Dubai, one of the seven members of the United Arab Emirates, has long sought to position itself as an international commercial, tourism and financial centre, luring businesses to its free zones with promises of tax-free earnings.
The global financial crisis has put the brakes on an economic boom in the Gulf Arab region, especially in Dubai, where a building boom is unravelling, property firms are laying off staff and banks are facing tight liquidity conditions.
Historical background
Wedged amidst salt flats on the edge of a vast desert, Dubai may not seem the most inviting place to settle, but it has never lacked for people. The first traces of human habitation date back nearly to the last ice age, in 8,000BC. More lasting settlers came around the 7th century AD, when the Arabic-speaking Umayyads arrived to spread Islam among the locals.
The coastal settlers lived off the Gulf's plentiful fish until the late 16th century, when the outside world began to encroach. In the early years of European colonialism, European ships—Portuguese, Dutch and British as well as Arab—plied the waters of the lower Gulf as part of their long shuttle between Europe and the East. Some also traded for pearls harvested in the Gulf's waters.
The British proved the most persistent of these powers, largely because India, their enormous colony of tea and spices, lay directly across the Arabian Sea. By the 17th century the East India Company, headquartered in Delhi, had come to rely on the lower Gulf as part of its trading route with Britain. Many slave ships sailed through Gulf waters as well, until a crackdown in the early- to mid-19th century.
• The first written reference to Dubai came from a Venetian jeweller, Gasparo Balbi, who toured the region in 1580 to assess its pearling potential. His list of place-names in the lower Gulf cites Dubai, then a tiny fishing settlement, as “Dibei”.
Watching riches sail up and down the Gulf's coast proved too tempting for some, and by the early 19th century the area was known as the Pirate Coast. Goaded by constant attacks, the British finally launched a devastating naval barrage against the Qawasim, a powerful clan based in present-day Oman. The coastal sheikhs were cowed into signing a non-aggression pact in 1820. They promised to clamp down on piracy in exchange for Britain's non-interference in their internal affairs.
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In 1833, a faction of Abu Dhabi's elite established itself in Dubai. This marked the start of the emirate's ascendancy
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The sheikh of Dubai was among the signatories. His fiefdom was tiny and insignificant compared with larger Abu Dhabi to the south. But change was afoot. In 1833, members from Al bu Falasah, led by the Maktoum family (part of the Baniyas tribe), a disgruntled faction of Abu Dhabi's ruling clique, broke away and took control of Dubai. The Maktoum family still rules Dubai today. This marked the start of Dubai's ascendancy. Thus too was born the uneasy bond between Dubai and Abu Dhabi, one of fierce rivalry built on a foundation of brotherhood. In 1853, the Gulf sheiks signed a permanent truce with the British, and their land became known as the Trucial states.
As the 19th century unfolded, Dubai, split by a 14km-long creek which led into a natural harbour, established itself as a flourishing hub for entrepôt trade. Other Gulf ports, such as those along the Persian coast, could not compete. Traders preferred Dubai's liberal policies—especially its lower taxes on foreigners.
If entrepôt trade was the first and most important pillar of Dubai's economic activity, the second was pearling. Offshore from Dubai and Abu Dhabi, the waters were rich with pearl beds. In high season, the Gulf's balmy summers brought traders and immigrants from India and the Persian coast. By the turn of the 20th century, with a population of 10,000, Dubai was starting to prove a worthy rival to Abu Dhabi.
Towards the end of the 19th century, Britain began to worry that its sway in the Gulf was becoming precarious. The tottering Ottoman Empire, in one of its last gasps of expansionism, had stretched its sphere of influence to Qatar and kept ships in the Gulf to defend its interests. Tsarist Russia was another looming threat, and Persia was nosing around Abu Dhabi in the late 19th century. So in 1892, Britain prodded the rulers of the Trucial states into “Exclusive Treaties”, pacts which banned the states from making deals with other governments without British consent. Such strict loyalties meant, for example, that Germany—another power eyeing up the Gulf—was unable to build a road between Baghdad and Kuwait until the first world war.
The first world war did not directly involve the Trucial states, but it did weaken foreign competitors for Gulf supremacy. The Ottoman Empire had dissolved, Germany was humbled, and Russia was mired in revolution. At the same time, the Gulf had suddenly acquired new stature. Formerly prized for its pearls and trading convenience, it was now sought after for oil. In the 1930s, oil was discovered in Kuwait, Qatar and Saudi Arabia—adding to that already found in Iran, Iraq and Bahrain.
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In search of pearls
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But oil was yet to be discovered in the Trucial States. Instead, as global demand for pearls dropped, the sheikdoms struggled to stay afloat. Only Dubai, which from the late 19th century boasted the largest Trucial port, managed to keep its economy alive through trading. Abu Dhabi (whose income at one point was 95% from pearling), was devastated. It was during this period that Dubai emerged as the main conduit for smuggling gold into India.
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As well as boasting a diversifying economy, Dubai was starting to prove a vanguard of political change
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As well as boasting a diversifying economy, Dubai was in the vanguard of political change. Governed by powerful and jealous sheikhs, the Trucial states were mired in tribal power structures. In 1938, Dubai initiated reform. A challenge to Dubai's ruler, Sheikh Saeed bin Maktoum al-Maktoum, by some of his cousins and local merchants, encouraged a subtle shift towards democratic systems. Although infighting brought many of the reforms to a halt, Dubai began to stand out as progressive among the Trucial states.
Immigrants from Iran, India and Baluchistan began to settle in Dubai, attracted by the prosperous port and relaxed customs duties. An Indian souk sprang up in Deira, on the north side on of the creek. By the 1930s, immigrants made up nearly 25% of Dubai's 20,000-strong population.
The second world war saw no fighting on Trucial soil, but brought the strategic importance of the Gulf into sharp relief. Britain increased its presence in the region, fearing that Germany might go after the oil in Iraq and Iran (it did not). Links to India were also important; an airport built in 1932 at Sharjah, one of the Trucial states, served as a refuelling point. British ships en route to India made Dubai their main port of call.
In 1947 Britain withdrew from India and began to alter its Gulf policies, encouraging regional powers to take a stronger hand. But it was still interested in the region's oil and in 1952 created the Trucial States Council, a twice-yearly gathering of the heads of the seven Trucial states to discuss―though rarely to make―policy. The sheikhdoms were, at the time, underdeveloped, and many of their inhabitants were illiterate nomads.
Despite its looser hold, Britain continued to help Dubai bolster its identity as a regional hub. Already an important political player (Dubai hosted Britain's political representative to the area from 1953), the growing sheikhdom was keen to increase its commercial credentials. In 1946, the Imperial Bank of Iran (later renamed the British Bank of the Middle East and now the HSBC Bank Middle East) opened a branch in Dubai, its first on the Trucial coast. Three years later came the gleaming Al Maktoum Hospital, the most modern in the Trucial states. Sheikh Saeed oversaw the widening and deepening of the creek, the building of Al Maktoum bridge and later, an underwater tunnel.
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The lengthy rules of two sheikhs in the 20th century were without doubt a stabilising influence on Dubai
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The lengthy rules of two sheikhs in the 20th century were without doubt a stabilising influence on Dubai. In 1958, Sheikh Saeed, Dubai's ruler since 1912, died, and his oldest son, Sheikh Rashid bin Saeed al-Maktoum, took power. Sheikh Rashid was a driving force in diversifying Dubai's economy and modernising the city. He built roads, expanded ports and improved the electricity and water systems. Under his rule, the urban population—including a middle class—grew quickly. A police force, funded by both Dubai's government and the British, was put in place, and Dubai's international airport, serving British Airways and Middle East Airlines, opened in 1959, just outside Dubai town. (The same airport, greatly expanded, is still in use today.)
Perhaps his most significant decision was to dredge the creek in the late 1960s and early 1970s, allowing modern vessels to access Dubai. As part of this development, Sheikh Rashid established a port at the mouth of the creek, which opened in 1972 and is named Port Rashid in Sheikh Rashid’s honour. In 1979, a second port was opened at Jebel Ali, 30km west along the Dubai coastline. Alongside the port was Jebel Ali Free Zone, an industrial and distribution facility that attempted to lure international businesses with guarantees of zero taxation and 100% foreign ownership of companies (within Dubai itself, every company has to be 51% owned by a UAE national).
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Something old, something new
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The discovery of oil in 1958 off the shore of Abu Dhabi provided the Gulf with an irresistible attraction. In 1966, smaller reserves were found near Dubai and export began three years later. Though significant, Dubai's oil reserves have always been a fraction of those in Abu Dhabi, and today they account for less than 10% of Dubai's income. Dubai's known oil reserves are scheduled to run out by around 2010.
Bigger changes loomed on the political front. In 1968, Britain's Labour government, strained by the cost of keeping troops around the world, announced a unilateral withdrawal of all forces east of Suez. This included the Gulf, where Britain had been the de facto protector—though never coloniser, save in the case of Iraq—for centuries.
The Trucial states faced a critical decision: should their loose political union continue, and if so in what form? After hurried discussions between the sheikhs of Abu Dhabi and Dubai, the two wealthiest Trucial states, a new plan emerged: the creation of a federal system under the United Arab Emirates (UAE). This would bring seven sovereign states (or emirates)―Abu Dhabi, Dubai, Sharjah, Ras al-Khaimah, Ajman, Umm Al Qaiwain, and Fujairah―into a single nation. Two other Gulf sheikhdoms, Bahrain and Qatar, were also invited to join the talks but opted for independence.
In July 1971, at a meeting in Dubai, the Trucial states became the UAE. A constitution was adopted with Islam as the state religion, and in December the new state joined the Arab League and the United Nations. The state was led by Abu Dhabi, much to the chagrin of Sheikh Rashid of Dubai, who was appointed prime minister, a post he retained until his death in 1990.
The birth of the new union was far from smooth. Dubai, a dynamic, self-reliant city-state, was one of the biggest opponents of federal power; neighbouring Abu Dhabi was its biggest supporter. The UAE's ruler, Sheikh Zayed bin Sultan al Nahyan, was keen to centralise power. He appointed a federal oil minister and set up joint internal security and border controls, immigration and intelligence. In 1979 he proposed uniting the armed forces and creating a federal budget. Dubai refused.
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Dubai, a self-reliant city-state, was one of the biggest opponents of federal power
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Frustrated, Zayed threatened to step down as president. The crisis was defused after a member of the Kuwaiti royal family intervened. But after war broke out between Iran and Iraq in 1980, military security became a pressing concern throughout the Gulf. In 1981 the UAE joined with Bahrain, Kuwait, Oman, Qatar and Saudi Arabia to form the Gulf Co-operation Council (GCC). Mindful of its powerful neighbours, defence spending in the UAE rose steadily.
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Pulling its weight
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Meanwhile, Dubai was booming. Its non-oil trade was growing at a healthy pace, and an influx of immigrants boosted the economy. By 1995, the emirate accounted for 70% of the UAE's total trade. Re-export trade with Iran, by dhow and freighter from the creek, grew significantly. From 1968 to 1975, a wave of immigration boosted the population across the seven emirates from 180,000 to nearly 560,000. Most immigrants—then as now—are Indian (largely Sindhi and Gujarati), Persian, Baluchi and Arabs from other Gulf states.
Today the population of the UAE is estimated at 3.2m, with Emirati nationals making up only 20%. About 1m people live in Dubai, making it the UAE's most populous city, and almost double the population of the city of Abu Dhabi. By 2010, the UAE's population is expected to grow by another 2m, and the proportion of foreigners may reach 90%.
The official religion of the UAE is Muslim, and almost all UAE nationals are Sunni Muslims. Much of the expatriate population is Muslim, with unskilled and semi-skilled workers coming principally from Pakistan, Afghanistan and Bangladesh, and the professional classes dominated by Indians, Iranians, Lebanese and Brits.
When Sheikh Rashid died in 1990 his eldest son, Sheikh Maktoum bin Rashid al-Maktoum, succeeded him as ruler of Dubai. Sheikh Maktoum ruled until his death in early 2006, but his role was largely ceremonial from 1995. That was when he passed a decree appointing his younger brother, Sheikh Mohammed bin Rashid al-Maktoum, Crown Prince of Dubai. Sheikh Mohammed was the prime mover behind Dubai's drive towards a modern service economy. He succeeded Sheikh Maktoum as the emirate's ruler, and became vice-president and prime minister of the UAE, thus earning far greater influence across the federation.
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Dubai's oil reserves are likely to be exhausted by 2010 and the economy needs to diversify
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In part, Dubai’s obsession with diversifying its economy is recognition that its oil reserves are likely to be exhausted by 2010. The information industry in particular has been lavishly cultivated. In 2000, Dubai Internet City opened at a cost of $250m. This is a zone of tax-free trading based on the model of the Jebel Ali Free Zone, designed to appeal to large information-technology companies and to “knowledge professionals” from around the world. The list of tenants includes Dell, Siemens, HP, Microsoft, Oracle and Cisco Systems. For media companies there is the adjacent Dubai Media City, which opened in 2001 and is now home to branches of CNN, Reuters and Dow Jones, among others.
Sheikh Mohammed has dedicated himself to turning Dubai into a business, tourism and aviation hub. He hopes to attract 15m visitors a year to Dubai by 2010. The annual Dubai Shopping Festival, launched in 1995, now fills hotels to 90% capacity and can generate sales of up to $1.5 billion. He also created the Dubai World Cup, the world's richest horse race, held every March. A rolling programme of investment and expansion continues: the Burj Al Arab, a luxury hotel built on an artificial island, has become a symbol of the city.
Emirates, the national airline launched in 1985, is equally ambitious. It has turned a profit every year, making $762m in 2005-06, despite soaring fuel prices. It is one of the biggest customers of both Airbus and Boeing, and plans to expand aggressively in the coming decade.
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Everything but the coconuts
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Sheikh Mohammed's boldest project is probably the Palm Islands, a grandiose plan to build the world's three largest artificial islands, which will at least triple the length of Dubai's shoreline. Costing several billion dollars and shaped like palm trees, the islands will be home to 60 luxury hotels and thousands of plush villas and apartments. The first island, which features 17 fronds, each 2km long, was ready for residents in early 2007. Expats in Dubai have been allowed to buy property in the emirate since 2002, though the law has yet to be approved at federal level.
Other projects in the works include the Dubai Marina, a $10 billion housing development; a $1.6 billion Festival City; and a $150m zoo. Then there's the Dubai International Financial Centre, which aims to turn Dubai into the leading capital market in the Middle East. Though some may worry about setting up a financial centre in a city known for its tolerance of money laundering, European regulatory bodies will oversee the project and new laws for financial transparency have been passed.
Most of the funding for these schemes comes from the government, which is to say the al-Maktoum family, whose assets are said to top $10 billion. Dubai doesn’t have much oil, but it has benefited from high oil prices since 2004 by selling previously worthless desert land to oil-rich developers from neighbouring Kuwait, Abu Dhabi and Qatar.
Dubai’s investment boom carries clear risks. Some property experts warn that the supply of residential property under construction will outstrip demand, although by early 2007 that had not happened, as prices and rents have been soaring in line with the rapidly growing population of expatriates. Indeed, ever since Sheikh Rashid began building modern Dubai in the 1970s, sceptics have been warning that the investment would never pay off. Why would big shipping lines want to divert from the Indian Ocean and into the Arabian Gulf to dock at Dubai? Why would an international IT company set up a base at Dubai Internet City, just as the dotcom bubble was bursting? Who would want to take a holiday on a desert coastline, where the summer heat and humidity are unbearable? Time and again, Dubai has clung to the belief that “build it and they will come”, and it has developed a good record of proving the sceptics wrong.
The rapid growth is not without glitches. Traffic congestion has become a headache as the population increases, and in 2007 road tolls were introduced. Blue-collar workers, without whom large construction in Dubai would be impossible, have begun protesting (illegally) against working conditions. Concerns about inflation make constant headlines in the local press. Expatriates are seeing rents rise by more than twice the official cap of 7% a year.
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The gold souk maintains a local tradition
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Modern Dubai, with its glass skyscrapers, lavish hotels and 21st-century business ambitions, seems a far cry from the city that existed here even 30 years ago. But scratch the surface and strong similarities emerge. Then, as now, Dubai was a haven for traders and entrepreneurs out to make a buck under the city’s liberal and low-tax regime. Illegal smuggling is largely a thing of the past, but the trade routes in and out of Dubai follow the same paths they have for decades, even centuries. Today, much of Dubai’s trade comes from multinationals such as Microsoft, which keeps its sleek regional headquarters in Dubai Internet City. But Dubai has been a regional trading hub since the 16th century; only the clients have changed.
Head to downtown Deira, by the mouth of the Creek, for first-hand evidence of modern Dubai’s links with its past. The thriving gold souk, now a busy tourist attraction, is a lasting legacy of Indian smuggling rackets. The throng of traditional wooden dhows moored on the banks of the Creek, still ferrying goods between Dubai and Iran or Sudan, harks back to Dubai’s roots as a humble trading post. The political system, which remains an absolute, hereditary dictatorship (albeit a rather benign one), has hardly changed. No one can question the advances Dubai has made in recent decades; the architectural evidence is everywhere. But strip the city down to its essentials, and it is at least partly a case of old wine in new bottles.
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