The effects of worldwide to the UAE
A recession is a contraction phase within the business cycle. It is a process characterized by poor performance of the economy and a slowdown of economic activities mainly low consumption and high rates of unemployment. The effect of recession has been felt and experienced through economic variables such as the real GDP, wholesale retail sales, the level of industrial production, level of employment, real income and the level of inflation. Currently, several countries have shown indicators of the worldly spread recessionary trend. These indicators have shown significant decrease in real GDP, drastic reduction in liquidity level, devastating sector based inflation of both food and energy and slowdown of the world’s economic giant, America. Currently, the world is experiencing high food and energy prices. This has made the so called UAE to land in blames for this kind of scenario. UAE is a short form of United Arabs Emirate (Dominic, 2004, p.34).
This is an economy block of the Middle East countries, characterized by vibrant and diversified economic activities. Countries in the Middle East are believed to threaten the world’s economy through monopoly of energy products especially oil and petroleum products. These countries include; Saudi Arabia, Dubai, Iran, Egypt, Qatar, Kuwait, Afghanistan and Gaza. The industries which have made this area prominent and economically powerful are oil and its related products, defense related tools and equipments (submarines, tanks, fighters, guns and ammunitions, jets, missiles), agriculture (cotton, cattle, dairy products, textile and leather), baking and surgical instruments.
Currently, the world is facing an energy crisis. This is a kind of bottleneck in the energy supply resources to the world’s economy. There has been shortage of oil, electricity and other natural resources which can be used to manufacture oil. This situation has been described as an oil crisis, energy shortage, electricity shortage or petroleum crisis. Due to this economic stability found in UAE, it has been felt that the world’s economic recession will not and is not affecting them. This is not the case. The crisis will affect them in the following ways (Richard, 2006, p.56).
Since energy products are essentials that no country can survive without, UAE is propelling and brainstorming several nations to think alternative sources of energy. When this takes place, UAE will lose is customers, market share and these economies will collapse. The non-conventional oil sources may be in form of synthetic fuel which can be obtained from oil mines. Additionally, countries can turn to renewable commercialization of energy and also use of alternative propulsion. People may also decide to turn to local foods which do not require high energy in manufacturing. Many countries can also apply micro generation, use the available solar and thermal collectors or turn to green energy sources. Building and construction techniques that consume high power will be rejected and the simpler ones adopted. For example, to reduce heating costs potentiality, more insulation will be employed in several areas. To facilitate this, green building will be used widely because it employs locally available resources like water. All this will be geared towards turning down the massive use of energy resources exported from the UAE economic block, thus shutting their demand and market outlets (Raymond, 2005, p.78).
According to the current reputation of UAE, their tourism industry may go down with time. This is because as the whole world believes that UAE is the driving force towards recession, the world will device this kind of mechanism to hit back to these vibrant economies from the Middle East. Due to the crisis, tourists who travel to poor nation such as African nations will adopt the locally available items for their upkeep and restrain from the expensive items. This process will make the unpopular items to gain favor and popularity. Nuclear power plants will emerge. . As tourists deviate from visiting their countries, this will hit hard their GDP and their economies collectively. Since this economic block is silently killing the other economic blocks in the world, the rest of the world may decide to sideline them in world forums and unions such as games, economic unions and crisis interventions and disaster management.
During this era of recession, Middle East will use its monopoly powers to harvest from their exploitative business. This is the reason why even the very weak countries like Dubai are challenging super power countries in their economic portfolios. This will make most of the countries within, the UAE community to invest in such scope of exploitation. Other countries that do not have the power to exploit their resources will have to sell the deposits to more powerful countries. In the process, conflicts will occur between these countries and this may in turn lead to war. When the war takes place, it may turn to be the most fatal country to country attacks since many tools and experts of terrorism are found in the Middle East. Some of these conflicts are claimed to be political but most come up due to oil deposits. Therefore, as these countries enjoy their monopoly power, things may turn against them with time (Richard, 2006, p.81).
Recession refers to a lowered purchasing power of a consumer. A consumer can be an individual, an organization or even a country. Since this recession is being propelled by the UAE to the world economy, which is the consumer of their products, it then implies that the GDP of the world then goes down. The irony occurs where the UAE members are trying up and down to utilize the opportunity but the status of the buyers pocket is diminishing. Sales basically expand proportionately to the real GDP. If the real GDP is diminishing, then the amount of sales will also diminish. This is implies that whatever economic impacts the world is experiencing is going to hit back the source in someway. Since the purchasing power of the world is diminishing, the stock of these commodities will drag and push the economies backwards. For these countries to succeed in their mission, it is necessary to take care of the purchasing ability of its customers, the world (Peter, 2003, p.11).
Recession is also associated with unemployment. Unemployment translates to low output. This is because most of the production industries have been thrown out of balance by the economic difficulties and thus has to close down. These industries are the super consumers of UAE’s products. Closure of these industries means the demand or consumption of oil related products is reduced. Therefore encouraging recession is encouraging market loss.
What measures can the government take in the short-term to deal with this recession?
In the short run, the government can apply both fiscal and monetary policies to counteract inflation. The first thing the government should do is to cut down trade deficits. This arises from engaging in an international trade without taking into consideration comparative advantage. This should be done with a lot of care because trade surpluses also have the same effects with deficits. A call is therefore made to the government to avoid instabilities in the balance of payment accounts. For the sake of the whole economy, marginal tax rates should be cut down as well as pay roll reduction. This narrows down the government spending and the size of the budget. Although countries stabilize their economies with the necessary fiscal policies and provide opportunities for public investment, these policies should be made with a lot of care during recessions (Roy, 2005, p.90).
Recent recessions have put pressure on policymakers to reassess the countercyclical fiscal policy. Fiscal adjustments include change in government expenditures and in the amount of taxes. When recessions occur government increases spending due to programs related to unemployment compensation. It also faces deficits because tax revenues decline as employment and real income fall. When a country experiences budget surpluses it is necessary to maintain interest rates low to give room for more private investment and higher economic advancement.
To solve unemployment, laws that affect the labor policy should be implemented. They include unemployment compensation and payroll policies. In the process of dealing with inflation, zero bound rates should be avoided. This is because it minimizes the power of monetary policy to stimulate and entice demand. This is because as nominal interest approaches zero, any further decrease in inflation rate makes the real interest rate to rise again and therefore reducing demand and also encourage inflation. This will enable them focus on the automatic and quick stabilizers but not the discretionary actions. Monetary policies have since long ago been recommended for facing issues on output and inflation. Therefore, a country should apply monetary policies for short run stability and apply fiscal policy in the long run solution because it focuses on tax reform and also social security reform (Raymond, 2005, p.103).
What long-run strategies should the government adopt to deal with global output volatility?
The nature of the global volatility in products output is detrimental in causing various economic effects. This is often evident of the high levels of inflation and interest rates that accrue in the global economies. The prospective process of creating strategies that deal with the crisis should therefore involve a mixture of macroeconomic variables that ensures a constant redress in these problems.
As of necessity, an importance should be attached to the process of exposure and openness to international commercial trade. This is achieved through the creation of foreign trade integration between nations that will ultimately reduce the probable shocks that would affect them in cases of economic surges and low functions. Consequently, economies can adequately exchange economic variables that would create a strong economic model which is free from volatility shocks (Peter, 2003, p.16).
Under monetary policy, interest rates should be made very explicit and systematic to handle inflation and output instabilities. Monetary policy puts concern on rational expectations, price and wage rigidities, and assumption of purposiveness of people in price decisions, unemployment and the production process. Elsewhere, central banks should adjust interest rates for them to move aggregate demand in line with money supply. When these banks pay attention to inflation matters, they dwell much on interest rates adjustments to respond to developments in the economy. Strong models of monetary policies are also an essential component in reducing the levels of global inflation which is a constant effect of the consumption and production process (Roy, 2005, p.107).
However, in some cases the roles of the demand management policies may be interchanged. In some cases monetary policy is constrained not to create cyclical changes in times of fixed exchange rates coupled with capital mobility. World interest rates constrain the monetary policy such that it can not respond independently to the changes abroad. In this scenario, fiscal policy should be applied. After considering all the above effects of depression, it is wise for a nation or government to utilize monetary policies to check on short-term matters of inflation, and fiscal policies to check on long-term issues unless otherwise indicated.
Dominic Fredrick (2004) Economic Liberalism and Regionalization. Westport, CT, Praeger, pp.34
Peter Geroski (2003) Coping with the Recession. New York, National Institute Economic Review, pp.11, 16
Raymond Gregory (2005) Models of Internationalization and Economic Integrations. New York, Blackwell Publishers, pp.78, 103
Richard Abraham (2006) Principles of Macroeconomics. London, Routledge, pp.56, 81
Roy Allen (2005) Financial Crises and Recession in the Global Economy. London, Edward Elger, pp. 90, 107