The UAE has introduced sweeping reforms to drive greater social, legal and economic liberalisation and attract new foreign investment. The measures are designed to counter the recent deterioration in the UAE’s growth prospects, the decline in its expatriate labour force, and to enable it to remain competitive as its Gulf neighbours – particularly Saudi Arabia – pursue their own economic liberalisation programmes.
Key measures include:
- New laws to allow foreign investors to own up to 100 per cent of local companies
- Wide-ranging legal reforms to liberalise society
- A new pathway for expatriates to become citizens
The reform programme is designed to maintain the UAE’s position as the preferred destination for foreign investment and labour. However, there are some risks, including the reaction from local Emiratis, who may be concerned about the loss of some of the advantages they previously enjoyed.
Asia House Middle East Associate
Freddie leads the Asia House Middle East Programme, convening briefings and events with leading business and policy figures and conducting research focused on the region.
The impact of COVID-19: the exodus of foreign workers and falling GDP
The UAE has long benefited from its ability to attract foreign businesses and workers. Between 2000-2019, the UAE’s population tripled from three million to almost ten million, which in turn has helped to quadruple the UAE’s GDP in current terms from $US104 billion to $US421 billion over the same period.
UAE population growth has been driven by an influx in foreign workers, attracted by the UAE’s offer of high wages coupled with a low-tax environment, and not by Emirati birth-rates. This has caused a large imbalance between natural-born Emiratis and the UAE’s expatriate population, with just 11 per cent of the UAE’s population being Emirati nationals.
Expatriates have contributed greatly to the UAE’s rise as a regional economic power. The UAE’s construction boom during the early 21st century was largely underpinned by migrant workers from South Asia; migrant workers particularly from the Philippines are significantly represented within the UAE’s hospitality and tourism industry; and expatriates also make up the majority of workers within the UAE’s financial services industries.
But, as with many other economies, the COVID-19 pandemic has undermined the UAE’s growth model. Dubai’s expatriate population fell by 8.4 per cent during the pandemic, the most significant decline in Gulf, with workers, whose residency rights are usually tied up with their employment, leaving the country when they became unemployed.
This exodus of foreign workers has been accompanied by a record 6.1 per cent annual decline in GDP in 2020. While the UAE’s ability to attract foreign businesses and workers has helped diversify its economy away from oil more successfully than other Gulf states, it still generates 30 per cent of GDP through its oil and gas industry. This sector has suffered during the COVID-19 pandemic due to decreased oil demand. Other sectors, such as tourism, have also declined, with Dubai International airport witnessing a 70 per cent decline in customers in 2020.
This negative economic backdrop has prompted the UAE’s leadership to look for new ways to liberalise its economy and attract greater foreign investment. But the UAE leadership is also conscious that it needs to continue innovating to maintain its position as the region’s favoured destination for foreigners to live, work, and invest, particularly as other Gulf states begin to accelerate their economic diversification plans.
Growing competition, particularly from Saudi Arabia
The UAE has often outperformed its Gulf neighbours in the World Bank’s ‘Ease of Doing Business’ metric, and surveys relating to countries’ desirability as a destination to live and work. The UAE is often the top destination in the Arab world for foreign direct investment. In 2019, it attracted nearly $US 13.8 billion in investment, according to the United Nations Conference on Trade and Development (UNCTAD). But as Gulf neighbours begin to accelerate their plans for economic diversification and introduce reforms to help with economic recovery after COVID-19, the UAE is looking over its shoulder and considering ways to maintain its comparative advantages.
Most significantly, Saudi Arabia, the Middle East’s largest economy, launched Vision 2030 five years ago, and has introduced regulations to increase foreign investment and encourage private sector growth. More recently, it has announced several measures to incentivise foreign businesses and foreign talent to settle in Saudi Arabia.
‘Programme HQ’, for example, offers companies that establish a regional headquarters in Saudi Arabia a fifty-year tax break, exemptions from Saudization quotas dictating firms ensure a certain proportion of its workforce are made up of Saudi nationals, and protections against future regulations.
Saudi Arabia has also pledged sweeping judicial reforms in 2021, partially aimed at increasing businesses’ confidence to invest in Saudi Arabia. Though full details are not yet known, the planned changes are aimed at making the country’s business environment more easily navigable by making legal procedures and rulings, including in dispute resolution, more consistent and reliable. Other touted changes include increased oversight of Saudi Arabia’s judiciary, and codifying certain laws to prevent discrepancy in court rulings that have harmed Saudi women.
Qatar has also recently announced new measures to enhance its competitiveness and prompt economic recovery following the COVID-19 pandemic, recently approving a draft law to allow foreign investors to own up to 100 per cent of companies listed on its stock exchange. Qatar has also sought to increase its appeal to foreign workers by becoming the first country in the region to introduce a non-discriminatory minimum wage. More than 20 per cent of Qatar’s private sector is expected to benefit from the new regulations that mandate companies to pay a monthly basic wage of 1,000 Qatari riyals (US$275) as well as food and housing allowances worth 800 Qatari riyals (US$220) if they do not provide workers with these directly.
The UAE recognises that it needs to respond to recent efforts by Gulf neighbours to make themselves more attractive to foreign investment and workers by introducing its own package of reforms.
How the UAE is responding – sweeping reforms to attract foreign investors and workers
To counter the deterioration in its economic growth prospects, the decline in its expatriate labour force, and remain competitive as its Gulf neighbour’s pursue economic liberalisation, the UAE is pursuing greater social, legal and economic liberalisation.
Its overriding aim is to encourage an open investment climate, greater economic diversification, and renewed economic recovery, but it is notable that some of the initiatives discussed could have profound implications for the relationship between the UAE government and its citizens.
Recent policy initiatives undertaken by the UAE include:
Encouraging more foreign ownership of businesses in the UAE
On June 1, new laws came into effect allowing foreign investors to hold a 100 per cent stake in companies throughout the UAE (except for strategic sectors such as oil, gas, and defence). Previously, full foreign ownership was only permitted within the UAE’s designated Free Zones and select economic sectors. Otherwise, foreign investors could only own a maximum 49 per cent stake in a business, with the majority stake being held by a local Emirati partner.
Originally designed to ensure Emiratis could benefit from the rapid inflows of foreign investment into the country, this measure also acted as a disincentive for investment. Investors could be subject to the whims of their local Emirati partners, and also had to endure legal uncertainty, added costs finding Emirati partners, and cumbersome legal arrangements to set up businesses. The new regulations also mean joint stock companies throughout the UAE no longer require an Emirati chairman or half of their boards comprising Emiratis, though local authorities will still be able to regulate the participation of Emiratis in companies.
While the new changes will undoubtedly benefit foreign investors (59 foreign investors reportedly took up 100 per cent stakes in companies during the first two days of the law’s introduction), they may frustrate Emiratis who have enjoyed extra income, or staked their careers on acting as local sponsors for foreign companies. Some Emiratis may sense that abolishing local sponsorship provisions infringes on their birth-rights, destabilising the implicit social contract between the UAE government and its citizens that Emiratis will benefit generously from the country’s economic development in return for limited political representation or freedoms.
Some have also questioned whether the new changes will chip away at Free Zones’ economic competitiveness. There is a case to be made that since Free Zones are concentrated in Abu Dhabi and Dubai, liberalising economic regulations outside Free Zones can help attract economic growth and level up the UAE’s other five emirates – Ajman, Sharjah, Ras Al Khaimah, Fujairah, and Umm Al Quwain. In reality, Free Zones will still be able to leverage their branding, influence within the UAE government, and networks to attract foreign firms. Exemptions from customs duties and other taxes in Free Zones also offer significant advantages for foreign firms looking for a presence in the UAE. But allowing full foreign ownership outside the Free Zones could be the start of a trend whereby the UAE strives to make its entire business environment more competitive.
Legal reforms to make the UAE’s social environment more liberal
In November 2020, the UAE introduced wide-ranging reforms to liberalise its social and legal environment, place the UAE on a more secular footing, and thereby make it a more attractive destination for expatriates to live and work.
New measures introduced include tougher laws against the harassment of women; allowing expatriates to apply the laws of their country regarding divorce and inheritance; scrapping reduced sentences for “honour” killings; the decriminalisation of alcohol consumption and suicide; and the decriminalisation of couples co-habiting without being married.
The new regulations weaken the influence of Sharia law in the country. While the UAE rarely invokes many aspects of Sharia, its presence within the legal system created uncertainty for many foreign businesses, residents, and tourists. Significantly, the new legal changes show the UAE is prepared to scrap elements of Sharia and codify new laws that contradict or supersede it.
Casting itself as a liberal model for the rest of the Arab World has been central to the UAE’s strategy of attracting foreign business and investment. The UAE has also been conscious of the need to neutralise conservative Islamists to prevent any backlash against steps taken to liberalise its society. It has pursued a rigorous campaign both at home and abroad against Islamism and introduced national initiatives to reduce its appeal by promoting greater religious tolerance. These include interfaith outreach, the building of non-Islamic places of worship, and hosting the first-ever papal visit to the Gulf. The UAE has also been promoting female economic empowerment, for example by recently ordering all firms listed on its stock exchanges to have at least one woman member on their board of directors.
There are, of course, areas where the UAE falls short of liberal Western values. Homosexuality remains criminalised in the UAE. Kafala (the relationship between foreign workers and local sponsors) still gives employers a high level of control over workers. Despite some positive reforms in this area, the UAE still receives criticism for failing to adequately implement measures designed to protect workers. Reforms in these areas could help the UAE attract further foreign investment.
A pathway to citizenship for foreign workers
The UAE’s rapid population growth has meant Emirati nationals are dwarfed by expatriates. Just 11 per cent of the UAE’s population are Emirati nationals. Traditionally, expatriates have enjoyed fewer rights and privileges than Emiratis, with expatriates’ residency rights often being conditional on employment. This has meant that expatriates often had to leave the UAE after employment, taking their money with them and divesting any property or investments held there.
The UAE is now trying to counter this by encouraging expatriates to create deeper roots in the UAE. In January 2021 the UAE opened up a pathway to citizenship for expatriates, announcing that skilled professionals, including senior business executives, investors, scientists, doctors, and engineers, will be able to obtain UAE citizenship. The first passports to foreigners were issued last month, with passports reportedly given to senior ex-pat professionals, including the founders of successful Emirati start-ups, Careem – a rival to Uber – and e-commerce group Souq.com, as well as the leadership of Emirati airlines Etihad and Emirates.
Greater access to UAE passports for residents also encourages business within the UAE, since UAE passport holders enjoy visa-free travel throughout the GCC, and can more easily open bank accounts and establish businesses. Though passports are not available to all expatriates, the UAE introduced a retirement visa in 2020, to allow expatriates aged 55 and over to obtain a renewable five-year visa provided they meet certain financial criteria, such as having one million dirhams ($US 272,000) in a UAE bank account.
Emiratis and ex-pats have lived harmoniously in the UAE for decades, but Emirati leaders have been conscious that rapid economic development in the UAE over the last fifty years, coupled with such a large ex-patriate population, has built a need to work harder than other nations to foster and embed a sense of national identity within its citizens.
Issuing passports remains at the discretion of the UAE cabinet, the various emirates’ executive councils, and local courts. This means they have only been given to a limited number of individuals so far. Acknowledging that citizenship is not exclusively defined by birth is a radical concept within the Gulf and may not necessarily be accepted by all Emiratis.
It is too early to assess the impact of opening up citizenship beyond natural-born Emiratis to the UAE’s national identity, as well as the social contract between the UAE government and its citizens. The UAE’s leadership has long tried to inculcate tolerance towards others within Emirati citizens. The UAE’s leadership may judge it is worth doubling down on this strategy.
The UAE will celebrate its Golden Jubilee on 2 December 2021 and has enjoyed rapid growth and delivered substantial transformation during that time. But the UAE is continuing to innovate and reform to liberalise its economy in the interests of attracting foreign investment and talent.
Foreign firms have often acknowledged that the UAE offers a more liberal, better connected environment, with better infrastructure and amenities for their foreign workforces. Many of these latest steps have been implemented amid a broader context in other Gulf economies, particularly Saudi Arabia, which are accelerating their economic diversification plans liberalising their economies. The initiatives demonstrate that the UAE is not prepared to cede ground to other Gulf states.
But there are risks. Some of these moves, such as opening a pathway to citizenship to expatriates and abolishing regulations that provide Emiratis access to income from being local sponsors, threaten to undermine the delicate social contract between Emiratis and their government. For the time being, though, the UAE remains the most politically-stable investment destination in the Gulf with the UAE’s leadership actively working to convince its citizens that welcoming foreign investment and labour benefits the UAE and Emiratis.
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