Until the 1930’s, and reaching a peak in 1929, pearl fishing brought considerable wealth to the Emirates. The bankers on Wall Street and maharajas of India held pearls in high esteem and that helped build the roots of finance and trade of the present day UAE. Yet, the combination of the Great Depression after the stock market crash of 1929 and the invention of cultured pearls in Japan caused the Emirates’ pearl business to fade in the years before WWII.
Oil replaced pearls as the dynamo of the Emirates’ economic growth in the 1960’s. Naturally, oil would alter the country’s configuration and its perspective, transforming it into one Of the richest states in the world. Dubai has become real nerve center of the Middle East for foreign investments, services and trade. However, economic growth and transformation have not translated to political and social progress. A slow process of democratic reform has begun in years. But the oligarchic system of the emirs dominates the institutions. Traditional customs and attitudes, moreover, prevail.
Oil and its Derivatives
Oil has been the engine of the UAE’s economy. The main oil fields are located underwater at Umm Shaif and Zakum and connected by pipeline to Das island. There are also fields on the mainland at Murban and Bu Hasa. Natural gas deposits are located in Hail and Shuwaihat. At current extraction levels, oil reserves could last up about 2050. Western oil majors such as BP, ExxonMobil, Total and Royal Dutch Shell have grabbed the lion’s share of UAE oil and gas sector concessions. But, China has been catching up quickly. In 2014, the China National Petroleum Corp (CNPC) won a contract to produce and export oil from Abu Dhabi. In February of 2017, CNPC and the private China Energy (CEFC) took a 12% stake in an Abu Dhabi National Oil Co (ADNOC) onshore concession.
Oil production has allowed the UAE to invest in other industrial pursuits including cement plants, food processing and metallurgy. Just as in Saudi Arabia, oil has fueled a sophisticated chemicals industry largely based in the major centers of Dubai and Abu Dhabi. Dubai exports most from Japan, South Korea and increasingly China. It imports most from the United States, China, India, Germany, Japan, United Kingdom and France.
Fiscal and Lifestyle Paradise
The ever more financial services and international trade oriented economy and the offer of favorable tax conditions have made the United Arab Emirates into a “tax haven. The country has a favorable tax regime, made possible by the prominence of the extractive sector, and a minimal bureaucratic burden, which makes it easy to open and run a business. This has attracted considerable foreign capital and favored Investments. The financial structure is supported by a well-capitalized banking system and two stock exchanges. The United Arab Emirates also have a wealth of overseas assets, most of which managed by the ADIA (Abu Dhabi Investment Authority).
UAE citizens in the main urban centers enjoy decidedly above average lifestyles. Anyone who has landed at one of the UAE’s major local airports can appreciate that unbridled luxury and glamor are everywhere – or seemingly so. It is precisely because of this unbridled luxury that sheikhs of the seven emirates of the UAE devised a solution that would allow this luxurious lifestyle to continue even when the oil reserves run out. The sheikhs had to solve a difficult riddle: how could they attract tourists in a desert territory with little historical appeal? The sheikhs resolved to build gorgeous and unique (a seven-star hotel with underwater restaurant for instance) capable of drawing millions of visitors, generating enough wealth for the natives to thrive for decades after the last barrel of oil is sold. This explains why, among other man made wonders, the world’s tallest skyscraper (Bourj Khalifa, 850 meters tall) was conceived and built in Dubai. It’s one of many other projects that have already been completed in Dubai and Abu Dhabi. In recent years, the sheikhdoms have invested heavily to facilitate cruise ships, renovating and inaugurating new state-of-the-art harbors, paying homage to their pearl fishing past.
The UAE thrives on foreign trade and financial services. The UAE suffered somewhat after the global financial crisis of 2008 – Dubai went into default – the Emirates are among the richest countries in the world in GDP/per capita rankings. The UAE stands as a veritable ‘monument’ to the idea of economic progress. Still, this has not trickled down to produce social and political progress. The vast majority – estimates suggest as much as 95% – of workers are of foreign origin. Apart from the professional and ‘white collar’ workers, many of whom come from the West, the core of the workforce, responsible for building the dozens of skyscrapers that dot the skylines of Dubai and Abu Dhabi, come from central Africa, Pakistan, Bangladesh, the Philippines and Indonesia among others. Many of these, especially in the Dubai area, live and work in conditions that border on the edge of slavery. The overwhelming wealth generated by the UAE’s oil production has helped fund enormous public works. The level of wealth reached by the highest social classes has, however, created equally enormous discrepancies. The State’s re-distributive efforts have failed to reach the internal areas of the UAE – much less the foreign workers.
If oil was the source that helped the UAE, the main economic goal now is for the economy to case relying on it as the main source of income. The two most important emirates, Abu Dhabi and Dubai, dictate the pace of the country’s economy. While Abu Dhabi, which owns 90% of the oil resources in the country, bases its own development on crude oil and natural gas proceeds, it has begun to favor economic diversification, especially in the field of alternative energy. As for Dubai, its natural resources are scarce, thus it has made a bold development of the services sector as its top priority. This ‘duopoly’ of has allowed the UAE to reduce the importance of hydrocarbons in the makeup of its GDP. Exceptionally, in the context of the Persian Gulf, the UAE earn some 50% of their GDP from services and less than 30% from oil and gas. Still, diversification and investment into developing the non-oil sectors would not have been possible without the proceeds of oil trading, which remains the basis of the country’s economic development.
Recent developments, especially in the field of alternative energy and tourism, another exception in the Arabian Peninsula, have contributed to the country’s ability to attract foreign investment. That said, the Great Recession that started after the Subprime crisis in the U.S. in 2007/2008 has not spared the UAE. Of the seven Emirates, Dubai was hardest hit, given its exposure to finance. Dubai World, the investment company that holds and manages the Government of Dubai’s national and international equity holdings, faced debts of $59 billion in November 2009. Such was the global concern over the debt and the Dubai government’s default that world markets crashed. Abu Dhabi stepped in to help underwrite about half of that debt, quelling fears. Despite these incidents, the country’s performance has recovered, but its GDP growth has not seen the 8-9% rates that had been the norm until 2007. Lower oil prices over the past two years have capped GDP growth at below four percent. Still, Eurasia Group, one of the world’s leading risk advisory agencies in the world, described the UAE as the “most dynamic” economy in the Middle East and North Africa region (MENA) in 2011. Considering the toll that the Arab Spring has had on MENA since then, that qualification must be even truer in 2017.
The Arab revolts of 2011 – the ‘Arab Spring’ – have not affected the politics and the economy of the UAE significantly. Having pursued a different foreign policy than Saudi Arabia has helped keep the effects of the Arab Spring away. As for Dubai’s economic future, apart from the diversification to reduce reliance on oil, China will play an ever greater role in the UAE. China became Dubai’s first trading partner in the first half of 2016 as bilateral trade volume reached over $21.50 billion, almost twice the volume of trade the UAE has with India, its second largest trading partner. The U.S.is third and Saudi Arabia was Dubai’s fourth-largest trading partner. The Kingdom is also Dubai’s main trading partner in the Arab world. China-Dubai relations were strengthened in 2016, as the Emirates and China started direct trade in Yuan – not U.S. dollars as has been the standard practice for international exchange – in late 2016. The UAE’s NBD bank issued a Yuan denominated bond – known as Dim-Sum, in 2012.
Beijing sees the UAE as playing an ever more important role in supporting Chinese trade in key emerging markets. The UAE boasts the Jebel Ali port, the ninth busiest container port in the world, which is strategically located to exploit emerging trade corridors markets in SAMEA (South Asia Middle East, Africa) and CHIMEA (China, India, Middle East, Africa). (A.B.)