United Arab Emirates - Overview of economy

The UAE is a tribal federation of 7 emirates occupying a portion of the southeastern Arabian peninsula. It is one of the most economically secure states in the world. The UAE controls 98 billion barrels of oil—10 percent of the world's proven oil reserves—as well as 212 trillion cubic feet of gas, the fourth largest amount in the world after Russia, Iran, and Qatar. The UAE has employed its natural resources and its strategic location to become one of the most modern and wealthiest states in the world. It boasts both large petroleum and non-petroleum sectors. Economic growth in large part has hinged on the price of oil and the ability of UAE governments, whose proceeds come almost entirely from oil sales, to invest in large infrastructure projects.

For much of the last 2 centuries, the inhabitants of the UAE depended on pearling, fishing, commerce, and, allegedly, piracy of commerce in the Indian Ocean. To protect its trade routes to India, Great Britain attacked many communities along the UAE's Arabian/Persian Gulf coast in 1819 and 1820 and for the next 50 years extended an informal protectorate (protection and partial control of one region or dependent country by another country) over the region, which became known as the "Trucial Coast" because of the non-aggression pacts (or truces) that Great Britain forced regional emirates to sign with each other and Britain.

The region "entered" the 20th century in the 1950s with the discovery of oil in Abu Dhabi and subsequent discoveries of oil in Dubai and Sharjah in the 1960s. Following Britain's withdrawal from the Trucial Coast in 1971, the UAE became an independent state composed of 7 of the original 9 emirates. The other 2 emirates, Bahrain and Qatar, became separate independent states. Abu Dhabi, Dubai, and to a lesser extent, Sharjah, used the proceeds from oil sales to build modern, urban societies. Dubai, with substantially smaller oil supplies than Abu Dhabi, sought to build commercial institutions, leisure industries, manufacturing, port and transportation facilities, and other service industries that were not dependent on oil proceeds. The crown jewel of this project is the Jebel Ali Free Zone , which opened in 1985 and now boasts 1,600 international companies from over 70 different nations. Sharjah too has sought to broaden its economy by investing in manufacturing. Since the early 1980s, Abu Dhabi has invested billions of dollars in nonoil industries, including manufacturing, services, and agriculture. After the Gulf War, the UAE used the glut in the world arms industry to mandate an "offsets" program requiring all firms selling weapons to the federation to invest in its non-oil related industries.

Because the UAE had a relatively poor and unskilled population when oil was discovered there, the federation has depended on expatriate laborers and managers to meet close to 90 percent of its labor demands. The vast majority of these expatriate workers are South Asian, though there are large numbers of Arab and Western expatriate workers. Expatriates earn half as much as UAE nationals but present 3 significant problems. First, expatriate workers may undermine the UAE by promoting their own governments' interests or that of organized crime within the federation. Second, expatriate workers often require high payments for social services and send virtually all of their salary home rather than spending it in the UAE. Third, expatriate workers intensify preexisting social divisions within the UAE since they tend to be the principal workers in non-oil UAE industries, while UAE nationals generally prefer to work for the government.

The federation cannot regularly feed itself or meet its water and electrical needs without significant imports or technological assistance. The UAE's hot and arid climate has few regions hospitable to large-scale farming. While the UAE has invested heavily in new technologies and irrigation systems, the federation's agricultural production cannot produce adequate amounts of the most basic commodities. Nor can the UAE meet the water needs of the federation for much longer due to the gradual poisoning through salinization (to become concentrated with salt) of the federation's extensive underground network of wells. Similarly, the demand for electricity is quickly outpacing supply and forcing the UAE to turn to desalinization plants as a way to provide adequate water and power resources for the federation since they generate energy as a byproduct of turning salt water into fresh water. These problems are particularly acute in the northern emirates, which lack the resources to meet the demand of their population for either water or electricity.

Still, the UAE has the financial and institutional resources to solve these problems. The UAE can depend on the proceeds from the sale of its petroleum and natural gas. Abu Dhabi has US$150 billion in overseas assets that can either cover budget shortfalls due to excessive spending or a sharp decline in oil prices. Equally importantly, the UAE's free market system and open economy has fostered the creation of numerous medium and large corporations that produce highly competitive goods for the regional and world markets.