Human Development Achievements of United Arab Emirates ...

Al Dar Research Journal for Sustainability 1(1), Nov. 2016.

http://aduc.ac.ae/adrjs.aspx

Human Development Achievements of United Arab Emirates: Implications on Sustainability of Economic Diversification Strategy Ghassan Ossman Al Dar University College, Dubai, UAE. Email: [email protected] [email protected]

Abstract The Human Development Achievements of the United Arab Emirates assesses human progress in the country based on the dimensions of knowledge, life expectancy, and a decent standard of living. The human development index is the geometric mean of the normalized indices for each of the three human development dimensions. This study utilizes the Human Development Index (HDI) of UAE as a comprehensive measure of human development and analyzes the relationships of its dimensions on the national diversification strategy of the country and its implications. The overall performance of the UAE economic diversification strategy over an eleven-year period from year 2005 to 2015 is represented by the Real GDP growth for non-oil industries in the country. The study is significant to policy makers and economists, through the new insights and concepts generated from examining these dimensions to create an overall score for the country’s level of economic and human developmentthat influence the success of the UAE economic diversification strategy which the country pursues for sustainability in the long-run. Correlation Analysis is used to determine the relationship of UAE HDI value with the strategy. Analysis of Variance calculates the variability levels of the dependent variable of economic diversification and determines a basis for significance tests. Multiple Regression Analysis determines how strongly each of the three independent variables (dimensions) influence the dependent variable, the strategy.A trend of the UAE human development progress and sustainability of the diversification strategy in the long-run is established by Time Series Analysis with lagged variables. Findings reveal that the HDI rating of UAE is very high due to the increasing trends in the three dimensions that are provento be significantly related to and singly or in combination strong predictors of the strategy which is also shown to be continuously providingconsiderable support to the growth of the non-oil industry and expected to contribute to sustainability of economic growth in the long-run.Furthermore, the human development achievements of UAE have significant implications to the successful implementation of the economic diversification model. It is recommended that continuous monitoring of the level of progress of the dimensions identified to have significant relationships with the strategy and shown to be strong predictors of the success of the economic diversification growth model, and conducting further research on other predictors not included in the study but likely to influence the success of the strategy. JEL Classifications: O1, O2, E, and F Key terms: Human Development, Economic Diversification, Economic Development, Sustainability.

1.

Introduction

The Human Development Achievements of the United Arab Emirates assesses human progress in the country based on the dimensions of knowledge, life expectancy, and a decent standard of living.Mean years of education of the adult population measures the knowledge level, long and healthy life is measured by life expectancy, and Gross National Income per capita which is expressed in international dollars and converted by purchasing power parity rates, measures the standard of living of the people in UAE. The human development index is the geometric mean of the normalized indices for each of the three human development dimensions. The UAE Human Development Index value of0.835for year 2014 puts the nation in a category of very high human development which ranks the country at 41 out of 188 territories in the world (Human Development Report 2015, pp. 1, 7). The increase of 15.1% from year 1990 results in 59% average annual increase. The great development of the average life expectancy of the citizens which increased to 76.8 years and HDI value increase of 29.3%, compared to the 2013 report, placed

10

OSSMAN

Human Development Achievements of UAE

the country in very high human development category among the countries all over the world. UAE adopts reforms that support economic diversification through enhancement of educational outcomes, development of infrastructures, strengthening businesses, and provision of increased company financing. The growth model of UAE aims to reduce exposure of the country to uncertainty of the world oil market, to put the country in place as a non-oil economy, andto provide sustainable development in the long-run. The non-oil industry sector grows at a nominal rate of 6.6% and real terms of 3.2% from 2007 to 2011, its contribution from the manufacturing, construction, and utilities form 21% contribution to the overall nominal GDP amounting to US$ 70 billion. Considered one of the most diversified economies in the GCC region, the service sector in the UAE economy accounts for 44% of the overall GDP in year 2011 (UAE Economic Insight 2012, p. 3).While the nonoil sector drove the UAE’s real GDP growth by 2.7% in year 2013, oil and gas share fell to 35% of GDP in 2013. This study utilizes the Human Development Index (HDI) of UAE as a comprehensive measure of human development and to analyze the relationships of its dimensions on the national diversification strategy of the country and its implications. Correlation Analysis determines the relationship of UAE HDI value over the period of year 2005 to 2015 with the national diversification strategy of the country. UAE’s Non-oil Real GDP Growth, which measures real annual economic growth of all industries except oil, from 2005 to 2015, is used to assess the overall performance of the economic diversification strategy during the eleven-year period (2005-2015). Product Moment Correlation analyzes linear relationship between human development variables and economic diversification strategy. Analysis of Variance calculates the variability levels of the dependent variable of economic diversification and determines a basis for significance tests. To determine how strongly each of the human development dimensions of knowledge, long and lasting life, and standard of living influence the dependent variable of the study, Multiple Regression Analysis is used. Time Series Analysis with lagged variables establishes a trend of human development progress and sustainability of the diversification strategy in the long term. With the strategy of economic diversification consideredvital in theachievement of UAE Vision 2021, in its objectives of reducing dependence on oil revenues, promoting job creation in the private sector, and sustained economic development, the researcher is motivated to uncover relationships, implications, influence, and sustainability of human development achievements in the success of the adoption of the economic growth model.

1.1

Statement of the Problem

This study determines the relationships between the human development dimensions and the UAE economic diversification strategy. It seeks to answer the following questions; 1. Are human development achievements of UAE significantly related to the country’s economic diversification strategy? 2. How strongly are the human development dimensions of knowledge, long and lasting life, and standard of living predict the level of UAE’seconomic diversification strategy? 3. Are there significant implications of human development achievements of UAE on the national diversification strategy?

1.2

Null Hypotheses

Ho1: Human development achievements of UAE are not significantly related to the national diversification strategy. Ho2: Each of the human development dimensions of knowledge, long and lasting life, and decent standard of living do not predict UAE’s economic diversification strategy. Ho2: There are no significant implications of human development achievements of UAE on the national diversification strategy.

1.3

Scope and Limitations

The study identifies implications of human development achievements of UAE on the success and sustainability of the country’s economic diversification strategy using the important dimensions of knowledge, long and lasting life, and decent standard of living. It identifies significant relationships 11

OSSMAN


of human development with economic diversification to non-oil industries and determines how strongly each of the HDI dimensions predicts the sustainability of diversifying from dependence on the oil industry. Other indicators of human development index not mentioned in the statement of the problem are not included in the study. For other indicators affecting the UAE economic diversification strategyare analyzed in the research studies of Ossman (2016, 2015, 2014, pp. 209212, 1-2, 49-51 respectively).

1.4

Significance of the Study

The study is deemed significant to policy makers and economists of United Arab Emirates, through the new insights and concepts generated by the current study, in examining three important criteria of knowledge, long and lasting life, and income levels to create an overall score for the country’s level of economic development. Findings of the study are useful in the determination ofhow the progress in human development influences the success of the diversification strategy which the country pursues for sustainability in the long-run. The present study serves as reference to students and academics in their discussions about human development, its effects onthe economic development of UAE, and the relevance of diversification strategy to non-oil industries. It contributes to the existing body of knowledge through new initiatives of the significant relationship of human progress to the economic diversification strategy.

1.5

Operational Definition of Terms in the Study

For better understanding of the terms used in this research, the followings are their operational and conceptual definitions; Adult Population: People aged 25 years and older. Decent Standard of Living: Gross National Income (GNI) per capita expressed in constant 2011 international dollars converted using purchasing power parity (PPPUS$) rates. Economic Diversification Strategy: An economic growth model adopted by UAE to supportthe nonoil economy, and to achieve sustainable growth in the long-run. Education Index: The mean years of schooling and expected years of schooling. Expected Years of Schooling: It is the number of years of schooling expected for a child at school entrance age. Gross National Income per Capita: It is the aggregate income generated by an economy through ownership of the factors of production and production activities, less the incomes used in the payment for the use of factors of production owned by nations of the world, and converted to US$ using power parity rates, divided by midyear population. Knowledge level: It refers to the average number of education years received by the adult population in a lifetime. Human Development Index (HDI): Measures the average achievement in human development dimensions of knowledge, long and healthy life, and a decent standard of living. Long and Healthy Life: It refers to life expectancy at birth, the number of years a newborn infant is expected to live. Mean Years of Schooling: Refers to the number of years of education received by people aged 25 or older.

2. 2.1

Review of Related Literature and Studies Human Development

The constitutional pillars of economic structure, income and knowledge were interrelated for the period 2000 to year 2005. The case of Latin America empirically confirms the hypothesis that knowledge, freedom, and economic structure are highly intercorrelated (Hartman 2014, p. 44). Positive effects of economic development are economic activities in people’s capabilities, expansion of social choices, improved learning processes, creation of more knowledge-intensive sectors, and innovations in infrastructures. Policies on economic diversification are crucial and can substantially contribute to human development. Governments expand their economies through support for human capabilities by focusing on health, skills enhancement, education, and efforts to achieve sustained progress. Human development must be measured in terms of provisions for long and lasting life, 12

OSSMAN


education, and opportunities for income, (Rwanda National Human Development Report 2014, p. 10). It should be designed for human capital development to enable the nation to attain sustainable human productivity. The GCC countries achieved huge progress in human development indices and infrastructures, high per capita incomes, transformed non-oil tradable industries into high value added sectors, (Cherif & Hasanov 2014, p. 3). There is significant increase in human development components of education, health, sanitation, and physical infrastructure. Human development achievement in UAE considers measurement of the three important indicators of education, human health, and gross national income, (Al Wasmi 2014, p. 1). The country aims to address vulnerabilities in its aim to share development progress to all the people, thereby achieving sustainable human development. With increased inequality in the previous years, education levels and life expectancy has increased. United Arab Emirates considers investment in human capital as a vital factor in the achievement of economic targets for full employment, higher productivity, and promotes greater UAE nationals participation in economic activities. The Human Development Programme of the country is aimed at improving standards in education system and creation of a skilled workforce to sustain provision of the required skills for diversification. An improvement in the HDI value for length of time that citizens stay in education is 13.3 years in 2014 compared to 12 years in 2011 and considers participation in higher education as vital in measuring the knowledge level for human progress, (The National Opinion 2014, p. 1). Human Development Values record an increase in life expectancy to 76.8 years in 2014 due to availability of quality medical facilities for the citizens in the country as well as in medical institutions in some parts of the world.Despite the decline in nominal per capita in all oil-exporting nations in 2015, United Arab Emirates occupies the highest category of capita GDP in purchasing power parity terms, that reflect a very high income level, to be ranked above all developed economies, (Issac 2016, p. 1). Economic strength of the country is assessed as very high, reflecting vibrant non-oil economy, very high income level, well-developed infrastructure, and using purchasing power parity terms as the main proxy for income level.

2.2

Economic Diversification Strategy

In implementing economic diversification strategy, key drivers needed to be pursued which included human and natural resources, infrastructure, trade and industrial policies, investments, macroeconomic stability, economic growth performance, competitive exchange rate, and responsible fiscal policy, (OECD/United Nations 2011, p. 14). Investments that supported economic activities such as human resources and infrastructure were vital, while maintaining traditional economic bases. Diversified economies have benefited from increased trade, high labor and capital productivity, reduced exposures to external shocks, and increased the human and social development. Promoting economic diversification entailed integration of human development policy with industrial policy (Hartman &Pyka 2011, pp. 1, 7). Sustained economic growth and development, which is the main goal of the diversification growth model achieved through expansion of human capabilities such as health and education, policies on employment and industry, and innovation. The GCC economies adopt policies to diversify and reduce reliance on oil. The economic diversification growth model achieved stable economic environment expansion in education, strengthened business environment, and liberalized trade and foreign investment. It is designed to boost the citizen human capital, developed new industries, and employment of high skilled labor. The growth model is useful in achieving rapid economic development and enhancement of social indicators, (Callen, Cherif, Hasanov, Hegazy, & Khandelwal 2014, p. 6). Human development index values increased with the rise in life expectancy, increase in the number of years of schooling. UAE’s economic diversification strategy is an economic growth model that concentrates on economic activities away from oil and gas, creating a favorable business environment that attracts foreign workers and investors, and considers non-oil industries and the service sector as economic growth drivers. Economic diversification was more difficult for a strong and concentrated resource, however, it provided funding for infrastructure investments, opportunities, institutions, and human capital, (Gelb 2011, p. 6). Such diversification is more positive when the stock of human capital is larger, low human capital limits diversification. Adoption of the economic diversification strategy resulted in UAE’S non-oil GDP growth of 3.7% in 2015 versus 4.8% in 2014, and contributed to the 13

OSSMAN


country’s gross domestic product increase of 3.1%, (HSBC 2016, p. 1). Abu Dhabi, which produces majority of UAE’s crude oil and the country’s largest contributor to the economy, is in the process of developing a resilient non-oil economy. Abu Dhabi Economic Vision 2030 targets development of non-oil sector, through improvement of efficiency and quality of the financial sector and labor market, encouragement of local enterprise, and innovation. Investment and spending patterns are transformed with a target increase of budget allocations for economic development that will increase non-oil GDP from 41% in 20015 to 64% in year 2030, (UAE Economic Insight 2012, p. 7).

2.3

Theoretical Framework of the Study

The study is based on the concept that human development emphasizes on people and their capabilities as vital for the assessment of the country development. Human Development Index summarizes the average achievement of three normalized dimensions of knowledge, life expectancy, and a decent standard of living that directly enhance human capabilities. Life expectancy at birth assesses the health dimension, mean years of schooling for adults and expected years of children’s schooling assess the education dimension, and standard of living measured by the gross national income per capita. Other indicators that create conditions for human development are participation in political and community life, environmental sustainability, human security and rights, and promoting equality and social justice. Figure 1 presents the dimensions of Human Development Index. Figure 1: Dimensions of Human Development Index Source: United Nations, Human Development Programme (2015), p. xii.

2.4.

Conceptual Framework of the Study

The study adopts a framework to visually represent the underlying concepts of the research study in order to prove therelationships of variables in the actual empirical investigation. The model represents a sequential and logical design of the propositions that provide a context in the explanation of observations, interpretation of the findings, and the development of a theory that can be useful in practice. As depicted in Figure 2, the conceptual structure assumes that three indicators (dimensions) of human development that are knowledge, long and lasting life, and decent standard of living have significant implications and impact on the success of the economic diversification model adopted by United Arab Emirates in its aim for sustained economic growth in the long-run. Changes in the level of human development indices eventually influence the achievement and sustainability of the growth 14

OSSMAN


model. Figure 2 presents the research paradigm of the study. Figure 2: Research Paradigm Independent Variables

Dependent Variable

Human Development Dimensions: 1. Knowledge 2. Long and Lasting Expectancy 3. Decent Standard of Living

Sustainability of the UAE Economic Diversification Strategy

2.5

Research Synthesis

This section presents information and evaluations of the previous related literature and studies which are helpful in establishing relationships between variables and setting of direction of the current investigation. Past research studies are assessed for the purpose of establishing evidence relative to the problems being addressed by the current study. Data of such literature and studies have been reviewed critically, highlighting on limitations and strengths, then compared and contrasted with the results of other related studies. The study of Hartman (2014, p. 44) confirmed positive relationship between human development and economic diversification that support sustainable economic growth and development of a nation. Government policies can substantially expand the economy through provision of support for human capabilities for increased human productivity. The findings of Hartman are supported by theRwanda National Human Development Report (2014, p. 10), which emphasizes the enhancement of human development components of education, long and lasting life, and income, if a nation seeks to achieve a continuing growth of its economy. Studies of Cherif & Hasanov (2014, pp. 3, 6) and Al Wasmi (2014, p. 1) focused on the human development progress and achievement of oil driven economies of the GCC countries including the UAE as a member nation of the Council. Significant increases in the level of human development indices of education, long and lasting life, and decent standard of living are seen in the Arab Gulf states and the contributions of the rising HDI indicators to the attainment of economic targets. Their studies provide evidence on the efforts of GCC countries in providing sufficient support for the improvement of standards, systems for human development, and the economic diversification strategy. Positive relationships among the variables of their studies are presented and found consistent with the current investigation. Human development progress and achievements, as key drivers of economic diversification strategy are highlighted in the Report of OECD United Nations (2011, p. 14) and the study of Hartman &Pyka (2011, pp. 1, 7), which promote investments in strengthening human capabilities in the areas of education, long and lasting life, and income. Callen et al. (2014, p. 6), proved the effectiveness of GCC economic policies focused in the enhancement of human capabilities to achieve success in their adopted economic growth model, as recorded in the region’s economic growth record in the past ten years. Findings of the current research proved to be consistent with the establishment of positive relationships between the human development variables and the economic diversification model. However, Gelb (2011, p. 6) raised some difficulties in setting conditions conducive to economic growth in the utilization of the diversification model but proved the possibilities of creating opportunities for success by focusing on enhancement of human capital. Growth of the non-oil industry of UAE indicates successful utilization of the diversification strategy, transforming spending patterns into allocations of budget to support sustainable economic growth and development. Success in increased non-oil GDP growth are evidenced by both the Report of HSBC Bank (2016, p. 1), and UAE Economic Insight (2012, pp. 3, 7) and the findings of the current research study. Findings of the current research are a new economic model for diversification in oil-driven economies, presenting a new paradigm that concentrates on the vital components of human development. Positive linear relationships established between human development and economic diversification and identification of the degree of how strongly the components of human development are predicting the successful implementation of the diversification model, make the 15

OSSMAN


current study both unique and a new concept added to the existing body of knowledge.

3. 3.1

Methodology Research Design

The study utilizes quantitative research in the collection of data and transforming them to numerical form in order to make statistical calculations and draw conclusions from the findings. It involves the systematic empirical investigation of variables in the study and their relationships. Hypotheses and mathematical models are formulated and employed to predict possible relationships between the human development dimensions and economic diversification strategy. Statistical analysis uncovers relationships and determinesthe degree of influence of each of the independent variables on the dependent variable. The use of the quantitative approach shows that validity of conclusions is dependent on the findings of the study.

3.2

Sample and Sampling Design

Data used in the study were obtained from documentary analysis of actual human development index values and percentage of the GDP growth of non-oil industries in United Arab Emirates over the period from 2005 to 2015.

3.3

Research Instruments and Techniques

This study utilizes the Human Development Index (HDI) of UAE to measure the human development achievement of UAE and to analyze the relationships of its dimensions on the economic diversification strategy of the country and its implications. Correlation Analysis determines the relationship of UAE HDI value over the period of year 2005 to 2015 with the national diversification strategy of the country. It quantifies the strength and direction of the linear association between the independent variables and one dependent variable. Percentage of GDP for non-oil industries assesses the overall performance of the diversification strategy during the eleven-year period. Linear association of economic diversification strategy and human development indices is measured by the Pearson Product Moment Correlation Coefficient of the statistical model. To determine how strongly each of the human development dimensions of knowledge, long and lasting life, and standard of living predict the dependent variable of the study, Multiple Regression Analysis is used, given economic diversification as the dependent variable and three human development indices as independent variables. Tests were conducted to ensure that the multiple regression model is satisfactory in order to predict the value of the dependent variable. Time Series Analysis with lagged variables establishes a trend of human development progress and sustainability of the economic diversification strategy in the long-term. It is used to model changes in human development variables and economic diversification over the period from year 2005 to 2015. Arithmetic mean measures the central tendency of data for the variables under investigation. The study utilized the following mathematical models: A. The Human Development Index (HDI) is the geometric mean of the three important dimensional human development indices:

[

]

B. Pearson Product Moment Correlation: analyzes linear relationship between human development variables and economic diversification strategy. The closer the value of r to zero, variations of data points around the line of best fit is greater. (∑ √[ ∑

)

(∑ )(∑ )

(∑ ) ][ ∑

(∑ ) ]

Where: 16

OSSMAN


N = number of paired scores ∑ XY = sum of the products of paired scores ∑X = sum of X squares ∑Y = sum of Y scores ∑ X² = sum of squared X scores ∑ Y² = sum if squared Y scores C. Multiple RegressionModel: quantifies the influence of three human development variables with economic diversification variable. Hypothesis test is conducted on the estimated slope coefficients to determine the significant contribution of independent variables in explaining variations in the economic diversification strategy. Where: = ith observation of the dependent variable Y, i = 1, 2, ….., n = independent variables, j = 1, 2, …., k = ith observation of the jth independent variable = intercept term = slope coefficient for each of the independent variables = error term for the ith observation n = number of observations k = number of independent variables D. Analysis of Variance: provides calculations on variability levels within a RegressionModel in forming a basis for tests of significance. The statistical tool is used to explain deviations of the dependent variable of economic diversification.

4. 4.1

Findings of the Study Human Development Achievements

The HDI value of 0.818 ranks United Arab Emirates in the category of very high human development in year 2012 (United Nations, Human Development Report, 2013, p. 2). There was a decrease of 2% between year 2005 and 2012. Figures 3, 4, and 5 review the UAE progress in each of the indicators for Human Development. From year 2005 to 2015, the life expectancy at birth increased by 8.5 years, mean years of schooling increased by 5.3 years. UAE GNI per capita decreased by 37.0%. Life expectancy and knowledge level exhibit an upward trend over the eleven-year period, while standard of living presents a downward trend from year 2005 and slowly moves up in the beginning of year 2015. Figure 3: HDI Component Indices Contribution toHDI Value (Year 2005 – 2015) Source: United Nations, Human Development Report, (2015) HDI Component (Knowledge Level)

10.5 10 9.5 9 8.5 8 7.5

17

OSSMAN


Figure 4: HDI Component Indices Contribution to HDI Value (Year 2005 – 2015) Source: United Nations, Human Development Report, (2015) HDI Component (Health)

HEALTH % 77.5 77 76.5 76 75.5 75 74.5

Figure 5: HDI Component Indices Contribution to HDI Value (Year 2005 – 2015) Source: United Nations, Human Development Report, (2015) HDI Component (Decent Standard of Living)

DECENT STD OF LIVING 100

0

4.2

Economic Diversification Strategy

The non-oil industry sector of UAE consisting of manufacturing, construction, electricity, water and gas, form 21% of GDP in year 2011 dominate the economy, contributing 62% of the total GDP, thereby achieving success in its economic diversification strategy. The construction industry is considered to be the largest sub-sectorand records significant growth in the same year, (Ossman 2015, p. 9). Supported by high prices of oil, Nominal GDP of UAE increased by 19%. Figure 6 presents the non-oil industry nominal GDP from 2007-2013. Figure 6: Non-oil Industry Nominal GDP in UAE (2007-2013), (US$ bn & % Share)

18

OSSMAN


Growth in the non-oil industry is moderate in 2016, is projected to grow until 2017 and continuously support the overall growth of the UAE GDP, (Al-Fakir &Kanafani 2016, p. 1). Industry gains are expected in the sectors of tourism, construction, and infrastructure expansions. With weaker growth of oil GDP and moderating non-oil growth, economic diversification strategy is seen to provide strong support to sustainable economic growth in the long-run.

4.3

Significant Relationship of Human Development Achievements and UAE Economic Diversification Strategy Table 1: Significant Relationship of HDI with Economic Diversification Strategy

Variable

N

Standard Mean Deviation

HDI

13

.8364

.02125

Pearson Correlation (r)

Sum of Cov Squares aria & Cross nce Products

Sig (2tailed)

Description

.522

.277

.047

Strong Positive Correlation

.231

Table 1 presents the relationship of human development achievements of UAE with economic diversification strategy and the strength of its relationship. The quantity of the Pearson Product Moment Correlation Coefficient (r) measures the strength and direction of the linear relationship between the two variables. The r value equivalent to 0.522 indicates strong positive relationship between human development and economic diversification strategy. Thus, changes in the level of UAE human development indicators are strongly correlated with changes in the level of success of the economic diversification strategy. The positive correlation between the two variables signifies that an increase or decrease in human development indices will lead to increase or decrease in the success of the implementation of the economic diversification model of UAE. This finding implies that success in the adoption of the economic diversification model requires progress in terms of human development indices of knowledge, long and lasting life, and decent standard of living as the two variables are seen to move positively together. The UAE GDP growth rate has satisfactory performance despite severe global economic crisis in the previous years. However, the country witnessed growth in the beginning of year 2012 as diversification has moderate performance considering the economy has high concentration in the oil sector. Non-oil industry was seen to have structural weaknesses due to labor and knowledge inefficiencies, (Schilin 2013, p. 228). Adoption of the economic diversification strategy as economic growth model that encompasses progress in human development, findings of the study show achievement of the economic transformation into a diversified knowledge economy. The ρ value of 0.047, less than 5% significance level rejects the null hypothesis of no significant relationship between the variables. There are statistically significant correlations between the human development and economic diversification variables. Therefore, increase or decrease in human development level significantlyresults in an increase or decrease in the economic diversification model. The sum of squares value of 0.277 reveals the amount of variation present in the dependent variable of economic diversification and how much data set vary around the mean. The sum of squares value close to zero indicates good fit of the data in the correlation model. The covariance value of 0.231 shows positive direction of the linear relationship between the two variables, with human development and economic diversification variables tend to increase or decrease together.

4.4

Human Development Dimensions Significantly Predict UAE’s Economic Diversification Strategy Table 2: Regression Model Summary for Significant Predictors of Economic Diversification Strategy

19

OSSMAN


Regression Model Summary Change Statistics Adjust Std. Error Mod R ed R of the R Square F df df el R Square Square Estimate Change Change 1 2 1 .820 .673 .580 1.9 .230 .894 3 9 a. Predictors: (Constant), SL, KL, HL b. Dependent Variable: NGG

Sig. F Change .481

Durbin Watson 1.920

As presented in Table 2 of the Regression Model Summary, R² value of 0.673measures the proportion of variation in the economic diversification variable explained by variations in human development indicators. It captures 67.3% deviations in the dependent variable explained by the regression model, a measure of the extent to which total variations of economic diversification variable is explained by the model. The high value of R² below 1.0 suggests that the regression model explains well the variations in the human development variables. R² value of 0.673 less than 0.75 indicates the absence of multicollinearity. Standard Error of Estimate of 1.9, measuring dispersion of the economic diversification variable around its mean is very low compared to ten percent of the mean of its predicted value. This value assesses the accuracy or precision of the predictions, approximates 95% prediction interval, with 95% of observations fall within ± 2 standard error of the regression from the fitted line, almost matching the prediction interval. The Durbin-Watson test statistic was used to detect relationship between values separated from each other through a given time lag in prediction errors from the regression analysis. The value of d equivalent to 1.920 assumes the absence of first order auto-correlation in the set of data, with Durbin-Watson statistic in between the critical values of 1.5 and 2.5. Table 3: Analysis of Variance for Significance of Regression Model Analysis of Variance Model Sum of Squares df Mean Square 1 Regression 922.038 3 857.346 Residual 123.985 9 28.221 Total 1045.056 12 a. Dependent Variable: NGG b. Predictors: (Constant), SL, KL, HL

F 30.367

Sig. .0481

Table 3 for Analysis of Variance shows the significance of the regression model to explain deviations in the economic diversification variable and that the independent variables of human development statistically significantly predict the dependent variable of economic diversification strategy. The value of ρ equivalent to 0.0481 less than 0.05, shows model fit of the regression data, with the model, significant at 95%, thus, the model is accepted and R² is significantly different from zero. The F-ratio in the ANOVA test shows fit of the regression model for the data. The F value was used to determine statistical significant predictive capability of the model as a whole. F-test value of 30.367, rejects the null hypothesis of no linear relationship between the human development variables with the dependent variable and the model has predictive capability where all regression coefficients are not equal to zero. The test is highly significant, with R² not equal to zero, there is linear relationship between independent variables and the economic diversification variable in the model, with 95% confidence of the ability of the regression model to explain the dependent variable. Table 4: Regression Coefficients of Human Development Indices Reliability of Regression Coefficients

20

OSSMAN Unstandardized Coefficients Model Std. B Error (Constant) 1.397 0.983 KL 1.415 1.749 1 HL 0.138 2.255 SL 0.067 0.083 a. Dependent Variable: NGG

Human Development Achievements of UAE Regression Coefficients 95.0% Confidence Interval for B t Sig. Lower Upper Bound Bound 0.598 0.055 1.13 1.664 0.809 0.0439 0.95 1.88 0.505 0.022 0.026 0.25 0.799 0.045 0.05 0.084

Collinearity Statistics Tolerance

VIF

0.657 0.612 0.56

1.522 1.633 1.785

Table 4 presents data on how strongly the independent variables of knowledge, long and lasting life, and decent standard of living predict the dependent variable of economic diversification strategy and the reliability of individual beta coefficients. It describes the statistical relationship between each of the predictor human development variables and the response economic diversification variable. The ρ values of 0.0439, 0.022, and 0.045, for knowledge, long and lasting life, and decent standard of living, respectively, at 0.05 significance level, reveal that all human development variables strongly predict the dependent variable. The low ρ values provide the strong evidence of the rejection of the null hypotheses for the three independent variables. This finding further implies that changes in the level of knowledge, long and lasting life, and decent standard of living will influence the level of effectiveness of the economic diversification strategy. Findings show that each or all of the human development components can predict economic diversification variable and they statistically significantly predict and contribute to the successful adoption and implementation of the growth model of UAE. Achievement of economic growth is not only concerned on output expansion but needs emphasis on transformation of the economy through human development, (Tanzania Human Development Report 2014, p. 1). The economy requires structural change in industries and demographic transition of the different components of human development. The process needs consideration of the creation of employment opportunities, expanding capabilities of the people, and income growth. The ρ values of 0.043, 0.022, 0.045, less than 0.05, hence, the estimates B for unstandardized coefficients are true, reliable, and statistically significant, with level of confidence at 95%. Unstandardized coefficients presented in Table 4 reveal the degree of how the dependent variable varies with one component of the human development indices when all other indicators are held constant. The coefficients not equivalent to zero prove the statistical significance of the independent variables of human development. The ρ values of 0.043, 0.022, 0.045, for human development indicators, reveal rejection of the null hypotheses, and that knowledge, health level, and decent standard of living, are predictors of the dependent variable that is the economic diversification model adopted by UAE to achieve sustainable economic growth in the long-term. The ρ values further show that the testing of the null hypotheses for the three independent variables result in coefficients statistically significantly different to 0. Predictors’ values are related to changes in the response variable. The critical t value for the 95% confidence interval represents the value that is exceeded with 0.025 probability in the t distribution. T values of 0.809, 0.505, and 0.799 for knowledge, health, and decent standard of living, respectively, is less than the critical value of 1.65, prove that the coefficient is greater than 0. The upper and lower values provide the 95% confidence limits for the beta estimates and accepted within this degree of confidence. Values for Variance Inflation Factor (VIF) shows how much variances are inflated by multicollinearity which occurs when independent variables are not independent from each other. Due to collinearity that can exist in the regressor human development variables, the variance inflation factors were used to measure the inflation in the variances of the parameter estimates. The VIF values of 1.522, 1.633, 1.785, for knowledge, health, and decent standard of living, respectively, less than 10, indicates the absence of potential significant multicollinearity between the independent variables of human development. Regression of the 3 human development indices has R² values less than 90%. 21

OSSMAN


Tolerance is a collinearity diagnostic factor determined in the study to identify multicollinearity in the explanatory variables. The small values of 0.657, 0.612, and 0.56 for knowledge, health, and decent standard of living, respectively, greater than 0.1 suggest significance and the absence of multicollinearity. Table 5: Regression Coefficient of Human Development Variable and its Relationship with Economic Diversification Strategy

Model 1 (Constant) HDI

Unstandardized Coefficients Std. B Error -46.866

16.424

61.434

19.632

Standardized Coefficients t

Sig.

95.0% Confidence Interval for B Lower Upper Bound Bound

-2.853

.014

-83.016

-10.716

1.129

.010

18.224

104.644

Beta .686

As presented in Table 5, overall human development variable has ρ value of 0.010, which is significant at both 0.01 and 0.05 significance level. The null hypothesis is rejected. Human development achievements of UAE strongly predict the variable of economic diversification strategy. This implies the changes in the level of human development in the country are related and associated with the changes in the effective implementation of the economic diversification model. The ρ value of 0.010 for the overall human development variable significantly predicts the economic diversification strategy of the country. High quality economic growth requires universal access to education, people empowerment, and healthy citizens, (Tanzania Human Development Report 2014, p. 16). Nations that achieved the highest rate of economic growth strengthen their human development programs through social policy. This will further require increase in public expenditures in human development and the creation of conditions necessary for human development. Table 6: Collinearity Diagnostics

Model Eigenvalue Condition Index 1 1 3.967 1.000 2 .75 2.9 3 .802 4.95 a. Dependent Variable: NGG

(Constant) .00 .00 .00

Variance Proportions KL HL .00 .00 .00 .00 .79 .00

SL .00 .58 .07

The study conducted multicollinearity tests to detect high correlation of any of the independent variables with other independent variables. Multicollinearity test using condition index values determinesthe presence of highly linearly correlated independent variables in the multiple regression model and collinearity of the combinations of independent variables in the data set. Collinearity test detects linear association between two explanatory variables while multicollinearity test determines highly linearly related two or more independent variables in the multiple regression model. Condition Index values presented in Table 6, less than 30 is acceptable and indicate absence of multicollinearity in the regression variables which can result in bias of estimates and problems in interpretation of regression results. With all condition indices of human development variables less than 0.90 in the Variance Proportion table, Condition Index test reveal no collinearity in the regression data. The Condition Index values presented in the table represent the square root of the ratio of the largest eigenvalue to each individual eigenvalue. Eigenvalue of the principle component analysis of predictor variables presented in Table 6 indicates the maximum amount of variance of the regressed variables accounted for with the regression model. Eigenvalues are the maximum variances of independent variables not correlated 22

OSSMAN


with each other. Eigenvalues of 3.967, 0.75, and 0.802 for the human development variables greater than zero reveal low indication of multicollinearity. Table 7: Residuals Statistics for Autocorrelation Test

Predicted Value Residual Std. Predicted Value Std. Residual

Residuals Statistics Minimum Maximum Mean 1.9356 6.5301 4.0231

-6.34397 -1.540 -2.213 a. Dependent Variable: NGG

3.79203 1.850 1.323

.00000 .000 .000

Std. Deviation 1.35518

N 13

2.48302 1.000 .866

13 13 13

To identify errors in the time series data with lagged variables that can exhibit serial correlation, autocorrelation test was conducted. Multiple regression analysis requires the absence of autocorrelation in the data, as it can occur when residuals are not independent from each other, and that the value of y(x+1) is not independent from y(x) value. The study assessed the appropriateness of the regression model through definitions of residual and examination of residual plots. The residuals described in Table 7 and Figure 7, present the residual or the amount of difference between the observed and predicted values of the economic diversification variable. The Durbin-Watson test previously conducted proved that residuals are not linearly correlated with d values ranging from 1.5 ˂ d ˂ 2.5, showing no autocorrelation in the data. Figure 7 presents the residual plot for the dependent variable which shows a fairly random pattern with positive residual indicating a good fit for a linear model. With all the points of the residual plot randomly dispersed around the horizontal axis, the multiple regression model used is appropriate for the set of data. Examination of the underlying statistical assumptions of the residual, independence of variables, constant variance, and normality of the distribution, the residuals randomly distributed around zero show that all assumptions hold true for the regression model. The decreasing trend of the distribution indicates error variance that decreases with the dependent variable. Figure 7: Residual Plot for Economic Diversification Variable

4.5

Significant Implications of Human Development Achievements of UAE on the Economic Diversification Strategy

As presented in Figure 8, UAE is experiencing a growing non-oil economy supported by the high growth of human development progress over the eleven-year period (2005-2015), and projected 23

OSSMAN


to continue in the long-term thereafter. The trend shows the success of UAE in transforming their oildriven developments into sustainable non-oil economy. Human capital dimensions are considered vital in their diversification efforts and structural transformations of the oil economy, (Ewers 2016, pp. 236-237). Labor and human capital augment the diversification process and structural change. Economic development efforts of UAE and the Gulf States continually give emphasis on labor force enhancement through human development policies and strategies to create new sources of economic growth that will achieve sustainable and less oil dependent economy. The study of Elhiraika and Hamed (2002, p. 360) confirmed the strong positive effects of human development to the GDP growth of UAE, as an oil-driven economy. Examining UAE’s economic performance in the study, the dominance of labor in terms of human development progress to the attainment of increased economic growth was revealed. Investment for human capital has been considered as key driver in the pursuit of sustained economic growth and development in the country. In terms of economic diversification, Figure 8 shows an upward trend in the progress of the diversification model as UAE is seen to be successful in the development of its non-oil industries, specifically, its tourism, manufacturing, international airline hubs, real estate, construction, retail, and transportation industries. With surpluses in oil incomes invested in non-oil industries, the country has achieved 6% increase in GDP, allowing UAE to achieve sustainability in economic growth, (United Arab Emirates Economic Outlook, 2016). There are additional implications of human development achievements on economic diversification strategy. First, continuous enhancement of the quality and systems of education, health and income leads to achievement of success in the economic diversification model that supports sustainability of the country’s overall economic growth and development. Second, economic productivity increases with improvement in the level of human development indicators of knowledge, health, and income. Last, growth of non-oil industry is dependent on the success of the implementation of the economic diversification model. Figure 8: Annual Growth of HDI with Non-oil Industry For Eleven-Year Period (2005-2015) with Projections (2016-2017) in UAE

GROWTH OF NON-OIL INDUSTRIES HUM DEV ACHIEVEMENTS 10 5 0 2005 2006

5.

2007 2008

2009 2010 2011 2012 2013 2014 2015 2016

2017

Conclusions

The HDI rating of United Arab Emirates is in the category of very high human development with increasing trends in knowledge, long and lasting life, and decent standard of living. The time series analysis with lagged explanatory variables of human development indices have predictive power for future success of the economic diversification model in UAE at long horizons and continuously improve at longer horizons. Human development indices of knowledge, long and lasting 24

OSSMAN


life, and decent standard of living in the United Arab Emirates have significant explanatory power for the eleven-year period (2005-2015) with all ρ values less than 0.05, supporting the theory that human development variables have predictive power for long-run success of the economic diversification strategy. The effect that HDI values can increase may not result in proportionate increase of economic diversification growth immediately, over time, justifies appropriateness of lagged explanatory human development variables. The economic diversification strategy of UAE is continuously providing strong support to the growth of the non-oil industry and expected to contribute to sustainability of economic growth in the long-run. The high positive absolute value of the correlation coefficient reveal strong linear relationship of human development variables with successful utilization of the economic diversification model, which is the measure used in the growth of UAE non-oil industry. The two variables tend to increase together and the line representing the correlation slopes upward. Human development achievements indicators of knowledge, long and lasting life, and decent standard of living is significantly related to the economic diversification strategy of UAE. The strength of association between human development indices and economic diversification is high and that correlation coefficient signifies highly significantly different from zero, with variations in the economic diversification variables explained by HDI indices. The probability value less that 0.05 shows statistically significant correlation of human development variables and economic diversification, with 5% probability of obtaining correlation coefficient by chance, proves the presence of a relationship between the two variables. The HDI components of knowledge, long and lasting life, and decent standard of living are strong predictors of the economic diversification strategy. Human development achievements of UAE have significant implications to the success of the implementation of the economic diversification model. The low ρ value less than 0.01 and 0.05 in the regression model is a meaningful outcome showing positive relationship in the changes of human development indices with changes in the economic diversification model or growth of the non-oil industry in UAE.

6.

Recommendations

Continuous monitoring of the level of progress of human development indicators, of knowledge, long and lasting life, and decent standard of living, identified to have significant relationships with the economic diversification strategy and shown to be strong predictors of the success of the economic diversification growth model. Moreover, conducting further research on other human development indicators not included in the current investigation but are likely to influence the success of the economic diversification strategy.

List of References 1) Al Fakir, D., &Kanafani, N. (2016, July 26). “UAE: resilient non-oil economy to support overall GDP growth,” Economic Update, Kuwait: NBK Economic Research, pp. 1-6. http://www.kuwait.nbk.com/ 2) Al Wasmi, N. (2014, July 24). “UAE performs well in Human Development Report,” Abu Dhabi, UAE: The National, p. 1. http://www.thenational.ae/uae/uae-performs-well-in-human-development-report 3) Callen, I., Cherif, R., Hasanov, F., Hegazy, A., &Khandelwal, P. (2014, December). “Economic diversification in the GCC: past, present, and future,” pp. 1-32, Washington DC, USA: International Monetary Fund. e-ISBN: 978-1498392297. https://www.imf.org/external/pubs/cat/longres.aspx?sk=42531.0 4) Cherif, R., &Hasanov, F. (2014, December). “Soaring of the Gulf falcons: diversification in the GCC oil exporters in seven propositions.” pp. 1-54, Washington DC, USA: International Monetary Fund, Working Paper, p-ISBN: 978-1498352754. https://www.imf.org/external/pubs/ft/wp/2014/wp14177.pdf 5) Elhiraika, A. B., &Hamed, A. H. (2002). “Explaining growth in an oil-dependent economy: the case of United Arab Emirates” in Nugent, J. B., &Pesaran, M. H. (Eds.) (2006). Contributions to Economic Analysis, Ch. 12, pp. 359-383, Elsevier, p-ISBN: 978-0-444-52240-5. 6) Ewers, M. C. (2016, September). “Oil, Human Capital and Diversification: The Challenge of Transition in the UAE and the Arab Gulf States,” The Geographical Journal. Vol. 182(3), pp. 25

OSSMAN


236-250, Texas, USA: Wiley Online Library. http://onlinelibrary.wiley.com/doi/10.1111/geoj.12138/ 7) Gelb, A. (2011). “Economic diversification on resource rich countries. Building human capital,” Center for Global Development. World Bank Press, Oil Division, Washington DC, USA, pp. 123. 8) Issac, J. (2016, June 16). UAE’s per capita stays high, Khaleej Times. p. 1. http://www.khaleejtimes.com/uaes-per-capita-gdp-stays-high 9) Hartman, D. (2014). Economic Complexity and Human Development. (How Economic Development and Social Networks Affect Human Agency and Welfare), Routledge Studies in Development Economy, London & New York: Taylor & Francis Group, Sunrise Setting Ltd., pISBN: 970-415-85891-5, e-ISBN: 978-0-203-72208-4. 10) Hartman, D., &Pyka, A. (2011). “Innovation, Economic Diversification and Human Development. Technology, Economics, and Finance,” Institute of Economics, University of Hohenheim, pp. 1-19. 11) HSBC Bank Middle East Ltd., Abu Dhabi, UAE (2016, April 7). "Non-oil still the strong link in Abu Dhabi’s economic chain,” HSBC Global Connections, p. 1. https://globalconnections.hsbc.com/uae/ 12) OECD/United Nations (2011). Economic diversification in Africa: a review of selected countries. OECD Publishing, pp. 1-87, p-ISBN: 978-9264096233, e-ISBN: 9264096233. http://www.un.org/en/africa/osaa/pdf/pubs/2011economicdiversification.pd 13) Ossman, G. (2016, May). “Economic Indicators in United Arab Emirates: Assessing National Growth for Sustainability of Economic Performance,” Advances in Economics and Business, Vol. 4(5), pp. 208-221, California, USA: Horizon Research Publishing Corporation, p-ISSN: 23315058, e-ISBN: 2331-5075. http://www.hrpub.org/download/20160530/AEB2-11806127.pdf 14) Ossman, G. (2015, October). “Profitability Variations Across Construction Firms in the UAE: Assessing Industry Contributions to National Economic Growth,” Annual Switzerland Business Research Conference, Geneva, Switzerland, Paper ID 235, pp. 1-18, Victoria, Australia: World Business Institute, e-ISBN: 978-1-922069-86-3. http://www.wbiworldconpro.com/uploads/switzerland-conference2015/1443693589.pdf 15) Ossman, G. (2014, November). “Effects of Unemployment Rate Fluctuations on Exchange, Interest and Inflation Rates in the Kingdom of Saudi Arabia, State of Qatar, and United Arab Emirates,”American International Journal of Research in Humanities, Arts and Social Sciences (AIJRHASS), Issue 8, pp. 35-58, Georgia, USA: International Association of Scientific Innovation & Research (IASIR), p-ISSN: 2328-3734, e-ISSN: 2328-3696. http://iasir.net/AIJRHASSpapers/AIJRHASS14-607.pdf 16) Rwanda 2014 National Development Report, Rwanda (2015, March). “Decentralization and human development: accelerating socio economic transformation and sustaining accountable governance,” Rwanda, United Nations Development Programme, pp. 1-196. http://www.undp.org/content/dam/rwanda/img/pubcovers/UNDP_RW_March%2031.pdf. 17) Schilin, D. (2013, August). “Diversification and Development of the United Arab Emirates’ Economy,” Journal of Applied Economic Sciences. Vol. VIII (2(24)), pp. 228-239, Dolj, Romania: European Research Center of Managerial Studies in Business Administration. http://www.cesmaa.eu/journals/jaes/index.php 18) Tanzania Human Development Report (2014). “Economic transformation for human development,” United Nations Development Program, Dar es Salaam, Tanzania: Economic and Social Research Foundation, pp. 1-128, p-ISBN: 978-9987-770-007. http://www.esrf.or.tz; http://www.thdr.or.tz. 19) The National Opinion, Abu Dhabi, UAE (2014, July 27). “The UAE soars but must strive for even better,” p. 1. http://www.thenational.ae/opinion/editorial/the-uae-soars-but-must-strive-for-even-better 20) UAE Economic Insight (2012). “The Abu Dhabi economic vision 2030 has been developed around four key pillars,” Doha, Qatar: QNB Group International Network, Qatar National Bank, SAQ. pp. 1-55. http://qnb.com.qa. 26

OSSMAN


21) United Arab Emirates Economic Outlook (2016). p. 1. http://pubdocs.worldbank.org/en/141211460471550773/UAE-MEM-eng.pdf 22) United Nations Development Programme, New York, USA (2015). “Work for human development,” Human Development Report (2015), pp. 1-288, p-ISBN: 978-92-1-126398, eISBN: 978-92-1-126398-5. 23) United Nations Development Programme, New York, USA (2013). “The rise of the south: human progress in diverse world,” Human Development Report (2013), pp. 1-216, p-ISBN: 978-92-1126340-4. http://hdr.undp.org/sites/default/files/2015_human_development_report.pdf

27