Financial Crisis in Dubai – Report 1
Dubai is one of seven emirates that make up the United Arab Emirates in the MENA region. In recent years, Dubai has experienced a period of rapid expansion and growth followed by a global economic crisis. This crisis has left Dubai in a situation where extensive implications are necessary in order to secure a positive future outlook. The rapid expansion and growth in Dubai occurred mainly during the economic boom from 2003-2008, in which construction and real estate were major factors of development. This economic strategy differs from the majority of other countries in the region that rely on oil revenues as the foundation of their economic development. The goal of Dubai’s investments, based primarily on tourism and foreign spending, is to establish a more sustainable long term economic plan. Dubai is the first Arab Emirate to allow foreigners to purchase land and so when the worldwide economic dip occurred in 2007-2009, many foreigners fled their countries for Dubai, which at the time, was relatively more stable. Because these foreigners were financially weak from their relative depressions, they had little money to spend on Dubai’s attractions, and the overall income level of Dubai began to drop. These low-income foreigners could not afford the high prices of housing and hotels that were in-place and under construction, and housing prices in Dubai began to decline for the first time ever. As housing prices and housing income fell, many foreign building companies began to put their excessive projects on hold. As building projects fell, the cheap construction labor that was hired began to cancel visas at a rate of nearly 1500 a day, at one point. All of these factors led to heavy losses in national income and a financial crisis that began with their inefficient, top-heavy infrastructure focus and became a large issue with the onset of the global recession of 2007-2010. To understand the present state of Dubai’s economy, it is important to understand how the Emirate state of Dubai was born.
In 1833, a subgroup of the Bani Yas tribe seceded from Abu Dhabi and formed its own sheikhdom in Dubai. This area was then ruled by Maktoum bin Buti, and all following leaders of Dubai were descendants of the Maktoum family. Dubai’s economic development was given a major advantage in 1902 when the Persian government started to enforce high taxes on merchants using their ports. This aided Dubai in becoming the main port where goods from India were re-exported to Persia and other nearby countries. Another factor in the historical development of Dubai was an offshore oil discovery in 1966. Large revenues from oil allowed the government to plan major infrastructure and industrial advancements, such as Port Rashid and Jebel Ali port. In 1971, Dubai and six other sheikdoms in the region came together to form the United Arab Emirates (Pacione 255-256). With this came an opportunity for Dubai to surface as one of the main economic and urban growth centers in the UAE and the MENA region as a whole.
The growing merchant sector of Dubai proved very useful during the 1980-1988 Iran-Iraq war, where Dubai earned large profits by supplying consumer goods and equipment to Iran. Another important factor that contributed to the fast paced growth of Dubai was the economic approach of the government. This approach intended to draw large investments to an area with low tax rates and a politically stable environment. For example, the opening of the Jebel Ali free zone in 1985 created a setting where businesses were able to work around Dubai’s customs and legislative barriers while also profiting from low wage non-unionized labor. The amount of firms operating in the Jebel Ali free zone increased from 480 firms in 1992, to 2051 firms in 2002 (Pacione 257). This led to the formation of other free zones such as Dubai Internet City, Media City, and Maritime City.
In 1991, Dubai’s oil...
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