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The United Arab Emirates: The United Arab Emirates: economic principles of a economic principles of a

model emergent economy.model emergent economy.

PROF.DR. SAAD OTHMANPROF.DR. SAAD OTHMANCOLLEGE OF BUSINES STUDIESCOLLEGE OF BUSINES STUDIES

AL GHURAIR UNIVERSITYAL GHURAIR UNIVERSITY

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IntroductionIntroduction

UAE's GDP, very dependent on oil prices, has followed a roller coaster pattern, soaring during the 1970s and declining precipitously throughout the 1980s,1990s till now. Even though the development of non oil economy has been impressive , oil still comprises 70% of export revenues and is crucial to the balance of payments.

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Development modelsDevelopment models

Each Emirate has so far followed its own economic path ,there is not yet a UAE global and comprehensive strategy implemented. Dubai has followed a resource based strategy based on services and tourism, Abu Dhabi has followed an industrial model based on hydrocarbons , the other emirates are following somehow the path taken by Dubai and launching similar initiatives.

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ModernizationModernization

The UAE has so far attained a high level of modernization according to western standards .This has attracted a qualified skilled workforce which has challenged the local workforce and needed formal government intervention through the so called Emiratization policies ,criticized by WTO as being a clear form of labor market subsidies.

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Economic activityEconomic activity

The UAE has been running high fiscal deficits and has reined in public spending while not compromising the development of the private non oil economy through a combination of deregulation, public private partnerships and other government initiatives. Fiscal deficit has fallen from 6% of GDP in 1998,to 5% in 1999 and 4% in 2000.

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Non oil sectorNon oil sector

Consists mainly of aluminium production, tourism,aviation,information technology, and the reexport sector now contributes 2/3 of total GDP,although oil is important to the economy as it contributes to 70% to total exports.

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DiversificationDiversification

These swings in income have caused the authorities to look for ways to diversify the economy, particularly in Dubai, where oil production is declining. The search for diversification has been only partially successful.

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Oil revenuesOil revenues

Oil revenues remain the engine that powers the UAE economy. Oil revenues in fact provide 80 percent of fiscal revenue and about 60 percent of export earnings in the current period.

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Financial solvencyFinancial solvency

The UAE is in better financial condition than its immediate neighbors. The government is not delaying payments to contractors or borrowing from foreign commercial banks to pay its debts. It is, however, drawing upon its own overseas assets and borrowing from domestic commercial banks in which it has an ownership share.

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Economic IndicatorsEconomic Indicators

• GDP (DH millions) :147.5• Real GDP Growth

(percent):3.03• Consumer Prices

(percent average change):6.0

• Fiscal Balance (percent of GDP):2.2

• Current Account (US$ billions):6.2

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Economic growthEconomic growth

The UAE economy is growing by an estimated 9 percent. The rise was due in part to the 20 percent increase in oil income, the strong economic growth in the non-oil sector. Inflation is about 3.5 percent.

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Oil reservesOil reserves

The UAE has nearly 100 billion barrels of proven oil reserves, or about 10 percent of total proven world oil reserves, most of it in the Emirate of Abu Dhabi, and 5.7 trillion cubic meters of proven gas reserves, which amounts to 4.6 percent of total world proven gas reserves, again, most of it in Abu Dhabi, which makes the UAE the fourth largest gas reserve country in the world after Russia, Iran and Qatar.

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Oil productionOil production

UAE oil production is at the level of the UAE's OPEC quota, 2.16 million barrels a day (b/d), with about 0.3 million b/d coming from Dubai and the rest from Abu Dhabi.

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Abu Dhabi oilAbu Dhabi oil

While Dubai produces at maximum capacity, Abu Dhabi has completed a US$ 5 billion capacity expansion program that has raised capacity to 2.5 million b/d by early 2000.

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Oil revenuesOil revenues

Largely because of flat or declining oil prices, oil's share of GDP in the UAE has declined from 44.2 percent in 1992 to 33.2 in 1994. Despite this, there is considerable growth potential in this sector in 2000s.

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Gas reservesGas reserves

Abu Dhabi also is in the process of increasing income from its enormous gas reserves. Abu Dhabi was until recently the only producer and exporter of liquefied natural gas (LNG) in the region. Back in 1994, it doubled the capacity of its LNG plant on Das Island to five million tons per year. LNG accounts for about 5 percent of total UAE export earnings.

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Non-Oil SectorNon-Oil Sector

Several factors have contributed to the growth of the non-oil sector in recent years including government investments in electricity, water, and other infrastructure, development of financial services, and strong demand for re-exports.

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An Open economyAn Open economy

An open economic system, free movement of capital and financial stability have also contributed. Government support through provision of incentives and subsidies, along with a high level of government expenditure in housing, have also played an important role.

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GNPGNP

The largest contributors, as a percentage of GNP, after oil (about 33 percent) are, in descending order, government services (12 percent), trade (11 percent), construction (10 percent), manufacturing (8.6 percent), real estate (6.7 percent), transportation, storage and communications (6.2 percent) and finance and insurance (5.6 percent).

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PortsPorts

Dubai Port Authority's container traffic increased by 10 percent in 1995, from 1.88 million teu in 1994 to 2 million teu. Trans-shipment business also increased to 1.04 teu, a 9 percent rise compared with 1994. Local and re-export business now accounts for 50 percent of the total container volume handled by the DPA. Overall growth is attributed to the strong import and export markets in Dubai which rose 13 percent and 21 percent, respectively.

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ReexportReexport

Most of the incoming traffic is destined for re-export, although Dubai's growing population, expanding consumer market and construction booms are taking an increasing share of imports.

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Free zonesFree zones

Jebel Ali Free Zone has significantly reduced the UAE's dependence on trans-shipment. Nearly 1,000 companies from over seventy countries and major corporations such as Sony, Aiwa, Black & Decker, Nissan, Honda and Coleman are present in the zone. Recent investors include Japan's Shivaki and the US-based General Motors

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Ports extensionPorts extension

To attract even more investment, major upgrades are underway, including the addition of another 52,000 square meters of container stacking runway. By the year 2003, the DPA had its two ports, Jebel Ali and Mina Rashid, who have thirty ship-to-shore cranes.

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AgricultureAgriculture

The local food processing industry continues to expand off export opportunities for semi-processed agricultural products. Major growth sectors are beverages (juices and soft drinks), dairy products (ice cream and yogurt), snack foods and biscuits.

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Public FinancePublic Finance

The UAE has a mixed economy, with the most productive assets owned by the government of the individual Emirates, but considerable scope is given to private enterprise. Its legal regime favors UAE nationals over foreigners. In both Abu Dhabi and Dubai, international oil companies maintain equity interests in their operations.

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BanksBanks

Some banks are privately owned. They represent one of the principal types of commercial establishment in which stock is sold to the public. Although foreign banks are numerous Islamic Banking is taking the lead.

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TradeTrade

Foreign contractors or service businesses require UAE nationals sponsors, one for each Emirate in which they do business. Foreigners are not allowed to own land in Abu Dhabi or Dubai except in free zone areas. Residential and commercial foreign ownership is not on the agenda.

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BudgetBudget

The government sector includes the accounts of the federal government as well as accounts of the seven individual Emirate governments. Only the federal budget, a small part of the total, is published.

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ReexportReexport

The UAE enjoys a booming re-export trade, 34 percent of all exports are re-exported. Traditional re-export markets are the Gulf Co-operation Council (GCC) states and Iran.

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New marketsNew markets

UAE traders have aggressively sought out new markets in such areas as Russia, the newly independent states of central Asia and in South Africa.New real estate developers such as EMAAR and DAMAC are entering strongly in new markets.

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PrivatizationPrivatization

All six members of GCC currently have privatization plans of some form as a means to reduce government expenditures and to turn around unprofitable state-owned businesses.

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PrivatizationPrivatization

The UAE especially has been testing plans for privatization on small agricultural enterprises and now hopes to open strategic sectors of its economy, such as the petrochemical industries, to private investors.

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PrivatizationPrivatization

As part of the UAE's ongoing commitment to the privatization process, in 1996 Abu Dhabi sold shares by public subscription in Food Co., a food products retailer and floated majority stake in the joint-stock company Abu Dhabi Shipbuilding Co.

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PrivatizationPrivatization

In 1997, shares were publically sold for al- Kanza Insurance Company and Oasis International Leasing Company. The General Industrial Corporation, a diversified Abu Dhabi-owned company, is also slated for sale, although the Emirate would prefer local citizens to be the major purchasers.

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Joint ventureJoint venture

Unlikely to ever be sold are government holdings in the oil sector. Foreign companies Nestle and Statoil have formed a joint venture with Abu Dhabi National Oil Company in the Ruwais project. Giat Industries has proposed buying the Taweelah power and desalinization complex as part of its offset obligations.

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Stock ExchangeStock Exchange

Public stock companies are registered in the UAE, there is a stock exchange at the present time in Dubai and Abu Dhabi. Shares of public companies are bought and sold through private brokerage agencies, and share price information is based on the latest transactions.

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Stock exchangeStock exchange

The UAE has opened a formal stock exchange in 1999. A proposed law provide the regulatory framework for the exchange. The UAE stock market is believed to currently have a market capitalization of more than DH 67 billion, and the primary market is also expected to become very active in the future.

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StocksStocks

The Emirates Bank group has currently established the Emirates Equity Index (Emnex), a composite of thirty-one actively traded UAE stocks.

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ExchangeExchange

There are also sub-indices for the three main market segments-banking, services and insurance. Official reports state that the UAE has set up an exchange to absorb planned privatization of service sector companies and shares in new commercial joint ventures.

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Current and Projected ProjectsCurrent and Projected Projects

The Dubai strategic plan has earmarked US$ 9 billion to be invested in the Jebel Ali free zone over the coming five years.

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ProjectsProjects

Development projects which are already underway include the construction of a US$ 200 million unit for the Jebel Ali topping plant now being planned by the Dubai-based Emirates National Oil Company (ENOC) and the possible US$ 400 million expansion of the Ruwais Fertilizer Company (Fertil) plant in Abu Dhabi.

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New projectsNew projects

Southern Petrochemical Industries Corporation of India has already received approval to construct the US$ 165 million Jebel Ali fertilizer plant, which produces urea and ammonia. Other plants currently being considered for massive expansion include the Taweelah A and Jebel Ali D power stations and the Al- Awir sewage treatment plant.

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ProjectsProjects

Additional major projects include the establishment of the 400-kilometer link from the Taweelah power complex to Abu Dhabi island, a ship repair and construction yard for Abu Dhabi Ship Building and a new Abu Dhabi naval base.

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New projectsNew projects

Other projects include the US$ 530 million expansion of Dubai Airport, a US$ 500 million expansion of Abu Dhabi and Al-Ain airports, the building of a number of new hotels, including a new 280-room Hyatt between Umm al-Nar and Shahama and a 416-room Park Plaza hotel near the Dubai World Trade Center, as well as two office towers in Dubai of 305 and 350 meters respectively and a new Sharjah world trade center, which will include a 320-meter tower and a 20,000 square-meter exhibition hall. Hospitals and housing projects are also being planned and should be open for tender anytime from now.

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ProjectsProjects

1998 is likely to see the beginning of consultancy work on a project to expand the capacity of the Mirfa power and desalination operations. The General Projects Committee (GPC) is currently discussing what form the expansion should take. One option is to install back pressure turbines at the A station to produce additional power and desalination output. An alternative is to go for a much larger development of 400 to 500 MW of power and forty to fifty million gallons a day (g/d) of desalinated water.

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InvestmentsInvestments

The government has said it plans to invest up to US$ 300 million in the recently-formed Saadiyat Free Zone, including the construction of a six kilometer bridge to the mainland.

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Build Operate TransferBuild Operate Transfer

One of the first BOT projects in the water treatment sector is the Ajman wastewater project. Concessionaires are Black & Veatch US International. and the Abu Dhabi-based KEO International Consultants. One hundred million dollars will be invested in the first phase of development and the overall project is expected to require an investment of US$ 600 million.

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Ajman projectAjman project

The concession will extend for twenty-five years, and the operators are expected to recover their outlay through house connection charges as well as through the treatment of waste water.

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New projectsNew projects

Another waste water treatment plant to be built on a BOT basis will be located in Salalah. The British partner of this British/Omani joint venture is North West Water International, a subsidiary of the North West Water Group. According to the terms of the award, the operating company will be responsible for building the city's wastewater transportation system as well as for operating a sewage plant, currently being built by ABB USA.

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New concessionNew concession

The concession is to extend for thirty years and will include responsibilities for billing and collection of water connection fees. Other income is to be secured through the sale of treated effluent back to the municipality and the sale of water to other interested buyers.

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FranchisingFranchising

Currently, franchises are operating in the fast foods industry; dine-in restaurants and clubs; auto leasing; apparel; soft drink bottling; beauty products; hotels; toys; photography; jewelry; vending machines; dry cleaning; furniture; hardware; natural health products; publishing; and sporting goods.

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FranchisingFranchising

The largest segment is the fast food franchise group which is highly sought after by local companies. Most of the major US fast food companies are already established in the market.

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RestructuringRestructuring

The industry, however, is currently going through a major restructuring with several major franchises being sold to new owners. These changes are seen as a positive change from weaker to stronger management, and not as a reflection of weakness in the market. There remains considerable potential for franchises of all kinds.

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RegulationRegulation

There is no special legislation for franchises in the UAE. General contract and commercial law apply to franchise agreements. UAE law mandates that only UAE citizens or corporations wholly owned by UAE citizens are allowed to conduct retail operations, the most common type of franchise. Foreign businesses must work through a local partner as licensee or enter into a joint venture.

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FranchisesFranchises

Franchisees usually prefer to own 100 percent of the franchise themselves. In other cases, the franchisee enters into a joint venture with the franchiser to operate all outlets as company-owned stores employing local managers.

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OperationsOperations

As with other types of business operations in the UAE, the selection of the local partner is critical. One common practice used by franchisers in the past that has, in many cases, caused considerable problems and significant lost sales is the selection of a master distributor to cover the entire Gulf through the use of sub-distributors in each country.

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Different marketsDifferent markets

Each market is different and requires qualified local partners to exploit its opportunities. Free zones are extended to include all possible services such as health,IT,education and research.

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WTO and integrationWTO and integration

WTO Negotiations are still on the way even after the failing Doha summit . US-UAE free trade area and EU-UAE free trade area as well as the GCC integration

efforts aiming the setting up of a single gulf currency are also on the way.

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ConclusionConclusion

The UAE economic structures have proven over the years their flexibility and adaptability to internal and external variations. The UAE development and growth model has been an inspiration to many but its replicability is difficult as it is a mix of politically sound leadership, conducive business environment, tax free open economy, attractive lifestyle, state of the art infrastructures, innovations and best practices’ friendly environment.

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I THANK you,,,I THANK you,,,

Dr.saad othman

Dean agu