Her Excellency Sheikha Lubna Al Qasimi, minister of economy of the United Arab Emirates (UAE) since 2004, is one of the most prominent female politicians in the Middle East.

Unlike most of her peers of either sex both inside and outside the region, she arrived at her current post after a business career that included spells as a senior manager—in her case, in the information systems department of the Dubai Ports Authority (DPA) and at Tejari, the Middle East online business-to-business marketplace, where she served as chief executive officer.

Sheikha Lubna, a niece of the ruler of the emirate Sharjah, operates within a UAE political structure that divides power between the federal government, which is responsible (through the Federal Council of Ministers) for setting a broad policy framework and sanctioning federal legislation, and the seven independent emirates—Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah, and Umm Al-Qaiwain. In her cabinet role she has steered the UAE along a course of economic modernization, diversification into new oil- and non-oil-based manufacturing and service activities, and encouragement of the private sector. In her concurrent capacity as chairman of the Emirates Securities and Commodities Authority (ESCA), she has been at the forefront of efforts to reform capital markets through better governance and regulatory guidelines.

Confirmation that the UAE is consolidating its "liberal" economic credentials came most recently with the publication of the 2006 Global Competitiveness Index, from the Geneva-based World Economic Forum. The UAE ranked second among Arab countries.

Sheikha Lubna met McKinsey partners Achmed Al-Shahrabani and Kito de Boer at her office in Abu Dhabi. In this conversation she discusses investment trends in the region, as well as stock market reform and the challenges presented by the local labor market.

The Quarterly: How effectively do you think the UAE, and the region generally, is spending its surplus during the current oil boom?

Sheikha Lubna: The crude oil and natural-gas sector in the UAE has increased from AED 92 billion¹ in 2003 to almost double that figure [AED 173 billion] in 2005. We've gone through this cycle with the oil price before, of course—but what's happening this time round is different. First of all, we are investing in ourselves by rebuilding our infrastructure so that we can create an environment for economic growth and attract outside investment. Second, we are collaborating more as an economic bloc so that money from the Emirates, for instance, is supporting joint ventures with Qatar, Saudi Arabia, and Oman. Third, we are seeing GCC money invested in major projects in the wider Middle East and beyond—in Egypt, Morocco, Jordan, and Pakistan, for example. In the '70s and '80s the typical investment was a financial one and was in the United States or Europe; today there is a more even distribution.

The Quarterly: To what do you attribute the change?

Sheikha Lubna: As I see it, 9/11 was an economic turning point. Anxiety about traveling, freezing assets, and the extra scrutiny of people entering the United States made a lot of businessmen here more inclined to invest at home. At the same time they gained confidence in themselves and a belief that we could advance ourselves. One result has been the emergence of companies like DP World and Emirates airlines, which are successfully exporting their homegrown competencies and developing branded services that are recognized and admired internationally.

The Quarterly: It's not just Gulf and UAE capital returning to the region, though, is it? Foreign direct investment trends are looking positive too.

Sheikha Lubna: FDI is very important. The UAE government believes that FDI involves a transfer of knowledge and expertise in areas that are not the country's core competencies. Money from outside comes with new ideas. Moreover, FDI sustains investor confidence, creates employment, and opens new market opportunities due to the creation of new networks. It also makes for better rules and regulations. The money won't come if we have corruption or if we lack transparency. The International Monetary Fund [IMF] estimates that net FDI inflows reached about $11 billion in 2005.

The Ministry of Economy has the mandate to champion reform and make the UAE more conducive to investments. There are no taxes or restrictions on the repatriation of capital. Likewise, there is a free movement of labor and negligible barriers to entry: the effective tariff rate is 5 percent for most goods. The UAE has also differentiated itself by having a menu of investment options—65 percent of our growth is in the non-oil sector, and 50 percent of that is in services.

The Quarterly: What are the latest FDI and growth trends in the UAE?

Sheikha Lubna: FDI is coming from all over—the United States, Europe, and Asia—which is a good sign, as no one area is dominating.

We have three main drivers of the economy: real estate, tourism, and manufacturing. In addition, financial services are increasingly contributing to growth.

The real-estate sector includes a number of residential and commercial megadevelopments in Dubai and Abu Dhabi and the other Emirates. The construction sector hires blue-collar workers, who have the highest marginal propensity to consume, and employment has increased by over a fifth. A sign of the boom is that we have 15 to 25 percent of the world's cranes but less than 0.1 percent of the world's population.

The UAE population is close to 4 million, but even without five thousand years of civilization and the Pyramids or a Petra we have 8 million visitors per annum. Restaurants and hotels, the internationally used proxy for measuring tourism effects, saw a 22 percent increase in revenues during 2005. We've cooked up something good ourselves, with the hospitality industry, health care, exhibitions, and megaevents like horse racing and golf providing a good foundation. This is mostly due to the creativity of people here. Manufacturing was up 22 percent in 2005, thanks both to home demand and export growth.

The Quarterly: Many outsiders see limits on foreign ownership and the UAE's agency law as outmoded and unnecessarily restrictive. What plans do you have to change this?²

Sheikha Lubna: What we've done is to launch a study looking at sectors where we believe the contribution comes solely from foreigners, or at least very little from locals. So with that in mind I think parts of the law might undergo change. Depending on the sector and the Emirate, foreigners might be allowed to hold controlling shares in these ventures. Having the agency law, however, does not mean that we have excluded all foreigners from majority ownership. The whole idea of creating the 23 free zones and special economic zones throughout the UAE was to offer 100 percent foreign ownership.

The Quarterly: How about financial markets? Do you see a negative fallout from the sudden stock market selloff in early 2006?

Sheikha Lubna: Financial markets are very important to us. It's only natural that the nascent stock market should have teething problems, and I'm proud that the UAE government did not interfere. The minute you do that you lose credibility and engender complacency in investors who think they can come running and get help every time there is a problem. We saw the correction as a reality check, what I would call a dose of humility. Investors had experienced too much euphoria and thought they were immune to disaster. That said, we have listened to the private sector, we have talked to the Central Bank, and we have set up a committee at the ESCA to look at what we can do today to ensure more stability in the future.

One of the important issues we're tackling is that of "green" companies: start-ups that attract a lot of liquidity but have no track record. We have stopped them from applying for an IPO and insisted that they can do so only if they show a solid two-year track record. I got a lot of pressure on this—people were shocked—but I think the markets respect decisions like this even when it curbs their temptation to do something adventurous.

The other thing I'm doing at the ESCA is establishing an advisory board that will comprise experts from international markets who can provide an external perspective and outside experience. As we go forward I expect there to be much more scrutiny, monitoring, and regulation of the two stock markets in the UAE. While we have investigated cases and fined some brokers, I don't want to be the bad guy. Companies know their limits, what they can and cannot do. There are a lot of new companies coming to the market, and that's important.

The Quarterly: You obviously feel the UAE needs a more vibrant entrepreneurial culture.

Sheikha Lubna: Absolutely. A lot of the businesses here were established when the oil industry started in the 1960s by what I call the "old merchants." Many of the younger generation have since pursued careers in professional services, but there is another breed that also aspires to create its own businesses and requires nurturing. That is why in Dubai we have the Mohammed bin Rashid Establishment for Young Business Leaders, an organization that drives and supports young national entrepreneurs. Meanwhile the business councils, the chambers of commerce, and the women's business councils in each of the Emirates are also focusing their efforts here. Fifty percent of entrepreneurs in the UAE, incidentally, are women.

One area I am very interested in is helping family-owned businesses become public through an IPO. The new IPO law will lower the current listing requirement so that companies can offer just 30 percent of their shares, against 55 percent previously. Corporate governance is very important here, notably educating businesspeople about best practice, but I don't believe in overregulation.

The Quarterly: How concerned are you about the unemployment rate among nationals and the extent to which foreigners dominate the labor market?

Sheikha Lubna: The UAE is, perhaps, the only country in the world where foreigners dominate the private sector, both as employers and employees. In almost all countries that allow immigration, the rule is that foreigners are only allowed to take up jobs when suitably qualified nationals are not available.

Expatriate workers will obviously continue to play a vital role in our economy, but it is unacceptable that 22,000 nationals are either unemployed or underemployed. The private sector therefore cannot be left unregulated. Hence the Emiratization program, which establishes a quota system for nationals in certain sectors. The strategy will only succeed in the medium to long term, though, if adequate educational and training programs are geared toward creating skills among nationals to suit the demands of the private sector. But the private sector has a social responsibility too—companies come here because it is a good environment for making money, they don't pay taxes, and they can leave at any time. Employing nationals who are well educated and computer savvy is a very small contribution we expect in return. It will be much better if they take the initiative—as some institutions have, for example—rather than having a policy imposed on them.

The Quarterly: One of your mandates is to negotiate the terms of the Free Trade Agreement (FTA) with the United States. Can you tell us how this is going?

Sheikha Lubna: As far as trade goes, the main driver at the moment is to meet the requirements of the World Trade Organization, of which we have been members for ten years. Most other trade agreements we enter into are multilateral and are mandated by the GCC (as opposed to the UAE): around eight or nine are currently under discussion, including China, Pakistan, Australia, Turkey, Japan, and Singapore. The United States is the exception, and while I would say we are more than halfway through the negotiation we are now reaching the critical issues. It is complex because the UAE is different than most other Arab countries in terms of demographics (more than 150 different nationalities live here), and the economy is very diversified and open. We are, after all, the third-largest reexport center in the world.

The Quarterly: Has the DP World saga hampered progress on the FTA? And do you think the process the Committee on Foreign Investment in the United States (CFIUS) follows should be reformed?

Sheikha Lubna: It didn't affect the negotiations, but the whole ordeal came as a complete surprise to people in the UAE and in the Arab world generally. DP World's acquisition of management—not ownership—rights over the six US ports should not have created such a backlash. After all, the deal would not have entailed a loss of security as some were claiming, since the US government retained the right to impose the same or even higher security measures. President Bush himself pointed out that DP World is from a country that "has been an ally in the war on terror," while the ports in question were previously being managed by a non-American company.³ Most Arabs and Muslims saw the widespread bipartisan US opposition to the deal as prejudice against them. A perfect CFIUS process does not exist, but if it gets more stringent this will be a challenge to the US given the value to its economy of inward investment.

The real issue is in the negative misrepresentation of Arabs and Muslims in the mainstream US media, be it Hollywood movies, TV shows, books, video games, and music. This has allowed politicians to build on negative public sentiment and take advantage of an opportunity for a quick win. Unless we work collectively to change these stereotypes, on both sides, mistrust and lack of communication will result in suboptimal trade and investment flows in both directions and a lose-lose situation.

The Quarterly: What are the major risks for the UAE over the next three to five years?

Sheikha Lubna: Number one is obviously the political stability of the region. Anything that happens to one of our neighbors has implications for us. We are all investors in and exporters to Lebanon, for example, so when it was brought to the ground, the efforts of the past ten years were completely demolished.

I've talked about labor in another context, but when you have such a mix of people they sometimes bring their political problems with them. So far the UAE has been very good at managing these differences, but that doesn't mean we should just take it for granted.

I don't think the price of oil will threaten the development of the UAE economy—the inflow of FDI shows it is working—but a more concerning issue is inflation triggered by the high oil prices and booming economy. It's a concern, and we need to try and find a balanced solution to the issue and avoid overheating.

The Quarterly: How have reactions across the region been to you as a woman?

Sheikha Lubna: The stereotyping worldwide is that a woman will rise to ministerial level but only in a portfolio like social affairs, education, or health, as has been the case elsewhere in the Gulf. There are very few female ministers of economy anywhere. For this reason the UAE made a very bold decision in my appointment—which I hope is credible given my track record and professional career—and it shows that there is no gender differentiation in the UAE. It sends a signal to schools, universities (where 70 percent of the students are women), and employers. And it has been a positive way of demystifying outside perceptions, something that several international commentators have picked up on to emphasize that we are a modern and liberal society.

In business, women are doing well: some major business enterprises in the region are owned and run by women, such as Lubna Olayan and Raja Al Gurg. But it's critical that there is more representation in the parliaments and national councils. It is my dream to see the participation of more women there.