Reaping Returns on Reforms
Spring 2025, Article written by Kaushik Pardeshi
Introduction
Economic growth in the Persian Gulf/GCC countries has been largely attributed to the hydrocarbon sector, with the majority of exports being driven by it [1]. The Oil Rush in the Gulf has driven its economic growth for the last few decades. However, prolonged dependence on Oil and Gas poses a risk to Gulf economies in the long run. GCC states are directly impacted by energy transitions. They are home to some of the largest global reserves and the economies most overdependent on hydrocarbon rents (in the form of export revenue in exporting economies and foreign remittances in importing economies from nationals working in exporting states). Thus, reduced global demand for hydrocarbons has long represented an existential threat to the region, especially for wealthy hydrocarbon-exporting Gulf Cooperation Council (GCC) states—namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE [2].
The common denominator here is that most of these economies have adopted the rentier-state model, where they rent their natural resources to external clients, creating unique economic and political structures [3]. However, the GCC’s resource dependency makes it vulnerable to market fluctuations, and global ecological transition and decarbonization efforts pose a challenge to this rentier-state economic model. In the midst of these circumstances, The United Arab Emirates stands out as a hub for tourism, innovation, commerce, and technology, testifying to its efforts to diversify its economy [4 ; 5 & 6]. It ranked the highest among GCC countries in the World Governement’s Summits Economic Diversification Index (EDI) [7]. Thus, it offers a line of inquiry/room for analysis to delve into the UAE model of diversification, and the ways and extent to which the UAE is diversifying, and de-risking, its economic model, and moving away from the rentier state model.
UAE’s Approach to Diversification
The UAE recognized the need to diversify its economy beyond oil early on. In 2010, it launched Vision 2021, an ambitious national strategy to reduce economic dependence on oil and GAS [8]. Under Vision 2021, the UAE has aggressively pursued diversification into sectors like tourism, renewable energy, healthcare, and finance. The UAE model of diversification focuses on four pillars: United in Responsibility, United in Destiny, United in Knowledge, and United in Prosperity [9]. Major projects include Dubai's expansion as a global tourism and trade hub and Abu Dhabi’s investments in green energy through Masdar [10]. The UAE has one of the most diversified economies in the region, with the non-oil sector accounting for 70% of GDP by 2023, driven mainly by growth in Saudi Arabia and the UAE [11].
Figure 1 Fossil Fuel Consumption by Fuel Projection (Source: IEA)
Economic diversification away from oil is especially important for the UAE and other Gulf countries, given projections that global oil demand could peak in the late 2020s to early 2030s due to climate policies [12]. Economic Diversification into greener sectors will propel these economies to be more resilient to potential declines in long-term oil demand and prices. The volatility of oil prices can be easily transmitted into the macroeconomic conditions of any country and could affect indicators such as employment, trade balance, inflation, public accounts, stock market prices, and exchange rates. GCC economies are especially vulnerable in terms of their fiscal policies if this vulnerability is not addressed. While a given oil price increase may be perceived positively by oil exporting countries and negatively by importers, an increase in oil price volatility (i.e. consecutive positive and negative oil price shocks) increases perceived price uncertainty for all countries – regardless of their trade balance [13]. OPEC countries faced significant fiscal constraints and deficits due to shrunken oil demand during the Covid-19 pandemic and faced up to a 5.2% decline in their GDP [14]. Oil price volatility, with consecutive positive and negative shocks, increases uncertainty for all countries by reducing planning horizons, causing firms to delay investments, and making it challenging to formulate robust national budgets for both importers and exporters [15].
Diversifying economic activities, reducing export sector and trade dependency on hydrocarbon, are among several things that aid this process. Besides, economic diversification will also create sustainable private sector job opportunities for their youthful populations as oil assets deplete over time. It is the key to reduce fiscal and financial policy constraints that reducing oil demands put on its economies.
Bearing this in mind, the UAE has quite persistently pursued economic diversification through several ambitious projects, policy initiatives and reforms, throughout sectors. For instance, Dubai hosted the Expo2020 [16], a landmark event hosting more than 24 million visitors. This represents the UAE's efforts to bolster its tourism economy and reduce dependence on oil. Tourism remains one of the key tenets of diversification for the UAE economy as outlined under the UAE Tourism Strategy 2031 [17]. It aims to increase tourism's contribution to GDP to AED 450 billion annually by 2031, strengthen the UAE's position as a top global tourism destination, and attract additional AED 100 billion in tourism investments by 2031 through 25 initiatives across four areas: strengthening national tourism identity, diversifying tourism products, building tourism capabilities, and increasing sector investments [18].
Moreover, the UAE's diversification efforts are also evident through its maritime and logistical position in the arena of Global Trade. Dubai's Jebel Ali Port, ranked among the top ten container ports internationally by traffic, and its operating conglomerate, Dubai Ports World (DP World), puts it in an important position for global supply chains [19]. UAE's efforts to upgrade trade infrastructure in the production of Dubai's economic geography as a sea-air multimodal trading hub are crucial not just for economic diversification but also for fortifying its position in global supply chains. This has three important benefits: this trade infrastructure paves the way for capital accumulation in Dubai, the internationalization of port services puts it in a favorable position for global trade, and its labor market flexibility, puts it in a cozy position with international logistics players [20].
Another sector that the UAE has been focusing on is its Financial Services sector. The Dubai International Financial Centre (DIFC) is an onshore financial free zone located in Dubai that hosts over 30,000 professionals. DIFC aims to position Dubai as a leading financial center and gateway to the Middle East, Africa and South Asia regions? [21].
Reforms to facilitate Diversification
The UAE also led some major reforms to establish a favorable business environment and attract FDI. These reforms began with liberalization moves such as the Federal Decree Law N (26) of 2020 - Commercial Companies Law, which removed the requirements for onshore UAE companin to have a UAE/GCC Nation as a majority shareholder. It also introduced 46 Free-zones offering tax and business incentives to investors and entrepreneurs [22]. Some benefits of these free zones include 100% foreign ownership, 100% exemption from personal and corporate taxes, 100% exemption from customs duty, and 100% Repatriation of Capital and Profits, among several others [23].
According to a report published by the Dubai Free Zones Council (DFZC), Free zones in Dubai alone contribute 167.2 billion AED or 38.2% of Dubai's GDP and employees 402,000 employees, which is 14% of Dubai's workforce [24]. It accounts for 40% of free trade in Dubai (557 billion AED in 2020) [25], with an increase of 9% per annum since 2018. Most importantly, it has been an impetus towards diversification as more than 75% of the FDIs coming in go into wholesale and retail trade, followed by Finance and Insurance. Besides, the "Make in the emirates" campaign has played a "pivotal role in driving growth in the manufacturing sector [26].
Moving on, the UAE also resorted to several legal and judicial reforms to facilitate commerce and increase the ease of doing business theis. The legal system has undergone several reforms since the creation of the federation in 1971. Rooted in both Islamic law and civil law traditions, the UAE's legal system reflects a unique integration of diverse legal heritages. Historically, local customs and traditions played a crucial role in governance, as tribal laws and Islamic principles laid the foundation for the legal structure [27]. Following the establishment of the UAE, the new government recognized the necessity for a cohesive legal framework that could accommodate both the needs of a rapidly modernizing society and the existing religious practices [28]. This led to the enactment of a series of federal laws aimed at creating a harmonized legal environment across the Emirates [29].
Some notable reforms include the introduction of specialized courts, such as commercial and civil courts, to streamline legal processes and reduce case backlogs [30]. Other changes include tightening appointment criteria for judges to ensure they possess the necessary qualifications and expertise to adjudicate commercial matters. In the interest of transparency and efficiency, it also introduced an electronic case management system to allow litigants to access cases online. It also actively pursued initiatives to align its regulatory and legal frameworks with the best practices as prescribed by internal legal bodies. For instance, it introduced major amendments to its Bankruptey law in 2024 with threshold changes where the creditors voting process on restructuring plans are now in line with international standards [31]. In an attempt to achieve gender balance in corporate boardrooms, it also mandated that private joint-stock companies allocate at least one seat on their boards to women, effective from January 2025. Issued by the Ministry of Economy [32].
However, the legal and regulatory landscape still presents challenges that impede the ease of doing business. For instance, the approved language of UAE federal Law is Arabic, and all contracts, transcripts, and other documents must be translated into Arabic. This conflicts with the internalization efforts put in by the governments, especially given the majority of UAE's population is non-Emirati and doesn't speak Arabic as its native language. This is a characteristic feature of this part of the MENA region. Moreover, political influence over the appointment of the judiciary also impeded Judicial independence. In many instances, the government's role can overshadow judicial proceedings, leading to perceptions of bias [33]. This dynamic raises concernsabout the impartiality of judicial decisions, as judges may feel pressured to align with governmental expectations or directives rather than adhering strictly to legal principles [34]. Furthermore, judges often encounter a lack of legal recourse, especially when members of the judiciary see that rulings may interfere with the State's interests. This may lead to self-censorship, where judges avoid making bold or progressive rulings that could potentially lead to professional consequences or backlash from governmental authorities [35].
Moving further, the UAE also harnessed Public Private Partnerships, especially in the infrastructure sector, to leverage private funds for public projects. Using PPPs to develop infrastructure gives Governments the opportunity to move large up-front capital spending off their near-term financing commitments and further plan a critical role in promoting economic diversification and FDI. As discussed before, economic and legal reforms made capital inflows much easier, catapulting the pace of PPPs in the UAE. The legal landscape for Public-Private Partnerships (PPPs) in the UAE is defined by the Federal Decree-Law No. 12 of 2023 [36]. The 46 free zones in the UAE are an example of PPP that induces economic growth by attracting international business and creating a platform for capital inflows. This model has been transformational in putting forward the UAE (the Emirate of Dubai particularly) as a business hub by:
Increased Foreign Investment: Attracting numerous global corporations and establishing Dubai as a premier business destination [37].
Economic Diversification: Reducing reliance on oil revenues by promoting sectors such as technology, logistics, and finances [38].
Enhanced Business Climate: Offering a conducive environment for businesses to thrive, innovate, and expand [39].
Outcomes and Progress Assessment
Figure 5 UAE Non-Oil Sector growth rates, 2023 (Source: FCSA, UAE)
Figure 6 UAE non-oil GDP growth (Source: Haver Analytics, Emirates NBD Research)
Figure 7 UAE GDP Growth/Per capital (Real values) (Source: MacroTrends.Net)
UAE’s reforms led by H.E Sheikh Mohamed bin Zayed Al Nahyan have palpably translated into a diversified economy that we see today and refer to as the “UAE Model of Diversification” for other GCC economies. In December 2024, H.E Abdulla bin Touq Al Marri, Minister of Economy, asserted that the preliminary estimates of the UAE’s GDP in the first half of 2024, issued by the Federal Competitiveness and Statistics Centre [40]. The key highlight of the National Accounting was that the UAE economy grew by 3.6|% in the first half of 2024, and Non-oil sectors contribute 75 per cent of the GDP, with transport and storage being the fastest growing industries [41]. The financial activities and insurance sector ranked second, achieving a growth rate of 7.6 per cent, and contributing 12.5 per cent to the UAE’s non-oil GDP [42]. Figures -1 and 2 also show consistent growth of Non-oil sectors and overall GDP growth, affirming the notion that diversification is helping the UAE rely less on the rentier-state model for the economy and build a more robust, and resilient model, based on forward and backward linkages via free trade. The fact that trade activities emerged as the most significant contributor to the UAE’s non-oil GDP, accounting for 16.5 percent, testifies to the importance of UAE's several trade agreements and its geographic location, which connects Asia-Pacific and European markets. Needless to say, the strategic importance of its port infrastructure, such as the Jabel Ali port handling close to 20 million TEUs, makes it a key logistics landmark in the Persian Gulf [43].
The UAE has signed about 112 agreements with trading partners to encourage investments, and these reforms and policy measures have had a concrete impact on FDI inflows in the UAE. According to the UNCTAD World Investment Report 2023, the value of foreign direct investment inflows at a growth rate of 10% and the total inflows of foreign investment in 2022 amounted to $22.7 billion (AED 83 billion), compared to $20.7 billion (AED 76 billion) in 2021 [44].The cumulative balance of the FDI inflow increased, amounting to about $194.3 billion [45]. It was also the top destination for FDI among West Asian and MENA countries, accounting for 32.4% of FDI inflows in the MENA region and 47.1% of FDI inflows in the West Asia region [46]. These figures show that UAE’s external sector performance has been impressive, and the diversification model it employed reaped healthy returns for it. Whilst previous Oil revenues gave a strong enough impetus for economic growth at the dawn of the 21st century, visionary policy leadership and foresight are critical aspects responsible for UAE’s position as a business leader not just in the MENA region but the world.
Figure 12 UAE on Oil Exports in AED Million (Source: Trading Economics)
Furthermore, it is important to note that a majority of this growth in FDI and exports is driven by the non-oil sector. As we can infer from the figures above (XX and XX), UAE non-oil exports have also been rising, coinciding with record FDI inflows and the non-oil sector's contribution to its GDP. These efforts are buoyed by initiatives such as Operation 300bn, which aims to increase the sector’s contribution to GDP from Dh133 billion to Dh300 billion by 2031, especially in sectors like aerospace, pharmaceuticals, and advanced technology manufacturing [47]. It goes to show the UAE is on a path to alleviate oil dependency and base its economic model on the multi- sectoral economy that thrives on the basis of a global free trade system.
What charms most policymakers is not just the reduction in Oil dependency and distancing from the rentier state model but also resilience towards global economic shocks such as the Covid-19 pandemic, with relatively stable FDI inflows in the region [48]. Events like the Dubai Expo 2020 significantly helped post-Covid recovery. According to a Deloitte report, the UAE demonstrated remarkable resilience during the COVID-19 pandemic and during the geopolitical instability in the Middle East. It estimates (assuming no further geopolitical instability) a steady rise in incoming FDIs, aiming to meet the government’s 150 billion US Dollar goals by 2031 [49].
Remaining Challenges
Transitioning from a rentier-state model to a business-based model that fosters entrepreneurship and innovation is easier said than done. It requires a cultural shift. This requires a higher degree of risk-taking, by promoting newer business models, and further creativity. Whilst the government is constantly working to ease business activity, bureaucratic inefficiencies still hinder the pace of progress. For instance, at a Press conference, Sheikh Mohammed bin Rashid Al Maktoum, Vice- President and Prime Minister of the UAE and Ruler of Dubai, has publicly ranked the best and worst government departments based on their performance in reducing bureaucracy [50]. Emirates Post, the Pensions Authority, and the Ministry of Sports were ranked as the worst-performing departments in reducing bureaucracy. Addressing these underperforming entities, Sheikh Mohammed emphasized that systemic inefficiencies could be swiftly corrected with bold decision- making [51]. Whilst reforms have significantly paved the way for higher business activity, the UAE administration believes there’s much more room to reduce red tape and boost efficiency and transparency.
Additionally, business confidence demands not just a viable business environment but markets without political influence. This is perhaps difficult, especially in regulatory issues where state interests are at stake. Additionally, free-speech restrictions and issues of judicial independence add to this doubt, which provides the UAE a wider opportunity to embrace reforms not just in the economy but also in its politics and institutions, to optimize international confidence in its ability to be the economic powerhouse of the MENA region, except where the power does not come from Oil.
Key Takeaways
UAE’s Diversification journey underscores the paramount importance of long-term strategic vision for the economy, from Vision 2021 in 2010 to Project 2031. Beyond strong foresight, it also requires clear goal-setting, policy design, and seamless execution, which despite challenges, the UAE accomplished well. Its commitment to goals and building an investor-friendly climate coupled with willingness to diversify, is what crystallizes investor confidence in UAE’s economy.
The UAE has been able to commit itself to diversification efforts on the basis of macroeconomic stability in the last few decades [52]. Medium-term fiscal consolidation, with a focus on non-hydrocarbon revenue mobilization, ensured macroeconomic stability in the UAE while increasing resources available for growth-enhancing investments [53]. Policy initiatives and investments in Human capital were key to such “non-hydrocarbon revenue mobilization” and boosted non-oil revenues and growth rates. Human capital development is a catalyst for economic progress and prosperity, and investing in education and skill-building is essential to compete in a rapidly changing world economy [54]. UAE’s efforts to make Dubai not just a business/trading hub or a financial center but also an epitome for the best professionals and talent to arrive, is also an important driver of growth. Legal and regulatory reforms are also key. By ensuring a stable and transparent legal system, especially for enterprises and economics, financial, trade and labor litigation, not only builds business confidence but also further attracts the best talent. This secures labor and capital without renting its natural resources to external clients, thereby reducing dependency on the rentier-state model.
Lastly, deeper economic integration through trade agreements, technology-sharing programs, and other measures is critical to making UAE’s economy relevant in the global economy, especially with global climate commitments to reduce oil dependency. Leveraging its strategic location between European, Asia-Pacific and African markets, the UAE not only attracts the best talent from these worlds but also creates forward and backward linkages in International trade. These linkages in the global supply chain make them a key part of the global economic system, and with a conducive business environment, drive in FDI inflows. Thus, free trade and economic integration are where several MENA countries can reap the benefits of global trade and open up newer avenues of investment and commerce.
Final Remarks
In the final analysis, the UAE has made significant strides in terms of diversifying its economy and significantly reducing its dependence on oil and the rentier-state model. Key sectors such as trade, financial services and insurance, and tourism, among others, have registered solid growth over the years, owing to aptly designed and executed policy interventions and campaigns. Initiatives such as Vision 2021, Vision 2031 and the Centennial 2071 plan further reiterates its diversification and sustainable development ambitions. Moreover, investments in infrastructure, human capital, and the adoption of innovative PPP models to finance various infrastructure projects were key to building momentum in the diversification process. Overall, whilst challenges still persist, based on the figures and assessment of progress made so far, UAE’s reforms have been impactful in driving change and innovation, and successfully diversified its economy. This shift marks a critical shift in its economic model, from a rentier-state model to a trade, business, and manufacturing hub, along with a major transit port between Europe and Asia.
Whilst every economy is unique, has different strengths and weaknesses, and faces different challenges, the insights from the UAE’s journey are transferrable. The UAE’s model offers valuable lessons for other Gulf oil-producing countries and even MENA/West Asian economies. Long-term strategic policy foresight, commitment to stability, diversification, and swift execution are crucial. Moreover, legal and regulatory reforms to match international standards and best practices, solid infrastructure, a microeconomic climate, and support for investment are essential to attract FDI inflows. By applying these insights with necessary adaptations, other MENA economies can reap the benefits of globalization, free trade and economic diversification and integration.
Notes :
[1] https://www.economist.com/special-report/2018/06/21/how-oil-transformed-the-gulf
[2] https://carnegieendowment.org/2023/05/03/hurdles-of-energy-transitions-in-arab-states-pub-89518
[3] https://pomeps.org/introduction-the-politics-of-rentier-states-in-the-gulf
[4] The United Arab Emirates: A Modern Phenomenon - The Global Citizen
[5] The United Arab Emirates: A global hub for future industries | Deloitte Middle East
[6] UAE home to GCC region’s most diversified economy, reveals Global Economic Diversification Index 2025
[7] global-economic-diversification-index-2024.pdf
[9] Vision 2021 | The Official Portal of the UAE Government
[10] https://www.elibrary.imf.org/view/journals/006/2014/012/article-A001-en.xml
[14] AR 2021.pdf
[15] Ibid 14
[16] https://www.expo2020dubai.com/
[18] Ibid 17
[19] https://onlinelibrary.wiley.com/doi/full/10.1111/1468-2427.12570
[20] Ibid 19
[21] Ibid
[22] Free Zones | Ministry of Economy - UAE
[23] Ibid 23
[24] PowerPoint Presentation
[25] Does not include petroleum products.
[26] The United Arab Emirates: A global hub for future industries | Deloitte Middle East
[27] Legal Reforms and Judicial Independence: The UAE’s Progress and Challenges
[28] Ibid 27
[29] Ibid 27
[30] Ibid 27
[31] UAE legal milestones 2024-2025: Key reforms and their impact on business and governance
[32] UAE legal milestones 2024-2025: Key reforms and their impact on business and governance
[33] Legal Reforms and Judicial Independence: The UAE’s Progress and Challenges
[34] Legal Reforms and Judicial Independence: The UAE’s Progress and Challenges
[35] Legal Reforms and Judicial Independence: The UAE’s Progress and Challenges
[36] The Role of Public-Private Partnerships in the UAE's Economic Landscape
[37] The Role of Public-Private Partnerships in the UAE's Economic Landscape
[38] The Role of Public-Private Partnerships in the UAE's Economic Landscape
[39] The Role of Public-Private Partnerships in the UAE's Economic Landscape
[40] UAE Non-Oil Sectors Contribute 75% to GDP in H1 2024
[41] UAE’s GDP grows by 3.6 per cent in the first half of 2024 | Ministry of Economy - UAE
[42] UAE’s GDP grows by 3.6 per cent in the first half of 2024 | Ministry of Economy - UAE
[43] DP World Records Highest Cargo Volumes At Jebel Ali Port Since 2015 | Al Bawaba
[44] Foreign Investment Inflow | Ministry of Economy - UAE
[45] Ibid 44
[46] Ibid 44
[47] UAE’s non-oil economy drives 75% of GDP growth in H1 2024 - Finance Middle East
[48] UAE economy survived impact of Covid-19: IMF official
[49] The United Arab Emirates: A global hub for future industries | Deloitte Middle East
[50] Sheikh Mohammed ranks best, worst UAE government departments
[51] Ibid 50
[52] Promoting Resilience: Shaping the Future of the GCC Economy Amid Regional and Global Challenges
[53] Promoting Resilience: Shaping the Future of the GCC Economy Amid Regional and Global Challenges
[54] Ibid 53
