Dubai Rides the Oil Boom

New towers spring up along a highway through Dubai's Marina district.

The growth is so staggering that skeptics fear the bubble may burst. After all, Dubai's ruler, Sheik Mohammed bin Rashid al-Maktoum, has set out a vision for something that has never been done before—building a world-class city on a par with New York or Hong Kong in a place where, only two generations ago, there was little but sand and a tiny merchant community.

Whatever Dubai might suffer from, it certainly is not lack of ambition. When the city decided to become a major global financial center, one of the first obstacles was its reputation as a haven for smugglers and money launderers, where businessmen and gangsters alike routinely bought luxury cars and homes with suitcases of cash. (Just ask Richard Threlfall, a helicopter pilot who two years ago tried to buy a condo on Palm Jumeirah, Dubai's first set of man-made islands shaped like a giant palm tree. He put down a deposit, but when he came back three weeks later with the rest of the money, the apartment was gone. "The place had been purchased by someone who actually turned up with a suitcase of cash," Threlfall says ruefully.)

The UAE has been working on new legislation to reduce money laundering, but U.S. officials say the government still has a long way to go. In the meantime, to attract the world's leading investment houses, which demand world-class regulatory systems, Dubai found a deceptively simple solution. It decided to create its own laws. It launched the fledgling Dubai International Financial Center, a government-owned but independently run city within a city, optimized for the world's major financial institutions. Starting from scratch, experts devised a legal code and built an independent court and separate regulatory body. "We had to get the Ministry of Justice and the Central Bank to come out with a form of mini-sovereignty and convince them to give up oversight," says Sandy Shipton, a DIFC managing director. As a result, many of the world's leading investment firms, including Morgan Stanley and Goldman Sachs, have set up operations here. Today, some 11,000 people work inside the DIFC's free zone, and officials project that number will rise to 20,000 by the end of 2008.

Amid the global credit crunch, the appeal of Dubai is self-evident. "From here, people have access to almost unlimited liquidity," says Shipton. In other words, there's lots of money floating around. Earlier this year, New York's Nasdaq completed a deal to rebrand the DIFC's stock exchange as a Nasdaq venture. There are, however, some signs that the credit crunch is beginning to affect even the Gulf, after two companies were recently forced to cancel their plans to go public on the DIFC's exchange.

The ultramodern DIFC complex is just one of nearly two dozen free zones, projects where foreign firms or residents can buy property and operate tax-free. There is, for example, Internet City, which has attracted the likes of Microsoft, and Media City, which hosts CNN and MTV Arabia. Dubai's Healthcare City has partnered with Harvard Medical School and others to build medical schools and hospitals. One of the more recent projects, Studio City, aims to expand Dubai's burgeoning advertising industry into a hub for television and movie production. Officials are actively courting Hollywood. "We're building 14 major sound stages so that we could host six major Hollywood film productions at a time," says Amina al-Rustamani, a spokeswoman for the project.

One-upmanship. The ability to purchase property has sparked countless other office and housing developments all over town, each one trying to outdo the next with outlandish design and trend-setting architecture. "Here, there is no such thing as 'it's impossible,' " says Abubakr Hejazi, a Saudi architect who runs the Dubai office of TVS International, a U.S.-based architecture and design firm.

Indeed, the breathtaking scope of Dubai's ambition is difficult to capture. Along with building a financial and business center, it also wants to be a global tourist destination attracting 15 million visitors a year by 2015, more than double the current traffic.