The United Arab Emirates (UAE) is a federation of seven Emirates located on the Arabian Peninsula. The UAE has coastline and seaports both inside and outside the Strait of Hormuz, the entrance to the Persian Gulf. The seven Emirates are Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Qaiwain, Fujairah, and Ras Al Khaimah. Each Emirate is ruled by a sheikh.

A high degree of political and economic power resides in the individual Emirates. Each sheikh retains control over natural resources, including oil, within his Emirate and regulates commercial activity.

Because hydrocarbon reserves, which are the major source of revenues, are not equally distributed, the seven Emirates are not equal in terms of wealth, power, or level of economic development. Abu Dhabi, the largest oil producer, is the wealthiest and most powerful, followed by Dubai, the federation's commercial center and second largest oil producer.

The terrain is mostly sand desert, barren mountains, and salt flats. Before the exploitation of petroleum deposits in the 1960s, the UAE had a subsistence economy, consisting mostly of fishing, date farming, camel husbandry, trading, and pearling. Today, the UAE is a prosperous country of global economic significance.

The UAE's GDP, which is dependent on oil prices, has followed a roller coaster pattern, soaring during the 1970s and declining precipitously throughout the 1980s. These swings in income have caused the authorities to look for ways to diversify the economy, particularly in Dubai, where oil production is declining. The search for diversification has been only partially successful. Oil revenues remain the engine that powers the economy. Oil revenues provided 80 percent of fiscal revenue and about 60 percent of export earnings in the period 1990-1994.

The UAE is in better financial condition than its immediate neighbors. The government is not delaying payments to contractors or borrowing from foreign commercial banks to pay its debts. It is, however, drawing upon its own overseas assets and borrowing from domestic commercial banks in which it has an ownership share.

The UAE maintains an extensive 'cradle to grave' welfare system for UAE nationals comprised of numerous subsidies, grants, loans and free services.

Most nationals are employed by the government. The government provides many subsidized services, which also are extended to foreigners who form 80 percent of the total population. In 1994, the government undertook to reduce these subsidies by increasing fees charged to foreigners for some services, such as health, water and electricity. The insurance does not fully cover costs, and nationals still receive many of these services at reduced rates or free of charge.

In an effort to curb the problem of illegal laborers, the government passed a law expelling all foreign laborers in violation of their visas. The law, which affects nearly 10 percent of the UAE's population, is sure to have negative repercussions. Already, some food distributors and retailers have reported a 30 to 35 percent drop in sales. In addition, the construction sector, which is a magnet for foreign workers, expects sharp reductions. Advocates of the law claim that the expulsion will ease unemployment problems, reduce crime and reduce government expenditures.