A three-month action plan for the UAE’s future economy is yielding near-daily views of how the country will look in the post-oil world.
On June 5, Sheikh Mohammed bin Zayed, the Crown Prince of Abu Dhabi and Deputy Commander of the Armed Forces, set officials a 90-day deadline to devise wide ranging economic reforms.
On Saturday, Abu Dhabi’s Department of Economic Development said it was rolling out dual licences which allow businesses in free zones to set up onshore branches – helping them to grow and work with government-linked companies and the public sector.
But Sheikh Mohammed’s proposals are part of a much bigger conversation – how to transform the country, whose prosperity was long driven by oil and gas, to a broader, diversified economy.
The buzz phrase is a “post-oil economy”. Once it was driven by the idea of “peak oil”, the date when the world’s reserves would hit their maximum output and then gradually decline over decades.
Today’s view is more complex and more urgent. New energy sources, particularly the falling cost of renewables such as solar and wind, have created viable alternatives to oil, especially when combined with concerns about climate change and pollution driven by rising carbon dioxide levels.
Then came the oil price shock of three years ago, when the price of a barrel crashed from a peak of $115 to merely $35 by February 2016.
Oil has recovered since to about $75, but the experience was a traumatic wake-up call for economies long dependent on this revenue to fund their increasingly expensive social welfare programmes.
For Arabian Gulf states like the UAE, but especially Saudi Arabia, oil revenue allowed governments to offer their citizens everything from free education and health care to generous allowances for housing and family support.The vast majority of those citizens also opted for government jobs where the pay was better and the hours and holiday allowances more attractive than the private sector. This was largely given over to expatriates, attracted by the lack of taxation – another revenue stream denied to governments.
Citizens and residents not only enjoyed almost zero taxation, they also benefited from subsidies on the same energy sources which created so much wealth.Petrol, electricity and even water could be provided far below the cost of production. The effect of energy subsidies worldwide was calculated by the International Monetary Fund to be $5.3 trillion (Dh19.46tn) in 2015.
Getting rid of them would increase the world’s GDP, the total value of its goods and services, by 3.6 per cent at a stroke, the IMF said. It would also cut carbon emissions by a fifth and halve the number of deaths attributed to the burning of fossil fuels.Building an economy less dependent on the ups and downs of the price of oil, and which is driven by a skilled workforce in many different industries, is obviously a good thing.
Making it happen is a more sensitive and complex issue. Some oil-rich countries have made it a political priority to re-imagine their economies. Some have not.
If the UAE is a textbook study for diversification, Venezuela is the opposite. Despite having the world’s largest oil reserves, the South American nation of 31 million is in chaos, its population heading for the borders to escape hyper-inflation and acute shortages of everything from medicine to toilet paper.
The left-wing government’s only solution to restoring stability is the petro, a new cryptocurrency allegedly backed by those massive oil reserves, which appears to have achieved nothing. Nigeria funds two thirds of its government spending with oil revenue, but with these falling and the economy stagnating, Washington think tank, the Brookings Institute, estimates the country has now overtaken India in having the greatest number of people living in extreme poverty.
Other countries have been better at investing their oil legacy. Norway’s enormous oil and gas reserves have created the world’s largest sovereign wealth fund, with more than $1 trillion in assets.Even so, the last downturn in the price of oil cost one in five workers their jobs. Post-oil diversification plans now include dumping oil and gas stocks to protect the future of the wealth fund.
Closer to home, Oman looks hopefully towards shipping, tourism and local manufacturing, with predictions that its oil sector, one of the smallest in the region, will decline to 30 per cent of GDP by 2020.
Saudi Arabia, late to the post-oil game, has created one of the most ambitious diversification plans of any oil economy.Bahrain, one of the first Gulf countries to strike oil, is well on the way to preparing for life without it, with its ruler, King Hamad bin Isa Al Khalifa, seeking energy independence in 2014 with plans for a solar grid which would use cutting-edge American technology.
For the UAE, the Crown Prince’s proposed reforms can be set against a much wider backdrop of plans to diversify the economy, from tourism and aviation to nuclear power and space exploration.
The government also plans to broaden its income flow. VAT, a sales tax, has been brought in. Sugary drinks and alcohol are also both subject to new “sin taxes”. Petrol at the pump is now sold unsubsidised. Official figures show that the non-oil sector is now driving economic growth in the UAE, predicted to contribute 3.9 per cent this year, about three times that of the oil sector.
It is a sign things are moving in the right direction.