Economic Growth of the UAE - Research Paper Example

Table of Contents Table of Contents 1 1.0 Introduction 2 2.0 Economic growth in UAE 2 3.0 Internal factors that contributed to growth 4 4.0 Sectors that are negatively affected in UAE 6 5.0 Oil market 7 6.0 Activities of OPEC 9 7.0 Factors that influence price of oil 10 8.0 Repercussions of OPEC policies 11 9.0 Conclusion 12 1.0 Introduction United Arab Emirates is known for its fast growing economy as compared to economies of other nations in the global market. This nation has gone through huge economic development and growth since its foundation due to external and internal factors. The economy of any nation is very important as it affects very many aspects of the nation. This includes the living standards and stability in the nation. (Bonne, 1992) Purchasing power parity is used to measure the economic Gross Domestic Product in United Arab Emirates. This paper therefore discusses two main internal factors that contributed to its growth. It has however been noted recently that some of the sectors have been negatively affected. (Bonne, 1992) This paper also shows the sectors that have been negatively affected. Oil prices have also shown dramatic changes over the years. The OPEC was formed and tried to influence the global oil market. The effectiveness of OPEC in achievement of its overall objectives is questionable and different events had effect on OPEC and oil prices in general. The activities of OPEC have also been analysed in this paper. (Roll, 1939) This includes the role of these activities and their successes or failures. There are various internal and external factors that influenced oil prices that also affected the state of UAE economy. Finally, the repercussions of the current OPEC policies are explained in this paper. 2.0 Economic growth in UAE An overall analysis of United Arab Emirates shows that it is one of the most developed economies that are also growing at a very fast rate as compared to that of other nations. This is basing on the HDI, the energy consumption per capita and GDP per capita. (Roll, 1939) United Arab Emirates’ GDP is currently rated to be third in the Middle East and fourteenth in global arena. The rate at which the economy of United Arab Emirates is growing is enviable. In the year 2006, the economy in this nation grew by 35%. In fact the research shows that between the year 2005 and 2006, United Arab Emirates had the fastest growth on GDP in the whole world. (Bonne, 1992) Source: www.tradingeconomics.com Table 1 Table 1 above shows the GDP growth rate in UAE that is adjusted by inflation. It is very clear from the table that the year 2006 experienced massive growth in the economy. The table also shows that in the year 2000, the nation experienced considerably high GDP. This was due to high revenue from oil and gas exports. (Roll, 1939) In the year 2002, the GDP went so low due to various factors in the market. These included changes in oil production and global oil prices. It then rose steadily until the year 2006 then started experiencing a slight decline. There are various factors that contributed to the growth in United Arab Emirates’ economy. They are as follows. (Bonne, 1992) 3.0 Internal factors that contributed to growth The economy of a nation is always influenced by both internal and external factors. One of the major internal factors that highly contributed to the growth in United Arab Emirates is its export. This nation is known to export natural gas and petroleum to other nations. This was a major contributor to the overall growth in the economy in this nation. This is considering the fact that the nation was able to get revenue from exporting natural gas and petroleum to other global markets. (Bonne, 1992) Dubai is known to produce approximately two hundred and forty thousand barrels of oil in one day. On the other hand Abu Dhabi produces approximately three hundred and seventy thousand barrels of oil per day. An overall analysis of UAE shows that gas and oil exports have been the major contributor to its economy. This is basically because the nation has vast reserves of hydrocarbon. (Roll, 1939) They are exported to other nations such as United States, Canada and United Kingdom among other nations. This nation is ranked forth in having the largest gas reserves in the whole world. Its natural gas reserves are known to be approximately 5.8 billion cubic meters while oil reserves stand at 98.2 billion barrels. Analysis carried out in UAE shows that the nation also exports jewellery, gold, pharmaceuticals, textiles and clothing, ceramics and cement. These are exported to other African and western nations. They have also played a great role in enhancing the economic growth in UAE. Other factors have also contributed to the success in the nation. They include the nation’s leadership that is visionary, availability of skilled labour and investments in real estate. It is quite essential to note that gas and oil exports do not contribute to the UAE economy as much as they used to. Recent research shows that non oil services are currently producing approximately sixty five percent to the nation’s economy. This is specifically to the nominal GDP of United Arab Emirates. (Roll, 1939) The nation’s infrastructure also contributed to the growth in the economy. This nation is known to have invested a lot of money on its road network. This nation has spent billions of dollars in construction of its infrastructure. The road network in the nation is quite extensive in nature and connects to the major towns. This has definitely enabled business within the nation to thrive therefore leading to overall growth in the economy. Raw materials are easily transported from one place to another without going bad and are sold or processed in time. There are also well developed seaports such as Port Zayed, Khor Fakkan, Port Saeed, Port Khalid, Port Jabel Ali and Port Rashid. All these make it easy for goods to be transported outside and also brought in the nation. This has resulted in booming business within the nation that brings in revenue to the government through taxes collected. (Bonne, 1992) There are also well developed airports. Its major airport known as Dubai International airport is known to be very busy bringing in tourists from other nations. Through this the nation is able to get foreign revenue that is quite imperative in economy growth. (Bonne, 1992) This airport allows business men in the nation to export and import goods. There are also other airports in the nation that are equally well developed like Al Ain International airport, Sharjah International airport and Abu Dhabi International Airport. They are located in smaller towns in the nation such that they easily allow quick transport of goods within the nation. This makes the nation to have a very good environment for business hence the enviable growth in the economy. Due to this infrastructure, UAE has many manufacturing industries that produce jewellery, gold, pharmaceuticals, textiles and clothing, ceramics, cement and blocks. All this have contributed to the growth of UAE economy by bringing in foreign currency and through taxes. 4.0 Sectors that are negatively affected in UAE Various sectors have been negatively affected in United Arab Emirates and show decreased growth. One of the sectors that have been negatively affected is tourism. As earlier on illustrated, UAE has well developed airports and infrastructure that encourage tourists to visit the nation. Tourism sector is also known to contribute towards the overall growth and stability of the economy in the nation. (Bonne, 1992) This sector has been negatively affected and research shows that the numbers of tourists have declined by approximately forty percent. This has been caused by the global economic crisis. Tourists in other global nations used to save money and specifically visit the nation. (Roll, 1939) With the onset of the global economic crisis, many of them cannot afford to save money for tourism which is not a basic need. They have been forced to take care of the basic needs and because of rising prices, very little money is left over for leisure activities like tourism. This explains the decline experienced in the tourism sector in the nation. (Roll, 1939) Oil exports have also experienced decline and are not contributing as much as to the economy they used to. Initially, oil exports used to give UAE so much revenue that contributed to economic growth in the nation. Production levels have reduced due to the quota system proposed by OPEC. In 2009, oil prices have reduced considerably leading to low revenue for the UAE government. There are also other restrictions in as far are exporting oil from UAE to other nations is concerned. This has therefore resulted in job losses in oil processing sector that have been contributing to the economy through payment of taxes. This has therefore influenced the decline witnessed in this sector. (Bonne, 1992) 5.0 Oil market There is no doubt in economists’ mind that the price of oil has shown dramatic changes over the years. Just like any other commodity, oil is normally affected by supply and demand among other factors. The graph below shows the changes in oil prices since the year 1869 to the year 2009. Research shows that the changes in oil prices were influenced by various factors. (Roll, 1939) For instance, in the year 1957-59 the prices went up slightly due to the Suez crisis. In 1972-75 prices went up due to the Kippur war. Around the same period, US had price controls that affected the global oil prices. The Iraq-Iran war also led to sharp increase in oil prices in the year 1980 to the year 1983. Other contributors to changes in global oil prices include Gulf war and recession in 2009. This affected through enhancing insecure environment for production and even exporting among other factors. When the OPEC came into picture, it also affected oil prices. (Bonne, 1992) Source: www.wtrg.com OPEC was formed in the year 1960. It started with only five nations which are Venezuela, Kuwait, Iraq, Saudi Arabia and Iran. This body attempted to influence the global oil market. OPEC tried to put in place production limitations so as to influence price in the global markets. Later on, other nations such as UAE, Nigeria, Libya, Indonesia, Algeria and Qatar joined OPEC. Venezuela is known to have joined and later on left due to the country’s oil and economic factors. With time there was a shift of power used to control oil prices in the global markets from United States of America to OPEC. United States lost its spare capacity that was used to control oil prices in the world. (Roll, 1939) Various factors had effect on OPEC operations. A good example is the Yom Kippur war whereby Egypt and Syria attacked Israel. This resulted in many western nations such as United States supporting Israel. On the other hand, Arab nations gave support to the other nations and imposed bans due to this situation. This saw Arab nations curtailing oil production by approximately six million barrels. (Bonne, 1992) This was approximately seven percent of the production in the entire world. This situation made world prices to increase by four hundred percent. It was very clear that all nations in Arab that exported oil ganged up and formed an embargo against those that were supporting Israel. The dramatic rise in world oil prices clearly indicated that the power to control oil prices was no longer in United States’ power but in OPEC. (Roll, 1939) 6.0 Activities of OPEC From its initiation, OPEC has had various activities which had various effects on global oil prices. This organisation was put in place to countries that produce oil to have their income guaranteed through coordination of prices and policies in the market. This was put in place to counter strategies of western nations in relation oil prices. An analysis of OPEC activities carried out in the year 2007 shows that they were geared towards mitigating global warming in the environment. In order to achieve this, OPEC put in place quotas for twelve nations in relation to production levels per day. (Roll, 1939) The reasoning behind this was that the consumption of fossil fuel results in production of large amounts of greenhouse gases and carbon dioxide that are major players in global warming. This meant that if the proposed quota system would be implemented, the effects of global warming would be considerably reduced leading to a better environment. Analysis of this activity shows that OPEC nations have not successfully adhered to the plans. In fact the effects of global warming continue to increase day by day due to the failure to adhere to this plan. This was not implemented because of selfishness in member nations as they want to make more money. The plans were therefore more of paper work than pragmatic in nature. (Roll, 1939) The other activity that OPEC had involved was increase in oil prices during the kapur war when United Stats supported Israel. This organisation managed to have the price of oil increased for very long time. Its success was however attributed to none other than the flexibility of Saudi Arabia. This led to an increase in the price of oil that was compared to that of products that are refined. (Bonne, 1992) 7.0 Factors that influence price of oil Oil prices in United Arab Emirates are influenced by both internal and external factors. One of the external factors that influence oil prices is OPEC. This is because this organisation determines oil prices through its activities that regulate the production of oil. (Bonne, 1992) When OPEC allows so much oil to be produced, oil prices definitely go down. On the other hand when OPEC puts in place quotas on production, then the price definitely escalates. This also affects UAE’s economy accordingly. (Bonne, 1992) One of the internal factors that also affects oil price in UAE is the stability of the government. The stable government enables oil prices to remain stable without unusual increase. This results in the economy of the country growing steadily without any unnecessary interruptions. In this case the oil is easily extracted since the political environment is conducive for business. (Roll, 1939) 8.0 Repercussions of OPEC policies Critically analysing OPEC’s policies shows that they have various repercussions. First of all, its policy on production of oil does not take into consideration the effects that oil has on the environment. (Bonne, 1992) There is very little that has been done in OPEC to ensure the oil produced by OPEC nations is environmental friendly. It is therefore justified to assert that OPEC has played a key role towards global warming problems being witnessed in the world today. (Bonne, 1992) Another OPEC policy is in relation to regulation of oil prices. While this is being carried out, it is done with a selfish perspective only to benefit OPEC nations. This has resulted in bad relations between OPEC nations and other western nations such as Europe and United States. This is basically because OPEC policies are reducing the profitability of many Companies in United States and Europe. This is by OPEC ensuring that Companies in United States do not get oil from OPEC producing nations. This resulted in high loses in these U.S and Europe based Companies. (Roll, 1939) 9.0 Conclusion In conclusion, United Arab Emirates is known for its economy that is growing very fast. There are various internal factors that are attributed to this fast growth. These are good infrastructure and its oil and gas exports. These two have played a major role in the nation’s past years in enhancing productivity and stability in the economy. There are however some sectors in the nation that have been negatively affected. They include tourism sector which has been adversely affected by the global economic crisis and the oil industry that has been affected by external forces in the market. The oil market has shown dramatic changes in the past years. It showed changes in prices that could be attributed to wars and other bodies such as OPEC. These wars included the Kippur war, Gulf war and the Iraq- Iran war. It is very clear that United States also used to control oil prices in the global market. Oil prices in UAE are influenced by both internal and external factors. This includes organisations such as OPEC and the political stability of the government. All these aspects play a great role towards the economy of United Arab Emirates. Reference; Bonne, A. (1992): The economic development of the Middle East; New York; Prentice Hall Lord, F. (2009): UAE economy; retrieved from; www.tradingeconomics.com; accessed on 8-10-09 Roll, E. (1939): History of Economic Thought, Englewood Cliffs; Prentice Hall Sader, F. (2009): Crude oil prices; www.wtrg.com; accessed on 8-10-09 Read More