The flags are out, the lights are on and the fireworks are in position for the biggest event in the short history of the UAE. Weeks of frantic preparations have gone into planning for the national party on 2 December which will mark both the silver jubilee of the federation's foundation and the 30th anniversary of President Sheikh Zayed Bin Sultan al-Nahyan's accession as ruler of Abu Dhabi. A high point of the celebrations will take place on the corniche in Abu Dhabi when Sheikh Zayed, the architect and co-founder of the federation, is formally welcomed home after successful surgery in the US.

The UAE has much to celebrate. Over the past 25 years, it has built up an enviable reputation as an oasis of prosperity and political stability in an often troubled region. It has defied two Gulf wars and a series of slumps in the price of oil, repeatedly impressing the outside world as a trusted ally and an attractive place to do business, even at the most uncertain times.

Recent days have provided ample proof of how well-regarded the UAE has become in the region. In the week following Sheikh Zayed's return to Abu Dhabi on 13 November, a succession of senior Arab and international dignitaries passed through the capital to visit the 79 year-old president. They ranged from President Mubarak of Egypt to an Iranian vice-president, testifying to the range of friendships that the ruler of Abu Dhabi has cultivated over the years.

The development that Sheikh Zayed has promoted over the past 30 years is still a strong feature of the federation where business never seems to stop. In just three days in November, an Italian joint venture confirmed that it had clinched one of the largest building contracts ever let in the Gulf - for a $400 million grand mosque to be built in Abu Dhabi - and Dubai-based Emirates sealed a deal to buy $2,000 million worth of aircraft from Airbus.

The seven emirates retain a high degree of autonomy within the federation which is dominated economically by the two wealthiest - Abu Dhabi and Dubai. After years of friendly co-existence under the federal umbrella, Abu Dhabi and Dubai are now starting to forge much more intimate economic ties. A big sign of closer co-operation came in the summer with an outline agreement for Abu Dhabi to supply an estimated 500 million cubic feet a day of gas to Jebel Ali, the industrial hub of Dubai, from 1999 onwards. More bonding is apparent in the plan for Abu Dhabi's General Industry Corporation (GIC) to take a 35 per cent stake in Dubai Cable Company (Ducab). Established at Jebel Ali in 1979 by the Dubai government and the UK's BICC, Ducab is one of the most profitable manufacturing ventures in the UAE and the embodiment of Dubai's savvy investment strategy.

New intimacy

Such intimacy between Abu Dhabi and Dubai is in marked contrast to the highly individualised economic strategies pursued by each emirate since the federation was created in 1971. Resource-rich Abu Dhabi has developed an economy firmly based on its vast oil and gas deposits. Less well-endowed with oil, Dubai has built on its commercial tradition to turn itself into the regional centre for trade, business and leisure. Despite complementing each other, economic exchanges between the two emirates have been surprisingly limited and mostly confined to the private sector: Dubai business people head for Abu Dhabi for trade and construction contracts; Abu Dhabi investors are active in Dubai's dynamic real estate market.

Synergy is now replacing the separate development of earlier days with the authorities in both emirates pushing for closer ties. 'We need each other more than ever before,' says one local businessman. 'With its finite oil and gas reserves, Dubai needs Abu Dhabi energy. In turn, Abu Dhabi needs Dubai's business flair. Closer ties are a must if we are to maintain our standard of living and provide fresh opportunities for the younger generation to pursue.'

The younger generation is increasingly apparent as a vibrant force in the political and commercial life of both emirates. Having come of age during the lifetime of the new country created 25 years ago, the generation now moving into positions of power is more attuned to the concept of the UAE as a nation, rather than a loose federation. Though respectful of tribe and tradition, they are also pragmatic and forward-looking.

The economic advantages of closer co-operation are apparent in the agreement on the supply of gas, which Abu Dhabi is likely to sell for as low as $0.40 a million British thermal units (BTUs). This would be about the cheapest gas available to consumers anywhere in the world. 'Elsewhere in the Gulf, most state oil companies sell gas to their own petrochemical installations at a minimum price of $0.50 a million BTUs,' says one. 'That shows you the political importance being attached by the two sides to this agreement.'

At Ducab, soon to be renamed BICC-Emirates Cable Company, Abu Dhabi's arrival among the shareholders will pave the way for a major addition to capacity. Over the next two years, AED 140 million will be invested in expanding its low voltage cable capacity and introducing a medium voltage capability. The aim is to double its annual sales to

AED 600 million by 2000.

There will be more such deals in the future. 'It is only the start. Both governments are looking at other industrial projects and we will let you know about them [when they are finalised],' Hamad al-Dhaheri, GIC projects manager, said at a Ducab press conference on 21 November. The official Emirates News Agency echoes the new policy. 'The new company will be the beginning of giant joint industrial projects between Abu Dhabi and Dubai to ensure progress of the industrial sector and diversification of revenues,' it said in an October report.

The federal government, better known as an employer than an energetic creator of policy is also gaining some teeth. It is assuming a more active role in drawing up new regulations, which are being implemented more rigorously by each of the seven emirates. In the summer, Dubai announced that it would enforce the first federation-wide law on traffic offences. Another first should be the arrival of a new federal environmental law next year (see page 58).

New muscle

Perhaps the most striking exhibition of federal muscle came in late June when the Interior Ministry announced that illegal immigrants would be given a three-month amnesty period to leave the country before a new entry and residency law was adopted in the autumn. Aimed initially at over-stayers and job-hoppers, it was soon expanded to include any immigrant whose documents were not in order.

There was considerable surprise in Dubai and the northern emirates that the federal government could muster enough support for such a draconian piece of legislation. After all, it was UAE citizens who earned tidy sums from the lax enforcement of the existing labour laws, by supplying visas and sponsorship - but not employment - to mostly Asian migrants prepared to pay AED 5,000 for the privilege of obtaining the necessary papers. By early November, it was clear that the times have indeed changed: official figures showed that by the final deadline of

31 October 167,000 illegal immigrants had left the country voluntarily.

The amnesty was the most concerted attempt yet to regulate the local labour market. It was not specifically aimed at reducing the UAE's dependence on foreign labour as the amnesty seekers were allowed to reapply for entry once they had returned home. Rather, it was an attempt by the authorities to regain control over a floating population. In retrospect, the action has probably helped to preserve the UAE's stability and reputation as a haven where crime is almost unknown. Businesses directly affected were less impressed by the action and regret that there was such short notice of the clamp-down.

There has been an inevitable economic price to pay for the sudden exodus of thousands of workers. Their departure also coincided with a perceptible slowdown in economic activity after three years of strong growth. The downturn has not been uniform, however. In Dubai and Sharjah, government departments are investing heavily in infrastructure projects and are being supported by an active private sector. In the less rich northern emirates, where economic activity relies more on federal spending, the Ministry of Electricity & Water is pushing ahead with several major utility schemes. In the key Abu Dhabi market, activity in the power and oil sectors has been subdued, but the Public Works Department (PWD) is spending against the trend: it is currently implementing AED 1,600 million worth of new project work - mainly on roads, sewerage and housing.

The UAE will also benefit from the $3 a barrel increase in oil prices this year. Crude production is 2.1 million barrels a day and prospects for the year ahead are bright. Abu Dhabi, Dubai and Sharjah all have major projects planned and even the northern emirates show some promise. In Ras al-Khaimah, a new free zone is expected and news is eagerly awaited from the exploration programme being undertaken by the Ras al-Khaimah Oil & Gas Company. In Fujairah, contract details are likely to be finalised on the planned $75 million Van Ommeren tank terminal and storage project, while in Umm al-Qaiwain, tourism will receive a boost with the opening of a AED 170 million water theme park. Tiny Ajman has just opened an exhibition centre to raise business activity and its own profile in local and international markets.

One of the main tasks as the UAE looks ahead will be to meet the high expectations of a young population, many of whom assume they will be able to enjoy the fabulous rise to riches experienced by their parents' generation. Greater private sector activity is another priority to promote if governments are to fulfill their long-stated goal of further expanding non-oil activity. The generous welfare system may well need reform, if the wide range of benefits on offer to citizens are to be sustained. Yet, given its resources and track record over the past

25 years, the UAE is in a far stronger position than almost any other developing country to deliver the goods.

Exchange rate: $1 = AED 3.673