Authors: Wei Hong Yeo & Bhavika Agrawal
Editor: Ho Chia Chun Daniel
The Oil Curse
Black gold; this commonly used phrase for crude oil perfectly, summarizes its paramount importance over other resources in the industrialised world. Countries having an abundance of this resource, with the Gulf nations as the prime example, experienced an economic boom for years upon its discovery. However, a grave challenge lies ahead of them; the challenge of sustainability.
Sustainability is often linked to economic diversification, which is when a country transitions away from its dependency on one or few resources to a diverse production or trade structure (Paul Brenton et al, 2019). Contrary to the common belief that Gulf countries have not diversified their economic activities, statistics show us that these nations have made significant value-added diversification in the past years. One such nation is the United Arab Emirates.
The UAE identified the shortage in the future loss in demand and supply of oil as well as the volatile nature of oil prices in the 1970s and decided to venture into other industries to develop a comprehensive export basket and grow sustainably. They soon realised the great potential in the tourism sector and started focusing on converting the emirate into a tourist destination of the Middle East. Their diversification seemed to be going well until the pandemic hit in 2020 and disrupted the entire economy along with the tourism sector. This exposed their need to diversify not into one sector but numerous sectors at once.
Why is diversification crucial?
The world is a volatile and uncertain place and no economy can sustain itself unless it continuously adapts through the process of creative destruction. The oil-rich countries have been noticing worrying trends in the demand and supply of ‘black gold.’ The exhaustive nature of the resource along with humanity’s initiation of moving towards a greener and more sustainable source of energy has left UAE, along with the other gulf countries, concerned about the sustainability of their oil-based revenue.
Additionally, the volatility in oil prices during the 1980 and the 90s shook the Gulf nations. As the chart below depicts, prices of oil directly impact the GDP of UAE, that is, a fall in oil price leads to a fall in GDP and vice versa. This volatility exposed the underlying issue of relying on one industry, especially oil which fluctuates considerably as it is deeply influenced by the geopolitical and economic issues of the world.
The expected fall in revenue has long motivated UAE to diversify its economy through the development of non-oil industries. Moreover, the economic breakdown brought about by the pandemic has further nudged them to do the same.
Graph showing the relationship between the GDP of UAE and the retail prices of oil. Source: CEIC
A brief history of UAE’s diversification
Since its independence in 1971, oil and gas have been the mainstay of the UAE’s economy contributing about 61 per cent to the GDP of the nation (Al Jundi, Salem, 2012). Oil revenue was increasing at an unprecedented rate. However, upon ascertaining that economic diversification was key for future economic prosperity, they emphasized their intentions to invest in the non-oil sector and develop it further.
From the 1980s, UAE began promoting industrial development through the establishment of firms in the manufacturing sector such as aluminium and fertilizer plants. They soon began diversifying into other sectors as well such as financial services, tourism, aviation, real estate and hospitality. They later discovered that tourism played a critical role in UAE’s structural transformation, in terms of its contribution to the non-oil economic growth. They realised that their economic and political stability alongside their culturally tolerant population attracted many tourists around the year, giving this sector an edge over its other sectors. Henceforth, they focused their efforts on the travel and tourism sector with their vision to make the nation ‘an economic, touristic and commercial capital for more than two billion people’ (UAE Vision, 2021).
Graph depicting the increase in tourism expenditure, source: CEIC
Graph depicting the increase in tourism revenue of UAE, source: CEIC
The peak and fall of tourism in UAE:
Before the coronavirus outbreak, UAE’s tourism industry was gaining traction. Tourism revenue and expenditure in the UAE increased significantly between 2018-2019 (World Bank, 2021), reflecting an increasingly competitive tourism sector in the UAE. Based on research conducted by Micheal et. al. (2019), the quality destination resources achieved through quality attractions and environmental sustainability, quality infrastructure services achieved through accessible amenities and a friendly business environment that offers investment opportunities has resulted in a more competitive tourism sector. Moreover, what attracted people to the UAE are geopolitical factors: openness to trade and capital and labour inflows (Callen et. al., 2014), making it an attractive place for business meetings, incentives, conferences and exhibitions (MICE) (Aburumman, 2020).
In evaluating the different factors contributing to the competitiveness of the tourism sector Micheal et. al. (2019) adopted Bris & Caballero (2015) notion of competitiveness - the means by which the state and business can jointly maximize the “totality of their competencies to achieve prosperity or profit.”, which is different from an oft-cited notion of competition, which refers to an oft-cited, macroeconomics notion of “the ability of an economy to supply increasing aggregate demand and maintain exports.” (Law, 2016). Here, competitiveness is measured through a microeconomic sense - how the government can effectively stimulate the demand of tourism, and how business can effectively respond to the direction set by the government. However, while this long-run strategy has certainly led to an unprecedented increase in the competitiveness and optimism in the tourism sector, the tourism sector took a turn for the worse due to the outbreak.
As Brouder (2020) aptly puts it, the “unhindered business tourism development has suddenly come to an end with the COVID-19.” The effects of the pandemic are also far-reaching; despite the tourism sector announcing reopening the city for international tourism, tourists were still afraid of travelling (Aburumman, 2020). Hence, although the pandemic is a worldwide phenomenon, the pandemic has the potential to disrupt the tourism industry, subjecting the economy to significant risk since the tourism industry constitutes 11.6% of UAE’s GDP (World Travel and Tourism Council, 2021), which was a fair share.
What the future hold for UAE’s tourism industry
It is of no doubt that the UAE was successful in positioning itself as a vibrant tourist destination. However, given that the pandemic has resulted in extensive disruption in the tourism industry even up to today, the tourism industry would not bounce back to its former position. Although the UAE is currently opening up its borders to vaccinated travellers (Bloomberg, 2021), there exist concerns about whether or not UAE is a safe travel destination amidst the pandemic (ExperienceLab, 2020).
There have been calls to embark on strategies that are aimed at boosting tourist confidence (Aburumman, 2020; ExperienceLab, 2020), which may be cost-inefficient as it necessitates a significant degree of government support and commitment (Sharpley, 2002). Hence, while it is laudable that the government harnesses the strategic advantages of a successful tourist destination to boost its economy, it may not be sustainable, in the event similar structural risks like the Covid-19 pandemic were to emerge.
UAE could still lose its competitiveness in the region as long as the issue of dwindling demand for the tourist experience in UAE is not addressed, which could not simply be addressed through further increasing the supply of the tourist experience through increasing the quality and quantity of amenities, infrastructure as well as nurturing a favourable business environment.
The UAE has established itself as the tourist destination of the region and is continuously adapting to diversify its economic portfolio. The ECI (Economic Complexity Index) developed by Ricardo Hausmann and César Hidalgo at Harvard and MIT (Hausmann et al. 2014), suggests that the nation is ahead of most other Gulf countries in the path towards economic diversification. As of 2019, UAE ranked 55th amongst 146 countries, with only Saudi Arabia ahead by four ranks.
The World Travel and Tourism Council’s report states that Travel and tourism contributed around 11.6 per cent to the UAE’s GDP in 2019. This is estimated to increase further to 12 per cent by 2027. However, the pandemic led halt to tourism drastically impacted this and bought down the contribution to 5.4 per cent.
It is indeed a strategic move that UAE focuses on boosting the tourism industry; leveraging its unique selling proposition for economic growth, articulated aptly by News Agency & Al Mansouri (2015), where the tourism industry would be enhanced further to “activate its role as a vital cog of the national economy”. However, some problems would arise should the UAE focus on it solely. The failure to achieve genuine diversification through solely developing its tourism sector would result in a concentration of risks, which is counterproductive in its quest of achieving long-term growth.
However, this school of thought that diversification solely on tourism is based on the ceteris paribus assumption and would not be a realistic strategy. What made the UAE so successful in diversifying the economy would be to continue doing what it is doing, to diversify its economy in non-oil sectors (Schilirò, 2013) such as the financial services and manufacturing; adopting Paul Brenton et. al. (2019) diverse production or trade structure. Nonetheless, the analysis on tourism in isolation would also help demonstrate the need for balanced diversification; to break the curse of black gold, and leveraging on tourism.
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