The outstretched palm

Having long ago depleted most of its oil reserves,Dubai has reinvented itself as a 8220;sell-side8221; emirate,dreaming up ingenious schemes for other people to invest in. Chris Davidson of Durham University,who has written a history of the emirate,describes it as a 8220;spongelike economy8221;,designed to absorb foreign money. The government imposes few levies Dubai has no income tax and accounts for only 10 billion of the emirate8217;s debts. But its rulers sponsor an extended family of companies. Between them,these corporations have amassed about 70 billion of liabilities see chart,adding to a debt pile that almost matches the emirate8217;s 2008 GDP of 82 billion.

On the other side of Dubai8217;s ledger,the government claims to have 90 billion in assets on top of the 260 billion held by its corporations. But it has not revealed the composition or liquidity of its holdings. The very fact that it had to turn to its neighbour for help suggests that its own family silver is not that easy to sell.

The bond proceeds will allow Dubai to meet its obligations this year which amount to about 10 billion-15 billion and probably next. But what will Abu Dhabi ask in return? On the face of it,not much. Tristan Cooper,of Moody8217;s,a rating agency,had expected Abu Dhabi to be 8220;a bit more fussy8221; about how the funds were used. It might,say,have taken equity stakes in Dubai8217;s freewheeling corporations or sought some control over their managers.

But Mr Davidson thinks the unstated price of Abu Dhabi8217;s support will be stiff indeed. 8220;It is the end of the second emirate8217;s economic autonomy,which it has fiercely protected,8221; he says. Why else did Abu Dhabi put Dubai through 8220;months of pain and humiliation8221;,if it did not see some long-term gain from chastening its neighbour and strengthening the UAE federation,Mr Davidson asks. Dubai will now have to be more accommodating of its neighbour8217;s wishes,he says. It will,for example,have to forgo its independent foreign policy,which had seen it become Iran8217;s outlet to the world,even as Abu Dhabi kept a careful distance.

Dubai will also have to 8220;lose its ambitions to become the Monaco of the Gulf,8221; Mr Davidson says. Abu Dhabi will insist on greater prudence and Dubai8217;s go-getting rulers may also now feel defeated. Their economic ambitions were driven partly by their political insecurities. 8220;A lot of the urgency we saw in the last ten years was fuelled exactly by Dubai8217;s need to keep its autonomy,8221; Mr Davidson says.

But for all Dubai8217;s woes,the Gulf still needs a financial centre,a port,and a secure place to live,Mr Cooper points out. With a little less gumption and a lot less gearing,8221;Dubai is plausible8221;.

The Economist Newspaper Limited 2009