How the UAE is moving towards an AI-driven, knowledge-based economy

The UAE has been making waves recently in the technology world. A $1.5 billion deal between American tech giant Microsoft and Abu Dhabi’s AI champion, G42, is a bold move to boost the UAE’s technology clout, especially in artificial intelligence.

With its vast oil wealth and energy transition, the UAE has certainly set its sights on becoming a global tech superpower. But can the country pull off this feat, and what might this mean for the region and the global economy?

From oil to algorithms

The UAE’s devotion to AI is evident in its decision to appoint Omar Sultan Al Olama as the world’s first Minister of AI, in 2017. This move signalled the UAE’s push to embrace technology as a key growth driver for its economy.

This reflected in the Gulf state's investments and fifth place international ranking for AI competitiveness last week in the Global Vibrancy Tool 2024 report conducted. The UAE followed the US, China, the UK and India in the Stanford Institute for Human-Centered AI study, and placed ahead of countries like France, South Korea, Germany, and Japan.

The top-down approach to AI regulation could be a big asset. A centralised approach allows the UAE to implement AI regulations more quickly and consistently.

The UAE’s ability to enforce data governance from a national level may give it an edge in attracting companies and talent seeking a stable environment for AI development.

The nation's wealth and investment ability is a big driver behind its AI development. With some $1.4 trillion in assets collectively managed by its top sovereign wealth funds, the UAE leads the Gulf region in terms of financial firepower. These funds have accelerated investments in technology, helping to diversify the UAE’s economy and reduce reliance on oil.

For now, the nation’s energy investments remain heavily influenced by hydrocarbons. But undoubtedly, the UAE aims to transition to a knowledge-based economy, one driven by digital services, including AI.

In that transition, the nation faces competition from a number of countries, who are also pouring resources into their AI and technology sectors.

Saudi Arabia is planning “Project Transcendence”, an endeavour designed to make the kingdom a major AI hub.

Backed by up to $100 billion from the powerful Public Investment Fund (PIF), the plan is to build up the infrastructure, back homegrown AI startups, and pull in global tech heavyweights to set up shop. The PIF has already struck a partnership with Google, focusing on Arabic language AI models.

The kingdom's push for AI could compete with the UAE's ambitions as they both seek to attract the private capital and talent they need in a highly competitive sector.

To sustain growth, the UAE needs to solicit more private capital through attractive fiscal policies and a stronger capital market. Although the nation has a promising IPO pipeline, higher borrowing costs have contributed to a slowdown in private sector investments, with government spending expected to offset this decline.

The UAE’s push towards AI is part of a broader strategy of economic diversification, but strong population growth and company formation can put pressure on a country’s infrastructure.

For example, Dubai’s population surged by more than 25,700 in the first quarter of 2024, bringing the total to nearly 3.7 million residents. Additionally, the city welcomed more than 34,000 new companies as members of the Dubai Chamber of Commerce in the first half of the year, reflecting a 5 per cent year-over-year growth.

This influx of talent and businesses that are helping build the country's tech and knowledge economy highlights the need for expansion and upgrades to infrastructure, particularly transportation.

The government has already announced a review of infrastructure capacity and investments. In March Abu Dhabi approved 144 projects across the emirate with a budget of $17.97 billion to enhance housing, education, tourism and more. This is in addition to another more than $10 billion infrastructure investment project the following month.

In October, Dubai revealed its largest government budget at $74 billion, of which half will be spent on infrastructure such as roads, bridges, transportation systems and renewable energy facilities.

Gulf’s new frontier

If the UAE succeeds in becoming a global AI superpower, the implications for the Gulf region could be huge.

It could lead to both collaboration and competition among neighbouring countries, all of which are seeking to diversify their economies through technology. Saudi Arabia, Qatar and Kuwait have all made AI an economic priority, and the UAE’s success could set a precedent for other resource-rich nations looking to lead in technology.

The UAE’s ability to create and retain AI-driven unicorns – companies valued at over $1 billion – will be a key measure of its success. The country has set a stretching target of becoming home to 20 unicorns by 2031.

Other than G42, other prominent unicorns in the UAE include Vista Global, which uses AI in the aerospace sector.

Despite the UAE’s progress in building a vibrant tech ecosystem, there are still questions about how data is collected, stored and used. To build trust with international companies and investors, countries and firms need to ensure that their data practices are transparent and secure.

European countries like Estonia have shown how technology can be harnessed for the public good, offering lessons for the UAE in building a digital society that is trusted. The country’s journey will be closely watched by other nations looking to diversify their economies, as the race to lead in AI heats up.