Economics of the UAE
1a) The non-oil sector’s development is attributed to growth of the tourism sector, real estate sector, a tax-free environment and capital appreciation (Abed, 75). The growth of the tourism sector is attributed to the demand for real estate, which has led to the development of resorts and hotels. Additionally, demand for real estate has been influenced by an upsurge of foreigners and expatriates and availability of capital to invest in property. Absence of taxes has also increased investors such as firms to invest in the country’s resources.
b) One of the main external risk factors is the Eurozone crisis, which is responsible for the contagion regarding other regions due to Eurozone deleveraging. Other external risk factors include inflation and slow growth in emerging countries and rapid deposit withdrawals. These factors can affect domestic prices for assets such as derivatives, bonds and shares and real estate as well, forcing investors to receive discounts on these assets. Foreign pacts such as Kyoto Protocol also affect the economy by affecting oil prices hence reducing revenue from crude oil.
c) UAE’s main economic sectors include real estate, construction, hospitality, finance, and transportation. The real estate sector has been accredited to increasing demand for residential estates leading to an increased demand in land. Financiers such as investment banks, for instance EFG-Hermes, avail investment finances at low interest rates thus increasing financing. The construction sector has appreciated due to the need for resorts and hotels in tourism. This has attracted investors and homebuyers to invest in the real estate sector. These sectors represent part of the non-oil development sectors.
The UAE has been considered as one of the fastest developing nations competing on national income levels similar to those of developed nations such as the United States and China. However, external risks such as the prevailing Eurozone crisis and environmental pacts such as Kyoto Protocol pose a threat to the country’s financial upsurge. Hence, it is important for UAE to prepare for threats by utilizing income from the non-oil sector, which would not be affected by decrease in oil prices due to the Eurozone crisis and the stringent pact. The income would be enough to back the economy throughout the European debt crisis.
2a) The non-oil sector has led to reduced dependence on the oil sector at 29 percent of the sector’s revenues. By the end of 2012, UAE’s GDP increased to an average of 7.6 percent. The tourism sector accounted for 0.5 percent of global tourism. Moreover, the sector is expected to achieve 4.9 percent of the GDP per year. The hospitality sector has seen hotel occupancy levels reach 90 percent. Moreover, the non-oil sectors have boosted UAE’s economy since they account for 55 percent of the country’s GDP (Cedwyn, 140-145).
b) UAE’s free trade zones assist in attracting foreign investors because they do not have taxes and offer full foreign ownership. Most firms operating in the free trade areas have access to re-exportation and shipment and enjoy full tax exemption. The industrial zones focus on particular economic activities by providing infrastructure to them respectively. These zones have increased revenue, promoted economic diversification and increased employment hence increasing the country’s GDP (Parker, 161).
c) Through free trade zones, investors are able to maximize investments since they receive zero exemption on taxes. Multinational organizations importing and exporting receive import and export duty exemptions on products that go through re-exportation. These zones also focus on the provision of incentives such as infrastructure for multinational organizations and investors regarding a particular economic activity. By providing infrastructure regarding the activity, production costs are reduced allowing for maximum production and increased revenue for the country, the investors and firms at the same time.
d) The transportation sector has boosted due to aviation, which plays a major role in transportation of tourists to the country. The construction sector has also boosted due to an increase in investors seeking residential and tourist facilities such as hotels and facilities regardless of the high cost of building raw materials. The financial services sector has supported the growth of these sectors by financing projects relating to the tourism sector. Moreover, financiers have provided mortgages at lower interest rates to facilitate construction.
e) The financial sector makes funds available for investment. Offshore financiers such as Dubai International Financial Center (DIFC) offer efficient and safe platforms for financial and business firms to reach out and in the country’s emerging markets. The financial sector also provides ample finances for prospective buyers and investors willing to contribute to various sectors of the country.
The migration from dependence on oil is one of the main reasons that led to UAE creating and diversifying a non-oil sector that accounts for more than half of the country’s GDP. Sectors responsible for the growth of the economy include the transportation, real estate, financial and construction sectors. Moreover, the introduction of special economic zones such as free trade and industrial zones has led to enormous amassment of investments due to their attractive particulars. Nevertheless, to boost more income and attract more investors, UAE can initiate Investment Zones, which could generate more income for the economy since they will be able to induce low tax exemptions on investors’ investments and yet provide the required infrastructure.
Abed, Ibrahim. United Arab Emirates: A New Perspective. London: Trident Press, 2001. Print.
Cedwyn, Fernandes. “Assessing UAE’s Oil Dependence: an Optimal Control Approach.” Education, Business and Society: Contemporary Middle Eastern Issues. 2.2 (2009): 138-152. Print.
Parker, Philip M. Executive Report on Strategies in the United Arab Emirates. ICON Group, 2007. Print.