AuthorJeong, Hae Won

The oil-based economy has been the backbone of socioeconomic development and the engine of state-building and nation-building processes of the Arab Gulf states (AGS). This includes the United Arab Emirates (UAE), which was established as a federation in December 1971. With a GDP of $382 billion and a population of 9.4 million (as of 2017), (2) the UAE has been referred to as "the miracle in the desert" and as a beacon of economic modernization in the region. At the same time, the UAE and the other Gulf Cooperation Council (GCC) countries continue to face structural issues stemming from an oil-dependent economy characterized by bloated bureaucracy, fiscal imbalance, and a marginalized private sector. As a federation, the vision of the UAE's founding president, Sheikh Zayed Bin Sultan Al Nahyan, and the discovery of oil in 1958 were central to transforming what was formerly known as the Trucial states--which was administered as a British protectorate with remote fishing villages and trading outposts in the desert--to an affluent society epitomized by a glittering skyline and high-rise skyscrapers during the construction boom in Dubai in the early-to-mid-2000s. (3)

As the second-largest economy in the Arab world with substantive sovereign wealth fund (SWF) reserves, the UAE gained geoeconomic and geopolitical significance. (4) The oil boon not only supported financial, human capital, and infrastructural development, it also elevated the UAE's status to an emerging regional player in the Gulf regional subcomplex after Saudi Arabia and Iran. Moreover, oil revenues that underwrite the UAE's state-building and nation-building processes transformed the Khaliji (Gulf) identity into a traditional society with a modern economic outlook. The low-hanging fruit of oil revenues notwithstanding, oil-dependent economies are susceptible to the boom-bust cycle. The UAE is a classic cradle-to-grave rentier state, which is defined as being dependent on externally derived rent, with only a handful of the population involved in generating rent. (5) In a rentier state, rent (i.e., oil revenue) accrues directly to the state, and the government's primary responsibility lies in allocating rent with the state expenditure exceeding 40 percent of the GDP. (6) While the state-building process in the UAE has been largely supported by public expenditure since the incipient days of the federation, the extent to which an expenditure-led growth alone could sustain economic competitiveness in the long run has been brought into question especially after the cumulative effect of the 2007-08 financial crisis and oil prices plunging in the 2010s. The UAE's economic diversification agenda (highlighted in the UAE Vision 2021), Abu Dhabi Economic Vision 2030, and the UAE Centennial 2071 were spurred on to mitigate against the acute impact of the budget deficits and the property market crash in Dubai among others.

While oil revenue continues to dictate government spending in the UAE, the prospects for American energy independence following shale revolution in the 2000s in North America (which culminated with the US turning into a net oil exporter on December 6,2018) has reduced Americas reliance on the Gulf states for energy supply. (7) Further to this, Chinas status as a global economic powerhouse (buttressed by Xi Jinping's Belt and Road Initiative [BRI]), Obama's pivot to Asia, and Trump's "America First" policy have retracted America's engagements with Europe and the Middle East and prompted the Gulf states to rebalance toward Asia. From a pragmatic perspective, it is evident from shifting geopolitics that it is imprudent for the Gulf states to "put all eggs in one basket" when it comes to forging diplomatic and commercial ties. Diversifying partners is vital for the UAE in the post-Zayed era, which has led to the emergence of a tripartite division in UAE's foreign policy that "looks to the West to ensure its security, to the Arab world to legitimize its identity, and towards the East economically." (8)

Although the decision-making processes in the Zayed Era and the post-Zayed era are conceptualized as mutually exclusive as per Abdulla Ghaith's Dynamic Process Model (DPM), the decision-making apparatus (i.e., the state) simultaneously interacts with the domestic sociopolitical structures and exogenous factors in shaping foreign policy decision-making against the backdrop of globalization. The DPM, therefore, construes foreign policy as a dynamic and iterative process that is shaped by the bearings of internal and external influences with the decision-making apparatus at the center. (9) Accordingly, under the overarching umbrella of globalization, there has been a paradigm shift in the UAE's developmental strategies that led to a transition from an expenditure-driven approach to an innovation-oriented approach. The former is dependent on the exploitation of natural resources whereas the latter promotes futuristic investments in science and technology. The paradox is that despite the structural constraints of resource-based industrialization (RBI), the UAE is ranked second place in the region and twenty-fifth place in the world for economic competitiveness according to the World Economic Forum's 2019 Global Economic Competitiveness Index. While this captures the UAE's rising international profile and prominence based on rapid institutional, political, and economic development, as I argue in this article, it also obscures the mismatch between quantitative and qualitative economic development. By mapping the history of the UAE's economic diversification strategies, this study is aimed at examining the extent to which international cooperation (i.e., UAE-Asia relations) supports this effort and critically assessing the prime motivators and drivers for economic diversification in the recent decades and discussing the implications thereof for the UAE's sustainability.


    The broader literature on the political economy offers some insights into the drivers and motivations for economic diversification strategies in the Arab Gulf states. While Dubai had successfully steered away from an oil-based economy by the mid-1990s, Christopher Davidson's Dubai: A Vulnerability of Success questions Dubai's ability to wean itself off from foreign dependency, noting that the non-oil industries of agriculture, light manufacturing, export processing, tourism, and real estate have inadvertently created other economic problems such as unbalanced integration and incurring hidden costs--thus the overall appraisal is at best a "superficial success." (10) Globalization, however, is a double-edged sword, especially for globally well-integrated emirates like Dubai and Abu Dhabi. Indeed, Dubai's liberal economy is rendered more susceptible to foreign dependency as a result of the promotion of the non-oil industries. The vulnerability has proven to be particularly acute in the hospitality and tourism industries due to the recent pressures from COVID-19 and weak oil prices. However, Davidson's assertion regarding cultural globalization is overplayed. Given the time of publication, his analysis does not consider the recent trends in the UAE's ongoing economic diversification efforts directed toward the innovation priority sectors, especially in the last six years. It is often overlooked that globalization also provides opportunities for the UAE to punch above its weight by expanding and fostering its integrative linkages with the global economy and emerging economies. (11) While the UAE has yet to deliver tangible outcomes in innovation, it has taken incremental steps to this end. Moreover, as Kristian Coates Ulrichsen suggests, the intensity of information and communications technology (ICT) adoption in the UAE has facilitated the latter's exertion of leverage beyond the traditional geographical confines of a small state. (12)

    Although the UAE was ranked behind Bahrain, Kuwait, and Egypt for the share of digital contribution to GDP in the Middle East and North Africa (MENA) region, it was ranked first in the region for overall digitization according to McKinsey & Company's 2016 Digital Middle East rankings. (13) Additionally, while digitization in the UAE lags behind the global innovation epicenters clustered as the "digital leaders" (i.e. Norway, Singapore, South Korea, Sweden, and the United Kingdom) and the US in the rankings, it is nevertheless ahead of the Asia-Pacific region. (14) At the same time, considering the UAE's exposures to oil price slump as a rentier economy, averting what appears to be "superficial success" necessarily entails rethinking allocation strategies to encourage more merit-based incentives for rent distribution and resource allocation vis-a-vis entrepreneurship, research and development (R&D), and education to allow for a more competitive environment.

    Regime type and domestic stability are also commonly broached topics in the literature on the political economy of oil. Notably, Michael Ross's quantitative study affirms that regime stability is generalizable across both oil- and mineral-exporting rentier economies. (15) Both Michael Ross and Samuel Huntington acknowledge the uneven impact of oil-based economies on different income levels and other socioeconomic disparities. (16) However, F. Gregory Gause discredits oil as the primary driver of regional conflicts of the Gulf states, and instead argues that domestic stability and politics of transnational identities inform the alliance decisions of regional powers--according to this view, regional conflicts are attributable to both ideational and material factors. (17) Gause raises some pertinent points in his book, especially considering that ideational factors constitute the primary source of catalyst for the foreign policy behavior of the Gulf states, both collectively and independently. However, his analysis is also flawed as it...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT