Assessing UAE's oil dependence: an optimal control approach

Purpose – The main purpose of this paper is to understand the impact on the United Arab Emirates (UAE) economy of the objective of reducing its dependence on oil, trying to achieve the Gulf Cooperation Council (GCC) fiscal convergence criterion and the inevitable depletion of oil resources. Design/methodology/approach – An 18 equation compact macro‐econometric model is constructed and is evaluated and calibrated employing dynamic simulation techniques. Optimal control techniques are used to analyze the economic impact of the three objectives listed above. Findings – Each of the optimal control experiments that has been carried out has served to reinforce the fact that the UAE is still critically dependent on oil. An increase in the share of the non‐oil sector, adhering to the GCC fiscal criterion and any reduction in oil output production will affect government finances adversely. Research limitations/implications – The macro‐econometric model developed is for the UAE and further research is needed to see if the conclusions can be generalized to the other oil exporting countries. Practical implications – The estimated macro‐econometric model and the optimal control experiments indicate to the policy makers the need to continue the diversification of the economy and for government to actively explore and enhance non‐hydrocarbon sources of revenue. Originality/value – This paper develops a compact macro‐econometric model of the UAE and uses optimal control techniques which go well beyond the standard simulation techniques and the routine counter‐factual experiments to understand the working of the economy.