Friday, November 7, 2008

The U.A.E. vs. Libya

The Energy Tribune

By Leon Hadar

Why is the United Arab Emirates so much more prosperous than Libya? These two ArabMuslim states have relatively small populations and lots of oil. Both are ruled by autocrats. Yet Libya population 6.1 million and the U.A.E. population 5.4 million could scarcely be more different in terms of their economic development.

Libya’s G.D.P., measured by purchasing power parity, is $74.5 billion or $12,300 per capita, while the U.A.E.’s is more than double that, $190.2 billion or $ 55,2000 per capita, fifthhighest in the world and third in the Middle East, after Qatar and Kuwait. Libya’s exports in 2005 were valued at $29.4 billion the U.A.E.’s were at $117.2. Libya’s rate of unemployment was more than 30 percent the U.A.E.’s, close to 2 percent.

Moreover, the U.A.E., a federation that includes Abu Dhabi, Ajman Dubai, Fujairah, Ras alKhaimah, Sharjah, and Umm alQuwain, has one of the world’s fastestgrowing economies, and in 200506 had the fastestgrowing real G.D.P., according to some estimates. Indeed, visitors are overwhelmed by the current massive construction boom to the tune of about $350 billion, including the Dubai World Central International Airport, which will be the most expensive airport ever built. The U.A.E. is also trying to expand its manufacturing base and its thriving services sector as well as its growing tourism, media, and entertainment industries. All of this is part of the effort to diversify its economy and make it less dependent on revenue from the export of oil and natural gas.

But while the U.A.E. is being transformed into an important financial and commercial center, the Singapore of the Middle East, Libya remains an economic backwater that continues to depend primarily on revenues from oil exports, which provide almost all export earnings and about onequarter of its G.D.P. One of the main reasons for Libya’s growth difficulties has been its antiWestern foreign policy, including support for terrorism, which led to U.N. economic sanctions, lifted in late 2004.

But the main factor in the difference in economic development between these two states may be their widely divergent responses to the challenge of globalization. Simply put, the U.A.E. has embraced a policy of economic liberalization and the opening of its economy to foreign investment and trade. Libya is only now beginning to move in that direction.

According to most recent Index of Economic Freedom available at issued annually by The Heritage Foundation and The Wall Street Journal, the U.A.E. is 62.8 percent free, which makes it the world’s 63rd freest economy. The U.A.E. is ranked 7th out of 17 countries in the Middle East/North Africa region, and its overall score is higher than the regional average. The U.A.E. scores above the world average in fiscal freedom, labor freedom, freedom from corruption, government size, and trade freedom. The average tariff rate is not high although general import licenses are issued only to nationals. Thanks to a flexible labor market, low level of corruption, and no federal income or corporate taxes, foreign businesses have been flooding into the U.A.E. But the Index authors urge the U.A.E. to continue to liberalize its financial system and establish transparent property rights.

Now consider Libya’s ranking in the Index. Its economy is 38.7 percent free, which makes it the world''s 154th freest economy. It ranks 17th out of 17 countries in the Middle East/North Africa region, and its overall score is much lower than the regional average. More specifically, high tariff rates and nontariff barriers combined with widespread corruption impede trade and foreign investment. However, over the past three years the government has carried out some economic reforms, including reductions in subsidies and plans for privatization. There has also been an effort to expand the nonoil manufacturing sector and to increase tourism, and visitors report that there are early signs of a business boom.

So how do you explain the divergent fortunes of the U.A.E. and Libya? The short answer is economic freedom.

1 comment:

Hafed Al Ghwell said...

Here is an op-ed piece I had published - July 2008 in the UAE's National Newspaper - about how effective public policy and administration represent a real competitive edge for national success: