Dubai’s economy: from desert to dominance to partial decline

Where it was

There has been some kind of human settlement in Dubai – a comparatively small emirate in the Persian Gulf – for hundreds of years. When the city was under British rule, it was mainly a pearl-diving hub and trading port (particularly for journeys through the Suez Canal to India).

In the early 1970s, the British left, onshore oil was discovered and Dubai confederated with six other emirates to form the United Arab Emirates. Suddenly they were rich.

However Dubai never had as much oil as Abu Dhabi (its neighbor, and the capital of the UAE, which has 80% of the country’s land mass). Estimates in the late 1990s suggested that Abu Dhabi’s oil could last for generations, while Dubai’s was running out. Fast.

This set an ambitious development plan in motion – spearheaded by the current ruler, Sheikh Mohammed bin Rashid Al Maktoum. The focus was on tourism (ski parks in the desert, Hollywood studios, and so on) and, in particular, real estate development.

Huge apartment blocks were completed in months. Nakheel (effectively a government company) reclaimed land and dredged sand to build three massive palm-shaped peninsulas on Dubai’s coastline. It was more profitable to buy and sell, or ‘flip’, an apartment than to rent it out. Rents and house prices skyrocketed.

People poured in to fill roles as real estate agents, recruitment agents, construction workers, and so on. Rising oil prices meant locals had cash. A low US dollar (against which the local dirham is pegged) meant budget tourists had affordable packages at 5 star hotels.

By looking at the crowds on the roads, in restaurants, in malls, and in bars, it seemed the good times – which came with attractive air-hostesses, tax-free salaries, and free-flowing liquor in a Muslim country – would never end.

Where it is

And then, the bubble burst in the US. Rising interest rates and falling house prices globally hit Dubai hard. Arab investors began to take their money out. The real estate markets crashed. Hotels suddenly emptied.

Major developers such as Emaar (which is building the Burj Dubai, the world’s tallest tower) are merging with government entities. Abu Dhabi has loaned Dubai US$20 billion. Many expatriate real estate agents and recruiters have lost their jobs. Even traditionally safe professions – such as law and accountancy – have seen job losses.

If you read pieces in the Independent and London’s Times, this was all coming to Dubai. Yes, the place did develop too quickly and it has a questionable record on human rights.

There are fewer jobs about, no doubt, and those who are hiring are paying much lower salaries. But life is more liveable, and the attractions of a tax-free, sun-drenched lifestyle remain. As at August 2009, there is a renewed sense of optimism.

This is in part fuelled by money pouring in for cheaper assets, in part by people thinking the worst is over. No one is sure how long this will last.

Where it’s going

Perhaps the economic devastation of the last year or so will be to Dubai’s benefit. At present, economic activity seems to be profiting from the downturn. Some sectors are taking advantage of buying assets at cut prices, others of the need to raise finance fast. Tourism seems to be down, likely due to a higher US dollar and the recession.

As to the future: Abu Dhabi provides financial assistance for the moment. There are rumours of VAT (goods and services tax) coming in. Real estate remains in oversupply, but prices have been improving since January. More projects are affordable, ready for occupation, in some of the most convenient locations. Job cuts have meant that remaining professionals seem to be doing better work. And finally – with the metro due to start –Sheikh Mohammed’s knack for infrastructure remains.

In the long run, Dubai’s advantage is likely to be what it has always been: as an income-tax-free, liveable trading and tourism hub between East and West. DP World bought P&O, a major shipping line, two or three years ago. The Jebel Ali port and free zone, which DP World also manages, is likely to rival Singapore as an Asian port.

With its ports, world-class airlines, and proximity to Europe, Saudi Arabia, and the Indian subcontinent, Dubai’s story is not over yet. The current turmoil will leave Dubai bruised, but almost certainly not broken.

By The Casual Truth