The Diversification of the Emirati Economy

The leadership of the United Arab Emirates (UAE) understands the perils of rentier state economics and has worked diligently in recent decades to diversify its economy away from exclusive reliance on oil revenues. The Emirate of Dubai is the most striking example of this long-term push toward diversification. Billing itself as an ‘international city,’ Dubai has embarked on a project of ambitious reform, moving away from the traditional rentier state model of reliance on the mineral sector in favour of an economic strategy that it hopes will be more viable in the long term.

The first pillar of this model is Dubai’s rebranding as a regional and global finance hub. A major part of this strategy was the completion of the Dubai International Financial Centre (DFIC) in 2004. The DIFC is intended to make Dubai a mecca of international finance by functioning as an intermediary between Western capital and investment opportunities in emerging markets in the Middle East and Asia1. Over 100 major international financial firms now have operations inside the DIFC, making the Emirate a globally recognised finance hub on par with its competition in Hong Kong and Singapore1.

Also central to Dubai’s diversification efforts is its historic role as a regional and global trade entrepot2. The Jebel Ali Free Zone has functioned since 1985 as the major trade nexus in the Gulf. Located just west of the main metro area surrounding Sheikh Zayed Road, it is now home to 6400 firms – 120 of which are Fortune Global 500 companies. Dubai utilised this project to create an environment where firms could conduct business free from import and export regulations, whilst gaining access to a reliable supply of labour3. The third pillar of Dubai’s diversification efforts is its emphasis on real estate development. Dubai’s real estate strategy relies both on private investment and state-led projects to develop residential, industrial, and commercial real estate3. While the liberal investment policies of both the UAE and Dubai have created a competitive market in the region, government-related enterprises (GREs) also undertake major development projects. One such project is the Palm Jumeirah, created by the wholly government-owned real estate developer Nakheel. The $1.5 billion project, once completed, will host 10,000 residential units, 40,000 hotel rooms, as well as shopping and entertainment venues3.

These ambitious real estate projects have all been financed with the unprecedented windfall oil profits of the past decade. Between 2001 and 2008, the price of a barrel of oil rose from less than $20 a barrel to nearly $140 a barrel. The most precipitous jump was between 2007 and 2008, where commodity prices spiked from roughly $55 a barrel to over $130. This sudden windfall in the period between 2000 and 2008 created a unique – some would say enviable – problem for the Gulf Cooperation Council (GCC) governments: how to most prudently invest this newfound wealth. Faced with massive windfall profits, and already committed to a diversification agenda, the GCC states – with the UAE in the lead – turned to large-scale real estate investment. Eventually $1.2 trillion of oil rents – 57% of the UAE’s total hydrocarbon revenues – was turned into real estate, and especially housing4.

Then the Global Financial Crisis happened. By 2009, global oil commodity prices had plummeted to $40 a barrel. $682 billion in projects in the GCC were cancelled – 80% of which were real estate developments4. The result of this sudden reversal was a flight to safety for the GCC states, which meant a return to disproportionate reliance on oil rents in their budgets. The diversification agenda has largely stalled and even been rolled back in some cases. The levels of global commodity oil prices required to balance GCC states’ budgets have risen as a result of this return to rent dependence. Qatar now requires oil to stay above $120 a barrel to remain fiscally solvent, and the UAE now requires oil to remain above $85 a barrel, where before 2008 it could remain solvent with oil at a mere $20 a barrel4.

However, with the 2008 crisis as a backdrop, the Emirate of Abu Dhabi is still committed to economic diversification. While Dubai has arguably achieved greater global publicity as an international tourism, trade, and finance hub, its much wealthier neighbour has its own ambitious diversification agenda. Much of Abu Dhabi’s strategy revolves around similar sectors – tourism, entertainment, and regional and local business – but with one key addition. Abu Dhabi has in recent years made clear its commitment to green energy and sustainable development.

This commitment led to the creation of Masdar, a ‘commercially driven enterprise’ which seeks to bring together capital and promising ideas in the green energy and sustainability space5. It is a subsidiary of the state-owned Mubadala Development Company. Masdar’s main project is Masdar City, designed to be one of the world’s premiere sustainable urban environments. Masdar City will be host to the Masdar Institute of Science and Technology, a research university created in cooperation with the Massachusetts Institute of Technology. It will both provide a major part of the research and development work for projects within Masdar City and as act as a hub for international clean technology development. Another notable partner is the U.S. Department of Energy, which has agreed to share carbon emission reduction expertise with Masdar6. In a coup for Abu Dhabi’s green branding initiative, Masdar City will also play host to the global headquarters of the International Renewable Energy Agency (IRENA)5.

Furthermore, even while the governments of Abu Dhabi and Dubai seek to move the UAE’s economy away from oil dependency, they are also channeling current oil rents into enormous sovereign wealth funds (SWFs). These assets, cumulatively valued at over $600 billion1, are worth several hundred thousand dollars per citizen and generate a continuous stream of income2. The SWFs have made the UAE a major player in international capital markets7.

All of these modes of diversification – tourism, international finance, trade, and alternative energy endeavors – are driven in whole or in part by developments funded by the UAE’s GREs. The GREs are themselves a mode of diversification. Major examples of GREs include: Emaar Properties, the ‘Gulf region’s largest land and real estate developer’8; Nakheel, developer of the Palm Islands, Dubai Waterfront, and The World Islands; The Abu Dhabi National Oil Company (ADNOC), a state-owned oil company; and Dubai World, the portfolio management company that oversees the other GREs. In the GREs, the UAE has found a middle way between laissez-faire neoliberal policies, which call for little to no government intervention in markets, and the highly state-centric economic structures prevalent in other parts of the Middle East and Asia.

While the UAE’s proven reserves and current production output mean that its oil revenues will not diminish anytime in the next century, its ambitious diversification efforts are nonetheless critical for long-term prosperity and political stability. Through targeted investments in key sectors such as tourism and entertainment, finance and trade, and green energy, the UAE has set itself on a trajectory of long-term growth – even when the oil does finally run out.

Sources:
1 Bhatti, Shahzad, et al. “Dubai Final Services Cluster: Oasis or Mirage?” Microeconomics of Competitiveness (2006). return to main text
2 Herb, Michael. “Kuwait and the United Arab Emirates.” Politics & Society in the Contemporary Middle East. Ed. Michele Penner Angrist. 2010. return to main text
3 Pacione, Michael. “City Profile: Dubai.” Cities 22.3 (2005): 255-265. return to main text
4 Lecture given by: Dr. Omar al-Shehabi, ‘The Rentier State and Neoliberalism: A Look at the GCC Economies in the 21st Century’, Florida International University, 25 July 2013. return to main text
5 al-Lawati, Abbas. UAE to host IRENA HQ. 29 June 2009. return to main text
6 Fielding, Rachel. “U.S. government pledges support for Masdar City plan.” Businessgreen.com. Website. 28 April 2010. return to main text
7 Fotak, V., et al. “The financial impact of sovereign wealth fund investments in listed companies.” Unpublished working paper, University of Oklahoma and Università di Torino (2008). return to main text
8 Emaar Properties. 22 October 2013 http://www.arabianbusiness.com/companies/emaar-properties-uae-66430.html

Leave a Reply

Your email address will not be published. Required fields are marked *

All writers' views in articles are their own and do not necessarily represent the opinion of the Asfar team.

Published by Asfar in London, UK - ISSN 2055-7957 (Online)