The United Arab Emirates’ (UAE) economy has grown tremendously in last four decades because it has robust economic sectors such as the oil industry, construction, real estate, shipping, tourism, finance, and hospitality, which have significantly boosted its economic capacity.
Moreover, the government provided stable political, economic, and social environment that attracted a fantastic deal of investors into the UAE. Dubai, being one of the prominent states in the UAE, generated a significant amount of Gross Domestic Product (GDP) followed by Abu Dhabi. Thus, Dubai and Abu Dhabi have veto powers in that they can make critical decisions on behalf of the UAE.
Due to the substantial economic growth, the government of the UAE established the Dubai World, an investment company that manages government projects with the objective of elevating economic growth of the UAE. Economic crisis that shook the world in 2008 did not spare the UEA because it significantly affected Dubai’s stock market and diminished its GDP. According to Pradhan (2009), robust sectors of the economy fluctuate according to business cycle, hence causing economic crisis at their dip (p.2).
In response to the economic crisis, Dubai, Abu Dhabi, and Dubai World struggled consistently to alleviate the impact of global financial crisis, which affected many of its robust sectors of the economy. Thus, this essay examines the 2008 Dubai economic crisis, coupled with how Abu Dhabi helped to alleviate its impacts.
Causes of Economic crisis
Economists attribute economic crisis that affected Dubai in 2008 to global economic crisis that originated from United States. Hasan (2010) argues that, global economic crisis emanated from United States property sector and spread gradually across all countries in the world (p.47).
Since Dubai relied on the real estate industry, it collapsed in 2008 due to the crumble of the United States’ economy, which caused a rippling effect on economies of various countries across the world. The value of property fell by 40% and scared away investors, thus causing a decline in profit margins due to low sales experienced.
Through real estate industry, UAE lost billions of dollars that aggravated its economic crisis in the face of global economic crisis that engulfed the world and threatened sustainability of economic growth. Though economists have praised and admired economic growth of Dubai because of its resilience and independence, global economic crisis did not spare it. Thus, global economic crisis were responsible for economic crisis that Dubai experienced in 2008.
Oil industry also contributed significantly to the economic crisis of Dubai. In 2008, Dubai experienced economic crisis that threatened its economic capacity in not only Middle East but also across the world.
During the first six months of 2008, the world experienced a steady increase in oil prices that caused speculations among countries that form part of Organization of Petroleum Exporting Countries (OPEC). Due to speculative factors, oil prices declined significantly by 60% and caused tremendously rippling effect that negatively affected the stability of oil prices in competitive markets.
Decline in oil prices severely affected capital markets of Gulf Cooperation Council (GCC) countries. Onour (2009) asserts that, the decline in oil prices from $120 to $70 per barrel, in the first six months of 2008, had a significant impact on economic growth (p.3). Hence, global economic crisis that occurred in 2008 coupled with the decline in oil prices aggravated economic crisis of Dubai.
The decline in oil prices triggered serious economic crisis in United Arab Emirates (UAE) and shuddered Dubai’s economy considerably. Since oil sector generates about 35% of Gross Domestic Product (GDP), the decline in oil prices predisposed Dubai to serious economic crisis that swept across the world.
Market volatility is another factor that contributed to the occurrence of Dubai economic crisis. Volatility of financial markets predisposes a country to unfavorable economic factors of globalization that have a negative impact on the economy.
According Khedhiri and Muhammad (2008), new legislations in UAE stock markets increased volatility of financial markets because it allowed more foreign investors (p.258). Increased number of foreign investors in local stock markets enhances susceptibility of local economies to international stock markets that follow trends of the global economy. Malik, Ullah, Azam, and Marwat (2009) add that, poor legislations increase susceptibility of stock markets to globalization (p.9).
Hence, even if local stock markets are remarkably stable, their volatility to external influences makes them susceptible to economic crises that occur periodically. Therefore, in 2008, financial markets of Dubai were highly volatile and predisposed it to global forces of the economy.
Dubai debt crisis also contributed to the occurrence of economic crisis in 2008. Dubai’s debt has been growing gradually in the past ten years, and now it has become a significant factor, which determines the economic growth and stability of the UAE. Due to global economic crisis that swept through the Middle East, the Dubai World experienced financial crisis and announced that it was going to delay the repayment of $59 billion debt for a period of six months.
Islam (2009) argues that, Dubai owe investors approximately $80 to $90 billion, which is a vast amount of money that is causing debt crisis in Dubai (p.4). Debt crisis enhanced vulnerability of Dubai to global economic crisis. As Dubai debt increased, it significantly affected its GDP and predisposed UAE to severe impact of economic recession that swept across the world in 2008 and 2009.
Impact of economic crisis
The global economic crisis, which caused financial crisis in Dubai affected Dubai banks negatively. Dubai economic crisis differentially affected banks in Dubai because Islamic banks experienced a significant reduction in profit margins as compared to conventional banks. According to Hasan and Dridi (2010), Islamic banks performed poorly during the economic crisis because their management practices and business models differ from those of conventional banks (p.33).
Dubai’s crisis proved that, Islamic banks have limited resilience, for they did not withstand the global economic crisis or even Dubai’s own economic crisis. Taylor (2009) argues that, the economic crisis worsened due to boom and bust cycles of economic growth that destabilized lending and profit capacity of banks (p.1). Hence, economic crisis considerably reduced profit margins of Dubai Banks during 2008.
Dubai economic crisis severely affected employment and wages of migrant workers. UAE depends on labor from expatriates since they form about 30% of UAE population. According to Rajan and Narayan (2010), UAE obtains about 75% of its labor from Asia: 25% constitutes skilled labor, 25% semi-skilled, and 25% unskilled (p.34).
Migrant workers contribute substantially to economic development of Dubai, for they constitute about three quarters of the labor force. In the face of economic crisis, companies that provided employment encountered economic challenges, which compelled them to reduce wages and lay off some of their employees. Construction companies like Arabtec dismissed about 40% of its employees as economic crisis severely hit the company.
Moreover, wages and salaries decreased by about 30% in 2008 as compared to 2007. The economic crisis profoundly affected skilled and semi-skilled workers because of increased food prices and accommodation coupled with reduced wages and salaries.
The economic crisis also shattered the UAE’s financial markets and destabilized the economic growth of Dubai as a commercial hub in the Middle East. Prior to 2008, stock markets grew steadily but due to the economic crisis that occurred in 2008, they began to deteriorate significantly.
Ellaboudy (2010) contends that, the economic crisis compelled Dubai to borrow money extensively to run its projects that Dubai World manages because bond market of GCC countries deteriorated markedly (p.182). During the economic crisis, Dubai World experienced financial crisis that stalled its projects, and thus forcing UAE and Dubai to intervene by providing more funds.
Guerrero (2010) explains that, the economic crisis caused serious losses in Dubai’s stock markets as investors lost about $600 billion dollars during the crisis (p.7). Regarding real estate property, Dubai lost approximately 42% of its stock following the economic crisis that crumbled its economy. Other sectors of the economy that operate in stock markets also experienced a significant decline in their sales and profit margins.
Importance of Abu Dhabi
Abu Dhabi played a critical role in alleviating the impact of economic crisis on Dubai and UAE. Given that Dubai was grappling with the debt crisis that worsened its economic crisis in the face of global economic crisis, Abu Dhabi offered $20 billion to help Dubai get out of financial crisis that was crippling its projects under Dubai World.
According to Islam (2009), given that Dubai World was contemplating to delay repayment of its debts, Abu Dhabi pumped $20 billion to alleviate debt crisis and increase liquidity of Dubai’s finance (p.2).
Since Dubai’s debt was about $60 billion, the Abu Dhabi assistance covered about a third of the debt and enhanced Dubai’s economic capacity to sail through the economic crisis. Thus, Abu Dhabi played a significant role in mitigating Dubai’s debt and consequently empowered it to face economic crisis that threatened to cripple it unreservedly.
Given that the economic crisis severely affected economic growth and development of Dubai, Abu Dhabi came to its rescue by offering additional financial assistance as economic stimulant. Muzio (2010) states, were it not for bailout that Dubai received from Abu Dhabi, the impacts of the economic crisis could have been much worse (p.16).
Abu Dhabi produces about 94% of oil that originates from the UAE; thus, it has much capital to aid other states within the UAE and even under GCC countries. In the bailout, Abu Dhabi gave $10 billion to Dubai World because outstanding projects that generate millions of dollars were stagnating amidst financial crisis that hit Dubai. About $4 billion helped in settling the Dubai World’s debt and, the remaining $6 became helpful in running of projects.
In the last four decades, Dubai has experienced steady and stable economic development and many nations across the world envied its economic growth. Stable political, social, and economic environment encouraged investors and promoted investment. Dubai also relied on varied robust economic sectors such as banking, tourism, construction, oil industry, tourism, hospitality, and real estate amongst others.
However, in 2008, global economic crisis shook Dubai’s economy, destabilized oil prices, enhanced volatility of markets, and worsened debt crisis, which consequently led to the economic crisis in Dubai. The economic crisis then affected the profitability of banks, caused dismissal of migrant employees, and weakened the lucrative capacity of stock markets. Ultimately, Abu Dhabi gave $20 billion to Dubai to alleviate its debt, and offered additional $10 million as economic stimulant to Dubai World to run stalled projects.
Ellaboudy, S. (2010). The Global Financial Crisis: Economic Impact on GCC Countries and Policy Implications. International Research Journal of Finance and Economics, 41, 177-189.
The article asserts that, liberalization of trade, flow of capital, and deregulation of local industries have enhanced the impact of globalization and predisposed many countries to the vagaries of the economic recession. It argues that, despite the fact that the economy of GCC countries rely on oil, global economic crisis that occurred in 2008 did not spare them.
It further recommends that GCC countries need to be well equipped to face impending economic crisis that occur due to globalization. Thus, the article is relevant because it attributes economic policies to financial crisis that affected Dubai in 2008.
Guerrero, B. (2010). A Dissection of the Globalized Middle East: Assessing Globalization’s Impact. The Philippines, 1-11.
To reduce the impact of economic crisis, Middle East countries require economic reforms that do not enhance inequality and establish autocracy, but enhance their resilience to economic crises. It asserts that meaningful reforms should focus on enhancing political freedom and alleviate poverty. The article states that reforms by multilateral financial institutions did cause serious economic crisis because they focus on the international economy rather than local economy.
Thus, for Middle East countries like UAE to survive economic crisis, they should enhance the capacity of their local economy. Hence, the article recommends legislative reforms that target stock markets, which is relevant in understanding effects of economic crisis on stock markets.
Hasan, M., & Dridi, J. (2010). The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study. International Monetary Fund, 1-47.
The article examines how conventional banks and Islamic banks performed in terms of profit, asset growth, credit issued, and competition with respect to impact of global economic crisis. Overall, the article argues that global economic crisis affected differently on banks because Islamic banks experienced greater decline in profitability than conventional banks.
Thus, the article suggests that Islamic banks are more prone to global economic crisis than conventional banks. Hence, the article is relevant in illustrating impact of economic crisis on Dubai banks.
Hasan, Z. (2010). Dubai Financial Crisis: Bailout and After, A Case Study. Journal of Islamic Banking and Finance, 47-55.
The article examines circumstances that resulted into economic crisis in Dubai. It focuses on steps that city-states and the UAE government took to alleviate the impact of the economic crisis. It states that international rating agencies worsened economic crisis and thus requires regulation to curb their activities.
Ultimately, it warns that regulatory mechanism should be in place because UEA is yet to face an impending economic crisis. As a regulatory mechanism, the article is helpful, for it shows how bailout by Abu Dhabi alleviated the impact of economic crisis.
Islam, M. (2009). The Dubai Debt Debacle: Likely Impact on South Asia. Institute of South Asian Studies, 1-4.
The article examines economic crisis and debt crisis that is affecting UAE with the objective of assessing their impacts on South Asia. It argues that the economic crisis of Dubai has far-reaching impact on economies of neighboring countries that often trade together. It emphasizes that neighboring countries have adopted dubious economic models of Dubai that seem to be unsustainable. Therefore, the article is beneficial as it depicts how debt crisis predisposed Dubai to global economic crisis.
Khedhiri, S., & Muhammad, N. (2008). Empirical Analysis of the UAE Stock Market
Volatility. International Research Journal of Finance and Economics, 15,251-260.
Economic crisis that UAE faced is attributable to volatility of its financial markets. The article employed different models to measure parameters that influence volatility of financial markets in UAE. Leverage effects, fat tail, and volatility clustering were models that predicted performance of the UAE in the stock market, while switching regime model assessed whether openness of stock market has any influence on foreign investments.
Hence, the article established that legislative reforms allowed influx of foreign investors into UAE markets, thus increased volatility of markets and contributed to the economic crisis. Therefore, the article is noteworthy as it attributes occurrence of economic crisis to increased volatility of markets.
Malik, N., Ullah, S., Azam, K., & Marwat, A. (2009). The Impact of Recent Global
Financial Crisis on the Financial Institutions in the Developing Countries: the Need for Global Solutions. COMSATS Institute of Information Technology Attock, 1-12.
The article examines how global economic crisis has affected financial institutions of developing countries. It aims at providing enough information regarding risks of investments to investors who target developing countries.
Thus, it asserts that countries need to reform their financial markets and institutions by enhancing their economic capacity to deal with global economic crisis. Hence, the article is quite helpful as it demonstrates how global forces of economy influence financial institutions and cause economic crisis.
Muzio, T. (2010). The World’s Affluent Playground: Dubai’s Architecture of Doom & the Future of Globalized Social Reproduction. University Helsinki, 1-21.
Powerful countries like United States and Britain increased Middle East debt because they accumulated money from oil using dubious means since 1970s. The article explains that Dubai has become a playground where speculations of oil prices and financial markets occur.
Hence, it examines how OPEC has become a playground of oil production and exploitation by foreign countries, and its impact on economic development of Dubai. Thus, the article is beneficial because it illustrates how global factors of economy cause economic crisis locally.
Onour, I. (2009). The Global Financial Crisis and Equity Markets in Middle East Oil Exporting Countries. The Arab Planning Institute, 1-19.
Downside risk model of economy predicts and estimates the effect of global economic crisis on OPEC and its equity markets. Findings show that there was variability in effects of global economic crisis from one country to another, but among OPEC, Dubai financial market was worst hit by the crisis. The article argues that increased debt of Dubai was due to global economic crisis. Therefore, the article is necessary, for it attributes the occurrence of the financial crisis in Dubai to increasing debt.
Pradhan, S. (2009). The UAE’s Economic Policy and the Current Global Meltdown: An Appraisal. Gulf Research Center, 1-26.
The article examines the nature of the UAE’s economic policy and how it contributed to the developments, which led to the 2008 economic crisis. It argues that UAE has undergone tremendous economic development in last four decades because it has robust economic sectors such as the oil industry, tourism, construction and shipping and finance amongst others. The article asserts that success of UAE emanates from its economic, social, and political stability.
Therefore, it attributes economic crisis that rocked UEA to the cyclical nature of its robust economic sectors that cause the economy to fluctuate with time. The article is significant because, it depicts how cyclical nature of varied economic sectors cause economic crisis when they happen to be at their off peak.
Rajan, S., & Narayan, D. (2010). The Financial Crisis in the Gulf and its Impact on South Asian Migrant Workers. Center for Development Studies, 1-127.
The article asserts that the economic crisis emanated from United States and gradually caused significant impact on GCC countries.
It argues that, the global economic crisis caused a decline in oil prices, decreased private investment, limited trade, and reduced flow of labor, thus adversely diminished GDP in Gulf countries. Hence, the article assesses the impact of global economic crisis on industries, migrant labor, and employment with a view of establishing overall impact of the crisis on GCC economies. Hence, it provides an insight of how economic crisis in Dubai affected employment of migrant workers.
Taylor, J. (2008). The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. Global Markets Working Group, 1-19.
The article explores empirical investigations to determine how the government put up interventions to alleviate the impacts of the global economic crisis, which shook various economies of the world. It attempts to integrate diverse empirical studies with a view of developing better economic policies based on past economic policies. Thus, the article expounds how economic crisis occurs because it examines thoroughly factors that cause, prolong, and worsen economic crises as in the case of Dubai.