The Financial Crisis of the United Arab Emirates

The Financial Crisis of the United Arab Emirates

     The United Arab Emirates is located on the southeast end of the Arabian Peninsula on the Persian Gulf, sharing borders with Oman, and Saudi Arabia, as well as sharing sea borders with Qatar and Iran. The UAE also has a population of 9.2million (2013, most recent). The UAE has an open economy and has a high per capita income and a sizable annual trade surplus (cia.gov 2015). The country has transformed from an impoverished region to a modern state with a high standard of living since the discovery of oil in the UAE more than 30 years ago. The government increased the spending on job creating and infrastructure expansion, and offered full foreign ownership with zero taxes, this causes to captivate more on foreign investors. There was a financial crisis in the UAE during 2008 which the UAE authorities tried to blunt the crisis by increasing the spending in the banking sector. Dependence on oil and the growing inflation throughout the years are pressurizing and gives the country a significant long-term challenge. The UAE is looking forward to their future for providing more jobs to the people through improved education and also by increasing the private sector employment.

    A real GDP stands for Real Gross Domestic Product; it comes from a macroeconomic measure of the value of economic output adjusted for price changes. Due to inflation, GDP will then increase and it does not actually reflect the growth of an economy, so inflation rate is subtracted from the GDP to get the real GDP.

[pic 1]

Indexmundi.com, (2015). United Arab Emirates - GDP - real growth rate - Historical Data Graphs per Year. [online] Available at: http://www.indexmundi.com/g/g.aspx?c=tc&v=66 [Accessed 8 Oct. 2015]. This is the website I had gotten the data from.

This is the graph of the real GDP of the UAE from the year 2007-2011. As seen above during the years between 2008 to 2009 there was a contraction. Firstly, a recession is defined as a period of a general economic decline and the decrease in the stock market, along with an increase in unemployment. During this time period from 2007 to 2009 there was a Financial Crisis, one that was more severely impacted to the society than that of the period right after the world war II. The difference between a recession and a depression is that recession is relatively less severe form of an economic downturn than the depression, and recession occurs more frequently than the depression, also a depression is defined when a GDP declines more than 10% and lasts longer than 3 years. On the year of 2009 the country underwent a trough, it then started to recover from the severe depression. A monetary fiscal policy is the process in which the monetary authority in one country controls the rate of money by targeting for an inflation rate or an interest rate to ensure the stability of the economy. And the Fiscal Policy is very similar, the fiscal policy is very important to an economy because it helps balance between charging tax rates and public spending. For example, by increasing the government spending with lowering taxes will cause inflation to rise, as known as implementing expansionary fiscal policy. We know that when the economy is growing too slowly (in a recession), the government can implement expansionary fiscal policy by cutting taxes and increasing the government spending, but if the economy grows too quickly (inflation), the government can do the opposite which is to implement the contractionary fiscal policy, which increases taxes and decreases the government spending to slow the economy down.

     The Inflation rate of the average consumer prices on year-on-year changes of the United Arab Emirates is produced in the chart below. By comparing the two charts of the Real GDP of UAE and the inflation, it is obvious that the inflation has been decreased with the real GDP decreasing. Since the Inflation rate shows that it is decreasing it means that the prices of good and services are increasing at a slower rate than ever before. The Disinflation (decreasing inflation rates) that the UAE is undergoing encourages people to reduce debt and become financially much responsible. As the decrease in inflation it becomes less advantageous to carry high debt, and so when inflation rates fall, people tend to get rid of their debt. Looking at the Inflation rates, it does come to me to think of the interest rates as the inflation rates fall. While inflation rates fall, so do the interest rates. However, even after the great depression, the percentage of inflation has never recovered.

[pic 2]

Indexmundi.com, (2015). United Arab Emirates Inflation rate (consumer prices) - Economy. [online] Available at: http://www.indexmundi.com/united_arab_emirates/inflation_rate_(consumer_prices).html [Accessed 10 Oct. 2015].

     Later on I will talk about how the inflation rate and the unemployment rate are related to each other. As seen above, as the rate of a countries GDP decreases, the unemployment rate would usually do the opposite, which an increase in the unemployment rate. Below is a produced graph of the unemployment rate in the UAE. As seen, it is obvious that the unemployment rate was rising rapidly in the course of the given years 2007-2009 when the great depression took place. Even if the graph shows that the unemployment rate was increasing it could be seen in a more positive way, which means that not a lot of people have dropped out of the work force and that they are still trying to look for jobs. [pic 3]

Tradingeconomics.com, (2015). United Arab Emirates Unemployment Rate | 1985-2015 | Data | Chart. [online] Available at: http://www.tradingeconomics.com/united-arab-emirates/unemployment-rate [Accessed 10 Oct. 2015].

     The relationship between the Inflation rate and the Unemployment rate was first reported by the A.W. Phillips in 1958, he created a so called the Phillips Curve (Ramaa Vasudevan, 2006). This trade-off between the inflation rate and the unemployment rate is that as unemployment rate decreases the workers will be empowered to push for higher wages which forces the firms to increase the cost on consumers resulting in a much higher price which then triggers an inflationary build up in the economy. The published article of the Phillips curve, which was names “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861-1957” in which he showed that the relationship between the two rates are inverse. As the levels of unemployment decreases, the rate of inflation increases. However, this theory of his was conflicted against those economists who were led by Milton Friedman, after they realized that many countries were experiencing high levels of both inflation and unemployment as known as the stagflation, Phillips curve was once again argued upon.

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