DUBAI—It was the kind of publicity stunt upon which this desert boomtown was built. Dubai's iconic sail-shaped Burj Al Arab hotel recently began offering what it billed as the world's most expensive cocktail. Well-heeled patrons could order a glass of 55-year-old Macallan single-malt Scotch, with custom-made bitters and ice cubes made from water near the Scottish distillery, served in an 18-carat gold Baccarat tumbler. All for just $7,440 a pop.
This being Dubai, it took only three days for a guest to buy not just one but two of the pricey concoctions.
It is easy to get intoxicated by Dubai's phenomenal marketing machine, which has made it into a city of superlatives. Along with the world's most expensive cocktail, it claims the world's tallest building (due to open in 2009), the world's tallest all-suite hotel, the world's largest man-made islands, and the first indoor ski slope in the desert. And even though a shopping mall billed as one of the world's largest is to open in August, an even larger one is already under development.
But beneath the one-upmanship, there is far a more serious transformation, one that is turning Dubai into the business, financial, and perhaps tourist center of a newly invigorated Persian Gulf region. With oil prices near record levels, the Gulf is on the receiving end of a historic transfer of wealth from oil consumers that dwarfs previous oil booms, even after adjusting for inflation. Just between 2002 and 2006, Gulf economies doubled. And this time, in contrast to earlier oil booms when most of the profits were reinvested in the West, Gulf states like the United Arab Emirates, Qatar, and Saudi Arabia are investing much more of that windfall at home.
More than $1 trillion of construction projects is currently underway in the Persian Gulf states, but the changes aren't just about the vast amounts of concrete, glass, and steel being erected. Indeed, this unprecedented wealth transfer is starting to rewrite the fundamental balance of power in the world economy, says Robert Hutchings, who as the head of the U.S. National Intelligence Council until 2005 led a project looking at what the world might be like in 2020. The rise of the Gulf economies "should give us pause about how much we Americans and the countries that created the global financial system 60 years ago still have control of it," he says. "The globalized economy doesn't require huge territory or militaries to translate into real power."
Transformation. Today, Dubai, with its outlandish developments and seemingly infinite number of construction projects, stands as the most high-profile physical manifestation of the Gulf's transformation. The second-largest of the seven emirates that make up the UAE, Dubai has nearly run out of its own oil. (The UAE's oil is concentrated around its astonishingly wealthy capital, Abu Dhabi.) But Dubai has successfully turned itself into a post-oil economy that feeds in part on the oil wealth of its neighbors, who have been happily investing in the city's red-hot real estate market. The UAE's economy has averaged 9.3 percent annual growth over the past five years, even after removing the effect of oil prices. In the leisure and entertainment sector alone, Dubai has launched or is planning an estimated $381.4 billion of projects, according to a study by Fast Future, a U.K.-based think tank. The newest plan calls for an eco-hotel designed by Brad Pitt.
The city's secret is a unique combination of marketing acumen that would make P. T. Barnum proud, an unusually tolerant society that has thrown its doors open to foreigners, and an attitude that is all about making money. "We believe in sharing the wealth," says Khalid al-Malik, CEO of Tatweer, a colossal, government-owned developer. Western companies, including a growing number of U.S. ones, are scrambling to create or expand regional offices in Dubai. "The door is open for more cultural and business engagement," says Paul Sutphin, the U.S. consul general in Dubai, "and we should walk through it."
There is much, much more to come. Dubai today is a place where construction sites seem to outnumber existing buildings, and the infrastructure, whether it's the roads or the electric grid, struggles to keep pace. Indeed, given the level of hype, the city is oddly underwhelming for many first-time visitors. Traffic is nightmarish, and the sky is perpetually choked with dust from the 24-hour construction activity.
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.
At times, it is hard to understand where all these tourists will come from. After all, Dubai is not blessed with great natural beauty or a friendly climate. The summer heat and humidity are so suffocating that its swimming pools need to be chilled. Tourism officials are counting on the Persian Gulf region, as well as the emerging middle class in places like India, which is a relatively short plane ride away. (The flights from many Indian cities to Dubai are no longer than those from Minneapolis to Orlando.) And Dubai already attracts hordes of European tourists looking for sun and tax-free shopping. "When you invest this much money into a small place, you need to rely on the whole world to see it," says Malik, whose company, Tatweer, is charged with developing industries like tourism in Dubai.
The centerpiece of the plan is Tatweer's implausibly massive Dubailand entertainment complex, which has become one of the biggest construction projects in the Middle East, estimated at $110 billion, according to Fast Future. This behemoth is not simply a large theme park. Rather, Dubailand is expected to house as many as a dozen full-scale amusement parks, including ones from Six Flags, Universal Studios, DreamWorks Animation, Legoland, and Marvel Entertainment, along with several more Arab-themed parks and one filled with 100 animatronic dinosaurs. There have even been conversations between Dubai and director George Lucas about a Star Wars park, says a knowledgeable source. "If you don't take risks," Malik says, "you're not serious." So, in case a dozen parks aren't enough, Dubailand is planning for a half-dozen golf courses, including the first one in the world designed by Tiger Woods; full-scale replicas of the Eiffel Tower, the pyramids at Giza, and the Taj Mahal; the world's largest shopping mall; and a related $54 billion, 6-mile-long Las Vegas-like strip, minus the casinos but jammed with shops and a staggering 51 hotels.
Of course, not every Dubai project materializes. In 2003, a developer announced a plan to build an underwater hotel, but sources say that construction has been suspended.
Coming and going. Dubai is nonetheless quickly expanding its infrastructure to handle all of these projected visitors. Dubai's airport, which has seen passenger traffic grow 15 percent each year since 2002, is opening a large new terminal this summer, and a third concourse is due in 2010. On top of that, Dubai is building an additional airport on the other side of the city, adjacent to its enormous port. That airport is planned to be the world's largest, with more than double the capacity of New York's John F. Kennedy International Airport.
The second airport will also be a major cargo destination, given its proximity to one of the world's busiest ports, a key foundation of Dubai's economic miracle. This pairing would make it even easier for companies to bring goods into the port and immediately dispatch them by sea or air around the region, or vice versa. UPS, the world's largest shipping carrier, is already in talks about opening a logistics hub at the second airport. "We will see a totally new business model that does not exist in many other places," says Jamal Majid bin Thaniah, vice chairman of DP World, which operates the massive Jebel Ali port, already the world's seventh-largest container port.
Jebel Ali, built in the late 1970s, was one of Dubai's earliest building projects and helped turn the city into a huge import, export, and distribution center and the prime link between manufacturers in Asia and markets in the Middle East, Africa, and even Europe. "There is a lot of glitz and glamor, but the core element of Dubai's development plan has always been infrastructure," says Aamir Rehman, author of Dubai & Co.: Global Strategies for Doing Business in the Gulf States.
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?"
More broadly, Dubai has managed to shrug off most of the traditional factors that held other regional economies back—inept bureaucracies, suffocating state control, bans on foreign ownership of land or companies, and prohibitions on nightclubs or liquor. Dubai has always welcomed outsiders, says Sheika Lubna al Qasimi, the UAE minister of foreign trade. "Here, you have an environment built for them," she says. "This society practically caters to the yuppies, the families, and young people."
In reality, this strategy requires a constant balancing act between catering to western interests and guarding Muslim sensibilities. Dubai's nightlife is lively. But while alcohol can be served in hotel restaurants, other restaurants remain dry. Many swimming pools offer ladies-only hours, but western women wear bikinis on the same beaches where some Arab women wear full-length abayas. "Dubai is a place for Arabs to let their hair down," says Dale Griffith, a vice president of Emirates Airlines, "and to relax with their families in a way many can't back home."
But there are some Emiratis who are uneasy about the degree to which these liberties have been taken (including the blatant presence of prostitutes in many of the city's hotels). "Dubai has always been tolerant, but this tolerance has been exploited by others," Ebtisam al-Kitbi, a political science professor at UAE University, says during an interview at an upscale European coffee shop in Dubai. She turns to scowl at a woman nearby who is wearing a revealing top. "They don't take into consideration that this is still an Arab and a Muslim country," she says. "I don't say this should be like Saudi Arabia, but people feel they are losing their identity."
There is another cost when it comes to people's personal and political freedoms. Several tourists have spent months in jail for having trace amounts of marijuana in their shoes or pocket lint. And when it comes to democracy, the UAE has made little more than token efforts, meaning that all important decisions are still imposed by the royal family.
There aren't that many Emiratis pushing openly for more democracy. Kitbi, a rare exception, recently gave a speech in which she complained that UAE nationals have "deficient citizenship," that many feel marginalized, and that they are "excluded from the decision making." The response was tough. "Some condemned me here as adventurist and crazy," she says, adding that she has been excluded from delegations and events. "People don't ask for political rights because they are getting a lot of economic benefits."
With its focus so squarely on business, Dubai is an explicitly apolitical place, which has allowed U.S. business to operate side by side with Dubai's massive 400,000-strong community of Iranians. But UAE officials also see themselves as an example for their more troubled neighbors. "It's a good model not only for the Middle East but for other countries as well," says Qasimi. "We could have had our oil and sat on it, but we built dynamics for a truly enterprising society."
There are many questions about whether Dubai can continue to deliver all that it promises. The city's official tourist map shows all kinds of elaborate artificial islands and attractions, but on a closer look, the bulk of them are still marked as being under construction. In some cases, building has yet to begin, meaning it will be more than a decade before the dust begins to settle.