Of the seven former Trucial States that united in the early 1970s to form the United Arab Emirates (Abu Dhabi, Ajman, Dubai, Sharja, Fujayra, Ra's al Khaymah and Umm al Qaywayn), all are ruled by dominant families, and power is based on heredity rather than democracy. Even though they use a single currency, the UAE dirham or AED, the individual Emirates have considerable autonomy in setting economic policy and keeping the oil sectors under their control. With autocratic rule and a large presence of foreign workers, there is some potential for tension and sociopolitical instability, but in the UAE, the diverse nature of society has not proven to be divisive.
Political strife is not a problem, and the loose federal structure has been highly cohesive, even though Abu Dhabi accounts for more than 90 percent of the oil production and makes up around 60 percent of GDP, with Dubai following in second place (about 25 percent), and the other Emirates being much smaller contributors. The federal Head of State and ruler of Abu Dhabi, Sheikh Zayed ibn Sultan an-Nahayan, was re-elected in 1996 by the Supreme Council for another five-year term as President. He is 78 years old and in poor health, so his succession has become a debated issue. More than likely, Crown Price Khalifa will succeed him as President of the Federation and ruler of Abu Dhabi. If so, this would not bring a major shift in diplomatic, political or economic direction.
The government in the UAE remains personal and secretive. The Emirates do not release any up-to-date economic statistics or balance of payments data, so it is difficult to assess exactly how well they are doing. Clearly, there is a historical pattern indicating that oil prices and revenues have a major impact on GDP, by pumping up fiscal income, government and consumer spending, investment, and-because this sort of expansion tends to be regional-re-exports, transshipments and services. Independent economists estimate that real GDP slipped a bit in 1998 (by about 1.0 percent), but then grew by 1.5 percent in 1999 and by at least 3.0 percent in 2000. We expect growth to be somewhere between 4.0 and 5.0 percent for the current year. Inflation and interest rates tend to move in broad alignment with those in the United States, due to the dirham's effective peg to the greenback.
Both the merchandise trade balance and the current account BoP are in strong surplus. The IMF cites FX reserves at 10,675 million USD as of end-1999. The UAE also have a large net positive balance with the BIS in Basel (of about 27 billion USD) and are believed to possess an overseas investment kitty of around 140-150 billion USD. The Federation is, therefore, as far away from running into international liquidity problems as a small country can be. Its foreign debt is under 13 billion USD and is being serviced promptly. …