Countries that have relied on extracting and exporting commodities, such as oil and gas, have always been vulnerable to global events that significantly undermine growth in their economies.
In a recent study by “Quartz”, using data from the World Bank, Indonesia was found to be the least volatile with regard to its GDP per capita growth. The analysis uses standard deviation, presumably from long-term growth, to measure volatility.
Volatility is higher for countries that have long been over-reliant on exporting natural resources or are yet to accomplish real economic diversification that could grow the economy sustainably. Quartz does not cite reasons for why Indonesia is the least volatile economy, which may be the result of constructive efforts in diversifying an economy of more than 250 million people. In other words, there is both production-based and consumption-based potential for economic growth.
Vietnam and Australia are ranked second and third respectively, with the former being one of the fastest growing economies in its region and Australia is on its way to becoming a key player in the global cobalt market — a key mineral used in the manufacturing of batteries in electric cars.
The lowest quarter includes countries with higher volatility in their economic growth. Interestingly though, this category has both the UAE, an oil exporter, and Singapore, a country with no natural resources, classified as highly volatile.
The right question to ask here is what made the UAE and Singapore volatile in their economic growth? The volatility could be attributed to their positioning in a global value chain and trade system, with their advantage being challenged by other countries that are occupying more prominent roles in the same. Another commonality is a small population and low population replacement rates, which means that economic growth in the future cannot be consumption-based.
And while the UAE exports oil and is hence vulnerable to fluctuations in oil prices despite economic diversification efforts, Singapore is an importer of the black gold, which also exposes its economy to higher prices. Moreover, Singapore is located in a region that is yet to achieve its full economic potential, and where economic growth is contagious due to trade links among those countries and Singapore.
Singapore is also well positioned to invest in countries with economies that are less volatile than its own and are in its geographic vicinity. Those include Indonesia, Vietnam, Laos, China, Malaysia, Thailand, and Myanmar.
The situation is not the same for the UAE, as its economic growth can be challenged by geopolitical events in a region that is anything but not turbulent.
The UAE’s economy has always been a consumption-based one. Imprisoned by its geography, the UAE could not follow the Asian development model of first expanding a country’s agricultural sector, and exporting basic commodities, before engaging in basic manufacturing on the way to fully-fledged industrialisation and even high-tech industries.
In fact, the UAE had to skip the first stage altogether because of its natural disadvantage in growing its own food. Fortunately, it was advantaged in extracting and exporting crude oil to grow its economy.
Put into effective use, oil revenues have made the UAE’s economy today the second biggest Arab economy in MENA after Saudi Arabia. It has also enabled the UAE to support and promote UAE-based companies to expand their products and services beyond its borders, ensuring long-term success for those companies while further enshrining the UAE in a global value chain and a global trade system. Examples include Dubai Ports in services and Strata in products.
Such an economic model, successful from 1971 to today, will now need to be tweaked in order to prepare the UAE’s economy for an ever-challenging global economic landscape. To do that, a few points need to be acknowledged and formulated into economic policies that will reduce volatility in growth and ensure long-term results.
First, and taking the current population and replacement rate into account, the UAE’s economy cannot be sustained as a consumption-based one. This is even more alarming given today’s population breakdown with regard to income per capita and how much of that income is being spent in the UAE versus how much is remitted out of the economy.
Secondly, the UAE’s future economic growth is dependent on where it wants to position itself in tomorrow’s global economy. That is, and as the UAE has been investing its oil proceeds abroad as well as spending them domestically, time is of the essence to revisit and recalibrate those investments to serve two main purposes.
One, such investments will be the driver of future economic growth by investing in key sectors of the future, with food security and A.I. being examples of the same. Return on capital, i.e. today’s investments, will enable future domestic government spending when economic growth slows down.
The second purpose is similar to the first, except that key sectors and industries must be identified in the UAE itself, attracting foreign direct investments and the UAE’s own investments to develop those sectors and position them to drive future economic growth in the UAE. Being a trade hub and an attractive destination for tourists and investments is only one side of an envisioned post-oil envisioned economy for the UAE.
Being in a turbulent region, the UAE’s economic diversification must be targeted towards strengthening its economic resilience and reducing volatility in its economic growth. The UAE must therefore balance its economic growth between consumption-based and production-based domestically, and return on its investments globally.
The last thought that I want to leave you with: what should the UAE’s global economic position be post 2050?
Abdulnasser Alshaali is a UAE based economist.