Dubai opens the world’s tallest building at a price of $1.5 billion, the month after it declared it was on the verge of bankruptcy
Dubai symbolized the economic boom of the 21st Century.
With its vast lavish construction projects and world-class sporting events, it quickly became the prime destination for some of the world’s largest and leading financial and service corporations. The increased attention it received world-wide made Dubai emerge as a world business-hub. With an economy to the tune of $46 billion, the Gulf emirate attracted world-wide attention with its rising property sector, all of this was achieved in two decades, before which there existed only barren dessert land. Impressed by Dubai’s success, many analysts emphasized that diversification-drive away from relying solely on oil revenues has placed it upon a path of development, one which represents a new formula for economic development for the Middle East and a distinctly Islamic approach to economic development.
Dubai past and present
The UAE has been blessed with a vast resource of oil, the revenues of which have allowed Dubai to turn into a modern city out of what was once a small fishing village. The aspirations of the ruling sheikhs led to the orientation of the economy towards tourism and service sectors. Dubai made its bid for fame by housing, banks, retail, media, shipping and logistics enterprises and by billing itself as a safe haven in a volatile region for investors. This has allowed Dubai to become a hub of tourism in not only the Middle East but also for the world. It strived to become a financial centre to rival the likes of London and New York with its lead in Islamic finance.
Due to this, Dubai was unique amongst the Muslim world in that it has witnessed phenomenal development over the last 20 years. It has become a modern city with mind-blowing amounts of wealth on display in the form of sky-scraping buildings and uniquely lavish developments. It is a city not only popular as a tourist destination for large numbers of Muslims, but one that is equally, if not more attractive to people from all over the world. Dubai offers a Western lifestyle with an Eastern flavour for all. The native population is a minority with 85% of Dubai’s population being composed of expatriates. For many, this would be considered a success story as Dubai has attracted the world to its tiny emirate, but in this apparent success lays the myth of economic development, which has now brought the desert empire to its knees.
The driving engine for Dubai was never sustainable. Dubai’s growth was initially through its oil wealth. This wealth was used to develop Dubai to attract foreign investment and soon enough, foreign companies and foreign workers arrived looking for an opportunity in Dubai. Its position as a trading hub meant many companies relocated its staff to work from Dubai which is fundamentally what brought Dubai its wealth.
This was never sustainable. The skilled workers that were developing the service sector were mostly from overseas, with only a small percentage of Dubai’s population today considered to be native Arabs. Its growth has been a direct result of it becoming an essentially tax-free zone for foreign nationals and companies. These companies, whilst providing jobs and income to people in the country, are not transferring any technical skills to the people. Its property market boom was due in large part to speculation that the prices would continue to rise.
Dubai has merely exploited limited natural resources and has been importing talent from abroad with little skills and knowledge-transfer to drive its economy. Dubai was always nothing more than a mirage in the desert; its growth and survival was dependent upon the talent and expertise of foreign entities. It could only offer specialist services such as banking and finance as a means to guarantee its future, along with tourism. As these sectors rely heavily on the goodwill and confidence of foreigners, if in any way this sentiment was affected, Dubai’s desert empire would crumble.
This is exactly what happened with the Global credit crunch. In order for financial companies to shore up their losses they have withdrawn their money from expensive and lavish projects. Service companies which relied on loans are now seeing this dry up as one bank after another either collapses or requires government bailouts. One expert from Nomura encapsulated the situation in Dubai: “Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance.” As Dubai was built upon foreign money, it now awakes to find that this has dried up, so in essence Dubai’s source of growth has been cut, causing the breakneck building-boom to come to a crashing halt. The lending bonanza has evaporated and the government continues to ponder wider steps to rescue banks, including asking its neighbouring emirate, Abu Dhabi, for financial assistance.
Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE Finance Ministry announced in January 2009 that it would inject 70 billion Dirhams ($19 billion) into the banking system, and is already looking at printing even more money.
Dubai does not produce any manufactured products that the people in the city buy. It is a city that is not self-sufficient, as it neither has the infrastructure nor the natural resources in place to develop the products it consumes. Dubai was, by all means, a bubble waiting to burst.
Asian Financial crisis
A decade ago, another region of the world attempted to organise their economies on the same model of economic development and today still suffers from the repercussions. South-East Asia attracted almost half of total capital-inflow to developing countries. The economies of South-East Asia maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region’s economies received a large inflow of hot money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced high growth rates, 8-12% GDP, in the late 1980s and early 1990s. This achievement was broadly acclaimed as the ‘Asian Economic Miracle’ by economic institutions such as the IMF and World Bank.
But the miracle then ran out of steam as investors tried to cash in on their money. By May 1997 large sums of money were withdrawn, causing many of the regions currencies to collapse. As foreign money sustained the miracle, the departure of this outside investment left the region in ruin with millions left in poverty.
The industrialised world all developed their manufacturing sectors and then colonised and dominated the world’s natural-resources, ensuring a regular supply of raw materials. By industrialising their economies, they fortified the domestic infrastructure and militaries to defend their countries. It was only after this process of industrialisation that they developed their service sectors. The economic models of export-driven growth, foreign direct investment (FDI) and globalisation are not models where economies can become self-sufficient and independent. This was the blueprint that even the West did not follow.
Islamic Economic Development
The suggestion that Dubai offered a new model for economic development and an Islamic approach could not be further from the truth. Building an economy upon foreign wealth, external expertise and personnel is a tried-and-tested model which has a substantial track record of failure. Latin America, South East Asia and the Baltic states have all attempted this approach with catastrophic results.
The claim that Dubai offered Islamic banking does not make its development Islamic; Britain was one of the first nations in the world to offer Islamic bonds yet nobody would argue that Britain pursues an Islamic economic system. To attract foreign industry, labour and money, Dubai has had to compromise on many Islamic values to do with the mixing of the sexes and alcohol in the name of necessity. The imposition of some Islamic rules in reality is a charade.
The development of the economy has extensive rules in Islam which has been elaborated by many scholars throughout history. Islam has made the Khilafah responsible for da’wah and the defence of the Ummah and this can only be achieved through a process of industrialisation. It also obliged the Khilafah to organise the fulfilment of the basic necessities of the people which are food, clothing and accommodation. This cannot be achieved by having an economy geared around services but needs one geared around manufacturing and agriculture. This allows a nation to produce all that it needs and export any surplus. Relying and depending on imports and foreign money is not an assured path for development and survival.