Oil and Dutch Disease

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ECONOMICS FOR BUSINESS
Project Report on –
Oil and the recent
‟Dutch Disease‟
- The Case of the United Arab
Emirates
Submitted by –
Amitava Manna
1|Page
Table of Contents
Introduction .................................................................................................................................................. 2 Purpose ......................................................................................................................................................... 3 UAE Background ........................................................................................................................................... 4 Theoretical Framework ................................................................................................................................. 4 Empirical Findings and Analysis ................................................................................................................ 6 Data ........................................................................................................................................................... 6 Descriptive Statistics ................................................................................................................................. 6 The Regression Model .............................................................................................................................. 8 Conclusions: ............................................................................................................................................ 10 2|Page

Introduction
Four decades ago, the United Arab Emirates (U.A.E) landscape and infrastructure consisted of not much more than deserts where sheikhdoms survived on fishing, pearling, herding and agriculture. Today, Abu Dhabi and Dubai are two of the most developed emirates in the country dominated by roads, luxury homes, and skylines (consisting of modern glass and steel skyscrapers). The new modern infrastructure has replaced the undeveloped cities that once existed before. To say the least U.A.E has transformed from a desert into a developed country1 with a high gross domestic product (GDP) reaching $192.603 million2 in 2010. According to the Global Competitiveness Report 2008-2009, U.A.E was ranked number 31 globally for its growth competitiveness.

The large boost in U.A.E‟s development and economy is founded on the export of the country‟s oil and petroleum-based products since 1958, when oil was first discovered in Abu Dhabi. Almost 10 percent (%) of the world‟s current oil reserves are controlled by the U.A.E, enabling it to command more than 16% of OPEC‟s total reserves.

The aim of the U.A.E‟s economy is to minimize its dependency on oil; therefore much focus has been targeted on diversifying the economy during the past two decades. In turn, making it more dependent on the service sector, especially high-class tourism as well as expanding the international finance sector. In both developed and developing countries, a natural resource boom, (as experienced in U.A.E) has triggered the so called „Dutch Disease‟. It is a theory that originates from the Netherlands in the 1970s, basically explaining a decline in the traditional manufacturing sector when the country experiences a boom in their natural resource. The Dutch Disease indicates that the natural resource abundant factor triggers an appreciation of the domes- tic currency. In turn, other non-resource exporters are affected at the same time and the manufacturing sector experiences a constrained activity to compete in the world market. Furthermore, the agricultural sector undergoes a decline as labor moves to either the booming sector or the non-tradable sector. The case of the Dutch Disease would be a problem to the U.A.E since it causes the shift of labor and production for the tradable sector to the non-tradable sector causing a decline in the country‟s exports of manufacturing and agricultural...
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