Economics of the United Arab Emirates - Example

Economics of the United Arab Emirates Insert Name Course Tutor Date Table of Contents Introduction …………………………………………………………………………………. 3 UAE Economic Progress ……………………………………………………………………. 3 Factors That Contributed to the Growth …………………………………………………….. 4 Limitations to the Growth ……………………………………………………………………5 Activities of OPEC ………………………………………………………………………….. 6 OPEC Policies and the UAE Economy ……………………………………………………... 9 OPEC’s Limitations ………………………………………………………………………... 10 Conclusion ………………………………………………………………………………….. 10 Works Cited ………………………………………………………………………………… 12 Economics of the UAE The United Arab Emirates (UAE) is one of the highly developed nations in the world basing on among others, energy consumption and Gross Domestic Product (GDP) per capita indices. In terms of GDP per capita, it is rated the fourteenth worldwide. In the middle-east alone, it is ranked at position three after Kuwait and Qatar. The economy is among the fastest expanding in real GDP. In 2006 for instance, there was a rise of 35% to a figure of $175 billion, up from the $130 billion noted in 2005. Basing on the figures, the UAE’s real GDP was the fastest growing in the world during the period (Icon Group 32). This paper addresses the economic issues surrounding UAE’s economy and OPEC as a regional oil producer. UAE Economic Progress The duration of economic development for the UAE began during the early 1970s. The formation of the federation on December 2, which also marked the creation of its political, social and economic institutions, happened together with a serious rise in production and sales of oil exports. This was further boosted by a major increase in oil prices during 1973. As at the late 1970’s, the UAE was among the least developed nations in the world. At the moment, it has been able to grow to per capita incomes levels that compete with those of industrialized countries. The UAE is among the countries that did not follow the theoretical developmental stages that have been noted in the developed world. Instead of this, the presence of a large amount of oil revenue has enabled the economy to skip the stages and go direct to the stage of high mass consumption (Greenaway 63). Large amounts of oil revenue have enabled a speeding up of procedures that usually take a long duration of time. The UAE economy was therefore able to avoid the tedious process of accumulating capital and saving money so as to implement economic development. Because of the large amount of gas and oil, the economy has focused on Resource-Based Industries (RBI) in development. This is founded on the maximum use of natural resources. Windfall income has been There has been utilized, mostly aimed at providing a single and final boost of economic and social infrastructure. This has made it possible for the country to have a considerable amount of economic development in a short while, especially between 1973 and 1982, a time that was characterized by really high prices of oil (Parker 46). The UAE also has among the fastest expanding tourist sectors. It attracts a record number of both international travelers and investors. The country’s tourism sector at the moment comprises about 0.5% of the total worldwide volume of tourism. The tourism industry of the Emirates is projected to grow further by an average of about 4.9% per year up to 2017. There is a vigorous activity in real estate and this is causing the development of a wide variety of beautiful resort and hotel developments that aim at supplying the ever expanding demand for high quality property within the UAE (FRD 34). Factors That Contributed to the Growth Among the factors that have contributed to the UAE’s success as an economy is its political stability. The political structures that exist in the country seemingly work best for the kind of society that is there. The spreading out of acquired oil revenues as economic and social infrastructure has also led to the empowerment of citizens. The good lifestyles have led to increased purchasing power hence demand for goods from the available industries, leading to considerable industrialization and strong internal markets. This is because the high salaries offered and high degree of social services for instance education and health has led to a rapid rise in living standards for its citizens and generally lowered the chances of internal social or political unrest. The UAE Government has retained an admirable human rights record as from the state’s foundation. This has facilitated political and social stability (Hakes 44). Externally, the influence to participate in regional integration has also contributed to success. Other than the rises in oil prices that have led to greater profitability, there has been pressure to join associations for instance the United Nations, Non-Aligned Movement, Arab Gulf Cooperation Council and the Islamic Conference. This has led to good relations with other countries, especially the west and therefore offered a stable market for oil and gas among other products. In addition to the social and political stability, there has been the implementation of liberalism in trade policies hence both international and domestic investments in local industries. The country is gradually reducing its dependence on oil and natural resources. However, natural gas and petroleum are still the main drivers of the economy (Falola & Genova 54). As at the year 2000, the country’s oil reserves were estimated at 98.8 billion barrels. Gas reserves on their part were estimated at about six trillion cubic metres as at 2000. This was over 4% of the known total world deposits. The country holds the fourth main reserve of natural gas throughout the world. Its gas production per day stood at 2,940 million cubic feet as at 1999, and projected to last for over sixty years. The country therefore has in its possession large amounts of gas and oil which are able to support its economic growth in the long-term in the recent past, there has been a huge boom in the construction industry, and a quickly expanding manufacturing base. These together with a fast expanding services sector have led to a greater diversification of the country’s economy. Throughout the country, construction projects are valued at a massive $350 billion (Hakes 34). Limitations to the Growth The main challenges that have limited economic growth recently include the limitation in raw materials and the small size of domestic markets. The presence of raw materials is important in ensuring lower industrial production costs. The UAE has been unable to assert itself in the aspect of ability to provide its raw materials, especially in the agricultural sector. The little involvement of the country in agriculture and forestry, mostly due to the nature of the environment is among the factors that have led to this situation. In the recent past, competition in the world markets has become even stiffer, with thee countries that have the capability of producing at the least cost being able to become more competitive. The need for the UAE to import raw materials has been a major hindrance to its attempt at attaining the necessary competitive advantage in the world markets (Greenaway 6). The small size of internal markets also plays a role in limiting economic development. Historically, countries that have had large domestic markets have tended to be more successful in industrialization. In the case of the UAE however, the country is not densely populated. Although the population has a considerably high level of purchasing power and demand for products, this has not been sufficient to ensure complete success. The reliance on external markets has a problem as it leads to more exposure to the unpredictability of the international markets and challenges posed by the international market structures. For instance, there has been the global financial crisis that has greatly limited the ability of countries to participate in trade since 2007. By creating a general shortage of funds, the crisis has posed a challenge even to the development of the oil and gas industries through the suppression of the commodities’ demand hence reduction of revenues that are supposed to be gained from their sales (Hakes 72). Activities of OPEC OPEC’s policy calls for the creation of favorable oil prices to benefit its members. This is achieved through the assignment of production quotas to members with the objective of limiting supply for crude oil that is available in the global market. However, the possibility of the quota system controlling price is questionable because there is the tendency of OPEC members producing more than their assigned levels of production. OPEC has in the recent past sought to influence the prevailing market conditions in the oil industry. Sellers and buyers have therefore had to wait for whatever the group decides as it considerably affects the markets for oil. As a response to some of the latest oil price increases, the organization has ignored the explanation of crude oil shortage as a possible cause of the rise. It has rather worked on the argument that there is an adequate supply of oil, even going past the necessary quota levels. OPEC therefore tallied and offered figures to support the claim (Amuzegar 22). Among the main stated goals of OPEC is to determination the best way of protecting its interests, both individually and collective. It is also supposed to identify how to ensure a stabilization of international oil markets and as a result get rid of unnecessary and harmful fluctuations. It is supposed to consider the interests of member nations and need to secure a consistent and fair income to themselves, efficiency and regularity in petroleum supply to buying nations and fair returns on capital for investors (Greenaway 14). The role that OPEC played in determining market prices can be traced to measures that it undertook beginning from 2002. During that year, the joint production of the group went down from the previous average of more than thirty million barrels per day to about 28.5 million units daily, a figure of 5% lower. The cutback in production altered the market during 2003. There was the slow recovery of economic growth and enhancement of oil demand. The subsequent production was supposed to both meet the rising oil demand and provide compensation for the less availability before the measures were implemented. The outcome of the conditions was that with market evolution during late 2003 and strengthening of economic growth in 2004, there was a continuous noting of shortages in inventory levels (Parker 48). OPEC has still cut down on oil supply, with great impact on western economies and by extension the world at large. The maintenance of high oil prices has had a harmful effect on economies such as that of the United States. The organization’s continuing approach of restricting output also raise questions as to World Trade Organization (WTO) commitments of OPEC members. Over a half of them are also in the WTO. WTO regulations are against its members setting export quotas to any other. The use of export quotas by the organization seemingly amounts to a possible violation of the WTO rules (Amuzegar 12). The OPEC officially claims to pursue a $ 22-28 range of price per barrel. This has not been achieved. While initially the idea was that working within this range will work best for the globe’s long-term economic growth, the pursuit of such low prices has not been implemented, with the set prices always being far above it. In October 2008, Qatar, Russia and Iran got together to create what is referred to as the gas troika. This is an alliance that aims at cooperating in gas trade, mostly in natural gas export contracts. The three together control about 55% of the total gas supply in the world. The idea is to spread the idea of OPEC to gas supply. The move to create a gas OPEC is a bad one. This is due to the possible effect on the supply and therefore price of natural gas. Considering the past experiences with OPEC which raised its oil prices and even used it to put political pressure upon western powers, the arrangement may end up hurting countries that are highly dependent on gas as a fuel (Amuzegar 6). Countries such as the United States are usually the most hit by the policies implemented by OPEC. This is because they have extremely high levels of petroleum consumption. The immediate consequence of reduced supply in case of regulation is often a relatively higher demand for oil and pushing up of prices. The overall effect is a raised cost of living which affects virtually every person in the population. The failure to maintain the stated low levels of prices also has the effect of depressing product outputs and incomes within economies, in addition to the obvious fuel inflation that often results. Oil exporting countries are on their part guaranteed of higher earnings. This is because they are able to acquire more money from the sales of the same quantities of oil. As a result of such measures, there has therefore been the further strengthening of the Middle East as an economic base of the world. There is greater industrialization there as countries invest their oil wealth, and by extension, individual country savings and investments are raised. Standards of living for citizens are generally boosted as may be demonstrated by the case of the UAE (Pitt & Leung 66). It is quite difficult to exactly point out the extent of effect that the policies have on importers of oil. There is however agreed upon that the oil prices arising from the prices tend to have a dampening effect on prospects for economic growth in the countries that import fuel. However, the policies in general may not necessarily be feared as being capable of derailing the world’s attempts at attaining economic recovery. Measures such as raising the level of production quotas and placing incremental barrels into the markets have a number of effects on economies. The most noteworthy of them is the placing of temporary caps on prices. This means that because of the large quantity of fuel that comes from the member countries, other producers will find it difficult to put their prices lower than OPEC’s (Richards & Waterbury 37). OPEC Policies and UAE Economy The UAE economy has experienced a contraction in 2009. However, there is the anticipation of a stronger economic growth during 2010, mainly because of an expected rise of oil prices. Among the challenges that are being faced within the oil and gas sector has been instability in their market prices. At the moment, weakened oil prices are effecting growth and causing shrinkage in the Emirates’ economy. Entire Gulf region has been seriously affected by a decline in crude petroleum prices that have gone down to slightly above $32 a barrel. A peak in prices was noted in mid 2008 when it reached almost $150 per barrel (Greenaway 81). The UAE has a rich endowment of major oil reserves, both onshore and offshore. Petroleum gas is also produced in addition to non-petroleum gas. As from the 1970s, the country’s speedy growth has been dependent on oil exploitation. There has been a very efficient management of the gas and oil industries. There is generally the use of the latest possible technology in order to raise the productive efficiency. The country’s population is generally small. With the export of oil however, there was a rapid expansion. This was due to higher rates of increase in the indigenous population and also a major inward migration comprising of expatriates who to date make up over 75 per cent of the total population. The existence of a tiny indigenous population, the wealth brought by oil and the big expatriate population, are the main socio-economic aspects of the UAE development (Falola & Genova 49). OPEC’s Limitations OPEC is not able to set prices. Rather, it sets production limits upon members and this is also mostly purely theoretical. This is because price setting is done within the markets, as a product of the supply and demand aspects. The ability of OPEC to control oil prices has declined since the mid 1970’s. This is partly due to the identification of new oil reserves in the Gulf of Mexico, Alaska and the North Sea. This is in addition to the opening up of Russia and modernization of world markets. As from 2003, there has been the concern that OPEC had a small excess in pumping capacity, hence causing speculation that its influence on the determination of oil prices was likely to begin slipping away (Amuzegar 26). Conclusion The UAE is among the wealthy countries of the world. Factors that have contributed to this include having a small population and massive oil resources. The ability to achieve great budget surpluses has made it possible to have a high rate of savings, controlled both by the public and private sectors, hence greater economic and social development. The challenges faced have however remained to be the lack of raw materials for industrialization and negative changes in the world economic climate, for instance the global financial crisis. The limited nature of the internal markets for goods places the country at a greater vulnerability top the international markets. Policies that are developed by OPEC need to address the issue of environmental conservation. What exists is mostly about pricing, demand and supply. It should be remembered that petroleum as a fuel leads to a lot of environmental degradation through pollution. Although there have been a lot of seminars held to establish the link between the two and how to deal with it, there does not seem to be any attempt to incorporate it. .   Works Cited Amuzegar, Jahangir. Managing the Oil Wealth: OPEC's Windfalls and Pitfalls. New York: MacMillan, 2001. Falola, Toyin & Genova, Ann . The Politics of the Global Oil Industry: An Introduction. Hawthon: Penguin Books, 2008. Federal Research Division. United Arab Emirates: A Country Study. Berkeley: California University Press, 2004. Greenway, David. The World Economy: Global Trade Policy 2008. New York: Wiley- Blackwell, 2009. Hakes, Jay. A Declaration of Energy Independence: How Freedom from Foreign Oil Can Improve National Security. New York: John Wiley, 2008. Icon Group. The 2009 United Arab Emirates Economic and Product Market Databook. San Diego: Icon Group International, Inc., 2009. Parker, Philip. The 2006 Economic and Product Market Databook San Diego: Icon Group International, Inc., 2006. Pitt, Edward & Leung, Christopher. OPEC, Oil Prices and LNG. Hauppauge: Nova Science Publishers, 2009. Richards, Alan. & Waterbury, John. A Political Economy of the Middle East. New York: Prentice Hall, 2007. Read More