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UAE’s steadfast scripting of economic diversity

The UAE presents an unique experience at both the political and economic levels, constituting as it does the only successful federal experience in the Arab region. However, the current phase requires an assessment and a drawing of lessons for other economic and political blocs, especially the Gulf Cooperation Council (GCC).

Despite many achievements, it is strategically important for GCC states to prepare for the post-oil era through diversification of sources of national income and development of non-oil sectors. The UAE’s experience is brilliant on several counts, the first of which is that oil was discovered relatively late and accordingly the flow of revenues was late too. As a result, the UAE economy began to grow many years later after the economies of other countries in the region.

However, the UAE economy promptly outshone these economies on diversification, thus making its experience a unique one that deserves to be analysed.

With the exclusion of Dubai’s trade and small agricultural clusters in Abu Dhabi, Al Ain, Ras Al Khaimah and Fujairah, oil was the main economic activity and was completely relied on for overall development when the UAE federation was established. The contribution to GDP by sectors such as financial, transport, telecommunications and manufacturing, which are now core components of the UAE economy, was marginal in 1971.

The policy of economic diversification has been based on consistent rules since the creation of the Union, and still forms the UAE’s strategic approach. These are represented in two main approaches, the first of which is preparation for development of non-oil sectors by investing heavily in infrastructure and thus laying the ground for growth.

This led to the availability of domestic and foreign investments, particularly private sector’s, in services that would enable them to develop their businesses. It thus attracted more domestic and foreign capital as well as prompting many companies, banks and financial institutions, to move to the UAE, making it a regional hub of their operations in the region.

The second approach adopted by the UAE focused on sectors that have a chance of success as part of a comprehensive plan for economic diversification, in accordance with the country’s economic and demographic capabilities.

In the area of foreign trade, transforming the UAE into a trade hub, particularly for re-export, required the setting up of giant ports, a move that explains the huge investments on Jebel Ali Port in 1985.

The development of transport and logistics sector, which now contributes a significant share to GDP, required investing heavily on airports and road infrastructure. This has led to turning the UAE into a world-class destination connecting airline routes.

Abu Dhabi has announced the development of the existing airport at a cost of Dh4 billion in the first phase. All phases are set to be completed by 2017.

Dubai invested Dh14 billion in Dubai International Airport, which is expected to receive more than 65 million passengers this year, compared to the 60 million passengers in 2013.

In manufacturing, apart from the development of small and medium enterprises, there has been a significant shift in the contribution of large industries, notably aluminium — an energy-dependent industry — after raising the production capacity of Dubai Aluminium plant from 150,000 tonnes a year in the early 1980s to 1 million tonnes at present.

Later, Emirates Aluminium (Emal) was set up as a joint venture between Abu Dhabi and Dubai to become one of the world’s biggest aluminium smelter with production capacity that will reach 1.4 million tonnes a year in the second phase.

To attract more capital, the UAE has embarked on the development of infrastructure for the services sector in all its forms, especially banking, given that the process of diversification needs world-class financial services to provide investments necessary to finance the process.

The UAE has developed local banking institutions and established financial centres that have become regional headquarters for global names, which too have contributed to economic diversity.

Now, there are serious moves by the UAE to enter the world of modern industries such as aerospace, in partnership with international companies, such as Boeing and Airbus. The UAE also seeks to strengthen its position within the so-called knowledge economy by making the most of technology in development, in addition to investing in alternative energy, especially solar.

It can be noted that while the oil sector dominated the GDP when the Federation was established, the contribution of non-oil sectors has increased over the past 40 years. It now constitutes most of the GDP, with a contribution of 62 per cent in 2013, compared to 38 per cent for oil, despite the boom that has kept oil prices above $100 a barrel.

The UAE’s success story of economic diversification is an example to be emulated by other countries in the region as well as developing countries elsewhere. It is well known that Abu Dhabi did not rely on its huge oil revenues, but had to utitlise these in diversifying sources of income. Dubai converted its oil revenues in the 1980s and 1990s to assets of the real economy. Oil does not comprise more than 5 per cent of its GDP — a milestone by any measurement.

Meantime, the rest of the non-oil emirates managed, within their capabilities, to achieve economic diversification. Sharjah, for example, has benefited from gas production to become the country’s industrial powerhouse of small and medium-sized industries.

Ras Al Khaimah has turned into a hub for building materials and construction industries, while Fujairah is one for ship supply and in second place globally in this space after Singapore. With the help of Abu Dhabi, Fujairah is gradually becoming an important port for the export of oil and oil products, taking advantage of its strategic location on the Gulf of Oman and the Indian Ocean.

The UAE has been assessed positively by neutral international organisations such as the UN. The UN Human Development Report has the UAE ranked first in the region and 32nd globally on the Human Development Index (HDI), which assesses the progress of nations in health, education and income.

The UAE also occupies an advanced position in the world, including among developed countries in the west and the east with regard to competitiveness and business services and in the rapid growth of non-oil economic sectors.

— Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.