriates. As for unemployment, it
is more prevalent in the below the 25 year age group for both males and
females, and for both nationals and expatriates, and which reached 4.2%
in 2009 for the UAE as a whole with the lowest rate in Dubai compared to
the rest of the UAE especially in the emirate of Fujairah. The survey showed
that the majority of unemployed nationals preferred to work in clerical
occupations for both males and females, followed by the desire to work
in military services for male nationals, and employment in services and
sales occupations for females, and finally employment in managerial and
administrative occupations for females. As for training programs, the survey
results showed that almost a third of unemployed nationals received some
form of training to upgrade their educational and occupational skills for
better employment opportunities with 35% of females and 21% of males
participating in such programs. Training programs focused on various
computer software, foreign languages, management, and finance.
35
3.2 Healthcare
Human development has always been at the heart of the sustainable
development strategy of the UAE Among the most important achievements
in this respect is the provision of excellent healthcare services which are
comparable to the highest international standards in terms of both the
quantity and quality of healthcare. This has led to a noticeable increase in the
health standard of its citizens, on par with standards in other high-income
courtiers. The UAE has continued to develop its healthcare and preventive
medical programs and has established the necessary institutions to cater for
the health of its growing population over the years.
To achieve its many objectives, the Ministry of Health has developed a
highly comprehensive strategy to support its healthcare sector on all fronts,
both human and logistical, and to reinforce cooperation and coordination
with all health related entities. It also plans to lay the foundations for regional
and international cooperation with academic and other institutions. The
highlights of this strategy encompass the provision of a comprehensive
healthcare system, increase longevity, eradicate all types of diseases,
and early detection of chronic diseases. The strategy has also focused on
targeted programs to improve the health of specific social groups such as
the economically active, mothers, children, students, the young and the
old, and professionals. It also aims at providing a unified and standardized
mechanism for disseminating information, planning, follow-up, and capacity
building in all specializations through continuously updated training programs.
The Ministry of Health also established the Federal Health Agency
by Federal Law No. 13 for the year 2009 which aims to build an advanced
healthcare system in all hospitals in the country that are under the
jurisdiction of the Federal Government, and to continuously improve this
system to meet the increasing needs of all its citizens30 . The Agency will be
responsible for the establishment and management of hospitals and health
establishments under the jurisdiction of the Federal Government according
30 Source: Ministry of Health, United Arab Emirates.
36
to international best practices and criteria, and the development of the
capabilities of healthcare employees in all fields and specializations in close
cooperation with local agencies, universities, distinguished foreign partners,
and with many others, with the aim of building an extended medical network
capable of achieving its many delegated tasks in the UAE. The Ministry of
Health has also developed a comprehensive medical drugs policy with laws
and regulations that govern the distribution and use of drugs for medical
purposes, and for controlling side effects. At the same time, the Ministry of
Health has extensively developed primary healthcare services through the
establishment of an extended network of clinics all over the country. These
clinics provide basic medical services, dental services, health awareness, and
preventive medicine which cover the monitoring and fighting of diseases,
early detection, vaccinations, and the provision of excellent healthcare
services to terminally ill patients, including various health awareness and
educational programs with specialized entities throughout the UAE.
Data from various sources show that 6.2 million medical prescriptions
were handed out in 2007 through 160 government pharmacies, and the
number of hospitals reached 34 hospitals with 7,607 beds and more than
197 clinics and health centers compared to only 7 hospitals, 700 beds, and
12 clinics and health centers in 197131. The development of healthcare
services continued throughout the past decade during which the number
of government hospitals reached 32 hospitals in 2008, 243 government
clinics and health centers, 2,886 government doctors and 365 dentists,
and 15,443 government nurses in various specializations as shown in Table
3.20 with high international standards. The private sector’s role has also
gained importance in recent years with over 50 private hospitals and over
2000 private clinics and health centers. In 2008, there was also a noticeable
increase in the number of doctors by about 30% to 13,311 medical doctors,
and a 40% increase in the number of nurses to 24,131 nurses with various
specializations which are clear signs of considerable improvements in
healthcare services.
31 Ministry of Health, UAE. Internal data, various years.
37
Table 3.20 Healthcare indicators 2007, 2008
Description
2007
2008
Hospitals
85
90
Government
34
32
Private
51
58
Beds
9,683
9,176
7,607
6,627
Private
2,076
2,549
Clinics
2,332
2,300
Government
197
243
Private
2,135
2,057
Doctors
10,123
13,311
Government
4,711
5,969
Private
5,412
7,342
Dentists
2,445
2,938
Government
566
526
Private
1,879
2,412
Nurses
17,336
24,131
Government
13,460
15,443
Private
3,876
8,688
Pharmacists
2,226
N/A
Government
629
N/A
Private
1,597
N/A
Government
Source: Health Authority, United Arab Emirates, and Annual Economic
and Social Report 2008, Statistics Center, Ministry of Economy, UAE.
38
3.3 Education
The United Arab Emirates has continuously focused on providing
equal opportunities to all its citizens in education and holds the correct
view that education is the main driver of sustainable growth. Emiratis
have been very fortunate to have the opportunity to obtain a first-class
education which will broaden their horizons and improve their skills to
participate in their societies more effectively. The UAE has always set
very ambitious educational goals to provide its citizens with world class
educational programs which would place its students on par with students
in advanced countries. It has also encouraged its students to rise to various
challenges through pursuing higher education at universities and colleges
and institutes of higher education providing them with the highest quality
of education both locally and internationally. Vocational training has also
gained prominence for those who did not pursue higher education as a
result of leaving school at an early stage. The education system in the UAE
ensures equal opportunities for all its citizens including those with special
needs by providing them with specialized programs to achieve their goals
and objectives. The spread of educational opportunities at both the private
and public levels is considered as one of the most important achievements
in the sustainable development of the UAE.
The success of the education system in the UAE is reflected in the spread
of educational opportunities throughout the 7 emirates as demonstrated in
Table 3.30 in which the number of public schools reached 1,183 schools
with 750,234 students in 2008-2009 compared to 1,181 schools and 684,967
students in 2007-2008.
39
Table 3.30 Number of schools, students, and teachers in 2007/2008
and 2008/2009
Description
2007 / 2008
2008 / 2009*
Number of schools
1,181
1,183
Public
727
721
Private
454
462
Number of students
684,967
750,234
Public
262,029
262,373
Private
422,938
487,861
Number of teachers
40,163
47,267
Public
22,778
22,732
Private
17,385
* Preliminary estimates.
Source: National Bureau of Statistics, United Arab Emirates.
24,535
The number of private schools in the UAE reached 462 schools serving
487,861 students, and the number of faculty and administrative staff reached
a total of 47,267 employees of which 22,732 were in the public sector and
24,535 in the private sector32. Universities and colleges of higher education
also spread rapidly in the last few years compared to only one university in
1977. There were 64 universities and colleges of higher education in 2009
which produced over 15,000 graduates of which 9,400 were nationals and
5,600 were expatriates33. The UAE government continues to develop the
educational system for the coming years as demonstrated in its strategy to
support growth at its highest levels to be on par with advanced countries
through the allocation of the required funds by the Ministry of Education
to expand model schools, support teacher training, and create a highly
conducive environment for businessmen to invest in educational facilities
which will generate benefits to all.
32 Annual Reports for 2008-2009 and 2008-2007. Ministry of Education, United Arab Emirates.
33 Annual Economic and Social Report 2008, Statistics Center, Ministry of Economy, Abu
Dhabi, UAE.
40
It has become increasingly important to coordinate between
demographic, educational, and health policies to determine the future
needs of the labor force for the long-term growth of the UAE economy. This
requires the development and upgrading of educational curricula in schools
and universities, teacher training, upgrading of skills and qualifications,
and much more, such that the supply of graduates from the educational
system matches the demand for labor, especially for nationals so that they
are able to substitute for the large expatiate labor force with all its different
specializations. To achieve this, the initial steps should start in schools by
improving student performance at both private and public schools such
that they reach the highest standards of education globally. This would
also require improvements in both the soft and hard infrastructures of
the educational system such as construction of modern schools and
improvements in the technical qualifications of the teaching faculty and
administrative staff. Educational policies have also strived to deepen the
role of higher education institutions such as colleges and universities to
fulfill societal requirements and achieve a much needed balance between
the supply of graduates from these institutions on the one hand, and the
demand for labor in its various specializations on the other.
41
3.4 Quality-of-life and social welfare
3.4.1 Quality of life
The UAE was ranked the No.1 country with the best quality of life
in the Middle East and North Africa region by the Economist Intelligence
Unit (EIU) 2009 Quality of Life Index34. Globally, the Quality of Life Index
ranked the UAE 15th in the world out of 160 countries surveyed. This
reflects the prosperity the UAE has seen in the past years and the result
of the ongoing strategic initiatives by the UAE Government across all sectors including economy, security, health and education. The Economist
Intelligence Unit’s Quality of Life Index relates subjective life satisfaction
surveys to objective determinants of the quality of life across 160 countries.
The UAE ranking was based on the country’s impressive civic development
and administration and high GDP growth, as well as family and healthcare
services, life expectancy, and safety and security. All that has been offered
and achieved so far in terms of improvements in the standard and quality of
life reinforces the sound policies, initiatives, and procedures adopted by the
UAE in support of various economic and social activities which will further
enhance its rankings in the coming years, placing the UAE in the top 10
countries globally in terms of its quality of life.
3.4.2 Social welfare
The standard of social work in the UAE is considered as one of the
best globally and is looked upon as a basic right of its citizens which, in
turn, is considered as the responsibility of the UAE authorities to improve
the societal welfare of all the population. The authorities have strived to
maintain and support the active participation of the private, public, and
civil society and institutions to contribute towards the success of various
social activities.
34 See Economist Intelligence Unit (2009). The Quality of Life index is based on a unique
methodology that links the results of subjective life-satisfaction surveys to the objective determinants of quality of life across countries.
42
Table 3.40 Public social organizations for the 2004-2009 period.
Activity
2004
2005
2006
2007
2008
2009
Religious
3
3
3
3
3
3
Women’s issues
9
9
9
9
9
9
Professional
20
20
21
22
22
22
Folklore
29
30
29
29
29
29
Culture and public services
23
23
21
22
22
22
Humanitarian services
11
11
13
13
13
13
Theaters
9
9
10
11
11
11
‘Jaliat’
15
15
15
15
15
15
119
120
121
124
124
124
Total
Source: Ministry of Social Affairs, United Arab Emirates.
Table 3.41 Number of cases and value of social assistance 2005-2009
Year
Number of cases
Value (million AED)
2005
31,541
783.5
2006
33,518
1,064
2007
37,484
1,130
2008
38,675
2,326
2009
39,242
2,325
Source: Ministry of Social Affairs, United Arab Emirates.
These improvements in social activities are evidenced by the increase
in the number of social organizations from 119 in 2004 to 124 in 2009 which
were engaged in a wide and comprehensive range of social activities such
as gender issues, folklore, general culture, professional organizations, and
many others. The country has also provided excellent social services to old
age homes and kindergartens for different social groups and classes. Table
3.40 shows the development of various organizations by type of activity for
43
the 2004-2009 period, and Table 3.41 shows the number of cases and value
of assistance for the 2005-2009 period. The number of cases that received
assistance increased by about 25% whereas the value of assistance increased
from AED 783.5 million ($213.5 million) to AED 2.325 million ($633.5 million)
or by almost 200% for the 2005-2009 period.
44
4. FUTURE OUTLOOK
4.1 Price of oil
The current price of oil is hovering around $80 per barrel of crude
oil with somewhat weak upward pressures caused by the weak global
recovery especially in OECD countries. This $80 price level is compared
with an abnormally high price of about $150 per barrel in mid 2008 which
fell to $60 at the end of 2009. These large fluctuations are neither good for
consuming countries nor for producing countries and both of these groups
have tacitly agreed at a ‘fair’ price of around $75. However, the current
economic recovery will place an upward pressure on the price of oil but this
pressure will be subdued due to first, a relatively weak global recovery as
OECD governments begin to adopt a more laissez-faire policy approach and
somewhat hold back their expansionary monetary and fiscal policies which
were pursued aggressively in the past 2 years, and secondly, OECD countries
have shifted away from manufacturing sectors, which are fuel-intensive, to
service sectors, which are more labor and technology intensive35. On the
other hand, the economic growth strategies pursued by many oil producing
countries, especially in the Gulf region, is estimated to increase domestic
demand for oil by 4.5%, or by 320,000 barrels per day in 2010 alone36. Unless
production is increased substantially, this will put an upward pressure on
prices as global supply is diverted to domestic consumption. The net effect
on the price of oil will ultimately depend on the extent to which the increase
in domestic demand is met by the increase in new production. However,
advances in renewable sources of energy will determine the consumption
share of these sources of energy although it is estimated, as shown in Figure
4.10, that these sources of energy were only 3.5% of total consumption in
2007.
35 Manufacturing during the past 20 years has moved from OECD countries to emerging
economies especially to Asian countries due to globalization effects.
36 See International Energy Agency, Paris, March 2010.
45
Figure 4.10 Total final world consumption by fuel 2007 (%)
Source: International Energy Agency (2009), p 28.
On the supply side, there is a perception of poor compliance of output
quotas in OPEC and that the UAE is being unfairly penalized since it is
bearing high opportunity costs by complying with lower production quotas.
However, the Abu Dhabi National Oil Company (ADNOC) is preparing to
pump more crude after curbing output for more than a year to comply with
OPEC cuts. ADNOC plans to boost its oil capacity by about 30% ‘in stages’
which is consistent with the company’s goal of raising capacity to 3.5 million
barrels per day by 201937. The cost of production will also increase because
oil companies are now adopting more advanced technologies to ‘squeezeout’ more oil from existing oil fields, and are exploring ‘non-conventional’
oil deposits which are much more challenging and expensive to exploit than
conventional ones38. On March 18, 2010, OPEC Ministers in Vienna agreed
to maintain existing oil output quotas in anticipation that demand will pick37 The National newspaper, March 8, 2010, “ADNOC to lift curb on oil output”, Abu Dhabi,
UAE.
38 Non-conventional oil deposits are deeper than conventional ones and require considerably more drilling efforts and capabilities.
46
up later in the year to mop-up the excess supply39. These promised cuts in
production were 4.2 million barrels per day with a compliance rate of only
53%. Supply side factors are also heavily influenced by competition from
non-OPEC oil producers40.
Figure 4.11 Crude oil production by region 2008 (%)
Source: International Energy Agency (2009), p 10.
The abnormally high price of oil in mid 2008 at almost $150 per barrel
and the subsequent fall to $60 in 2009 has created a psychological price-floor
of $50 below which the price of oil is not expected to fall in the foreseeable
future especially in light of the current global economic recovery. As most
analysts, oil producers, and consuming countries have stated, a price of $75
is considered a ‘fair’ price, high enough to provide a cost effective revenue
to oil exporters to meet their investment requirements, and low enough
not to decrease the relative cost of alternative renewable sources of energy.
Moreover, the developmental needs of emerging economies in the Gulf
countries will increase the need for producing more oil as ‘internal’ domestic
39 Reuters news (March 18, 2010).
40 OPEC countries include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi
Arabia, United Arab Emirates, and Venezuela.
47
demand increases. This induced increase in supply and the autonomous
modest increases in both domestic and global demand for oil will more or
less offset each other, and, depending on the relative effects of these opposing
market forces on the price level, it will most likely have a negligible effect
on the short-term price of oil barring any unforeseen political, security, or
other external shocks to the global oil market, leaving the global price of oil
to fluctuate between $70 and $90 per barrel in the short-term.
4.2 Real GDP growth forecasts
GDP growth forecasts have ranged from a high of 3.2% to a low of
0.6% with an average estimated rate of growth of 2.25% for 2010. (See Figure
4.20). At the official level, the latest estimates of the rate of growth of GDP
have ranged between 1.5% and 3.2% as forecasted by the UAE Central Bank
and the UAE Ministry of Economy respectively and announced in various
statements in the public media.
Figure 4.20 Real GDP growth forecasts by various entities for 2010
Source: The National, March 22, 2010.
48
This relatively wide disparity in GDP forecasts is due to the different
weights attached to the various drivers of growth in the UAE. Chief among
these is the world price of oil which is expected to hover around the $70$90 price range in the short-run given the recovery in the global economy
especially regionally in Asia which is expected to boost the regional demand
for oil by about 4% in 2010-201141. The UAE also plans to pump more oil to
meet this extra demand as recently announced by the Abu Dhabi National
Oil Company (ADNOC), although it was agreed in the most recent OPEC
meeting in Vienna (March 18, 2010) that production quotas will remain
unchanged to maintain the current ‘fair’ price of oil in the $70-$90 range.
The global economic recovery will also increase the non-oil GDP growth
rate to 1%-1.5% after growing at a relatively low rate of 1% in 2008 and
an average rate of growth of 8% for the 2005-2007 period. In the medium
and long-runs, the UAE will leverage its excellent infrastructure, both soft
and hard, to meet the regional demand for services and logistics especially
in Dubai where trade, logistics, and financial services have been slowly
replacing real estate activities. Tourism is also beginning to rebound from
its lows in 2008-2009, and large infrastructure projects such as the Dubai
Metro, Burj Khalifa, Al Maktoum International Airport, Dubailand, the
Yas and Saadiyat Island developments in Abu Dhabi, and many others will
definitely attract more tourists as the global recovery gains momentum
in the coming few years. On the monetary side, although growth in the
broad money supply (M2) will slow down to 6.3% in 2010, the Central Bank
has moved decisively to guarantee all bank deposits by creating an AED 50
billion ($13.6 billion) credit facility, in addition to a liquidity injection of
AED 70 billion ($19 billion) into the banking system in 2009. In addition
to these drivers of growth, the Ministry of Economy has just started to
implement its many initiatives to diversify the economy in-line with the
National Charter 2021 by promoting growth in industry, entrepreneurship,
small and medium enterprises, renewable energy, and many other sectors
to help build a competitive economy and create a highly attractive business
environment.
41 See International Energy Agency, Paris, March 2010.
49
Against this positive background, the growth prospects of the UAE are
somewhat subdued due to weaknesses in the global economic recovery and
the slowdown in the real estate sector which has traditionally taken much
longer to recover than other sectors. The restructuring of the $24.8 billion
debt of Dubai World42 will undoubtedly slow down the rate of growth of
the Dubai economy but this will be more than offset by strong growth in
Abu Dhabi especially if the world price oil holds at its ‘fair’ value of $70$90 in 2010-2011 which will finance the diversification strategy of the UAE
across all the 7 emirates. Consumer spending has also been held back by
the reluctance of banks to provide loans which grew by only 2.4% in 2009
compared to an unprecedented 40% growth rate in 2008. Non-Performing
Loans (NPLs) are expected to increase from 4.4% in 2009 to 6.5% in 2010
although the Central Bank has taken precautionary measures by creating
special credit facilities to the banking system. Some observers have argued
that the delays associated with the Dubai World debt restructuring process
will have a negative impact on growth since foreign banks and investors
are reluctant to invest under this uncertainly. But as stated on more than
one occasion, the Federal Government stands ready to support individual
emirates even though the increasing role of the government in the dayto-day operations of a market type economy is not to be encouraged as
demonstrated by the ‘exit strategies’ of many governments in high-income
countries. GDP growth prospects of the UAE will be more favorable than
high-income countries in advanced economies but will lag behind other
emerging economies, especially in Asia, in the short to medium terms.
Moreover, the current low rate of inflation has worked to the advantage of
the domestic economy by lowering the cost of production and improving
the competitiveness of the economy43.
42 See Dubai Department of Finance.
43 The rate of inflation in 2009 was 1.56% with an estimate of 1-1.5% for 2010 as calculated by
the National Bureau of Statistics.
50
4.3 Inflation expectations
The rapid pace of economic development during the period before the
financial crisis in 2008 caused high rates of inflation throughout the emirates
where it exceeded 12% until the end of the crisis. In 2009, the rate of inflation
eased to 1.56% with expectations that it will be as low as 1.1% at the end of
2010 and will gradually increase to 2-2.5% in 2011 as the global economic
recovery gains momentum44. In 2008, the main cause of the increase in the
inflation rate to 12.3% was the upward pressure on rents which constitutes
about 45% of the total basket of goods and services used in the calculation
of the Consumer Price Index (CPI)45. This high rate of inflation was also the
result of increases in the price of fuel compared to other countries in the GCC,
and increases in the price of imports especially of foodstuffs which reached
85% of the total food requirements of the UAE. This ‘imported inflation’ was
caused by the fall in the value of the US dollar against the euro and other
major currencies especially since a large percentage of UAE imports are
from the EuroZone Area46. Low rates of interest, as a result of expansionary
monetary policies, also contributed to the high rates of inflation in 2008 as
liquidity increased and consumer spending exploded which contributed to
the increase in wage rates and which, in turn, were passed on to consumers
through higher retail prices.
In 2009, the UAE witnessed a large fall in prices during which the rate
of inflation was at a very modest 1.56%. This achievement was primarily due
to the extended efforts of the Ministry of Economy to protect consumers by
checking the increase in prices. Moreover, the recent economic slowdown
has forced many consumers to spend less and save more which has placed
further downward pressure on the price level. Similarly, private investment
expenditure by foreigners and domestically was considerably reduced due
to market uncertainties which lowered prices further by slowing down
aggregate demand. At the retail level, food price indices have exhibited a
downward trend until mid 2010 after which prices are expected to rise as
the economic recovery gains momentum. This was evidenced by the recent
44 See Bani Melhem, Ahmad Q. (2010).
45 See Jomaa, Abdalafu (2010).
46 The UAE adopts a fixed exchange rate regime with the US dollar at $ 0.27 per UAE dirham.
51
upward pressure on the prices of sugar and rice which increased between
15% and 20% in the first quarter of 2010. The gradual economic recovery in
2010, especially in the real estate sector, is expected to slightly increase the
rate of inflation between 1% and 1.5% by the end of 2010, and between 2%
and 2.5% in 2011. On a quarterly basis, the UAE experienced a slight reversal
in the inflation rate by 0.01% at the end of the 1st quarter in 2010 compared
to the end of the 1st quarter in 2009 which shows that inflation is no longer
a major threat and that the authorities have succeeded in reducing the rate
of inflation. The inflation rate also improved further by 0.51% at the end of
the 1st quarter of 2010 compared to the 4th quarter of 2009.
Despite the estimates above which were based on time-series data
on consumer prices in previous years, the global economic recovery which
has been estimated at 4%, coupled with the increase in the price of oil,
will increase capital inflows into the UAE and will put upward pressure
on the level of prices. There are some indications that the inflation rate is
exhibiting this increasing trend as reflected in the increase in the price of
basic foodstuffs, steel, and building materials which will eventually lead to
an increase in the UAE import bill, which, in turn, will be reflected in an
increase in domestic prices. Taking into account these developments, the
rate of inflation is expected to be above the level estimated at 1-1.5% by the
end of 2010.
52
5. POLICY ISSUES AND RECOMMENDATIONS
5.1 Stabilization policy
The global financial crisis caused severe liquidity shortages in the UAE
banking system which forced banks to hold back their loan making activities,
in turn constraining consumer spending. The government intervened
through expansionary monetary and fiscal policies to cushion the adverse
effects of the downturn by adopting counter-cyclical stabilization policies
to support aggregate demand and ensure sufficient liquidity in the financial
system. In a fixed exchange rate system, as adopted by the UAE with the US
dollar, interest rates in both countries become closely linked. As a result, the
low rate of interest in the US was clearly reflected in the low rate of interest
in the UAE, and the ‘degrees of freedom’ available in using expansionary
monetary policies by reducing interest rates further were severely
constrained. In addition, the fall in the real estate market in Dubai and the
ensuing Dubai World debt crisis squeezed liquidity further as Several domestic banks were exposed to the crisis. This temporary loss of confidence
caused a capital flight and reduced bank liquidity further. The monetary
authorities of the UAE, specifically the Central Bank, moved aggressively to
reassure financial markets of its readiness to support any bank domestic
and foreign in the face of increases in Non-Performing Loans (NPLs) or large
exposures to Dubai World. To this end, the Central Bank created an AED 70
billion (about $ 19 billion) facility for banks in the UAE and lowered interest
rates further to boost economic growth and consumer expenditure. In early
2009, the monetary authorities also began to monitor bank liquidity more
closely to determine the health of banks and the quality of its assets. The
ratio of liquid assets to short-term liabilities increased from 76% in January
to 92% in April 200947. Banks had also continued to increase their deposit
base while at the same time slowing loan growth. Bank deposits reached
AED 950 billion ($259 billion) at the end of the first quarter 2009 compared
to AED 840 billion ($ 229 billion) at the end of June 2008. Bank’s capital and
reserves also increased by 18% (from September 2008 to March 2009) and
47 This ratio means how much extra cash banks have on hand compared to their upcoming
payments and is used to determine their solvency.
53
the average capital adequacy ratio (CAR)48 of locally based banks stood at
16.4% in mid 2009.
At the same time, the shortage in liquidity and the fall in consumer
spending caused by the decline in the real estate sector49, especially in Dubai,
resulted in a fall in the money supply (M1)50. As a result, bank lending was
stable at around AED 1 trillion ($273 billion) in July 2009 which contrasts
sharply with events in the past 5 years when the oil-fuelled investment
boom encouraged consumers to spend more and enabled new lending to
grow by an average of about 30% every year. To increase lending, the monetary authorities reduced the rate on its previously created liquidity support
facility51 from 2.5% to 1.5%. This policy was designed to boost investment
and consumption expenditure by reducing the cost of borrowing of the
end users. This rate cut was just another part of the monetary authority’s
policy to lower the Emirates Interbank Offered Rate (EIBOR). In 2009, the
Central Bank also overhauled the panel of providers for EIBOR in the hope
that it would lower interest rates which it has said are too high and do not
reflect existing market conditions. The new 11-bank panel includes 4 new
local banks and dropped 2 international banks which were in the ‘old’ bank
panel.
At the same time as the authorities were adopting an expansionary
monetary policy, the UAE government52also increased its expenditure
using expansionary fiscal policies to make-up for the shortfall in aggregate
demand caused by the global financial crisis and the subsequent fall in the
48 The Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to risk. More specifically,
it is a bank’s core capital expressed as a percentage of its assets weighted credit exposure.
Note that foreign banks operating in the UAE have a slightly lower capital adequacy ratio of
15% which is considered ‘high’ by international standards.
49 The fall in consumer spending is the result of what is known as the Pigou effect (or wealth
effect) where consumers feel ‘poorer’ as the value of their assets such as homes and other
durable goods decline causing them to consume less.
50 The M1 definition of the money supply is the broadest of definitions which encompasses
currency in circulation and demand (current) deposits.
51 The rate cut refers to a facility created in 2008 by which banks could deposit securities with
the Central Bank in exchange for liquidity.
52 Includes expenditures of the governments of the individual emirates and the Federal Government.
54
real estate market. As a result, the consolidated expenditure of the UAE
government increased from AED 254 billion ($69.2 billion) in 2008 to AED
289 billion ($78.8 billion) in 2009 or by 14%. This increase in government
expenditure occurred at a time when government revenue fell by a massive
35% from AED 450.3 billion ($122.7 billion) in 2008 to AED 292.6 billion ($78
billion) in 2009 due to the fall in the price of oil and ‘losses’ in investments
abroad53. These large expenditures and the concurrent fall in government
revenue completely wiped out the budget surplus in 2009. The UAE Federal
Government in 2009 also introduced an important methodological change
in its budgeting practice by adopting zero-based budgeting as opposed to
incremental budgeting. In the latter methodology, Ministry budgeting teams
need to only justify increases over the previous budget without reference
to previous levels of spending. Under zero-based budgeting, individual
government departments would have to build each 3-year budget from the
ground-up including approving all expenditures rather than just increases
in spending. The first 3-year budget of the Federal Government would
run from 2011 to 2013 using zero-based budgeting since it better reflects
changing economic circumstances and is much more appropriate in rapidly
growing economies because of the need to finance large-scale infrastructure
development projects as is the case in all the emirates as the UAE builds
its soft and hard infrastructures to achieve sustainable growth targets for a
more balanced and diversified economy in the near future.
Both of these expansionary fiscal and monetary policies have been
successful in sustaining aggregate demand by increasing consumption,
investment, and government expenditure as drivers of economic growth.
However, these expansionary policies have also the potential to create
inflationary pressures as economic activity picks-up and profitability
increases especially in the subdued real estate market with the potential
of creating renewed bubbles. These inflationary pressures are reflected
in increases in domestic and regional stock market indices compared to
market lows during the 2008-2009 period. The global economic recovery,
especially in China and more recently in the US, has also put upward
53 See Consolidated Government Finances in IMF Article IV Consultations, Table 3, page 33.
55
pressure on the price of oil with potential inflationary effects on the UAE
as oil revenues are increased further resulting in large capital inflows which
would increase liquidity and drive consumer spending and investment.
For all these reasons, the authorities must be careful in their exit strategies
by ensuring that an appropriate dose of stimulus is given to the economy
such that inflationary pressures are checked and excessive spending is
restricted. These expansionary policies must therefore be fine-tuned much
more carefully which can be achieved by measuring economic performance
more accurately by designing better economic indicators, one of the main
objectives of the newly established National Bureau of Statistics.
5.2 Industrial policy
Apart from the aggressive expansionary monetary and fiscal policies
used by the government in 2009 to stabilize the economy in the shortrun, the government continues to adopt industrial policies for sustainable
economic growth in the long-run54. These industrial policies are outlined in
more detail in the respective strategic development plans of the individual
emirates, most notably the Dubai Strategic Plan 2015 and the Abu Dhabi
Economic Vision 2030. The Dubai World debt crisis in 2009 also presented
the government with new challenges and opportunities to fine-tune its
industrial policies to adapt to changing market conditions. To this end,
the government began to pay much closer attention to the institutional
framework within which industrial policy is conducted by examining
and re-evaluating foreign investment laws, free zone areas, cost of doing
business, and a host of other issues of immediate relevance to increase
the competitiveness of the economy through industrial policies. Most
government support programs were evaluated and changes in goals and
objectives were made based on international best practices55. In Abu Dhabi,
the industrial policies outlined in the Economic Vision 2030 were further
separated into four 5 - year plans to take into account changing economic
conditions in the medium-term. The long-term objective is to diversify the
54 ‘Industrial’ does not mean only industrial and manufacturing in the traditional sense. It
also encompasses services such as financial, telecommunications, logistics, and many other
non-tangibles.
55 See Rodrik (2004) for an excellent discussion of these best practices.
56
economy into high-value and high-tech manufacturing sectors, in addition
to logistics, finance, and tourism as demonstrated in the development of
various industrial parks and touristic attractions56.
Most of the so-called ‘economic’ policies outlined in the respective
strategic development plans of the individual emirates are known as
industrial policies, defined as government intervention in the form of
support programs to the private sector. The argument against industrial
policy has traditionally been that it is impossible for the government
to consistently pick winners because of the existence of market failures,
namely, informational failures and coordination failures57. A central
question in industrial policy is therefore how to take into account these
market failures such that industrial policy maximizes the likelihood to
contribute to economic growth. In other words, what is the best institutional
framework (or process) through which the UAE Federal Government can
maximize the effectiveness of industrial policy? This first-best institutional
framework is known as embedded autonomy (Evans 1995) - a discovery
process in which the government and the private sector come together to
learn and discover underlying challenges and opportunities, and engage in
strategic cooperation. This could be achieved by linking best practice design
elements58 to the structure of the existing institutional framework in the
conduct of industrial policies in the UAE59.
5.3 Labor policy
The year 2009 will be remembered as a breakthrough year for labor
policy that considerably improved the living conditions of workers. The
56 Most prominently the massive projects in the Yas and Saadiyat islands which will host a
wide range of artistic, cultural, sports, and other recreational activities.
57 Informational failures arise because when entrepreneurs enter into the production of ‘new’
products, they need to incur high discovery costs with no guarantees that these costs will be
recouped. The government therefore needs to interfere by supporting these entrepreneurs to
reduce their discovery costs. Coordination failures arise because for some industries to succeed, other ‘related’ industries must be established at the same time. The establishment of
these other ‘related’ industries is very expensive and can only be provided by the government.
58 There are 13 such elements as outlined in Rodrik (2004).
59 On designing a first-best institutional framework for industrial policy, see Balian (2010).
57
introduction of the Wage Protection System (WPS), which obliges all
companies to pay wages via electronic transfer rather than in cash, was the
most important development of the year. The system was designed to help
the Ministry of Labor track and fine companies which were making late or
irregular salary payments. This resulted in considerable improvements in
the living conditions of workers as echoed by the Embassy of the Philippines
especially since there are over half a million Filipinos working in the UAE of
which 60% are skilled or professional workers, 25% are in the service sector,
and 15% are household workers. The year 2009 also saw a significant increase
in the number of inspections carried out by the Ministry of Labor to identify
day-time break violators60. Inspections increased from 45,000 in 2008 to
75,000 in 2009 and 677 companies were fined for breaching the regulation
of which 436 were first-time offenders and penalties for 241 repeat offenders
were doubled. In May 2009, the Ministry of Labor along with the Health
Authority – Abu Dhabi (HAAD) launched a Safety and Health campaign
to raise awareness among workers of the importance of drinking enough
water during the summer months. This campaign targeted 465 companies
employing close to a million workers at more than 4,500 construction sites
and 1,800 labor accommodation camps61. Regular inspections were conducted throughout the year to ensure that workers were accommodated in
conditions according to the law. While legislation has been in place for a few
years, it was more widely implemented in 2009.
Although the UAE authorities have been successful in reducing labor
market imperfections on the demand side of the market as elaborated in
the above paragraph, supply side considerations such as exploitation of
workers in their home countries by charging them high travel and other
fees, are obviously outside the jurisdiction of the UAE authorities. These
abuses include illegal practices such as charging workers high recruitment
and ‘transportation’ fees which place a very high burden on these poor
workers in making payments to their so-called ‘sponsors’, sometimes over
60 The regulation, which was introduced almost 5 years ago, requires employers to allow
outdoor workers a break from 12:30 noon to 3:00 in the afternoon in the months of July and
August, and to provide them with appropriate shaded and cool areas.
61 See Health Authority – Abu Dhabi (HAAD), United Arab Emirates.
58
very extended periods of time, forcing them to work on minimal subsistence
wages. Supply side imperfections thus require close cooperation and
coordination with labor exporting countries, and the UAE has been at the
forefront of GCC countries signing and ratifying labor agreements with its
partner countries. Nevertheless, given the large size of the unskilled bluecollar labor force in the UAE, especially the size of the labor force in the
construction sector, the UAE authorities have genuinely strived to achieve
more since they are increasingly aware of the fact that long-term sustainable
economic development requires a strategy of human capital development to
effectively assimilate workers into the domestic endogenous labor force. To
this end, the UAE authorities have aggressively investigated and prosecuted
employers which violate UAE labor laws, have prohibited companies from
doing business with recruitment agencies (both in the UAE and abroad)
that charge workers fees for travel and /or employment visas and contracts,
have substantially increased the number of inspectors responsible for
overseeing the treatment of migrant workers by private companies, and
have taken various actions to inform workers of their rights upon arrival to
the UAE. Moreover, although a sizeable share of the expatriate labor force is
comprised of low-skilled construction workers, this share has been somewhat
reduced in the wake of the recent slowdown in the real estate sector and
the diversification of the UAE economy into high-value manufacturing and
service sectors.
The current and future demographic and labor market conditions
necessitate the adoption of appropriate policies and plans to tackle the
many demographic and labor market challenges faced by the nation. It is
therefore recommended that the authorities control the inflow of foreign
labor and adopt policies to increase the rate of growth of the population
of nationals to raise its share in the total population and the labor force.
This would result in a more ‘balanced growth’ among the different emirates
and would regulate internal migration. In addition, the authorities should
continue to develop human capital through improvements in health,
education, and appropriate training which meets the requirements of the
labor market and create new job opportunities especially for women. This
is compatible with the comprehensive long-term development strategy of
59
the UAE which is accompanied by a feasible demographic policy through
which we can attain a balanced demographic composition and build the
structure of a labor market capable of allocating UAE resources efficiently
which ultimately is the basis of a strong economic foundation.
5.4 Trade policy
The UAE has traditionally pursued an aggressive free trade policy
for deeper integration into the global trading system. The recent global
financial crisis and the associated fall in global trade has somewhat
increased protectionism in the rest of the world as individual countries
have sought to protect their domestic industries in the face of the global
economic slowdown in 2009. The UAE, on the other hand, continues to
adopt an outward looking free trade policy by liberalizing its trade regime
through various Free Trade Agreements (FTAs) with the rest of the world.
However, the UAE’s trade policy is bound by agreements within the GCC
to act collectively as one group as stipulated in various GCC agreements,
most notably in the GCC Economic Agreement (EA) in 2002 which calls
for a ‘collective negotiation strategy’ in the conduct of FTAs with major
trading partners, and the establishment of the GCC Customs Union62 in
2003 which was a prerequisite in the achievement of economic unity and
to facilitate GCC member countries’ engagement in FTA negotiations as a
unified trading block.
In 2009, the UAE participated in 3 important FTAs with various
degrees of success, namely, with Singapore, with the European Free Trade
Area (EFTA)63, and with New Zealand. The first of these, the GCC-Singapore
FTA, concluded their negotiations in 2008 (after 4 rounds of negotiations)
and which was ratified by the UAE in September 2009 (along with Oman
and Qatar), allows access for companies in both blocks to operate in each
62 A Customs Union is a group of countries between which there are no tariffs and there is
a common tariff (5% in the GCC) against countries which are not in the group. A Free Trade
Area, on the other hand, is a group of countries which, again, do not have tariffs between
themselves but each country is ‘free’ to set its own tariff against countries which are not in
the group.
63 The EFTA countries consist of Switzerland, Norway, Iceland, and Lichtenstein.
60
other’s markets with a minimum of restrictions64. This FTA covers various
areas such as trade in goods, trade in services (including financial services),
e-commerce, and government procurement. The GCC-Singapore FTA is
expected to consolidate commercial relations and stimulate investment
flows between the two blocks. It will also allow the unrestricted flow of
goods and services between the blocks benefitting numerous sectors such
as professional services, distribution, tourism, and air and maritime transport. The FTA between the EFTA states and the GCC was signed in Norway
in June 2009 and covers a wide spectrum of agreements including trade in
goods and services, competition policy, and government procurement. The
EFTA-GCC joint committee established by the agreement will supervise the
implementation of the agreement which also provides for dispute settlement
through arbitration. Finally, a draft FTA between the GCC and New Zealand
was signed in October 2009 which aims at liberalizing trade in commodities
and services to promote mutual trade and investment between the two, develop commercial partnerships, promote competition, and improve market
access to each other’s markets. It also established a dispute settlement
mechanism within the World Trade Organization (WTO) framework to
settle trade disputes and refer them to international arbitration.
In the global arena, the UAE continued to improve its rankings in various
categories published by various international organizations. In the Doing
Business 2009 Report published by the World Bank65, the UAE was ranked
number 46 out of 181 countries in terms of ease of doing business, jumping
8 ranks from its ranking in 2008. This composite indicator was measured
by 10 individual indicators where UAE’s ranking increased in 3 indicators,
decreased in 5, and was unchanged in 2. The largest increase in rankings
was the increase from 116th to 68th in the ‘obtaining credit’ indicator. As
for trade across borders, the UAE in 2009 was ranked number 14 out of 181
countries in the World Bank’s report. In the Global Competitiveness Index
64 These restrictions can be tariff or non-tariff barriers (NTBs). The latter are restrictions such
as standards and specifications on imports and various other non-price measures which unfairly restrict trade. These types of barriers have been used more frequently in recent years
since they are ‘hidden’ forms of restrictions and are extremely difficult to detect.
65 See Doing Business (2009).
61
2009/2010 published by the World Economic Forum (WEF)66, the UAE was
ranked number 23 out of 131 countries, moving up 8 places from 2008.
This improvement in UAE’s ranking reflects a highly favorable assessment
of its institutions, technological readiness, and innovative capacity. This
ranking has placed the UAE ahead of a number of very large economies
such as China, India, Russia, Brazil, Malaysia, Ireland, and Italy, to name
just a few. The report also ranked the UAE as the 21st and 25th in terms
of efficiency and innovation respectively, and 6th, 9th, and 10th in terms
of infrastructure, institutions, and market efficiency respectively. The
report argues that institutions, infrastructure, technological readiness, and
innovation will continue to support the long-term competitiveness of the
UAE economy in the global marketplace for many years to come. Similarly,
Edelman’s global survey released annually at the World Economic Forum
(WEF) in Davos, Switzerland, has revealed that UAE opinion-formers have
relatively high levels of trust across most institutions, business and media.
Trust in institutions in the UAE is among the highest in the world at 67 %,
while trust in banks is high at 75%, compared to levels as low as 29 % in
the United States and 19% in Germany67. Moreover, the Index of Economic
Freedom has ranked the UAE as the 46th most economically free country
which is higher than some of the world’s major countries such as France,
Italy, Saudi Arabia, and China68.
66 The World Economic Forum (WEF) is an independent non-profit organization based in
Geneva, Switzerland. It promotes economic growth and social progress worldwide and has
NGO consultative status with the United Nation’s Economic and Social Council. Its activities
are funded by multinational corporations.
67 See Edelman’s Global Trust Barometer Survey (2010).
68 See Index of Economic Freedom (2010).
62
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