Economic Growth and Trade in the United Arab Emirates

The success or failure of the United Arab Emirates’ (UAE) mid- and long-term growth strategy will, in large part, be determined by innovation. The country aims to continue transitioning from its past focus on oil and gas, energy-intensive products, and re-exporting services to a future economic model increasingly relying on high-value, knowledge-intensive goods and services. A successful transition will necessitate importing and adapting frontier foreign innovation, but also creating a world-class innovation ecosystem at home.

Part of this effort will entail developing further the country’s Research and Development (R&D) capabilities. While significant catch-up is already visible, much remains to be done to bring the UAE’s R&D output in line with the ambitions assigned by its leadership. The production of scientific publications and patents has been rapidly increasing over the past few years. However, the current level of scientific publications and international patenting activity remains below that of aspirational peers, such as Singapore and Norway, but also fellow Gulf Cooperation Council (GCC) countries, such as Qatar and Saudi Arabia.

One of the reasons may be simple: there are not enough researchers in the UAE. The proportion of researchers in the UAE’s workforce is below what is expected for such an advanced economy. While the UAE has been successful at attracting foreign students and skilled workers, including in STEM fields which underpin R&D activities, this has not translated into a higher density of researchers in the labor force. Determining whether that results from low current demand for R&D skills due to the country’s current economic structure or from difficulties in producing or attracting R&D talent is difficult, although both likely contribute to the issue.

This report examines how the United Arab Emirates can leverage three key policy tools to accelerate economic diversification and transition to a knowledge-based economy: Foreign Direct Investment (FDI), Free Zones, and Sovereign Wealth Funds (SWFs). While the UAE has successfully attracted substantial FDI inflows and diversified its export basket over the past two decades, the country continues to underperform in economic complexity and faces challenges attracting knowledge-intensive investments, particularly in research and development activities. The analysis reveals that Free Zones have evolved beyond regulatory arbitrage advantages to become mechanisms for public-private coordination and specialized public goods provision, though their contribution to broader knowledge spillovers remains limited by restrictions on mainland business interactions. Similarly, while the UAE’s SWFs have increasingly pursued domestic diversification objectives through strategic acquisitions and partnerships, their impact could be improved by better aligning foreign investments with domestic capabilities and leveraging multiple channels for knowledge transfer beyond firm relocation. The report recommends a quality-oriented approach to FDI attraction focusing on innovation and R&D activities, adaptive Free Zone management that responds to evolving firm needs, and strategic SWF investments guided by economic complexity metrics, emphasizing that successful diversification requires intensive public-private and public-public coordination across all three tools to provide the necessary inputs for new, complex activities to appear in the UAE’s economic and industrial landscape.

The world is rapidly shifting towards a lower-carbon economy, drawing a new map of comparative advantage in the process. As the global economy decarbonizes, it will bring about profound changes in the landscape of production, giving rise to new industries, markets, and pathways for economic development. This transformation will manifest through changes in global demand and prices for existing products but also through the emergence of novel technologies and industries, many of which will replace older, carbon-intensive practices and production methods. These trends will have a significant impact on the fundamental competitiveness of every economy. Therefore, it is crucial for national economic policies, including in the United Arab Emirates, to include a well-designed green growth strategy to harness the global drive towards a decarbonized world economy.

This report aims to identify green growth opportunities for the UAE through a structured approach and suggest concrete policy ideas to seize them. We analyze green growth opportunities along the following four pillars: (1) make the enablers of decarbonization; (2) make green versions of energy-intensive products; (3) capitalize on carbon capture, utilization, and storage (CCUS); and (4) export decarbonization-related know-how.

One of the most promising opportunities identified lies in the development of green industrial parks. The UAE should consider establishing such green industrial parks to attract energy-intensive industries aiming to switch to low-carbon production processes. These parks provide the necessary inputs to low-carbon industrial production in a concentrated geographical area. These include dedicated low-cost renewable energy, but also clean, high-temperature heat, low-carbon hydrogen, as well as carbon capture technology and other services necessary to certify the green nature of the production. A net-zero world will need to make things like steel, cement, chemicals, aluminum, and glass without emitting carbon. It will also need to develop fuels for ships, planes, and heavy-duty transport that have near-zero life cycle emissions, a large proportion of which are expected to come from renewable energy that is used to make hydrogen and liquid fuels. Low solar energy costs make the UAE one of the best places to develop low-carbon energy-intensive industries. Additionally, the UAE has a low cost of capital, which is an important comparative advantage since many of these industrial activities are highly capital-intensive. As the world transitions towards a decarbonized global economy, green industrial parks will drive high-value green economic activities to locate in the UAE, resulting in stronger exports, more value-added, and a future-proof economic model for the country.

As developing green industrial parks is complex, this is an opportunity to accumulate valuable know-how that, in turn, can be monetized. For instance, nobody yet knows how to build, manage, and operate a multi-gigawatt green hydrogen production facility. In the process of building green industrial parks in the UAE, the UAE will have to learn how to optimize a very complex renewable energy system, balance electricity, heat, and hydrogen across multiple energy users with different load profiles, and deploy multiple new technologies together that are still in the pilot phase.

The UAE should consider monetizing its domestic experience by developing and exporting green industrial parks in other countries and developing a business model around these activities. Such a strategy could involve (1) owning the Engineering, Procurement, and Construction Management (EPCM) contractors and other related businesses that develop and operate parks; (2) where possible, having as much of the high-income knowledge workers who provide these services live and work in the UAE; and (3) helping UAE industrial companies that wish to expand abroad (such as Emirates Global Aluminium, or Emirates Steel Arkan) make profitable foreign investments in green industrial parks in other countries.

There may be another opportunity in critical minerals processing. A mining boom is required to provide the world with enough critical minerals to build a clean energy system. Currently, China is dominating the critical minerals processing market, but many countries are looking to diversify their critical minerals supply chain. Given its low cost of capital, strategic location, and good trading infrastructure, the UAE is well-positioned to take advantage of this opportunity. The country already has nascent strengths in mineral refining to build off, in the aluminum and, soon, in the lithium value chains.

Other promising policy ideas are centered on accelerating the creation of green growth knowledge in the UAE and encouraging high-potential business applications. Given their potentially large implications for low-carbon industrial processes in the UAE, we recommend that the government consider establishing applied research hubs in the areas of electrochemistry and thermal energy management & storage. Our research has already identified leading actors in this area that may be attractive partners for collaboration. Additionally, to ensure the close monitoring of the innovation and technology developed abroad, we recommend discussing the establishment of a green technologies working group within the Emirates Scientist Council. This working group would continuously monitor advances in green technologies and their impact on the UAE, reporting findings to the higher levels of government to inform strategic decisions.

This document summarizes high-level findings on the United Arab Emirates’ (UAE) growth trajectory, economic diversification record, and future prospects. It is based on the work carried out as part of an ongoing collaboration between Harvard’s Growth Lab and the UAE Ministry of Economy (MoE). This collaboration aims to produce novel research-based inputs to inform an ambitious, forward-looking economic policy agenda. Over the last year, it has entailed research on various topics. These have included documenting the country’s past growth path and potential for the future, understanding UAE’s short-run macroeconomic and inflation dynamics, studying trade patterns and free-trade agreements, and looking into labor markets and productivity dynamics. 

This document provides a summary of some of the research stemming from the first phase of work, drawing especially on two reports: Elements of a Growth Diagnostic: The United Arab Emirates (Brenot et al, unpublished) and Economic Complexity: The United Arab Emirates (Tapia et al, 2023). These two reports together lay out research on the UAE’s growth model over the last two decades and use an “economic complexity” lens to analyze where future sources of diversification and growth might come from. The Elements of a Growth Diagnostic report mainly focuses on the past. It examines the UAE’s growth performance between 2000 and 2019 (prior to the COVID-19 pandemic) to understand the drivers of the UAE’s growth model and document the changes in the UAE economy during this time. Economic Complexity: The United Arab Emirates looks at the performance of the UAE’s exports and industrial diversification using a “knowhow” and complexity lens, pioneered by Hidalgo & Hausmann (2009), and also suggests high-potential activities for further diversification. 

As part of a broader research agenda, this summary document is meant as a companion piece to more than a year of past research, but also as a starting point for the next phase of collaboration between the Growth Lab and the MoE. In addition to this summary document and the reports it draws on, there is also a companion Inputs for Policy Design – Tools for Economic Diversification report. The report makes a more policy-oriented contribution, discussing more in-depth three concrete tools to achieve further economic diversification: foreign direct investment (FDI), Free Zones, and Sovereign Wealth Funds (SWFs). 

This summary document highlights the key themes and insights gathered during this past year, while also laying out a set of questions for future research. The rest of this document is structured as follows. Section 2 summarizes key themes of the UAE’s past growth performance and its key drivers at an aggregate, national level. Section 3 goes deeper to describe the current state of the UAE economy by geography and sector, and documents the way the economy has already begun to diversify into non-oil activities. Section 4 further examines the UAE’s diversification path using a complexity approach to better shed light on the UAE’s future diversification prospects. Finally, Section 5 concludes with a set of key takeaways and themes for further research. 

The UAE has achieved significant economic diversification over the past two decades, with non-oil goods exports growing 7.7% annually (2005-19) and services exports expanding by a factor of 3.5, driven primarily by transport, logistics, tourism, and stone/metals products. However, the current export matrix remains energy-intensive and exhibits relatively low economic complexity compared to aspirational peers, indicating limited accumulation of sophisticated productive know-how and suggesting constraints on future growth potential. This report applies economic complexity theory to identify a country-specific diversification roadmap, using density measures to assess feasibility based on the UAE’s existing capabilities and prioritizing opportunities with high complexity and growing global demand. Through this systematic sector identification process, we identify 63 products and 18 service industries organized into ten diversification themes: five in goods (food, metals, chemicals, plastics, and machinery) and five in services (ICT, financial services, business services, healthcare, and creative industries). Given the UAE’s relatively low Complexity Outlook Index, achieving further structural transformation will require active policies to accumulate productive capacities, execute well-targeted capability jumps, and strengthen state capacity to address market failures inherent in the self-discovery process.

In this report, we describe the UAE labor market and analyze its ability to support the country’s growth agenda. The growth of the economy is closely related to its labor market. Hence, understanding it is even important to operationalize the country’s objective to increase productivity and expand its growth engines.

Over the past two decades, the UAE has proven able to build the labor force needed to support its fast-growing economy. The open migration policy allowed employers to swiftly source the skills needed in sectors like construction and trade, and gradually source talent across a broader range of sectors. Going forward, as the growth agenda includes objectives such as deepening diversification and transitioning towards a knowledge economy, the adequate supply of human capital will be an important determinant in the successful pursuit of the growth agenda. Understanding the trends of the country’s labor market, and the threats that could constrain its ability to support growth are thus important. The first section of this chapter describes salient characteristics of the UAE’s labor market. The second section explores the mechanisms that have led to such characteristics. The last section describes threats that may hamper the ability of the UAE’s labor market to support the country’s growth agenda.