To understand Dubai's economic crisis it helps to understand the four driving forces behind its economic growth. Incidentally, these are the same four forces that brought the meltdown.
Dubai borrowed heavily in the 50s and 60s to expand the port. This was an excellent decision since world trade was booming and the growth potential was enormous. Earnings from shipping operations was one of the first main sources of income for the Emirate.
Along with the development of the shipping industry (1st force) came the development of the financial center (2nd force) to support the shipping industry and to offer companies the chance to be in the Middle East and closer (but not too close) to where oil is.
Establishing Dubai as a financial center meant the development of new buildings, hotels, shopping centers and entertainment facilities. This fact combined with the expansion of the airport and the world class service Emirates offered let to a jump in tourism (3rd force).
The popularity of Dubai, along with expectations of a possible de-pegging to the USD let to speculative investment in real estate that created a price bubble.
Unfortunately, the current global economic crisis turned these four forces against Dubai. The shipping industry is in a bad shape right now, the first time in lots of recession that the industry has been affected. No one I believe expected that this financial crisis would damage the shipping industry so badly.
The financial firms that established operations in Dubai either disappeared, or they are so bruised by the crisis that are not expanding operations, but rather they are decreasing them. Even if there are companies willing to expand operations in the Gulf, Dubai is not the only attractive place any more. Qatar, Bahrain, and Abu Dhabi now have both developed financial centers and offer the opportunity to these firms to be closer to their clients (oil and gas companies).
Tourism is down as a result of the global crisis. This is a temporary shock. However, there is a permanent shock that is important. Many of Dubai's tourists are traveling to other locations with Emirates, and stop in Dubai for a few days. However, the expansion of Bahrain and Qatar's airports means that a large share of these travelers will now be diverted away from Dubai. At the same time, Dubai is not the only place any more that offers such exciting architecture (although no other place is anywhere close to where Dubai is in that respect).
Finally, all the speculators are out of the market. The real estate price collapses. People learned their lesson and prices are not expected to come back for a long long time (given all the factors above).
Where does this leave Dubai? I agree with a previous commentator that Dubai is important for the region and we should all hope that it survives and become stronger.
My humble view is that when all these turbulence clears, Dubai will offer a different sort of service for the region. It will become the "entertainment" and tourist destination for the residents of the Gulf. As Qatar and Abu Dhabi (but also Bahrain) will be hiring more expats to work here, Dubai will offer the weekend getaway destination to go and relax. Dubai's neighbors are reluctant to "become Dubai" so they will be happy to help the Emirate through the tough times so that it can perform this function in the future.
I am no expert on the matter nor have I been here long enough. This is just some thoughts I have. Please view my thoughts with cautions.
To understand Dubai's economic crisis it helps to understand the four driving forces behind its economic growth. Incidentally, these are the same four forces that brought the meltdown.
Dubai borrowed heavily in the 50s and 60s to expand the port. This was an excellent decision since world trade was booming and the growth potential was enormous. Earnings from shipping operations was one of the first main sources of income for the Emirate.
Along with the development of the shipping industry (1st force) came the development of the financial center (2nd force) to support the shipping industry and to offer companies the chance to be in the Middle East and closer (but not too close) to where oil is.
Establishing Dubai as a financial center meant the development of new buildings, hotels, shopping centers and entertainment facilities. This fact combined with the expansion of the airport and the world class service Emirates offered let to a jump in tourism (3rd force).
The popularity of Dubai, along with expectations of a possible de-pegging to the USD let to speculative investment in real estate that created a price bubble.
Unfortunately, the current global economic crisis turned these four forces against Dubai. The shipping industry is in a bad shape right now, the first time in lots of recession that the industry has been affected. No one I believe expected that this financial crisis would damage the shipping industry so badly.
The financial firms that established operations in Dubai either disappeared, or they are so bruised by the crisis that are not expanding operations, but rather they are decreasing them. Even if there are companies willing to expand operations in the Gulf, Dubai is not the only attractive place any more. Qatar, Bahrain, and Abu Dhabi now have both developed financial centers and offer the opportunity to these firms to be closer to their clients (oil and gas companies).
Tourism is down as a result of the global crisis. This is a temporary shock. However, there is a permanent shock that is important. Many of Dubai's tourists are traveling to other locations with Emirates, and stop in Dubai for a few days. However, the expansion of Bahrain and Qatar's airports means that a large share of these travelers will now be diverted away from Dubai. At the same time, Dubai is not the only place any more that offers such exciting architecture (although no other place is anywhere close to where Dubai is in that respect).
Finally, all the speculators are out of the market. The real estate price collapses. People learned their lesson and prices are not expected to come back for a long long time (given all the factors above).
Where does this leave Dubai? I agree with a previous commentator that Dubai is important for the region and we should all hope that it survives and become stronger.
My humble view is that when all these turbulence clears, Dubai will offer a different sort of service for the region. It will become the "entertainment" and tourist destination for the residents of the Gulf. As Qatar and Abu Dhabi (but also Bahrain) will be hiring more expats to work here, Dubai will offer the weekend getaway destination to go and relax. Dubai's neighbors are reluctant to "become Dubai" so they will be happy to help the Emirate through the tough times so that it can perform this function in the future.
I am no expert on the matter nor have I been here long enough. This is just some thoughts I have. Please view my thoughts with cautions.
Thanks