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UAE’s Economic Progress: A Symbol to Follow

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United Arab Emirates (UAE) has transformed into a regional trading hub of the Middle-East and is on a road to becoming a trading center of the world. It has grown into a business capital and is recognized as the wealthiest in the region with the GDP per capitaincome of $49500. UAE has managed to gain this position due to its enormous gas and oil reserves since UAE has the third largest gas and oil reserves of the OPEC. Previously, the UAE was highly dependent on oil and natural gas as it comprised 40% of total exports and 38% of GDP. However, efforts are being made to diversify the economy and reduce the dependency on oil revenues by investing in tourism, financial, and construction sectors. The diversification ofthe economy is rapidly becoming a success story and a role model for others to follow.

The UAE had a different medium for economic growth throughout the years. Until the 1930s, pearl fishing proved profitable but after the Great Depression and the invention of cultured pearls in Japan caused the Emirates’ pearl business to collapse. In the 1960s, oil replaced pearls as the medium of economic growth. The oil proved to be highly profitable and it altered the dynamics of the country and transformed it into one of the richest states in the world. Oil production attracted foreign investments and trade and allowed the UAE to fund the development of other sectors such as cement plants, food industry, and tourism.

Sheikh Mohammed bin Rashid al- Maktoum succeeded in 2006 with a vision in his mind which later changed the image of the UAE in the world. He is credited with the rapid economic expansion of Dubai in particular. In 2010 he launched the UAE vision of 2021 intending to make the UAE ‘one of the best countries in the world’ by 2021. He launched a number of major enterprises such as Emirates Airline, Jumeriah group, and DP world. His economic vision led to Dubai becoming a global city with free economic zones, technology parks, International Finance Centre, the Palm islands and the Burj Al Arab hotel. In 2016, the government announced a long-term planned to multi-diversify the economy of the UAE to attract businesses and investments in other sectors like knowledge-based industries than oil to reduce the dependency on the energy sector as a source of economic activity.

UAE VISION 2021

The UAE vision of 2021 is to be ‘one of the best countries in the world’ by 2021. Their aim is to be united in the notion of knowledge, prosperity, destiny and responsibility. The government of UAE has announced a plan through which they will introduce high quality global standard infrastructure, government services and recreational environments.This will help promote a business environment and lure foreign investments in the country.

Since the economy of the UAE is centered on international trade and financial services; it offers favorable tax conditions which have made UAE into a ‘tax haven’. The favorable tax condition is a result of the domination of the extractive sector, and a minimal bureaucratic burden which has made the running of businesses easier. This environment has fostered considerable foreign capital and investments from all over the world.

In order to implement this vision, the government put forward the strategy that would act as a benchmark for the federal entities to develop their strategic plans. The strategy was divided into 7 general principles. These are the following principles:-

  • To enhance the role of national entities in carrying out operative regulations and cohesive policies by successful planning and implementation.
  • To strengthen coordination and cooperation among national entities and the local government.
  • To focus primarily on delivering high class, customer based and integrated government services.
  • To invest in human resource sector and create new leaders.
  • To promote efficient resource management within the national entities and facilitate partnerships.
  • To create a strategic culture to promote uninterrupted performance improvement and produce excellent results
  • To ensure transparence in order to enhance the accountability mechanisms of the government throughout the federal entities.

These steps have encouraged the change in the economic environment of the UAE and have facilitated the growth of UAE into the second largest economy in the Arab gulf with the fastest expanding economies of the world. In the past 40 years, UAE’s GDP has increased exponentially from $6.5 billion in 1971 to a whopping amount of $1248 billion in 2011. It accounted for 192x increase in Dubai’s GDP per capita which has increased from 100,000 dirhams (1975) to 174,000 dirhams (2011). This excellent success prompted international organizations, to name Dubai along with China, Turkey, India, Singapore, Russia, Malaysia and Brazil, among the world’s top emerging markets.

According to local and international estimates, steady economic growth has not resulted solely from energy output and oil exports, it has resulted from diversifying income streams and reducing oil dependence. Moreover, according to recent oil contribution figures, GDP has fallen from 70% in 1971 to 29% in 2010. This approach portrays the country’s significant economic achievement as it highlights a big contribution to the national economy’s stability. The recent report published by IMF shows that GDP growth of UAE will raise from 3.3% in 2011 to 3.8% in 2012.

To further capitalize the environment of UAE, the government made the protection of environment a priority of its government developmental strategy. Agriculture was also extensively discussed by the UAE government, and given the question of scarcity and desertification the government was successful in achieving goals. The key target for agriculture sector development and growth was the provision of food to the local economy. It is because the government finds it an aspect of national security. Similarly, the industrial sector has boomed considerably in the recent years with investments in this sector in 2010 amounting to DH101.12 billion (IMF). Nearly 4960 industries have been developed which created employment opportunities for the youth. It clearly demonstrates the federal and local government’s vision of improving and expanding the Industrial market.

UAE has managed to create a modern infrastructure which meets the requirements of the business world and their people likewise. The infrastructure includes not only highways, power and bridges but also transcends open, specialized and economic zones. The free zones are more than 30 in size, and are widely spread across the emirates. .The Abu Dhabi and Dubai real estate industry significantly contributed to the country’s transformation. In these states, the real estate has been referred to as the world-renowned with its contemporary concepts and designs.

Over the years even, the tourism sector has grown tremendously. In 2010, the number of tourist visiting reached over a 10 million. The influx of private and foreign investments has contributed majorly to the development of the tourist sector. In the last 10 years, 47 billion dirhams investment went into the tourism sector. A report published by IMF in 201, ranked the Dubai airport as the fourth best Airport in the world.

Moving towards the foreign trade, it accounts for 70% of UAE’s GDP. The country has a broad network of trading partners all over the world and they all enjoy bilateral trade relations. International trade is expected to rise by more than 25 per cent after 2011, due to significant changes in the UAE’s (Trade) economic climate. The UAE is among the world’s biggest exporters and importers with $235 billion in exports and $170 billion in imports. The exports contribute to 2% of the total world exports while the imports accounts for 1.4% of the total world imports.

Furthermore, the financial services sector of UAE has seen rapid growth as well. This was facilitated by the commercial and specialized banks of the UAE which played an important role in sponsoring economic activity and commerce in the country. There are 51 banks in the country including 23 national banks. Another contributing factor is the establishment of the financialmarketswhich havemobilized domestic savings. The Dubai Internationalfinancial market has become a free economic zones for the markets in the Middle East.

Another important step taken by the government was the e-government project. It was an attempt to promote electronic payment method for accessing federal government services. This encourages the local level entities to start e-services as well which proved to be time efficient andcost efficient.The e-government strategy helped maximize the efficiency of the UAE by the provision of world class practices in all the areas of E-government. The strategic plan was further sub-divided into 3 parts: E-services, E-readiness and ICT environment. The E-government proved to be a successful gamble and is now operating on local levels as well.

Likewise, The E-Commerce is responsible for overseeing the implementation of the UAE e-commerce law and certification services. It promotes adherence to the laws and regulations that allow safe and secure e-commerce transactions. The ultimate goal and mission of the E-commerce department is to promote economic development and technological advancement and innovation within the defined limits of a regulatory e-commerce regime that is fully in line with global standards. It also aims to create a regulatory and licensing framework that will be responsible for providing optimum development and fostering innovation, growth, competitiveness and significant investment in UAE ICT and the ecommerce sector, by adopting best global practices and standards while reacting to market needs and local consumers.

ABU DHABI ECONOMIC VISION 2030

After the completion of major objectives of the UAE’s economic vison plan of 2021, the government has launched another economic vision plan for 2030 in which they hope to achieve sustainable development goals (SDGs). The first initiative was started in 2016 which the introduction of the Dubai 3D Printing Strategy. The goal of this strategy is to establish the image of the UAE as the leading hub of 3D printing technology by the year 2030 by ensuring that 25% buildings in Dubai would be based on 3D printing technology by 2030.

Moreover, Dubai Industrial Strategy is launched to elevate Dubai into a global hub for knowledge-based, sustainable and innovation-focused businesses. The primary aim is to increase the total output and of the manufacturing sector by through innovation in order to make Dubai a manufacturing platform for global businesses and create an environmentally friendly and energy-efficient center for the global Islamic products market. This will help create additional revenue of AED 160 billion by 2030.

Dubai Autonomous Transportation Strategy aims to revolutionize the transportation sector to autonomous mode by 2030. This will generate AED 22 billion by reducing the transportation costs by 44%, carbon emissions, and enhancing the efficiency of individuals while saving time wasted in conventional transportation. The government has also started Abu Dhabi Transportation Mobility Management Strategy which will encourage the use of sustainable modes of transport and reduce traffic jams.

Abu Dhabi government has developed an environmental vision 2030 to ensure integration among the three pillars of sustainability: environmental, economic and social vision. This seeks to protect and improve the natural heritage of Abu Dhabi in the efficient use of resources and lead to a better quality of life for everyone. The top priority of its plan is to minimize the impact of climate change, reduce water and air pollution to ensure healthy living standards and preserve the bio-diversity and habitats of animals.

The Government of Abu Dhabi announced an economic plan for the transformation of the emirate’s economy. The plan aims to further reduce the reliance on the oil sector as a source of economic activity and a greater focus on knowledge-based industries in the future. It aims to achieve this goal by building an efficient and effective globally integrated business environment, manage levels of inflation, support the labor market and enhance their skills.

Moreover, UAE has begun the construction of the largest single-site solar park in the world, The Mohammed bin Rashid Al Maktoum Solar Park. It is estimated to generate 1,000 Mega Watt by 2020 and 5,000 MW by 2030. The project aims to build the world’s tallest solar tower, measuring 260m. This project was originally started under the Dubai Clean Energy Strategy 2050 to promote the use of clean energy in Dubai’s total power output to 7% by 2020, 25% by 2030 and 75% by 2050.

CONCLUSION

The recent developments and achievements of the UAE has transformed it into a leading country in the world with constant innovations and increased international trade.It has managed to reduce the dependency on the energy sector considerably by investing heavily in manufacturing, tourism, IT sector. The UAE Economic Vision Plan 2021 and Abu Dhabi Economic Vision plan 2030 will further elevate the international standing of the UAE in the global politics as the leading economic country in the world.

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Economy

Reforms Key to Romania’s Resilient Recovery

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Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

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US Economic Turmoil: The Paradox of Recovery and Inflation

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The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

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Carbon Market Could Drive Climate Action

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Authors: Martin Raiser, Sebastian Eckardt, Giovanni Ruta*

Trading commenced on China’s national emissions trading system (ETS) on Friday. With a trading volume of about 4 billion tons of carbon dioxide or roughly 12 percent of the total global CO2 emissions, the ETS is now the world’s largest carbon market.

While the traded emission volume is large, the first trading day opened, as expected, with a relatively modest price of 48 yuan ($7.4) per ton of CO2. Though this is higher than the global average, which is about $2 per ton, it is much lower than carbon prices in the European Union market where the cost per ton of CO2 recently exceeded $50.

Large volume but low price

The ETS has the potential to play an important role in achieving, and accelerating China’s long-term climate goals — of peaking emissions before 2030 and achieving carbon neutrality before 2060. Under the plan, about 2,200 of China’s largest coal and gas-fired power plants have been allocated free emission rights based on their historical emissions, power output and carbon intensity.

Facilities that cut emissions quickly will be able to sell excess allowances for a profit, while those that exceed their initial allowance will have to pay to purchase additional emission rights or pay a fine. Putting a price tag on CO2 emissions will promote investment in low-carbon technologies and equipment, while carbon trading will ensure emissions are first cut where it is least costly, minimizing abatement costs. This sounds plain and simple, but it will take time for the market to develop and meaningfully contribute to emission reductions.
The initial phase of market development is focused on building credible emissions disclosure and verification systems — the basic infrastructure of any functioning carbon market — encouraging facilities to accurately monitor and report their emissions rather than constraining them. Consequently, allocations given to power companies have been relatively generous, and are tied to power output rather than being set at absolute levels.

Also, the requirements of each individual facility to obtain additional emission rights are capped at 20 percent above the initial allowance and fines for non-compliance are relatively low. This means carbon prices initially are likely to remain relatively low, mitigating the immediate financial impact on power producers and giving them time to adjust.

For carbon trading to develop into a significant policy tool, total emissions and individual allowances will need to tighten over time. Estimates by Tsinghua University suggest that carbon prices will need to be raised to $300-$350 per ton by 2060 to achieve carbon neutrality. And our research at the World Bank suggest a broadly applied carbon price of $50 could help reduce China’s CO2 emissions by almost 25 percent compared with business as usual over the coming decade, while also significantly contributing to reduced air pollution.

Communicating a predictable path for annual emission cap reductions will allow power producers to factor future carbon price increases into their investment decisions today. In addition, experience from the longest-established EU market shows that there are benefits to smoothing out cyclical fluctuations in demand.

For example, carbon emissions naturally decline during periods of lower economic activity. In order to prevent this from affecting carbon prices, the EU introduced a stability reserve mechanism in 2019 to reduce the surplus of allowances and stabilize prices in the market.

Besides, to facilitate the energy transition away from coal, allowances would eventually need to be set at an absolute, mass-based level, which is applied uniformly to all types of power plants — as is done in the EU and other carbon markets.

The current carbon-intensity based allocation mechanism encourages improving efficiency in existing coal power plants and is intended to safeguard reliable energy supply, but it creates few incentives for power producers to divest away from coal.

The effectiveness of the ETS in creating appropriate price incentives would be further enhanced if combined with deeper structural reforms in power markets to allow competitive renewable energy to gain market share.

As the market develops, carbon pricing should become an economy-wide instrument. The power sector accounts for about 30 percent of carbon emissions, but to meet China’s climate goals, mitigation actions are needed in all sectors of the economy. Indeed, the authorities plan to expand the ETS to petro-chemicals, steel and other heavy industries over time.

In other carbon intensive sectors, such as transport, agriculture and construction, emissions trading will be technically challenging because monitoring and verification of emissions is difficult. Faced with similar challenges, several EU member states have introduced complementary carbon taxes applied to sectors not covered by an ETS. Such carbon excise taxes are a relatively simple and efficient instrument, charged in proportion to the carbon content of fuel and a set carbon price.

Finally, while free allowances are still given to some sectors in the EU and other more mature national carbon markets, the majority of initial annual emission rights are auctioned off. This not only ensures consistent market-based price signals, but generates public revenue that can be recycled back into the economy to subsidize abatement costs, offset negative social impacts or rebalance the tax mix by cutting taxes on labor, general consumption or profits.

So far, China’s carbon reduction efforts have relied largely on regulations and administrative targets. Friday’s launch of the national ETS has laid the foundation for a more market-based policy approach. If deployed effectively, China’s carbon market will create powerful incentives to stimulate investment and innovation, accelerate the retirement of less-efficient coal-fired plants, drive down the cost of emission reduction, while generating resources to finance the transition to a low-carbon economy.

(Martin Raiser is the World Bank country director for China, Sebastian Eckardt is the World Bank’s lead economist for China, and Giovanni Ruta is a lead environmental economist of the World Bank.)

(first published on China Daily via World Bank)

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