Dubai Rides the Oil Boom

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

Dubai has also positioned itself as a safe and reliable base for conducting business in a region that includes India and the former Soviet Union. Local businessmen talk about being within three hours' flying distance of well over 1 billion people. "If you take 1 percent of the wealthiest cream of the crop, that's 10 million people worth at least $5 to $10 million," says Frank Khoie, a property developer. "They can leave their countries, which are not clean, organized, and safe, and come to a new America—the UAE. Then you take away taxes and high regulations and combine it with relatively little prejudice."

But there are serious growing pains. The roads are notoriously clogged, but until the first Metro rail line opens in 2009, there is no alternative way to get around. Prices are rising alarmingly fast on everything from housing to food. For U.S. companies trying to operate here, the cost threatens to constrain the growth. "We can't afford people on the same old compensation packages because the house is too expensive," says Craig McLay, the managing director of the new Dubai office of Pinkerton's Agency, an investigations firm. "It's hard to expand your business."

This could spell trouble. Already, some fear that Dubai has become something of a pyramid scheme that will prosper only as long as it continues to grow and property values continue to rise. The city needs to boost its population from 1.3 million today to 4 million by 2020 to fill all of the business and residential developments being planned. Most of the growth will have to come from guest workers. Reliable statistics are hard to find, but expatriates are estimated to make up as much as 95 percent of Dubai's population. Housing, particularly on the more affordable end, is in short supply. And problems with labor and the mushrooming cost of materials such as concrete are putting additional squeezes on Dubai. "In the next 10 years, we will be delivering around 50 percent of everything that will be built in Dubai," says Chris O'Donnell, the CEO of Nakheel, the government-owned developer that is building the Palm Islands and many other residential projects. "But we are potentially in a position of not being able to accommodate the potential population because of construction capacity issues in this market."

Underclass. For the foreign labor on which Dubai has been built, the quickly rising costs mean that Dubai is getting prohibitively expensive. Ejaz is a Pakistani taxi driver who battles Dubai's legendary traffic jams on 12-hour shifts, seven days a week with no holidays. "People keep coming here, but after six months, they are tired of the life," he says. "If you have money, this country is for you. If you don't have money, you cannot have a good life." Ejaz is considering returning to Pakistan.

It is even harder for the armies of guest construction workers, most of whom come from the Indian subcontinent and Southeast Asia. Many live in rudimentary camps and make an average of $175 a month working 12-hour shifts in the punishing heat. Companies wield tremendous power over their employees because fired workers automatically lose their visas and have to leave the country immediately. UAE officials say they have passed new laws to tackle concerns about working conditions, but enforcement lags. With the inflation rate as high as 15 percent, laborers are having trouble saving money. Labor protests, once rare, are becoming more common.

Dubai has so far managed to avoid the terrorism that plagues many of its neighbors. Troublesome workers can be deported quickly, with no judicial process. Security is relatively tight, but, for the most part, it is invisible. Yet Dubai's laborers could be vulnerable to radicalization, and there is also the risk of homegrown extremism. "Terrorism is the big elephant in the room that no one wants to discuss," says Christopher Davidson, a professor at Britain's Durham University and author of the forthcoming book Dubai: The Vulnerability of Success. Davidson notes that two of the 9/11 hijackers were from the UAE. "If there was a terror strike in Dubai or war in Iran, which is only 55 miles away, are investments going to be sustained?"