Abstract
This paper is a comparison of two economies, the UAE and the UK, using variables that made them similar or different from each other. First, the two countries are members of their respective regional integration, the Gulf Co-operation Countries and the European Community. The GCC and the EC have long been trading partners. This study used qualitative data from various databases to prove our choice of variables, namely: the International Monetary Fund (IMF), the National Bureau of Statistics of the UAE, the World Data Bank using the World Development Indicators (WDI), and the Eurostat.
The UAE is a predominantly Muslim country while the UK is a Christian country but multi-ethnic groups are flocking into England as immigrants. UAE is a culturally-diverse country in the Gulf and multi-ethnic groups coming from other parts of the Middle East and Southeast Asia flock to this small Trucial state to find work. With Dubai becoming a regional hub, UAE’s population will exponentially grow. UAE’s performance is outstanding every since its founding while the UK, despite being “older” than the UAE, has been struggling. When it started to make reforms from the 1980s up to the 2008 financial crisis, Great Britain, the forerunner of what is now called the UK, produced positive results. But the financial crisis brought in new challenges and problems for the UK government.
This paper took note of the IMF reports for both countries. IMF has positive comments for the UAE and provided negative outlook for the UK. The data for both countries will explain the causes for the IMF reports.
Introduction
The United Arab Emirates (UAE) is a member of the Gulf Co-operation Council (GCC), and the United Kingdom (UK) is a member of the European Union (EU). While both countries can be compared in terms of economic development, it is important to note that the GCC and the EU (or European Community) are trading partners. These two regional integrations significantly influenced both countries’ economic performances.
The United Arab Emirates (UAE) is a predominantly Muslim country and its economic activities are rooted in and deeply influenced by their Muslim beliefs. Sheikh Zayed bin Sultan Al Nahyan, UAE’s first president, ruled wisely but with a compassionate heart as he instituted liberalization reforms for the UAE economy. He got worldwide approval ratings, particularly from the International Monetary Fund and the World Trade Organization (WTO). The economy and GDP grew continually, supported by the strength of the oil sector and the non-oil economy, such as real estate, construction, and tourism. The economic transformation of the UAE does not conform to ordinary norms. About a generation ago the people of the Trucial States were illiterate and very poor. Now they are facing the greatest challenge of dealing with an extreme and sudden wealth (Heard-Bey, 2005, p. 358).
The UK, on the other hand, had a productivity gap, a gap it shared with the United States, France and Germany. What is this productivity gap? Labour productivity is measured through “output per hour worked” and the UK is now the lowest in output compared to the three countries. It had to increase investments, labour skills, innovation, and even competition. Before the financial crisis in 2008, UK made substantial reforms that were instituted in the 1980s and impacted on the micro-economy, increasing productivity on firms which used to have strong unions.
It also encouraged the coming in of more foreign capital. Liberalization was the key. Employment regulations were eased while product market rules were loosened up. UK’s macroeconomic performance became outstanding. In late 1990s and early 2000, the Bank of England was given the chance to independently manage itself but with only one policy initiative and that is to control inflation. In 1993 up to the recession period of 2008, England gained stability with increased employment (Pissarides, 2012, p. 42).
The UAE is a relatively young country while the UK has long been in existence, with the core of its geographic existence in England as part of Great Britain. While UAE’s economic growth is believed miraculous, UK’s economic and political existence and growth experienced the rough roads.
The UAE is part of the Gulf Cooperation Council, established in 25 May 1981 by six Gulf states; its primary objective was to secure the smaller states in the Gulf against an aggressive Iran. Economically, the GCC aimed to provide a common market of the member states leading to an ultimate economic integration which took effect on 1 May 1982. The common market aimed for “a common customs tariff” for five years, the introduction of a unified “economic, social and defence policies” and a common currency (Arab Law Quarterly, 1987). Most of the economies of the GCC states have been dependent on oil and gas but the UAE has evolved into a non-oil economy setting the stage for more economic development. The GCC holds about 40 per cent of the world’s known oil reserves and account for approximately 15 per cent of oil production. (Arab Law Quarterly, 1987)
The United Kingdom (UK) is part of the European Union. UK has energy policy objectives on mitigation of climate change and energy security. UK energy policies are to ensure that energy prices are reduced and energy markets are competitive. Greenhouse gas emission targets have become an integral part of present and future policies with the enactment of the Climate Change Act (HMG, 2008 as cited in Ekins et al., 2011, p. 866).
The variables
The variables chosen to compare the two economies are: gross domestic product per capita (GDP), employment in industry and services, labour productivity, employment rate, energy production and CO2 emissions.
The “balanced-budget theorem” can be applied in our choice of variables for macroeconomics. The theorem states that a marginal enlargement of “public expenditures for goods and services, balanced by an equal marginal increment of “real” taxes or other public receipts, will yield an equal marginal increment of real income when supply conditions permit, i.e., at less than full employment and in the presence of excess capacity” (Bronfenbrenner, 1981, p. 178).
The equilibrium for GDP is expressed in the formula:
“Y = C + I + G + (X-M) = GDP”
The expenditures of a country or organization equal the GDP if all the elements are added in the model as shown above. Bronfenbrenner (1981) cited the microeconomic phenomenon which was known as the American “tax revolt” of the 1970s, which formed the notion that many specific activities of the public sector should be left to the private sector to dispense with, wholly or partly. Reduced public expenditures were applied to counter inflation. One theory applied to this was the “Parkinsonian law” which states that “an organization’s expenditures always rise to meet (or stay ahead of) increases in the organization’s revenues” (Bronfenbrenner, 1981, p. 181). Tax reduction must be followed by public expenditures.
In the following section (WDI Data), variables for the two countries’ economies were chosen to reveal their similarities and differences and their true income as explained in the balanced-budget theorem.
WDI Data
Source: World Data Bank (2014)
Explanation for the WDI data
For the ten-year period, there were increases for both countries in the GDP per capita and the increases were not far from each other, although UAE was higher than UK in the GDP per capita. However, in 2007 UAE started to decline. Year 2008 was the start of the financial crisis and UAE’s performance was slower compared to UK whose GDP per capita continued to rise despite the financial crisis. This did not mean the UK was off the hook during the financial crisis. It did suffer during the crisis with many sectors affected, particularly the banking sector.
The two countries’ expenditures and tax increases are provided in Appendix “C”. These latter variables will explain whether both countries acted reasonably to provide a balanced equilibrium, i.e. expenditures have to rise to meet the increase in revenues. The UK’s taxes and expenditures on goods and services were constant all throughout the years 2003 up to 2012. The UAE’s taxes and expenditures for 2011 and 2012 also did not change, or had very slight changes.
UK labour market performance before the crisis
The labour union eased its hold on production because of the UK government’s legislation in the 1980s, at the same time trade union membership slowed down. Government-owned enterprises were privatized while manufacturing decreased. Harsh legislation on dismissal of employees was corrected and complaints by employees were acted upon and simplified. The UK government made reforms that removed blocks in the labour market amid increasing requirements (Pissarides, 2012, p. 40). Inflation was controlled through the inflationary procedures implemented by the Bank of England since early 1993 and this influenced inflation expectations that impacted on the labour market. When inflation was put to the minimum, workers became less dependent on wages and labor unions.
The British labour market did not have good productivity performance in the 1980s because of the so-called shocks. Unemployment grew along with the deflationary forces and it remained for a long time, making unemployment one of the greatest problems of the Conservative government. But the 1980s was also a period of reforms. There were large state-owned industries which contributed about 12% of GDP, and there was also poor employer-employee relations (Pissarides, 2012, p. 41).
Those nationalized industries resulted into strong unions which opposed market reforms. The Conservative government then instituted reforms aimed to restore British economic power in the region which was taken over by Germany, France and the United States. Market-oriented policies gave the government of Margaret Thatcher and succeeding governments opportunities to develop once again the British economy. Industries were liberalized and passed on to the private sector, making the public sector less participative. Trade union membership was substantially reduced and its power also slowly diminished. In 2013, employment rate for the EU, in which the UK is a part of it, was 74.9% of the population and its target in 2020 is 80% (Eurostat, 2014).
As to their CO2 emissions, it appears that the UAE has greater CO2 emissions expressed in kilogram per 2005 PPP $ of GDP, for the years 2003 up to 2010, than the UAE. This means that the UAE is not prepared to accept more economic development since its programs to minimize carbon emissions are not comparable than those of the UK. However, both countries are signatories to the Kyoto Protocol. WDI Table for CO2 emissions for the UAE and the UK is provided in Appendix “B”. The UAE has to improve its CO2 emissions target before it provides more innovations in the economy.
UAE performance before the crisis
The unorthodox nature of the UAE’s political structure has provided it strength and can be perceived even in the foreseeable future. Many observers believe it has strong foundations that can provide lasting stability and economic prosperity in the many years ahead. This was laid to the people by the charismatic leader, Sheikh Zayed, but even without this leader the people can sustain and struggle to survive politically. Much will depend on the strength of the federal make up, particularly on the relationship of the central government and the powers endowed on individual emirates. One example is Dubai, once a vast desert with its declining oil reserves, it has transformed into the world’s biggest real estate business. Large corporations, organizations and businesses, are flocking into Dubai, establishing their offices and headquarters. Its population has risen exponentially.
The people’s standard of living has also increased. Before the people were living in extreme poverty, now most families import household help from Asian countries. In contrast, the UK has diversified to other economic programs, such as educational tourism. UK university programs have accepted foreign students from Africa, China, and the Middle East (Heard-Bey, 2005, p. 359).
Microeconomic Theories
Microeconomic reform is like technological change because it paves the way to increase production of goods and services of a given economy depending on the quantity of productive resources. This leads to improved living standards. Microeconomic reform can be examined by assuming that “the level of aggregate employment is independent of the reform” (Adams & Parmenter, 1994, p. 1). There is the assumption that when the employment rises and unemployment is kept at the minimum, the economy is growing.
Adams, Dixon & Parmenter (1991 as cited in Adams & Parmenter, 1994) examined “the relationship between microeconomic reform and aggregate employment in short-run ORANI simulations” (Adams & Parmenter, p. 1). ORANI is used in a multisectoral model, considering the economy as an organization of different sectors. In this simulation, the experimenters introduced reforms which can be related to some form of technical change. Reforms related to labour practices can be considered labour-saving. Still there are other reforms that can be classified as “all-primary-factory-saving” (e.g. eradicating penalty rates, facilitating the operation of capital equipment) (Adams & Parmenter, p. 1). Reforms to the labour market will certainly impact all industries. Technical changes by way of microeconomic reform can also be applicable to manufacturing, transport and communication.
The study of Adams and Parmenter (1994) using the ORANI simulations method cleared some fears in introducing microeconomic reform. There is that one fear that by displacing workers in the industries having the reform, it might lead to more unemployment. The study found that this could occur only “when the reform is purely labour-saving and even then only if the proceeds of reform are taken out by workers in the form of increased wage rates” (Adams & Parmenter, p. 11).
Furthermore, if workers support microeconomic reform without demanding higher wages, then the cost for effective labour can provide savings and employers can increase the number of effective units employed. This reform therefore cannot decrease employment. The authors further posit that: “In some cases, the employment of labour hours increases, the increased demand for effective labour units more than offsetting the fact that labour-saving reform implies that each effective labour unit translates into fewer labour hour” (Adams & Parmenter, p. 11).
The theory discussed here can be related to the reforms initiated by the Conservative Government of England during the 1980s. The government introduced reforms in employment and labour, in banking laws, in liberalizing the nationalized industries, paving the way for the private sector to play a major role in the economic transformation. The UAE also introduced reforms in the labour sector providing changes from the start. Even if the political structure was autocratic, the government did not put pressure on the industries but provided regulations favorable for a free market.
IMF Country Report for the UAE
In its 2013 report on the UAE economy, the IMF indicated that the non-oil economy has strengthened, supported by rising oil prices and increasing capital markets. After the 2009 financial crisis, the non-oil economy, like the real estate market, has recovered and there are ongoing large projects in real estate, construction and tourism. Fiscal consolidation was instituted for the year and monetary policy was focused on accommodating the dollar peg. The IMF report recommended that the UAE government should strengthen its government-related entities (GRE) by anticipating future problems and enhancing transparency and management.
The aforementioned megaprojects must be carried out carefully and GREs avoid more risks. The banking system is quite stable, careful of the emergence of liquidity shocks. UAE should have implemented mortgage lending regulations that should be enhanced by earnings from real estate and housing projects. UAE’s banking system was rated good although there were recorded high non-performing loans (NPLs) and private sector borrowing was quite slow. The UAE’s growth and performance were provided in a report by the country’s National Bureau of Statics as provided in the appendix “A”. In this report, the UAE has progressed in the different sectors of the economy, both on oil and non-oil markets. (International Monetary Fund, 2013)
IMF Country Report for the UK
The European Union is pushing for financial development to meet growth. The EU established a “single market” and authors Bena and Jurajda (2011) posit that this provided an opportunity to study the relationship between financial development and growth. The countries differed in the subject of financial development, so does UK. In its 2012 staff report, the IMF provided some negative comments. First, this is the post-financial crisis period where some repair and coping mechanisms had to be provided. The report is that the post-crisis steps were halted. The repair and stabilizing acts would take some time than was initially seen.
There was lesser confidence from various sectors, with uncertainty looming. But there was some hope as the economy would still have reticent growth. Policies had to be reformatted so that the economy would not loosen up, or productivity might get lost. The IMF staff recommended “quantitative easing” through slashing of the policy rate; lower borrowing costs; and fiscal easing should be slow. (International Monetary Fund, 2012)
Conclusion
The IMF has positive outlook for the UAE. But the UAE should heed to the IMF recommendations in strengthening its government-related entities (GREs) by focusing on future problems and enhancing transparency and management. Another strong point made by the IMF was for the UAE to avoid more risks. UAE’s banking system was rated good although there were recorded high non-performing loans (NPLs) and private sector borrowing was quite slow.
In its country report, the IMF had negative comments for the UK. The country is still coping with the 2008 financial crisis; meaning, the post-financial crisis reforms were not good and did not provide suitable solutions to the challenges and problems created during the crisis. But growth was coming in 2013 when the UK provided “quantitative easing” by cutting the policy rate, lowering borrowing costs, and reforming unwanted regulations.
References
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Bronfenbrenner, M. (1981). The balanced-budget multiplier by the back door in a tax-revolt context. Kyklos, 34(2), 178-185. Web.
Ekins, P., Anandarajah, G., & Strachan, N. (2011). Towards a low-carbon economy: scenarios and policies for the UK. Climate Policy, 11, 865-882. Web.
Eurostat: Employment rate by sex, age group 20-64. (2014). Web.
Heard-Bey, F. (2005). The United Arab Emirates: Statehood and nation-building in a traditional society. The Middle East Journal, 59(3), 357-375. Web.
International Monetary Fund: United Arab Emirates 2013 article iv consultation. (2013).
International Monetary Fund: United Kingdom 2012 article iv consultation. (2012). Web.
Pissarides, C. (2012). British labour market performance before the crisis, 1993-2007. In G. Giudice, R. Kuenzel, & T. Springbett (Eds.), UK Economy: The crisis in perspective: Essays on the drivers of recent UK economic performance and lessons for the future (pp. 39-58). New York: Routledge. Web.
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Appendix “A”
UAE growth in the different sectors
SOURCE: United Arab Emirates, National Bureau of Statistics (2014)
Appendix “B”
SOURCE: World data bank (2014)