On November 25, 2009, Dubai shocked the world by requesting a moratorium on debt repayment. Foreign banks had previously pumped significant amounts of money into Dubai, knowing that they would suffer huge losses if the emirate defaulted on its debt. Thus, Dubai's request prompted financial markets worldwide to plummet immediately. Revelations that Nakheel, a subsidiary of the state-run Dubai World, had suffered losses of US$3.64 billion since June 2009 caused further financial turbulence, especially in Dubai's stock market. Faced with financial turmoil and a collapsing real estate market, Dubai is now in the throes of an identity crisis. Once the symbol of Middle Eastern prosperity and the opulence of contemporary globalization, the emirate must reinvent itself because its model of economic development is no longer realistic. Dubai must adopt a diversified approach to sustainable growth by developing other industries and looking to become the cultural gateway to the Middle East.
During the real estate boom, Dubai could do no wrong. Riding a wave of easy credit and a deluge of foreign capital, the emirate built the world's tallest buildings, most luxurious hotels, and most exotic celebrity getaways, epitomizing the rewards of international finance and becoming the crown jewel of the United Arab Emirates (UAE). By attracting foreign investment to develop the Middle East's prime business environment and the world's most posh desert getaway, backed by the expectation of forever rising property prices, the emirate sought to diversify its industries and escape dependence on oil revenues. For several years this strategy worked, as the world's elite paid handsomely for Dubai's luxurious new real estate.
The expectation of perpetually rising real estate prices, however, proved to be irrationally exuberant. Since real estate prices began to drop in 2007, a combination of excess real estate supply and dwindling demand has threatened the very foundations of Dubai's economy. The declining real estate market is especially dangerous in Dubai because the government is heavily invested in the real estate industry. Indeed, government investment in real estate has far outstripped state support of other industries. While there is wisdom to the concept of comparative advantage, the principle of risk management warns against putting all of an economy's eggs in one basket. As real estate prices dropped by 50 percent in 2009, Dubai's economy grew by only an estimated 1.3 percent, down from 6.4 percent in 2008.
Abu Dhabi has agreed to provide some conditional bailouts, and the UAE's central bank has put together a liquidity scheme to help Dubai meet some of its short-term debt obligations. Both of these actions should reduce the international impact of Dubai's financial crisis and improve the domestic economy in the short term. In the long run, however, Dubai must radically restructure its economy and adopt a more realistic goal for its future role in the world. The emirate's plan to develop more real estate above ground than Manhattan by the end of 2010 must be replaced by a less glamorous but more robust alternative. Rather than seeking to be a dazzling spectacle of high rise buildings and opulence, Dubai should focus on becoming the international gateway to the Middle East.
Dubai's social and economic policies, which are liberal in comparison to those of the rest of the Middle East, have attracted foreigners for over a century. This influx of people has helped the emirate develop into a cosmopolitan city and has provided a steady stream of immigrants to the area, from wealthy international investors to ambitious young workers. Dubai's liberal domestic policy has also led the emirate to play a central cultural role within the Middle East itself; Dubai often serves a center for conflict resolution, and it has become a tourist mecca for many Middle Easterners. …