As with Malta, Dubai's importance lies in its strategic location and natural deep harbours. For ages it served as a trading outpost. The Arabian city-state prospered on smuggling and pearl fishing. Dubai essentially bestrides a six-mile creek but it has an extensive desert hinterland. Dubai and six other autonomous emirates form the United Arab Emirates federation. Dubai is the most populated emirate with some 1.25 million, but only one in every five of these is indigenous.

Over the last decade, Dubai has been heavily promoting itself as a cosmopolitan, entrepreneurial hub targeting upmarket tourism, real estate and financial services. It has earned a reputation as a prodigal state, the closest thing to Neverland. Dubai could fill a Guinness Book of Records on its own. It boasts the biggest, tallest and most expensive of everything. Man-made archipelagos in the form of a palm tree or planet earth have fascinated people all over the world. Next month, the Burj Dubai, the world's tallest building, will be inaugurated. Unfortunately, it is not the most opportune moment.

So what went wrong for this new-age, pharaonic state? Dubai has limited oil reserves and the industry accounts for less than six per cent of its GDP. It has been very keen to build a vibrant economy for the morning after oil. It has achieved impressive economic growth rates financed by easy money and speculation. In its drive, it relied on Western brains and Asian brawn. Dubai put in sun, sea, incentives and a high degree of tolerance for a Muslim state. It evolved into a glamorous playground for the famous and the nouveau riche; an oasis for global capital in search of a plush, extravagant way of life and economic alchemy. In the process, it borrowed heavily. Its debts officially amount to $80 billion (140 per cent of its GDP) but analysts claim that the country's total indebtedness could amount to twice that figure.

The global financial meltdown and economic crisis are leaving their mark on the city-state. Dubai's leaders tried to put up a brave face and went into denial. But the fact that property prices dropped by half since 2008 worried investors who started looking for signals to disinvest. Last February, the UAE Central Bank bought $10 billion of Dubai's emergency bonds. Dubai issued fresh liabilities amounting to $5 billion to pay off its debts rather than rolling its loans or disposing of its assets. A few hours after the government closed the placing, Dubai World, one of the three government conglomerates at the core of Dubai Inc., announced that it was asking for a six-month moratorium on interest payments. Dubai World's borrowings are estimated at $60 billion. The company owns various blue-chip investments at home (such as P&0 Ferries, Dubai Ports and Jebel Ali Free Zone) and abroad (from Ferrari to Barneys Department Store in New York).

The conglomerate's weakest link is Nakheel, its property arm, which has a $4 billion Islamic bond (sukuk) due for repayment later this month. Nakheel has no more money and work on the World archipelago is at a standstill. Investors were shocked. They were angered that the news was given just before the country started its Eid Al Adha festivities, which commemorate Abraham's willingness to sacrifice his own son as an act of obedience to God.

The relationships between the dynasty, the government and government-owned holdings were never clear. Investors had assumed all along that the government would make good for money lent to its companies. Now they have realised that it was not so. Also, they had trusted that, if Dubai ran into trouble, it would be bailed out by oil-rich Abu Dhabi, which has the UAE Presidency. Abu Dhabi's conservative rulers indicated that they were prepared to offer support on a "pick and choose" basis. The UAE Central Bank promised to help all locally-operating banks and this somehow stabilised the situation. Abu Dhabi realises that its economic fate is closely linked to Dubai's and has a lot to lose from the collapse of its cousin-emirate.

Will this crisis, which sent tremors throughout the financial world and wiped out over $9 billion on UAE stock markets in 48 hours, be a passing sandstorm? For sure, Dubai's brand and reputation have been severely tarnished. It was a reminder that the road to global recovery is still full of potholes. Also, hopefully, a few more lessons have been learnt: that it is dangerous for economies to grow too fast, to be disconnected from the "real" economy while lacking a prosperous middle class. Other lessons: If Dubai really wants to establish itself as an important financial centre it needs more than money and good marketing. To be sustainable, prosperity has to be based on serving customers and not speculators. It also requires transparency and financial oversight. How Dubai handles this crisis will also be critical for the future of Islamic finance, because it is raising many questions, which are not as yet answered.

It would be a sad story were Dubai to sink under its dunes. It would be a silent victory for conventional Arab regimes; the failure of an economic, social and cultural experience. Although Malta is in a different league, the Dubai crisis has some lessons for us too.

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