The Economy

Persian Gulf States Table of Contents

Before the discovery of oil, the separate amirates that now constitute the UAE had similar economies. The raw materials of these economies were the fish and pearls of the gulf and the meager soil and scarce water onshore. In this forbidding milieu, the rich and poor fought heat, disease, and famine to make a living. Occupations ranged from slaves who dived for pearls and artisans who hammered coffee pots or stitched sandals to wealthy pearl merchants and powerful shaykhs. Among the sources of revenue for ruling shaykhs were the collection of customs fees, the issuance of fishing licenses, and the imposition of levies on date groves. Pearl merchants, many of whom were also landholders and moneylenders, gained political influence through their wealth and connections. In addition, there were cultivators of dates in oases, nomadic livestock herders, and small-scale traders.

Pearls from the rich banks off the amirates' coast were probably the single largest source of wealth until the 1930s and 1940s. In 1905 the pearling trade involved 22,000 men from the amirates working in about 1,300 boats, and income amounted to 600,000. Trade and fishing were also important maritime activities. Sharjah, the principal port and political power in the nineteenth century, was in the twentieth century eclipsed by Dubayy. A large boatbuilding industry, using timber imported from India, developed along the coast; the industry supplied vessels of varying sizes and designs for pearling, fishing, and transport. The Great Depression of the 1930s, coinciding with the development of the Japanese cultured pearl industry, severely disrupted markets for the Persian Gulf. At about the same time, large numbers of men from the amirates began to migrate to work in the fledgling oil industries of Kuwait, Bahrain, and later Qatar and Saudi Arabia.

Agriculture is limited to those few locations where fresh water is available. In the Al Buraymi and Al Liwa oases and the plains of Ras al Khaymah, relatively abundant water resources permit settled agriculture, especially the cultivation of date palms and fodder crops. The wells of the oases also provide water for the nomadic population, who migrate with their animal herds throughout the desert areas in search of seasonal forage.

British hegemony in the Persian Gulf had positive and negative economic consequences for the inhabitants. British suppression of maritime raiding, for example, meant that pearling fleets could operate in relative security. (The fleet had previously been unable to sail during periods of unrest, losing vital income for divers and merchants alike.) Some shaykhs and merchants benefited from regular visits by steamships from Britain and from other countries. For a period of time, local Indian merchants received deferential treatment as a result of Britain's control of India. On the negative side, however, the British prohibition on raiding and trading in slaves and arms meant an important source of income was lost to some shaykhs and merchants. In addition, because non-British powers were kept out of the gulf, trade and development opportunities were lost.

British development assistance began piecemeal in the 1940s and 1950s, prompted by fears that the United States and other countries would gain a foothold in the region and compete for oil concessions. Total outlays in 1954-55 were 50,300 and funded a water resources study, an irrigation restoration project, improvements at the hospital in Dubayy, and school construction in Sharjah. In 1961-62 the amount rose to 550,000. The total British investment between 1955 and 1965 was 1 million. Neighboring Qatar provided a freshwater system for Dubayy and the first bridge across the city's creek. Saudi Arabia built a road from Sharjah to Ras Al Khaymah. Britain also paid Sharjah's ruler to allow the establishment of a military base there in 1966.

Trade began to grow, especially in Dubayy, in the 1950s and 1960s. Imports increased from 3 million in 1958 to 8 million in 1963 and 41.7 million in 1967. Gold, often smuggled into India, greatly enriched Dubayy merchants and bankers during this period. An estimated 250 tons of gold brought revenues of about 80 million in 197O.

The discovery and export of petroleum resulted in a major transformation of the amirates' economies. Before federation, oil revenues enriched the royal families who ruled the amirates in which production occurred and provided funding for local economic development. After the formation of the UAE, oil revenues, especially from Abu Dhabi and Dubayy, continued to fuel local development but increasingly became the main engine of growth for the national economy.

Oil revenues became significant in Abu Dhabi in 1963, in Dubayy in 1970, in Sharjah in 1975, and in Ras al Khaymah in 1984. The disparity in resource endowment and timing of oil discoveries led to uneven economic development before and after federation. The governments of Abu Dhabi and Dubayy, which together in 1991 accounted for 99 percent of the UAE's production, expend significant portions of their oil revenues on infrastructure development, including airports, highways, and port facilities. Nonetheless, Abu Dhabi's economic predominance has created tensions with the other amirates. Lack of coordination in economic development and duplication in facilities and industries are problems that political federation had not solved as of 1993.

The rapid pace of development brought other problems. In the early and mid-1970s, the distribution system could not keep up with the massive amounts of imports. Shortages resulted, and inflation exceeded 30 percent per year. By 1982, however, the rate of inflation had declined to about 10 percent. Between 1975 and 1980, the gross domestic product in constant 1980 prices increased by an average of 16 percent per year. Although oil production declined after 1977, sharp increases in world oil prices in the 1979-80 period brought windfall revenues to the amirates, pushing per capita GDP up to US$29,000 in 1981, one of the world's highest.

During the early 1980s, the economy began to contract. This economic slowdown was caused by several factors, including lower oil revenues, the completion of several large industrial and infrastructure projects, and the Iran-Iraq War (1980-88). By 1983 GDP had fallen to an estimated US$26.7 billion, down from US$32.5 billion in 1981.

The mid-1980s were a period of recession, with GDP falling from a little less than US$29 billion in 1983 to US$21.5 billion in 1986, caused in large part by a 40 percent drop in oil revenues. Exports fell by 33.5 percent in 1986, and the federation's trade surplus dropped 58 percent compared with 1985. As a result of the austere conditions, the 1986 federal budget allocated funds mainly for current expenditures, stalling many new projects.

The late 1980s and early 1990s saw improving conditions, with oil exports increasing. A spurt in oil prices as a result of Iraq's invasion of Kuwait helped push GDP to almost US$34 billion in 1990. Contracts to help rebuild Kuwait after its liberation aided the UAE economy. But the invasion also had negative effects. Banks lost between 15 and 30 percent of their deposits, and development projects were halted. Trade declined as a result of uncertainty and higher insurance premiums. And the UAE paid out about US$6 billion to the United States and Britain to help defray the military costs of the war and to contribute to a fund that supported countries whose economies were severely hurt by the war.

The collapse of the Bank of Credit and Commerce International (BCCI) in the summer of 1991 caused ripples throughout the UAE economy. The BCCI collapse became a major international scandal because the bank had become a significant financial institution in several countries, including Britain and the United States, and because members of Abu Dhabi's ruling family were major shareholders in the bank.

For more recent information about the economy, see Facts about United Arab Emirates.

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Source: U.S. Library of Congress