Overview of the United Arab Emirates


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As one of our major trading partners and a more democratic alliance within the Middle East, the UAE is a fascinating nation that must be understood from a socioeconomic and geopolitical context.

In this light, both travelers to locales such as Dubai and Abu Dhabi, as well as policymakers, alike, will be best equipped to interact effectively with this regional power as a more informed stakeholder.

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Overview of the United Arab Emirates

  1. 1. Overview of the United Arab Emirates (UAE)By the early twentieth century, a leading source of economic activity was the pearl trade. However, World WarI, the Great Depression, and the Japanese invention of the cultured pearl resulted in a significant weakening ofthe pearling industry. The heavy taxation on pearls imported from the Gulf following World War II by Indiacaused its irreversible decline. As a result, some turned to fishing. But, with little education and no roads orhospitals, the future looked bleak. By the 1930s, the first oil company entered the region and began conductingsurveys around Abu Dhabi. In 1962, Abu Dhabi exported its first cargo of crude oil that would play an essentialrole in the UAEs development.Since the 1820s, the English had maintained a presence in this region. In 1853, Britain intervened in the areadue to pirate threats and made a permanent truce to provide protection and oversight of the foreign policy. Itwas explicitly understood that Britain would not colonize the area. This agreement was made with a groupknown as the Trucial States, which were a collection of sheikdoms in the Persian Gulf. The Trucial States, alsoreferred to as the Trucial Colony, was composed of present-day Bahrain, Qatar, UAE and Oman. Following aperiod of Arab nationalism and anti-British activity beginning in the 1940s and 1950s, the British eventuallyrelinquished administration of the region in 1971.On December 2, 1971, the UAE was created by uniting seven of the Trucial States under a unified Constitution:Abu Dhabi, Dubai, Sharjah, Ajman, Umm al Qaiwain, Ras al-Khaimah and Fujairah. Abu Dhabi is the largestof the former territories and is the federal capital. Dubai is second largest of the emirates and is the main port,commercial center, and airport hub. The five other emirates are smaller areas that realize political and economicbenefits through alliances with the larger neighbors, Abu Dhabi and Dubai. All seven states are ruled by Sunnis.The UAE is considered by some to be an autocracy, which is a form of government in which one personpossesses unlimited power. There has been even less political reform in this country than in other Gulf States,even Saudi Arabia. International non-governmental organizations (NGOs) have ranked the UAE as havingamong the least free political systems in the world. In particular, such studies have highlighted the existence ofthe sheikhs dilemma in the UAE, in which economic but not political reform is pursued. To maintain peace, aruling bargain is implemented where the UAE government distributes oil wealth equitably, while also carefullyexploiting a range of ideological, religious, and cultural resources. Others simply state that the UAE exhibits amonarchical presidency led by ruling families on neo-patrimonial lines.Following the British withdrawal, Sheikh Zayed bin Sultan Al Nahyan became the first president. SheikhZayed, once Emir (or ruler) of Abu Dhabi, ruled as UAEs president for over thirty years until his death onNovember 2, 2004. Due to oil wealth, Sheikh Zayed became one of the richest individuals in the world with anestimated net worth in excess of $24 billion (USD). Following his death, the eldest son of Sheikh Zayed, SheikhKhalifa bin Zayed Al Nahyan became President of the UAE. Sheikh Khalifa is the worlds third richest memberof a royal family, with an estimated net worth of $19 billion (USD). The presidency of UAE is decided by avote by the Federal Supreme Court (FSC), a governmental entity in the UAE rather than through an electoral orpopular vote. Political parties are strictly prohibited.The UAEs highest authority is the Supreme Council of Rulers (SCR). The SCR is given power to initiate policyand reject laws that have been previously passed. Seven hereditary rulers and sometimes their crown princesand closest advisors have control of this governing body. Subordinate to the SCR is the Federal Council ofMinisters (COM). The bulk of UAEs policies and daily affairs are formulated by the COM, which meets morefrequently and formally than the SCR. The judicial branch of government is run by the Union Supreme Court.Judges are appointed directly by the UAE president.
  2. 2. The FSC is the highest constitutional authority in the UAE and has both legislative and executive powers.Overseeing the FSC are the rulers from each of the seven emirates. In addition to the FSC, there are both secularand Islam courts in all seven emirates. The secular courts in the UAE rule on criminal, civil, and commercialmatters. Family and religious disputes are heard in the Islamic courts. Each emirate has their own governmentwith municipalities and departments.There is a high degree of political stability in the UAE, and it is the only Arab state to have a working federalsystem that withstood the test of time. Furthermore, there are many women in all levels of government. This is apositive reflection on the UAE given its Middle East location.Sheikh Zayed had a foreign policy to not use force over compromise and to become a major donor of overseasaid, such as infrastructure development and humanitarian relief.Sheikh Kahlifa developed a foreign policy of non-interference in the internal affairs of other countries. He alsosupported the pursuit of peaceful resolutions of disputes. The UAE has provided support to the IraqiGovernment in the form of debt forgiveness and is a strong advocate of instilling peace in the Middle East withhelp primarily from the USA. In addition, the UAE promotes intercultural and interfaith dialogues with theprimary goal of mitigating misunderstanding between faiths and cultures with the belief that suchmisunderstandings are used as leverage by terrorists and those who harbor them.There is strong support in the UAE for international institutions such as the United Nations. The UAE signed orratified laws to protect the rights of people with disabilities and hosted conventions to eradicate torture andcruelty in punishment, suppression of nuclear terrorism and combating human trafficking. Illicit drugs areanother problem, as its proximity to South Asia makes it a drug transshipment point for traffickers.Furthermore, being a major financial center, the UAE is at risk of harboring money laundering schemes. Theinternational community is seeking the UAE government to implement controls to mitigate these problems. TheUAE is also a supporter of peaceful resolutions in Palestinians with the support of the Gulf Cooperation Council(GCC).Disputes have existed between the UAE and Iran over the ownership rights to three UAE-based islands. Thesedisputes date back to 2003 when Oman and the UAE signed and ratified boundary agreements for the entireborder. Failing to publish the agreement and detailed maps of alignment gave Iran the opportunity to dispute theTunb and Abu Musa Islands. In October 2009, Iran signed a Memorandum of Understanding to establish a jointcommission between itself and the UAE. Furthermore, the UAE has concern over Irans nuclear program. Oncelong-time tensions between Saudi Arabia and the UAE have also abated. The biggest threat to the UAE is aninternal regime failure, which would collapse the GCC military.The UAEs foreign aid policy is based on the Islamic philosophy of extending a helping hand for the needy tofulfill a duty of all Muslims. Wealth from oil and gas provides the UAE with the means of helping less fortunatecountries. Organizations such as the UAE Red Crescent, which provides emergency relief, play an importantrole in such efforts.Relations with the USA have been well-maintained and unified with the goal of maintaining a strong alliancewith security and economic interests, including stability in the Middle East and the reliable supply of energy toglobal markets. The UAE is the largest importer in the Arab World of US goods at $144 billion (USD) in 2008.Over 750 US firms have a presence in the UAE, including Bechtel, ExxonMobil, Starbucks and Cold StoneCreamery. (The World Factbook 2009, 15) Following the global recession, the UAE has tried to insulate thelocal economy while working with multilateral institutions, such as the International Monetary Fund (IMF) andon a bilateral basis to help countries most seriously impacted.One setback for the UAE is the severe repression of freedom of speech. There are controls restricting the mediafrom criticizing or questioning the actions of policy. The UAE government pushed new media laws past a firstlegislative hurdle on January 20, 2009, which would restrict the freedom of press. Any journalist who criticizes
  3. 3. the royal family or publishes information that is damaging to the economy, Islam, or UAE citizens is fined up to1,000,000 Emirati Dirhams (AED). The maximum fine is equivalent to about $270,000 USD. Imprisonment isalso possible, but rarely enforced, as the industry practices self-censorship. Censorship has also been exercisedby the UAE government. Censoring media on UAEs prison affairs, democratization efforts, and criticism of theruling family is seen as repressive to the rights of UAE citizens.For instance, the UAE does not participate in a bankruptcy process as in many Western nations. Debtors unableto meet such obligations are sent to a debtors prison and this has been an increasingly occurring affair since thestart of the global financial crisis. Many questions have been raised about the ethical nature of this practice, aswell as the level of humane treatment at such facilities.Property rights in the UAE are about forty percent below the global average, according to the HeritageFoundation, due to the considerable influence the ruling families exercise on the judiciary. Corruption andincompetence in the system is rarely challenged. All land in Abu Dhabi is government-owned. Foreigners mayobtain mortgages in Dubai. The UAE leads the region in the protection of intellectual property rights.The population of the UAE is expected to grow from 4.76 million in 2008 to 5.06 million in 2009, a 6.31percent annual growth rate. The UAE is extremely reliant on expatriates in its workforce. As of 2007, therewere an estimated 3.62 million non-UAE nationals versus 864,000 UAE-born nationals. Most labor issuesconcern expatriates, especially among the unskilled segment. Addressing these issues is an ongoingdevelopment.In the same year there were an estimated 3.08 million males and 1.4 million females. While Arabic is theofficial language, English is preferred in the international business community of the UAE. Islam is the officialreligion of the UAE, but all religions are tolerated.UAE nationals are described as being tolerant, forward-looking individuals who maintain a strong sense oftradition. There is a high standard of living that is shared by many, including a well-developed education systemand health services. There are over sixty public and private universities in the UAE. The illiteracy rate isapproximately seven percent.The UAE government supports efforts to develop human services, especially to assist in the empowerment ofwomen and for social welfare programs. Approximately thirty percent of the UAE workforce is comprised ofwomen. While migrants primarily wear Western-style clothing outside of work, the UAE nationals primarilywear traditional clothing in most settings for cultural reasons and to distinguish themselves from foreigners.Rapid advancements in healthcare facilities have drastically reduced infant mortality (to approximately eightout of every 1,000 births in 2008) and raised the average life expectancy age in the UAE (to seventy-seven formen and eighty for women). Social security services amounted to over $600 million (USD) in 2008, providingfinancial assistance to nearly 38,000 people.The UAE sought to modernize under President Sheikh Zayed. Today, the country benefits from a vibrant freeeconomy with a significant annual trade surplus. Reform of property laws has led to a boom in real estate andtourism, especially within Dubai. Tourism is expected to increase to 11.2 million tourists to the UAE in 2010.Using such efforts as free trade zones, the UAE has been able to successfully diversify away from dependenceon oil and gas exports. Free trade zones attract significant foreign investment given the incentive of one-hundred percent foreign ownership and tax-free profits, creating thousands of jobs and facilitating a technologytransfer. In 2007, the direct foreign investment (DFI) into the UAE was the highest in the region, at around $19billion (USD). Two of the largest free trade zones in the UAE are the Dubai Media City and Jebel Ali FreeZone. For instance, Jebel Ali Free Zone, a container port terminal, transports over eight million containers ofcargo each year and was expected to reach $180 million in profits in 2007. This is more than all of Indias portscombined.
  4. 4. The GDP in the UAE was approximately $199 billion (USD) in 2007 using current prices, which represented a5.2 percent annual growth rate and is approximately 115 times larger than its GDP in 1971. Major industries areoil and gas, petrochemicals, aluminum, cement, ceramics, ship repair, pharmaceuticals, tourism, transport, realestate and financial services. While many private companies operate six days each week, the governmentinstitutions reserve Friday and Saturday as days off.In 2007, the UAE economy was ranked the twenty-ninth most competitive economy out of forty advancedeconomies in a study. This puts the country well ahead of any other Middle Eastern nation. According to thestudy, some of the strengths of the UAE included a government surplus, low national debt and a high nationalsavings rate. Some of the weaknesses include uneven performance, a lack of innovation and entrepreneurshipand high inflation, which unofficially has been as high as fifteen percent. In fact, the UAE is now the secondlargest Arab economy, behind only Saudi Arabia.Economic growth is anticipated to slow as the country continues to mature and stabilize. Several serious issueshinder the continued UAE economic expansion. The property market throughout the country has issues such asproject delays and bank funding shortages. Partially finished commercial buildings can be found primarily inDubai and Abu Dhabi, and to a lesser extent in the other five emirates The recent decline in fuel prices has hadimplications on the UAE budget despite efforts to diversify. Furthermore, the UAE government is implementingmore stringent lending guidelines for individuals and companies, while UAE banks are reducing exposure toforeign debt. The UAE had a budget surplus in 2006 of 211.3 billion AED. In 2007, the budget surplusincreased to 236.15 billion AED.Despite the efforts by the UAE to become less dependent on natural resources as a source of revenue, petroleumand natural gas exports continue to play an important role in the economy. UAE main export partners are Japan,China, and Iran. Imports into the UAE are mostly machinery and transport equipment, chemicals and food. Itsmain import partners are the European Union (Germany, UK and Italy), China, India, the US, and Japan. In2006, the UAE had a trade surplus of 132.38 billion AED and a trade surplus of 135.94 billion AED in 2007.To support the banks, the government is working on establishing guarantees of banking deposits and supportinglow interest rates. Also, major infrastructure projects are being initiated at this time to lock in savings due to theeconomic downturn. Corporate governance and transparency standards are rising in the UAE as of late to instillinternational investor confidence in its equity markets.The AED is currently pegged to the USD at 3.673 AED to every USD. The peg was established in the late1980s; the current peg was established in 2002. This strategy could work well for the UAE because one of thecountrys major sources of revenue is oil, which is denominated in USD. However, this also makes the UAEsubject to any and all currency movements in the USD relative to other currencies. One of the major drawbacksof this exchange rate policy is the effect of high inflation in the UAE.There have been several lessons learned in the UAE following the most recent global recession. First, leaders inboth the public and private sectors took note of the correlation and interconnectedness of global market players.Secondly, careful study was undertaken to evaluate the re-recessionary impact on the UAE economy of oil pricedeclines. Despite slowing growth, the UAE still has one of the fastest growing economies in the world. One ofthe main drivers of economic growth and employment creation in this country has been the consistency of fixedcapital investment from the government, public institutions, and private entities. Four primary sectors areattracting investment and providing economic expansion in the UAE: hydrocarbons, manufacturing,transportation and communications and real estate.Dubai plays a strategic role in the future of the UAE. Since the beginning of the twentieth century, Dubai hadbecome the premier trading post of the Persian Gulf. Today, it is a massive metropolis with a population inexcess of two million people. The initial catalyst for the emirate was oil wealth, which was used to invest ininfrastructure and facilitated rapid socioeconomic developments starting in the 1970s and 1980s. A pioneeringmodel was then introduced to create a post-oil economy based on diverse industrialization and a variety of
  5. 5. specialist free zones. The diverse industrialization included such sectors as commercial infrastructure, lightimport-substitution, promotion of luxury tourism and a freehold real estate market.Abu Dhabi, UAEs political capital, has at least ten percent of the worlds proven hydrocarbon deposits and overninety percent of UAE oil exports. Through oil-based revenues flowing into the country, the Abu DhabiInvestment Authority (ADIA) has formed to become the largest sovereign wealth fund (SWF) in the world.ADIA has teams of foreign experts that scour the globe for a variety of investment opportunities in thedeveloped world, such as a five-percent stake in Fiat-controlled Ferrari, Southeast Asian emerging markets, andother developing countries (such as investments in Libyas tourist infrastructure) that are expected to havesubstantial future growth.Over the next ten or more years, the UAE and GCC members as a whole are anticipated to receive a windfallfrom a strong demand-side energy stimulus due primarily to the rapid economic developments in Brazil, Russia,India and China (BRICs). The BRICs were first recognized by a team of economists and other researchers atGoldman Sachs and, according to their predictions, the BRICs will exert considerable pricing pressure on globalenergy markets over at least the next decade due to their rapid economic development. If this takes place, theUAE will be able to sustain high investment levels and strong welfare-enhancing economic growth. Due tocurrent regional instability and periods of regional violence, which is among the worst in the world, the UAEsfull economic potential from this scenario will unlikely be reached. Nonetheless, the UAE and the rest of theGCC have an opportunity in the coming decades to become one of the most prosperous regions in the world.Despite impressive economic growth and development, areas of vulnerability within the economic system of theUAE exist. Social welfare systems have tied the government to burdensome distributive practices, which canbread an unproductive mentality among the native population. Secondly, many new sectors are especiallyreliant on foreign investment and an expanding expatriate workforce. For instance, Dubai has succumbed to notonly globalizing but also appears to be Westernizing. Taboo industries for the UAE have been established inDubai to cater to foreign residents. They include night clubs, movie theaters and bars.The other five emirates outside of Abu Dhabi and Dubai lack in economic development and growth potential.Ajman and Sharjah are both resided in by Dubai workers looking for cheaper accommodations. Ajman has greatstability, with only four rulers since 1900. Sharjah is a city of learning and the arts, representing the culturalcapital of the Arab World and has over twenty museums. Umm al-Qaiwain is the second smallest emirate and isrelatively unproblematic and politically stable. However, the emirates stance on alcohol has created rifts withthe UAE rulers. Umm al-Qaiwain licenses the right to sell and consume alcoholic products, like Dubai, but alsooperates hug shops at beach resorts. Residents in this emirate rely on fishing and cultivating palm trees asprimary sources of income. Umm al-Qaiwain is undergoing an architectural renaissance and is rapidlydeveloping. Fujairah is the only emirate on the eastern side of the UAE along the Gulf of Oman and has lowlystatus in the countrys development process. If it is able to overcome this situation, Fujairah has the potential tobecome an important alternative port of Dubai and the rest of the UAE.The emirate benefits from great stability and good neighbor relations. Ras al-Khaimah has experiencedinstability over the last few decades and is expected to have more internal problems over the near future. It isnot oil rich nor near Dubai, but is an important supply of labor into Dubai.Financial regulation is somewhat complex in the UAE. The DIFC has its own regulator, the DFSA, and its owncivil and commercial laws. The rest of the UAE financial system is regulated by the Central Bank of the UAE,The Emirates Securities and Commodities Authority (ESCA) and the Ministry of Economic Planning (MEP).The Central Bank of the UAE is granted a general power to create rules governing all matters that fall within itsauthority. Most of the Central Banks power focuses on setting monetary policy and bank regulation, rather thanregulating the securities market unless it regards anti-money laundering practices.
  6. 6. There is no formal bond market in the UAE. In order for companies to issue debt, they must list the bondoffering on a different exchange (such as the London Stock Exchange), through bond dealers in commercialbanks or through private placements directly to investors.Of the seven emirates in the UAE, Dubai has been hit the hardest by the global financial crisis. The volatilesituation in Dubai has affected the whole country and, coupled with a fall in oil prices, the IMF estimate a 3.3percent contraction in the UAE in 2010. Alternatively, UAE officials have expressed optimism about thecountrys future in an attempt to instill confidence in the UAE economy.The GCC states, seek to become a regional financial hubs. Barriers to achieving this goal have risen as a resultof the Dubai World crisis and the UAEs response. International confidence in the ability of GCC to restructuretheir debts have been questioned as global investors express concern over issues of transparency, accountabilityand good corporate governance. At the heart of the issue is the regions reputation for good governance. Aneven more serious development is whether such problems are symptomatic of a deeper trend. It is expected thatinternational investors will subject the Gulf states to a far greater level of scrutiny in the future.UAE government-produced research on the economic outlook in 2009 acknowledged that challenges lay aheaddue to the financial crisis and global economic downturn, but emphasizes the countrys strong foundation inwhich to withstand such challenges. The large current account surplus, estimated at $285 billion (USD) in 2008,and the governments large controlled overseas assets is expected to shield the UAE from a sharp downturn.However, trade and associated industries are anticipating a slowdown in exports in the future. One positive keyprospect from this downturn is the expected decline in inflationary pressures in the UAE due to a fall in soft andhard commodity prices.Liquidity in the banking sector is an issue that is receiving close attention by government officials in the UAE,as non-Abu Dhabi based banks appear to be undercapitalized following a series of profit falls. The propertymarket, especially in Dubai, is very weak and precipitated by negative sentiment and a short supply of funding.Future construction projects are in doubt as leveraged property firms struggle to obtain new capital. Public-funded infrastructure projects, on the other hand, are expected to continue to experience robust growth. Forinstance, construction on Dubais Al Maktoum International Airport will be the worlds largest aviation hubwhen finished in 2015.The UAE government literature emphasized that the government will not let any major firm fail. Furthermore, itwas highlighted that most leading firms in major sectors such as property, banking and transport are eitherwholly or partially government-owned and, as such, their debts have an implicit government guarantee.David Stone, MBA is a recent business school graduate with sell-side equity research experience.Article Source: http://EzineArticles.com/?expert=David_J_Stone