UAE economic freedom: How others see it?
Dubai Chamber is following closely what is written by economic organizations on UAE economy. This article reviews the 2008 Index of Economic Freedom (IEF), which is produced by Heritage Foundation and Wall Street Journal. The views in this article are those of producers of IEF and not those of Dubai Chamber.
The 2008 IEF covers 162 countries across 10 specific freedoms. Economic freedom is measured by 10 specific freedoms, which are averaged equally into a total score. Each one of the 10 freedoms is graded using a scale from 0 to 100, where 100 represents the maximum freedom. A score of 100 signifies an economic environment or set of policies that is most conducive to economic freedom. The IEF ten component freedoms are: Business Freedom, Trade Freedom, Fiscal Freedom, Government Size, Monetary Freedom, Investment Freedom, Financial Freedom, Property rights, Freedom from Corruption, and Labor Freedom.
According to the 2008 IEF, the UAE economy is 62.8 percent free, which makes it the world’s 63rd freest economy. The UAE 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 UAE scores above the world average in fiscal freedom, labor freedom, freedom from corruption, government size, and trade freedom. Figure 1 shows the ranking of these freedoms and they are detailed below.
BUSINESS FREEDOM: 47.9%
The overall freedom to start, operate, and close a business is limited by the UAE’s regulatory environment. Starting a business takes an average of 62 days, compared to the world average of 43 days. The minimum capital requirement to launch a business is costly. Obtaining a business license takes less than the world average of 234 days. Bankruptcy proceedings are lengthy and cumbersome.
TRADE FREEDOM: 80.4%
The weighted average tariff rate in the UAE was 4.8 percent in 2005. Import restrictions, service market access barriers, non-transparent standards, sanitary and phytosanitary regulations, and inconsistent government procurement add to the cost of trade; only firms with a trade license may engage in importation; and only majority-owned UAE firms may obtain such a license (except for goods imported into free zones). An additional 10 percentage points is deducted from the UAE’s trade freedom score to account for non-tariff barriers.
FISCAL FREEDOM: 99.9%
The UAE has no income tax and no federal-level corporate tax, but there are different corporate tax rates in some emirates (for example, corporate tax rates of 55 percent for foreign oil companies and 20 percent for foreign banks). There is no value-added tax or general sales tax. In the most recent years, overall tax revenue as a percentage of GDP was 2.1 percent.
GOVERNMENT SIZE: 80.2%
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent years, government spending equalled 25.7 percent of GDP. The state remains significantly involved in the economy through regulation and state-owned enterprises.
MONETARY FREEDOM: 70.9%
Inflation is high, averaging 9.1 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. The government influences prices through regulation, subsidies, and numerous state-owned enterprises and utilities, including oil, gas, electricity, and telecommunications. An additional 10 percentage points is deducted from the UAE’s monetary freedom score to account for policies that distort domestic prices.
INVESTMENT FREEDOM: 30%
Foreign investors do not receive national treatment. Except for companies in the free zones, at least 51 percent of a business must be owned by a UAE national. Distribution of goods must be through an Emirati partner, although “liberalized goods” may be imported without the agent’s approval. There are no controls or requirements on current transfers, access to foreign exchange, or repatriation of profits.
FINANCIAL FREEDOM: 40%
Financial supervision has been strengthened. There are 21 Emirati banks (some with federal or local government ownership), 25 foreign bank entities, two investment banks, and about 50 representative bank offices. Six major banks account for 70 percent of assets. Rising oil revenues have improved the health of the financial sector. Domestic banks offer a full range of services. Islamic banking systems are increasingly prominent. The central bank, under WTO mandates, has announced that it will issue licenses for new foreign bank branches, not issued since the mid- 1980s. There is a 20 percent tax on foreign bank profits. The government has also announced that it will reopen the insurance sector, closed to new foreign entries since 1989. Capital markets are relatively developed. The two stock markets are open to foreign investment, but foreign ownership of listed companies is limited to 49 percent, and some companies prohibit foreign ownership.
PROPERTY RIGHTS: 40%
All land in Abu Dhabi, largest of the seven emirates, is government-owned. Mortgages have been introduced for select Dubai-based five-star property developments and are otherwise generally unavailable. The UAE leads the region in protecting intellectual property rights.
FREEDOM FROM CORRUPTION: 62%
The UAE ranks 31st out of 163 countries in Transparency International’s Corruption Perceptions Index for 2006. The government has established special anti-corruption sections to investigate and prosecute violators in cases such bribery, nepotism, embezzlement, and abuse of power.
LABOR FREEDOM: 76.2%
Relatively flexible employment regulations could be further improved to enhance overall productivity growth and job creation. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is relatively costly. Regulations related to the number of work hours are not flexible. There is no minimum wage.
In conclusion, the UAE government needs to work more to improve the weakest freedoms and these are namely investment freedom, financial freedom, property rights and business freedom.