A bailout by neighboring emirate Abu Dhabi has apparently stabilized Dubai’s financial crisis. But the longer-term economic impact—on Dubai and other nations—could grow more serious. Professor of Finance and Insurance Jeffrey Born says the possibilities range from a prolonging of the recession in some Western economies—especially the United Kingdom—to a more serious credit crisis for Islamic economies.
When people think of Dubai, they think of extravagance. Can you give us a brief historic perspective on the financial rise of the United Arab Emirates?
On an area of the Arabian Peninsula on the south coast of the Persian Gulf lie seven sheikdoms that formed a confederation known as the United Arab Emirates (UAE) in 1971, when a 100- year protective treaty with Great Britain expired. Dubai is the second-largest emirate and it takes its name from the major port city located on the Gulf. The confederation members use a common currency, the UAE dirham, but each has its own legal system and constitutional monarchy. Oil, discovered in the early 1960s, accounts for 25 percent of the UAE’s total GDP, which rose to $206 billion in 2008. For comparison, when formed, the UAE had a GDP of approximately $1.5 billion. Linkage of the UAE dirham to the U.S. dollar has led to significant inflation, but nonetheless, real growth rates have been amongst the highest in the world since the mid 1970s, and the creation of OPEC.
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