Dubai Inc.

How does Dubai Inc. work? Back in early 1985, the prince of the then little-known Arab sheikdom was stewing after an airline canceled his flight at the last minute. He called in the Englishman who managed the Dubai tourism authority and asked how much it would cost to start an airline. "Ten million dollars," replied the Brit, Maurice Flanagan. The prince told him to get started, and the first plane took off that same year. Today Emirates airlines has been growing at 20 percent a year for 17 years, and is the world's second most-profitable airline, flying to 80 destinations in 55 countries.

Its founding father, Sheik Mohammed bin Rashid Al Maktoum, is now the ruler of Dubai, and his managerial style has suddenly come under the microscope in Washington. One of the companies his family controls, DP World, agreed last week to put on hold its purchase of container terminals in seven U.S. ports, pending a security review. With U.S. President George W. Bush calling Dubai a loyal ally in the war on terror, and critics in Congress demanding to know why Washington would cede control of U.S. port terminals to any government, much less an Arab one, DP World found itself scrambling to explain. What is Dubai Inc.? Who calls the shots? Critics dwell on Dubai's ties to the men and money involved in the 9/11 attacks, painting the sheikdom as a threatening Arab mini-state. Advocates point to Dubai's transformation into a commercial and financial hub, built on Western law. The truth lies somewhere in between.

Sheik Mohammed, known to his people as "the boss," assumed practical control of Dubai in 1995. Since then he's refashioned the city-state according to his "Vision 2010"--revving up tourism, finance and media-related businesses, while turning its harbor into a model of efficiency that DP World has exported to ports in India, China and beyond. Dubai is selling itself as the Singapore of the Middle East, an oasis of commercial discipline in a chaotic region. But Dubai is part of the United Arab Emirates, a federation of seven tiny Arab sheikdoms created in the early 1970s. And the politics of the U.A.E. are still a tribal affair, particularly in the smaller emirates, which produced one of the 9/11 pilots.

Sheik Mohammed is the prime minister of the U.A.E., and is pushing the federation to embrace his dream of a modern Arab economy, built on more than easy oil money. But the U.A.E. president hails from Abu Dhabi, where there is growing unease about what critics see as Dubai's "headlong rush" to modernize and "harebrained schemes" like plans to erect the world's tallest building, says Global Insight analyst Anoushka Marashlian. The doubters dwell on Dubai's rising congestion and pollution, as well as recent signs of potential unrest among migrant laborers who do the dirty work in Dubai.

And Abu Dhabi matters. Dubai is successfully diversifying beyond oil in part because its own small reserves are dwindling. But Abu Dhabi is still awash in oil and oil profits, and continues to support Dubai through "cash transfers and energy subsidies," says Marashlian. How big are those subsidies? "That's the million-dollar question everyone is trying to figure out," she says. "It's very secretive."

It is in the commercial realm that Sheik Mohammed has most clearly distanced Dubai from tribal practice. His family owns every major business in Dubai, and hires as a multinational business does: on merit, not family ties. The Dubai financial services center is modeled on U.K. and Australian laws, and has attracted the likes of Credit Suisse and Morgan Stanley. The latest Transparency International survey ranks the U.A.E. as one of the least corrupt countries in the Middle East, at No. 30 out of 158 nations worldwide. This is the environment from which DP World emerged in 2001. "DP World is a Dubai company, not a federal U.A.E. company," says Marashlian. "That's a very important distinction, though it gets blurry."