Over a century ago fishermen would dive into the Gulf’s azure waters to hunt for pearls and men in dhows would hoist handmade nets into the sea to provide the two main sources of income for local tribesmen in what is now known as the United Arab Emirates.
The Great Depression, coupled with Japan’s discovery of cultivating perfect pearls, all but destroyed the Gulf state’s pearl industry. But the discovery of oil in the 1960s transformed the barren desert landscape into sprawling metropolis of lavish skyscrapers, steel and glass centres of trade and commerce and pristine beaches.
“It was transformative. Sheikh Zayed and Sheikh Rashid in Dubai literally used the oil money to transform the landscape,” says Jim Krane, author of City of Gold; Dubai and the Dream of Capitalism. The capital, Abu Dhabi, and neighbouring Dubai wasted little time in investing their vast oil wealth in healthcare, education and national infrastructure for its tiny population while its tax-free environment, year-round sun and booming construction industry lured hundreds of thousands of foreigners to live and work in the country. Its rapidly growing economy saw gross domestic product increase 1,252 percent from $2.8bn in 1973 to $35.7bn in 1993, according to data from the World Bank.
But while Abu Dhabi, home to around 90 percent of its country’s oil exports, adopted a conservative, long-term approach to its economic development, Dubai, aware of its own less abundant oil supplies, implemented a far more aggressive approach to its economic diversification.
Tourism and real estate became the name of the game. The emirate ploughed billions of dollars into transforming itself into a global tourism destination. In the space of a few decades Dubai established its own airline, built the world’s first so-called seven-star hotel and erected lavish shopping malls that boast some of the region’s most outlandish attractions. A series of free zones, allowing firms 100-percent ownership, were also established as it sought to recreate itself as a global trade and commerce hub.
In 2002, Dubai’s government opened its real estate market up to foreign investors, granting them ownership rights for the first time. Foreign investors flooded the market, pushing up real estate prices by 75 percent between the start of 2007 and the end of 2008, according to Morgan Stanley.
“Opening up its real estate key sector was one of the key decisions that has made Dubai what it is today and put it into the global consciousness,” says Krane. “When HH Sheikh Mohammed decreed that foreigners could buy real estate, he unleashed a frenzy of pent up demand. The spotlight was on Dubai, they went as fast as they could and took it as far as they could. It was a classic bubble scenario, not dissimilar to Florida in the 1920s,” he adds.
Emaar Properties, Nakheel – a subsidiary of the conglomerate Dubai World – and statebacked Dubai Properties became synonymous with the emirate’s five-year real estate boom. While Nakheel became famous for its manmade islands in the shape of palm trees and the world, Emaar Properties made global headlines when it broke ground on the world’s tallest tower in 2004.
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While Dubai spent the early 2000s developing a reputation for glitz and glamour, Abu Dhabi set about establishing a more conservative – but no less ambitious – plan to diversify its economy away from oil. The capital released details of a development blueprint, called Vision 2030, invested in beaches and started to develop its manmade and natural islands to serve as centres of culture and entertainment. The emirate hosted its inaugural Formula One race in 2009 and announced plans to bring international museums, the Louvre and Guggenheim, to its $27bn Saadiyat Island.
“Abu Dhabi still went for the grandiose mega-project with the big-named architects but they didn’t go with quite the same volume [as Dubai],” says Krane. “Abu Dhabi had more of a conservative, more Bedouin mentality…it took a more of a wait-and-see approach and watched Dubai for a few years.”
The six year oil-fueled boom saw GDP in the UAE increase from $70.6bn in 2000 to $261bn in 2008, according to the World Bank.
Despite the transformations in Abu Dhabi, little changes were felt in the five remaining emirates of Ras Al Khaimah (RAK), Sharjah, Ajman, Fujairah and Umm Al-Quwain.
While RAK, the last emirate to join the UAE in 1972, developed its production of cement, pharmaceuticals and glass and Fujairah sought to develop itself as a weekend tourist destination, all five remained heavily reliant on Abu Dhabi.
“The federal budget, which is primarily funded by Abu Dhabi is the main source of spending in the northern emirates,” says Rachel Ziemba, a senior analyst at Roubini Global Economics.
But Dubai’s Midas touch hit a bump in the road two years ago. As of November 2009, Dubai’s flagship company Dubai World had liabilities totaling $59bn, nearly a quarter of the country’s GDP. The state-owned investment conglomerate rocked global markets when it asked creditors for a standstill on $26bn in debt mainly linked to its two property firms, Nakheel and Limitless World.
Now, however, hotel occupancy is up, malls are teaming with visitors and some analysts expect growth of around four percent next year. In addition, the UAE has emerged as something of a safe haven amid the political turmoil that has swept across the Arab world this year. Real estate analysts have reported investors from Egypt, Tunisia and Bahrain are showing renewed interest in property while several international firms, such as Deutsche Bank and Credit Agricole, have relocated to the Gulf state following Bahrain’s crackdown on demonstrators earlier in the year.
“We want them all to prosper, we don't want anyone to have a disaster but it’s a fact that it’s affecting us positively,” says Emaar chairman Mohamed Alabbar, adding that he believes the “worst is over” for Dubai’s burgeoning real estate sector.
The UAE might have been spared the repercussions of the Arab Spring – and indeed benefited from it – but the unrest sweeping the region has put increased focus on the lesser-known emirates.
“I do think that spending on the northern emirates is probably one of the few places where government spending is likely to increase over the next 12 months. That’s partly because its particularly there that the few political strains we’ve seen within the UAE have come from the northern emirates, where economic opportunities are lower and where you started to seen the sense of disparity of opportunity within the UAE,” says Ziemba.
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UAE rulers this year also raised the pool of voters and candidates at its 40-member strong FNC council from less than one percent of a population of nearly one million to about 20 percent, in a gesture towards greater levels of democracy.
The Gulf state has so far managed to avoid the European debt crisis but reports that Abu Dhabi is scaling back its projects are being seen by many as a sign that the UAE is adapting to current economic realities. At least nine Abu Dhabi-controlled companies have seen top managers exit this year, including investment vehicle Mubadala and developer Aldar as the government seeks to rein in costs. TDIC, Abu Dhabi’s tourism arm, said on 29 October that it would delay the completion of the Zayed National Museum and branches of the Louvre and Guggenheim due to the “magnitude of work”.
“All of this can be very healthy; it is akin to some of the cost cutting that we have seen across large corporations around the world,” says Ziemba. “I think to some extent we can see some of the cuts within Abu Dhabi as being partly reduction of some of the spending on expat staff and projects that were thought maybe to be more attractive to expats, and part of a redirection of spending a little bit more towards nationals,” she adds.
But if the UAE’s first 40 years are any yardstick by which to judge future progress, the next decades are likely to be exciting times indeed.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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