Dubai's government could soon be bankrupt if it does not receive support. The glittering city in the desert has gone from the pinnacle of the world economic boom to the brink of bankruptcy. Christopher Davidson of Durham University explains some of the background.
The inability of the government of Dubai to refinance the massive debts incurred by its largest state-owned company, Dubai World, has sent shockwaves throughout the world prompting many observers to ask not only how severe the economic crisis is, but also what exactly is Dubai and who is in control of it?
What went wrong in Dubai.
Dubai does not have the enormous oil wealth enjoyed by its neighbours such as Abu Dhabi. Its main source of wealth has historically been as a port. In recent years it has sought to make money from property development and luxury tourism, building impressive hotels such as the Burj al-Arab.
The global downturn left many financial workers unemployed. The population fell an estimated 17%, meaning there was little demand for new properties.
There was also less demand for luxury holidays. Dubai companies have borrowed money to fund huge building projects such as "The World" and are now unable to repay it.
There are jitters on financial markets about who lent all the money. European banks are estimated to have lent more than £50bn to the whole of the United Arab Emirates.
Dubai state-backed companies may also have to sell-off some of their assets overseas such as luxury property in London and the Turnberry golf course in Scotland.
Although frequently described as a city state or even as a country in its own right, Dubai is a constituent member of the federation of United Arab Emirates along with six other emirates.
Only one of these, Abu Dhabi, possesses substantial oil reserves, and as such it has dominated most areas of federal politics - including foreign affairs and defence - since the UAE was formed following Britain's withdrawal from the Persian Gulf in 1971.
Control.
Dubai, however, has always maintained an air of autonomy within the federation as a result of its long history as a successful free port. When the UAE constitution was drafted this relative independence was taken into account as each emirate was allowed to retain control over its own natural resources and economic development path. Gradually Dubai did allow itself to integrate more fully into the UAE, finally handing over its militia - the Dubai Defence Force - in 1996.
But this move was interpreted at the time as a means of transferring costly services to the federal government so as to allow Dubai to pursue its economic ambitions. With little oil, Dubai's only hope of maintaining a distinct identity from Abu Dhabi was to diversify at a fast pace, building up various non-oil sectors such as luxury tourism and real estate.
Overextended.
On paper it was succeeding, as by 2008 over 95% of its GDP was made up by such sectors. But with the onset of the credit crunch much of this success began to come undone as foreign direct investment and appetite for these activities faded.
Dubai had also badly overextended itself with most of its mega projects - including giant manmade islands - being financed by large debts. With most of these needing to be refinanced in the near future, the emirate's government spent most of 2009 trying to attract international creditors but was largely unsuccessful.
With Abu Dhabi providing some limited financial assistance, both in February 2009 and earlier this week, Dubai managed to keep afloat. But with Abu Dhabi's clear unwillingness to completely bail out Dubai, much attention has been placed on the relationship between the two emirates, especially since the recent default. If Abu Dhabi does not provide more help, then the government of Dubai will soon be bankrupt.
Competition.Although the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, recently told journalists to "shut up" and stop referring to Dubai and Abu Dhabi as being separate, and although the Al Maktoum family is of the same tribe as Abu Dhabi's ruling Al Nahyan family - the Bani Yas - the two dynasties nonetheless have a long history of rivalry.
In 1833, Dubai broke away from Abu Dhabi and had to rely on British protection. Even in the 1940s, there was armed conflict between the two neighbours.
More recently, there has been intense competition, including each establishing its own 'national airline' despite obvious overlaps.
As such, further assistance from Abu Dhabi is far from guaranteed. Beyond the government and the ruling family there will also be a broader impact of the crisis in Dubai.
Thousands of migrant workers, mostly from South Asia, are already stranded in the emirate, and there are likely to be more over the coming weeks as more companies cease their operations or face cutbacks. These men will have difficulty returning home.
Similarly many other expatriates, some of them Westerners, will also lose their jobs, and the many foreigners who invested in the emirate's much vaunted real estate sector may see substantial losses on the properties they purchased as investments, retirement homes, or holiday villas.
Christopher Davidson is the author of Dubai: The Vulnerability of Success
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