Progress and the future of economic diversification in UAE

Following the discovery of oil, Abu Dhabi together with six other sheikhdoms (Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah, and Umm Al Quwain) established the United Arab Emirates in 1971. Since the founding of the federation, oil and gas has been the economy’s mainstay, consistently accounting for up to 40 per cent of its GDP in the past decade (except during periods of declining commodity prices).1

The government has long emphasized its intention to pursue economic diversification and to reduce the federation’s reliance on oil. This was borne out of the recognition that hydrocarbon resources are finite, that both the price and demand for oil fluctuates considerably, and that the oil and gas industry was the sole source of wealth in many economies in the Persian Gulf (unlike resource-rich industrialized countries such as the Netherlands, Canada and Australia, which in addition to resource-based industries also have viable non-resource-based productive industries).

Manufacturing industries were deemed of high economic importance, not least because they provide job opportunities, address unemployment (especially among young and well-educated citizens), improve skills and facilitate technology transfers.

Beginning in the 1980s, the UAE promoted industrial development by establishing firms in manufacturing industries associated with oil and gas, including refineries, fertilizer plants and aluminium smelters.2 The premise was to make use of the UAE’s natural resource endowments as feedstock and fuel for industries. For example, Abu Dhabi National Oil Company (ADNOC) was set up to implement oil exploration, production, marketing and processing. The Dubai Aluminium Company (DUBAL) has become an important producer of basic metals by importing raw materials through the adjacent Jebel Ali Port to be processed into metal ingots which are then exported through the same port. Ruwais Fertilizer Industries (FERTIL) was established to utilize gas supplied from the onshore fields to manufacture fertilizers and to market them locally and internationally.

In addition, industrial development departments were established in the Emirates to support industrial activity. Industrial enterprises were exempt from customs duties on imports of machinery, equipment, spare parts and raw materials required for production. These firms were also exempt from export duties and taxes. Procedures were simplified to allow foreign talent to work in targeted industries in the UAE. Furthermore, specialized industrial zones were established for different types of industries, ranging from basic metals and metal products to machinery and mechanical equipment. Other programmes include the standardization and modification of investment procedures for the industrial sector, and simplifying the approval of industrial licenses and mergers to appeal to investors.

The UAE has since made some progress in terms of its economic diversification efforts. In 2016, the UAE had the second highest share among the Gulf Cooperation Council (GCC) economies of manufactured goods in its total merchandise exports (after Bahrain) at 69.7 per cent. The share represented an increase by 39 percentage points since 1995 – the strongest among the Gulf economies. As a result of expansion in aluminium smelting and fertilizer production, basic metals and chemicals have ranked, besides fuel, among the UAE’s top five manufactured exports for most years since 1995.

Building on progress made thus far, the UAE seems determined to continue its transformation into a diversified and knowledge-based economy. When the UAE Vision 2021 was unveiled (in 2014), the government set the target for non-oil sectors’ contribution to 80 per cent of GDP as a means to ensure economic prosperity and sustainability (the share of extractive industries in GDP declined to one-fifth or less in GDP in 2015-2016, but this was primarily attributable to declining commodity prices).3

Strategic planning for the industrial sector was also adopted at the level of the Emirates. For instance, the Abu Dhabi Economic Vision 2030 reaffirms economic diversification as a “key pillar” and aims to grow the non-oil sector by more than 7.5 per cent annually to help the UAE achieve a neutral non-oil trade balance.4 The explicit objective of a separate Dubai Industrial Strategy 2030 is to “increase the output of manufacturing” and “increase the value added share in output”.5

The development of the strategies of the two Emirates makes an interesting subject for study. Abu Dhabi and Dubai are the richest Emirates within the UAE, but have historically taken different approaches to diversification, according to one study.6 Backed by huge oil reserves which accounted for nearly 7 per cent of the world’s proven oil resources, Abu Dhabi sought diversification through resource-based manufacturing. By contrast, having depleted its small oil resources, Dubai was more proactive than other Emirates in its attempts at diversification but chose to pursue it by bypassing industrialization and instead creating a service economy. Their respective diversification approaches have in the past run into limitations following the global financial crisis (which affected services) and commodity rout (which affected resource-based manufacturing).

The two Emirates’ latest strategies provide a strong indication of their intention to break into industries with higher technological intensity and to cater to both regional and global markets.

The Abu Dhabi Economic Vision 2030 has identified aerospace and healthcare equipment industries as the engines of future growth, alongside established manufacturing industries (such as oil and gas, petrochemicals and metals) and a number of service industries (including tourism, education and media). One of the initiatives was the setting up of Strata Manufacturing by Mubadala Investment Company (Abu Dhabi’s state investment arm) in 2009. It has since entered into partnerships to develop and produce aircraft parts for the likes of Airbus, Boeing, Pilatus and FACC. Strata Manufacturing has been collaborating with Siemens and Etihad Airways since 2017 to develop 3D-printed parts for aircraft interiors.

The Dubai Industrial Strategy 2030 also targets aerospace and medical equipment industries, as well as a number of other high-technology activities such as ship repair and maintenance as well as machinery and equipment based on economic considerations. Dubai is already one of the four “super-connector” hubs for long-haul routes between Europe and Asia. Emirates Airlines, which operates one of the world’s largest fleets of wide-body aircraft, is owned by the Government of Dubai and is based in Dubai. The industrial strategy envisages measures aimed at “supporting Emirates Airlines and Dubai’s longstanding competitiveness over the long term, through the localization of manufacturing capabilities in certain aerospace sub-industries”. The Dubai Industrial Strategy also seeks to develop manufacturing capabilities in specific maritime sub-industries by leveraging on the position of state-owned Dubai World, which operates Jebel Ali Port and a number of port terminals elsewhere.

There are early indications that the UAE’s strategies have made some gains. The UAE’s share of global export markets for other transport equipment (of which aerospace and ship repair and maintenance are sub-industries) increased from 0.3 per cent in 2010 to 0.7 per cent in 2016, rising to become the world’s 23^rd largest exporter.

The UAE’s journey to economic diversification is far from complete. To deepen its industrial development, the UAE’s government has identified some obstacles that must be overcome.7 These include different procedures and regulations in the industrial sector between the Emirates, as well as the absence of an industrial standards unit that governs the quality of imported and exported industrial products. State-led efforts alone will not suffice to achieve the targets; they will likely need to be complemented by substantial private sector investment and expertise. It will also require greater coordination and integration with other Gulf countries to organize the industries at the regional level to avoid over-duplication of activities that negatively impact prices and sales.