Structural Change in the United Arab Emirates

The Challenge of Sustainability

Andreas Rostin

Georgetown University
Economics of the Middle East
December 2004

Table of Contents ...  2

1. Introduction ...  3

2. From Rags to Riches ...  4
2.1. 30 Years of Growth and Prosperity  ...  4
2.2. Nationals versus Expatriates  ...  5

3. The Need for Fiscal Sustainability  ...  6
3.1. Finite Natural Resources  ...  6
3.2. Progress with Economic Diversification ...  6
3.3. Little Progress with Fiscal Diversification  ...  8

4. Suggestions for Reform  ...  9
4.1. From Public to Private  ...  9
4.2. Taxation Options  ...  10

5. Conclusions  ...  11

Appendix  ...  12

References  ...  17

1. Introduction

Over the past 35 years, the seven emirates comprising the United Arab Emirates (UAE)¹ have experienced unprecedented economic development. The immeasurable inflow of petrodollars since the first oil crisis in 1973 has transformed the UAE from one of the poorest countries in the world into one with a standard of living comparable to the countries of Western Europe and North America. However, with crude oil and natural gas reserves diminishing steadily, income from these two natural resources will not continue to flow indefinitely. It is questionable whether economic growth in the emirates can be sustained when oil extraction and exports decline. Recent efforts to diversify the UAE’s economic activity and thereby lessen the country’s dependency on oil and natural gas have had a certain degree of success. At the same time, however, the federal government has been unable to broaden its revenue base to include income from nonhydrocarbon activities, a step seen as essential for guaranteeing sustained economic prosperity.

This essay will cast an eye on the economic and social transformation that has taken place in the emirates, focusing heavily on the question of sus tainability. It will begin by outlining the effects that the oil windfall has had on the UAE’s development over the past three decades. Then it will emphasize the importance of economic and fiscal diversification and point to success and failure in attempting this structural transition. It will analyze the inhabitants’ apparent reluctance to change and attempt to give reasons for this phenomenon. Finally, it will offer suggestions for achieving a foundation for sustained economic growth in view of continuously decreasing oil reserves.

2. From Rags to Riches

2.1. 30 Years of Growth and Prosperity

When the UAE started generating significant income from its oil exports in the early 1970s, the government was overwhelmed with the task of managing the sudden inflow of capital. Foreign advice was therefore sought on most infrastructure projects. The foreigners’ ignorance of local needs and objectives, however, led to the construction of cities and settlements dominated by unattractive concrete monoliths. One of the government’s main priorities had been to provide each citizen with appropriate housing. The result was a steep increase in urbanization. Between 1970 and 1995, the share of the population living in cities rose from 57% to 84%.² The fact that most of these housing projects were entirely subsidized by the government led to an uncontrolled boom in construction. As a consequence, many buildings today stand empty. Furthermore, costly oversized airports and seaports, an extravagant road network affording access to even the most remote mountain towns and a highly modern but inflated communications network were constructed.

When oil revenues began to decline after peaking in 1980, the side effects – in the form of prohibitively high maintenance costs – of this megalomaniacal expansion started to become visible. However, the decrease in oil rents also had a positive impact: Money was spent more wisely, with many projects being stopped and new projects undergoing additional scrutiny. Local traditions and stylistic e lements – viewed as a sign of backwardness only a decade earlier – were now taken into consideration as well.

Today, the country’s infrastructure is comparable to Western standards. Improvements in education have led the literacy rate to rise from 54% in 1970 to 79% in 1995.³ Remarkably, the literacy rate of the female population has recently exceeded that of the male population. ⁴ This phenomenon is likely attributable to the fact that women are granted equal opportunities in education and the job market under the law.

The UAE’s health care system is excellent. Improvements in medical treatment and nutrition have helped life expectancy rise from 53 years in 1960 to 72 and 77 years for men and women respectively in 2002. ⁵ In comparison, male and female life expectancy in the United States stood at 74.5 and 80 years respectively. ⁶ The infant mortality rate has dropped from 149 per 1,000 births in 1960 to 7 in 2003. ⁷ This compares favorably with a rate of 6.7 for the United States.⁸ However, free access to the health care system is only granted to Emirati nationals. Since 1983, expatriate workers have been required to pay fees in order to receive coverage.

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1 Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al-Qaiwain, Ras Al-Khaimah and Fujairah

2 Human Development Report (1997)

3 Statistisches Bundesamt (1995)

4 United Nations (1995)

5 United Nations Development Programme (1997) and World Almanac (2002)

6 World Almanac (2002)

7 Unicef (2003)

8 World Almanac (2002)