2009 Index of Economic Freedom

Quick Facts

Population:

• 4.2 million

GDP (PPP):

• $151.7 billion
• 9.4% growth
• 8.3% 5-year compound annual growth
• $35882 per capita

Unemployment:

• 2.4%

Inflation (CPI):

• 11.0%

FDI Inflow:

• $8.4 billion

The United Arab Emirates'economic freedom score is 64.7, making its economy the 54th freest in the 2009 Index. Its score is 2.2 points higher than last year, reflecting improvements in five of the 10 economic freedoms. The UAE is ranked 7th out of 17 countries in the Middle East/North Africa region, and its overall score is higher than the world average.

The UAE has achieved average annual economic growth of about 8 percent over the past five years and scores above the world average in fiscal freedom, government size, labor freedom, freedom from corruption, and trade freedom. The average tariff rate is not high, but non-tariff barriers still limit overall trade freedom. There are no federal-level income or corporate taxes. The labor market is highly flexible. The level of corruption is low for a developing nation. The UAE aims to be a regional financial hub.

The UAE is weak in business freedom, investment freedom, and property rights. Foreign investment remains restricted, but lifting limits on foreign ownership in certain areas of the services sector is under consideration. The government has tried to streamline the regulatory process, but there is room for further improvement. The judiciary remains vulnerable to political influence.

Background Back to the top

The United Arab Emirates is a federation of seven Arab monarchies (Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah, and Umm al-Qaiwain). Abu Dhabi accounts for about 90 percent of UAE oil production and has taken a leading role in political and economic decision-making, but many economic policy decisions are made by the rulers of the individual emirates. Dubai has developed into the UAE's foremost center of finance, commerce, transportation, and tourism. The establishment of free trade zones that offer opportunities for 100 percent foreign ownership with zero taxation has attracted substantial foreign investment. UAE nationals still rely heavily on the public sector for employment, subsidized services, and government handouts.

Business Freedom 57.4 Back to the top

The overall freedom to start, operate, and close a business is limited by the UAE's regulatory environment. Starting a business takes less than half the world average of 38 days, although the minimum capital requirement remains costly. Obtaining a business license takes less than the world average of 225 days. Bankruptcy proceedings are lengthy and cumbersome.

Trade Freedom 80.8 Back to the top

The UAE's weighted average tariff rate was 4.6 percent in 2006. Import restrictions, services market access barriers, non-transparent standards, sanitary and phytosanitary regulations, and inconsistent government procurement and customs valuation 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). Ten points were deducted from the UAE's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 99.9 Back to the top

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 general sales tax or value-added tax, but authorities are considering implementing the latter. Property transfers are subject to taxation. In the most recent year, overall tax revenue as a percentage of GDP was 1.4 percent.

Government Size 86.3 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 21.4 percent of GDP. The state remains significantly involved in the economy through regulation and state-owned enterprises.

Monetary Freedom69.8 Back to the top

Inflation is high, averaging 10.2 percent between 2005 and 2007. The government influences prices through regulation, subsidies, and numerous state-owned enterprises and utilities, including oil, gas, electricity, and telecommunications. Ten points were deducted from the UAE's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

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. Company bylaws often prohibit foreign ownership. Distribution of goods must be conducted 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 Freedom50.0 Back to the top

The UAE's modern financial sector has become more efficient and competitive in recent years. Financial supervision has been strengthened. Domestic banks offer a full range of services. Islamic banking is increasingly prominent. Six major banks account for 70 percent of assets. The central bank has announced that it will issue licenses for new foreign bank branches. There are currently 23 local banks, 28 foreign banks (with more than 700 branches), over 60 investment companies, and other financial institutions. There is a 20 percent tax on foreign bank profits. The government has also announced that it will reopen the insurance sector. Capital markets are relatively developed, and the two stock markets have become more open to foreign investment.

Property Rights40.0 Back to the top

The ruling families exercise considerable influence on the judiciary. Incompetence and corruption are rarely challenged. All land in Abu Dhabi, largest of the seven emirates, is government-owned (and, in some cases, government-created by landfill in the Persian Gulf). Foreigners may buy and hold 99-year freehold interests in property in Dubai, and mortgages are available to them. The UAE leads the region in protecting intellectual property rights.

Freedom From Corruption57.0 Back to the top

Corruption is perceived as present. The UAE ranks 34th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. A series of corruption scandals in early 2008 led to a broad campaign against corporate malfeasance and the arrest of many executives working for the huge government-owned property development companies. In a separate case, a federal minister of state was charged with breach of trust and fraud. A 2005 Abu Dhabi police study cited 'rampant' bribery, nepotism, embezzlement, and abuse of power throughout local administrations.

Labor Freedom76.2 Back to the top

The UAE's relatively flexible employment regulations facilitate overall employment and productivity growth. 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 rigid. There is no minimum wage.