Is Dubai’s Party Over?

Perhaps. Certainly many Dubai residents say they'd like a chance to catch their breath, and there are ample signs the city needs to catch up with itself. Just 50 years ago, the place was a dusty outpost of a few thousand people on a forgotten corner of the Arabian Peninsula. Forty years ago, one of its biggest businesses was smuggling gold to India. After British forces withdrew in the early 1970s from what were called the Trucial States, the seven local sheikhdoms became the United Arab Emirates. Abu Dhabi had the greatest share of wealth because it had by far the greatest share of oil. But Dubai had entrepreneurial spirit.

In the 1980s, under Sheik Rashid bin Saeed Al Maktoum and then his son Sheik Mohammed bin Rashid Al Maktoum, Dubai developed its enormous free port—even as Iran and Iraq fought a war on the horizon. Golf courses that were kept green with millions of gallons of desalinated water started changing the landscape, and by the 1990s, Dubai was building landmark resorts like the sail-shaped Burj Al Arab Hotel. It also started cashing in on new technologies with special Internet and media "cities" built to make it as important a hub for communications as it was for shipping and air traffic. In just five years, from 1995 to 2000, Dubai's population grew 25 percent, and now stands at about 1.6 million people. The vast majority are expatriates coming to work at every level of society, from menial labor to senior management. In 2007, the Emirates as a whole counted only 864,000 citizens, compared with 3.6 million foreign workers. "While infrastructure development was rapid, the number of expats flocking to the city overwhelmed it," says Citigroup's Khan.

But even if Dubai needs an enforced breather, it's not likely to get through the downturn unscathed. Abu Dhabi, after many years of quietly helping to fund Dubai's growth and watching Dubai develop a reputation for innovation and excitement, is now looking to take a bigger share of the action. "A formal statement is unlikely," says Khan, "but strategic assistance from Abu Dhabi is likely." And so is increasing control. Abu Dhabi dominates the UAE's federal government and last week the federal constitution was pointedly amended to bar the prime minister (Dubai's Sheik Mohammed), his deputies and federal ministers from "any professional or commercial job" and to prohibit them from any business transactions with the federal or local governments. How this can be enforced is an open question—to a large extent, Dubai is Mohammed Al Maktoum—but the message was clear enough: Abu Dhabi is now in charge.

Meanwhile, the Emirates are literally taking some time off, first for Muslim holidays and then for Christmas. Few big new initiatives are likely to be announced before the beginning of the year, if then. But the cracks continue to show. Take the new Atlantis resort, for example. It is a joint project between South African developer Sol Kerzner's group and Nakheel, the Dubai development company that built the Palm Jumeirah island and other even more extravagant real-estate follies up and down the coast. Days after the grand opening, Nakheel announced it was laying off 500 people, or roughly 15 percent of its global workforce. "The people with Nakheel spend $20 million on fireworks and don't have money to pay their own people," says a Lebanese businessman with extensive interests in Dubai. "It's a disaster."

Meanwhile, even the rich are feeling the pinch. Last week the owner of a Mediterranean-style villa on one of the Palm Jumeirah's beachy fronds facing the Atlantis dropped his asking price from $4.9 million to $3.6 million and then $3.13 million, and offered to throw in his Bentley as well. "Our client has his money stuck in the markets and he desperately needed it to run his business," says real estate agent Anthony Jerish. "Still, nobody bought it. Maybe we will sell the Bentley separately. I don't know." No, this isn't the old Dubai at all.

With Vivian Salama In Dubai and Nick Summers in New York

© 2008