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Over the last 30 years, the major Gulf states and the city of Dubai in particular have been pitching themselves to the global economy as business hubs that could serve as a center of modern commerce. The states have offered very low or often zero taxes, easy paths to residency, worldclass airlines to physically connect to other commercial centers, a lot of luxury facilities to spend all that money, all in what was considered a convenient location in a central point between a majority of the world's population centers. Above all though, these centers promoted the idea that they were safe for wealthy Westerners who could be cocooned away from these states religious conservatism, authoritarian leadership,
human rights abuses, and of course, wider regional instability. Everybody knew these ugly sides were there. But for a little while, it became profitable enough for a lot of people to ignore with the tacid understanding that as long as nobody stepped out of line, this was a safe space for tourists to do a stopover, or more importantly, for wealthy individuals to run a business and keep almost all of their money to themselves. It was a story that worked well enough for a lot of the world's wealthiest people, making it the number one destination for multi-millionaire immigrants and expats, according to some estimates. But that story has changed. In the early hours of the morning on the
1st of March, the Dubai International Airport was hit by an air strike launched from Iran in retaliation to attacks from the USA and Israel. The strikes also hit hotels, a regional Amazon data center, shipping ports alongside domestic and foreign military bases. In the months since the UAE started getting caught in the crossfire of this conflict, their own government has claimed to have intercepted more than a thousand inbound aerial attacks with no direct mention of how many have actually got through. Even in the most direct sense, these ongoing attacks have had real casualties, done real damage, and represent a real ongoing threat to the self-declared safest city in the world. But as many internal outlets and
paid influencers have been quick to point out, in the grand scheme of things, these strikes were relatively incidental to the city as a whole. What wasn't though was the reaction to them. Within the span of just 30 days, the city has made it much harder to ignore the underlying reality of the manufactured utopia they were trying to create. And this alone is going to have serious long-term consequences on their economy. So, why have the Gulf States and Dubai in particular become so dependent on wealthy foreign immigrants? Will these events really scare people away long term? And finally, are these individuals really going to have to
return to their home countries and start paying taxes again? Covering Iran is very difficult without crossing into the political landscape. At Economics Explained, we try our best to bring you a balanced argument from both sides. That's why we use Ground News. Ground News is an independent subscriber-funded website and app on a mission to give readers a data-driven, objective way to read the news. They gather related articles from around the world so you can get different perspectives in one place. But they do so much more than that. For example, here is a right-leaning article that is framing Trump suffocating Iran as an economic strategy. But when you click on the bias comparison tab, you can see the left framing it as oppressive to Iran's
creaking oil population. You can also read through different headlines from different sources and clearly see how reliable they are or who owns them. These are the kinds of differences we like to see when creating a video, so we make sure to look deeply into both sides. You can also see which stories are disproportionately covered by one side of the political spectrum in their dedicated blind spot feed. In an ecosystem that is becoming more biased by the second, Ground News makes it easier than ever to check your bias. Go to ground.news/explained to save 40% on the same unlimited access Vantage plan I
use to get my news on the economy and the world. Supporting Ground News not only supports my work, it supports an independent news platform giving us agency over the information we consume. The Gulf States have known for a long time that oil wealth won't last forever. And even if there are still huge reserves left in the ground, running an entire economy off a single export category is very risky. Because as we have seen just this month, the price of that commodity can change drastically and bring the economy down with it. This is to say nothing of the general trend in the global economy to try and get off fossil fuels. And per capita, we are
actually less oil dependent today than we were during the last major oil crisis in 1980. Now, most people think the idea was to become a destination for travelers who would bring money into the country to replace the oil industry. And while that was certainly part of the equation, it was actually only a small part of it. The real game plan was to become a hub of new world business activity. positioning themselves as a new Singapore, Hong Kong or Switzerland. Neutral, low tax, and perfect for wealthy people who could come there and develop a services economy around them. Now, this is an important distinction because Singapore, Hong Kong, and Switzerland didn't become financial centers by building skyscrapers and
hoping bankers would show up. They developed strong institutions, rule of law, and deep pools of skilled labor over generations. And the financial infrastructure followed naturally from that. Even Singapore, which had some of the most intense decades of economic growth ever, still started off with very unglamorous development. The Gulf States were trying to do the same thing, but in reverse and much faster. To do this, they developed a literal build it and they will come approach. The Gulf States have become infamous for their grand mega projects, some better thought out than others. But the big fancy projects touted as tourist magnets were just as much about establishing a critical mass
of commercial activity to get major multinationals to set up operations in the country. The same logic was used to redirect enormous funding towards worldleading national airlines like ETA, Emirates, and Qatar Airways. These airlines were heavily subsidized by their respective governments, sometimes to the tune of billions of dollars, which allowed them to offer routes and service levels that would be completely uneconomical for a privately funded carrier. The logic was straightforward, even if the economics were questionable in the short term. If they made it easy and pleasant for global business people to pass through their city, some of them would eventually stay for a stopover, a convention, or even long-term, and the
money they bring in will more than pay for the airline subsidies over time. This not only put these countries on the map and made them easier to travel to, it also made the airlines a business opportunity in their own right. Emirates alone quickly went from a cost of doing business into a massively successful business in its own right. Up until about 45 days ago, it was generating over $6 billion dollars a year in profit, employing tens of thousands of people and operating one of the largest widebody fleets in the world. In many ways, Emirates, the airline, was a perfect example of what the Gulf was trying to replicate with the economy as a whole. Foreign companies could move to
the Gulf to cash in on the oil funded development boom. But while they were there, they would be cultivating the business ecosystem with the plan that one day it would be self-sustaining without outside money coming from energy. Now, to be fair, this strategy has produced some genuinely impressive results. Dubai's non-oil GDP now accounts for roughly 95% of its total economic output, which on the surface looks like a remarkable transition away from fossil fuel dependence. The Emirates population has grown from around 370,000 in 1990 to well over 3.5 million today. And the vast majority of those people aren't Emirati citizens. They're foreign nationals who move there to work or do business. In 2024, the UAE attracted roughly 6,700 millionaires as
net new residents, making it the number one destination in the world for high net worth migration for the second year running. That was expected to grow to nearly 10,000 millionaires in 2025, bringing with them an estimated $7 billion in direct capital inflows, which alone is nearly half of Dubai's total foreign direct investment. Now, little disclaimer time. These migration numbers are very hard to accurately track, and there has been disagreement about the specifics. But either way, the magnetic pull of the UAE and other Gulf states has been undeniable thanks to its low taxes and financial opportunities. So clearly, the strategy of building world-class infrastructure to attract
global talent and capital has worked to a significant degree. Dubai has managed to build a genuinely diversified service economy in a place that 50 years ago was a small trading port in the desert. And that is a remarkable achievement regardless of what you think about the politics or ethics of how it was done. But there's a problem with how that transition actually played out. Ironically, even when they were effectively playing Sim City with infinite money hacks on, they still fell into the same trap as a lot of other economies, they became overly dependent on real estate. The real estate and construction industry is now a larger
part of the economy in Dubai specifically than oil is, and by a pretty wide margin, too. To give you some sense of scale, in 2024 alone, Dubai recorded 217,000 real estate transactions valued at over 526 billion Durhams, which is roughly 143 billion US. And that represented a 38% increase in the number of transactions compared to the year before. The sector attracted 110,000 new investors to Dubai's property market in a single year, a 55% increase, and developers launched more than 220,000 new property units in 2023 and 2024 combined with over 300,000 units currently under construction. The rest of the UAE and most other Gulf states still primarily depend on oil, although a lot of them are trying to
replicate this model. Now, in principle, there's nothing wrong with a lot of construction activity in a fast growing city. That's perfectly natural and healthy. The problem is what happens when that construction activity becomes the economy rather than just serving it. We saw something very similar happen in places like Spain and Ireland before the 2008 financial crisis where real estate and construction became so dominant that when the bubble popped, the entire economy went with it. Some of these real estate developments in Dubai have not been particularly successful because there is almost endless space for urban spraw in a very car-centric city, which means supply is not nearly as
constrained as it would be in a place like Hong Kong or Singapore where land is genuinely scarce. But they did have one lifeline. As more wealthy people moved there, they would buy up properties as a speculative asset as well as a residence for when they were in the city. Foreign nationals now hold around 43% of the total value of all residential property in Dubai. And a lot of that isn't being lived in full-time. It's being held as an investment in a jurisdiction with no capital gains tax and minimal regulatory oversight. Property in Dubai became less about living in and more about parking money somewhere safe and tax-free. This is a
pattern we see in a lot of global cities like London, Vancouver, and New York where foreign capital drives up property prices well beyond what local incomes can support. But in those cities, there is at least a large domestic economy underneath that can absorb the shock if foreign demand dries up. In Dubai, the foreign demand essentially is the domestic economy, which means the whole system is far more fragile than it might appear from the outside. This kept the machine going, but it depends on a continual flow of new wealthy residents continually buying in. All other things being equal, as long as new money keeps arriving faster than old money leaves, the property market stays inflated and
the economy looks healthy. But that equation has a very obvious vulnerability. And this is where the recent events become so economically significant. The attacks were a major blow to this entire transition strategy and they were spurred at least in part because the Gulf States host American military bases and are generally cooperative with Western military operations in the region. The actual damage done across the region in terms of direct infrastructure has not by itself been crippling. But there are three areas where these countries are really hurting. The first and most obvious to everybody outside of the region is the closure of the Straight of Hormuz. The straight of Hormuz is a narrow waterway between Iran and the UAE
through which roughly 20 million barrels of oil pass every single day and that represents about 20% of all global petroleum consumption and around a third of all seaborn crude oil trade. Its closure has throttled oil exports from countries that are at the end of the day still very dependent on fossil fuel revenues even if they've been trying to diversify. About 89% of the crude oil and condensate that flows through the strait is headed for Asian economies, particularly China and India, which means the disruption isn't just a local problem. It's rippling through the supply chains of the world's two most populous countries. The closure also has significant implications for global gas
trade because Qatar and the UAE together account for nearly 20% of global LG exports and about 93% of Qatar and 96% of the UAE's liqufied natural gas exports pass through the straight. So, it's not just oil that has been disrupted, but a huge portion of the world's natural gas supply as well. But a bigger problem for the Gulf States specifically is not just that the oil isn't going out. They have enough cash reserves to deal with reduced oil revenues for a while. The bigger problem is that closing the straight also choked off their supply of goods coming in. The Gulf States have developed massive population centers in deserts that simply cannot support them without continual outside supply. The UAE imports more than 90% of its food, and
roughly 70% of those food imports normally transit through maritime routes that are now either blocked or significantly disrupted. Air freight is an option, but it is several times more expensive than ocean freight and potentially at the mercy of Iranian missiles as well. These countries already knew this was a potential problem, which is why they have built up strategic food reserves. But those reserves are generally measured at around 3 to 6 months of basic commodities like grains and rice, and they will not last forever. It's as of yet unclear if the USA is going to be willing to step in and organize something like a modern Berlin airlift if these countries become fully cut off from outside support to the point it becomes a genuine crisis. Now, for
context, the Berlin Airlift in 1948 supplied a city of about 2 million people and it required the largest sustained air transport operation in history at the time. So, replicating something like that for a region with tens of millions of people living in even more extreme conditions would be an enormously complex and expensive undertaking even if the political will existed. The second area of concern is damage to critical infrastructure. These countries have extremely vulnerable infrastructure like power grids and deselination plants that could be targeted. Further crippling what are essentially life support systems for populations many times too large to be living in such an unsupported environment. More than 90% of the Gulf's
desalinated water supply comes from just 56 major plants. And this concentration of essential infrastructure within range of Iranian missiles represents an almost existential vulnerability. In extreme cases like Qatar, more than 99% of drinking water for the country's 3.2 million people comes from desalination, and the country does not have sufficient storage capacity to buffer a significant supply interruption. If those desalination plants are destroyed or severely damaged, the country could quite literally become uninhabitable within weeks because there is simply no natural freshwater alternative in sufficient quantities to support the population. The third big problem, and
arguably the most damaging in the long term, is the blow to the stability and confidence these countries have painstakingly been building up over decades. And this is worth dwelling on for a moment because confidence is not just a nice word that economists throw around. It's the actual foundation that the entire Gulf economic model is built on. Nobody moves to a desert country with no democratic protections and no social safety net unless they are confident that the upside of doing so, the low taxes, the business opportunities, the lifestyle outweighs the risks. The moment that calculation changes, even just psychologically, the whole model starts to unravel. Before we continue, a quick word about the
Economics Explained newsletter. There are a lot of economic stories we genuinely love to cover on this channel, but not every topic is quite big enough to justify its own 15-minute video. So, we started a newsletter to give those stories the space they actually deserve. It goes out once a week and covers topics like how much AI is adding to your monthly bill or why some researchers are paying businesses to fake their work. It's completely free and you can sign up through the link in the description or the QR code on screen. Now, if you're the kind of person who watches economics videos for fun, it was made for you. Now, back to the video. The attacks themselves were a very visible demonstration that these
are still countries in a vulnerable region of the world. But to make matters significantly worse, the governments themselves, especially in Dubai, cracked down on people sharing these events online. This shattered two illusions on the same day. the illusion of safety and the illusion of a fair and balanced government that respects basic personal freedoms. For a lot of wealthy residents, this was a worse signal than the attacks themselves because it confirmed that the freedoms they enjoyed were conditional and could be revoked the moment they became inconvenient. Tourism, which had become a major industry in its own right, collapsed almost overnight. The major airlines
they had built up using their cities as a hub have been largely grounded with Emirates forced to ground nearly 250 widebody aircraft and over 23,000 flights canled across the region's major carriers since the escalation began. Emirates alone reportedly lost over a billion in revenue within the first week. And the airline has stated that delayed aircraft deliveries and grounded routes have cost the company roughly $10 billion in missed revenue opportunities. Jet fuel prices certainly haven't helped either, but that is a wider issue for everybody to be fair. The bigger blow though may be to their ambitions of being a global business hub. Wealthy people who can live anywhere generally
don't want to live in a place that could be dragged into a war. And carefully controlled media and influencers did their best to play down these concerns. But the picture is still pretty clear. There is certainly nobody lining up to move their family to Dubai right now, no matter how great the tax breaks and supercars are. And this is where the real economic vulnerability kicks in. Because remember that the entire model depends on a steady inflow of wealthy immigrants who buy property, start businesses, and spend money. Before the crisis, the UAE was on track to attract nearly 10,000 new millionaires in 2025. But obviously, those projections are now
meaningless. Even the millionaires who are already there have started reassessing whether this is really where they want to keep their families and their fortunes. Since a lot of the wealthy residents of these countries were immigrants to begin with, there is much less holding them in place compared to a situation where it was their true homeland. When you move somewhere for the tax breaks and the lifestyle, you can just as easily move somewhere else when those advantages are undermined. And that's exactly what a lot of people are now doing, or at least planning to do. This has resulted in some things that from the outside, you can't help but feel a bit of shard and freer over.
Like wealthy tax exiles who have spent years talking endlessly about how incompetent their tax hungry government is, begging that very same government to get them back home by any means necessary, preferably on a taxpayer funded emergency flight. Now, nobody can predict the future, least of all economists, but there's going to be some fallout from this. These countries are going to be hit with a major financial shock as some of their biggest industries are completely pulled out from under them. They could in theory replace some of that lost revenue by cashing in on higher oil prices because global oil prices have surged significantly since the straight closure. But the problem is they can't actually sell their oil right now and
they probably won't be able to until this whole situation deescalates. Which means the one asset that could bail them out in a crisis is sitting in the ground while the crisis plays out around them. It's a bit like having a fire extinguisher locked inside the burning building. The real estate market is also going to face serious pressure. If wealthy foreign buyers stop coming in or worse, start trying to sell their properties to get out, you have the ingredients for a pretty significant correction in a market where foreign nationals hold 43% of all residential property value. Remember that over 300,000 new units are currently under construction in Dubai, most of which were planned and financed on the
assumption that demand from wealthy immigrants would keep growing indefinitely. If those units come online into a market where demand has collapsed, developers are going to be stuck with enormous amounts of unsold inventory and the banks that finance those projects are going to be left holding loans secured against assets that are worth significantly less than what was borrowed against them. That matters because in Dubai, real estate is not just an investment vehicle. It's a core part of the economy's output, employment, and tax base. And a correction in property values would send shock waves through construction, banking, retail, and basically every other sector that has been riding the boom. This is the same kind of cascading
financial shock that brought down the Irish economy in 2008. And it took Ireland nearly a decade to fully recover. And Ireland had the backing of the European Union and a highly educated workforce that could pivot to other industries relatively quickly. Advantages that Dubai does not necessarily share to the same extent. Now, in the grand scheme of things, it's hard to feel too sorry for these countries as sovereign entities, especially since they have made things worse for themselves through the crackdowns on free expression. But there could be a genuine humanitarian crisis brewing. A lot of workers, particularly migrant laborers who are already in precarious situations, won't have as many jobs to work as construction slows
and businesses close. These workers are likely to be the last ones out the door if things get really bad. Because unlike the wealthy expats, they don't have a home government chartering emergency flights for them. Many of these workers come from countries like Pakistan, India, Bangladesh, and the Philippines. and they've been sending money home to support their families, which means any disruption to their employment doesn't just affect them, it ripples out across some of the world's most vulnerable economies. We actually explored this in our video on the economy of Pakistan, where remittances from Gulf workers make up a significant portion of the country's foreign currency inflows. So,
the consequences of a slowdown in the Gulf extend well beyond the region itself. The longer this conflict carries on, the more these countries are going to be starved of vital imports, critical infrastructure maintenance, and their steady supply of wealthy immigrants moving in to prop up their housing and business markets. And that cycle is very hard to restart once it stops because the entire model was built on confidence. And confidence once broken, takes a very long time to rebuild. There are plenty of examples in economic history of countries that built their growth model around being a stable, attractive destination for foreign capital and then lost that reputation
and spent decades trying to get it back. Lebanon being perhaps the most sobering example of a once thriving financial hub that was never able to recapture what it lost. Now Dubai obviously has far more resources and institutional backing than Lebanon ever did. But the underlying lesson is the same. You can spend 30 years carefully building a brand and lose it in 30 days. Now this whole situation is concentrated on these individual countries, but the effects are going to be felt everywhere through higher energy prices and stagnated economic activity, which is a combination economists have a specific word for. We've already made an entire video on stagflation and what it could mean for the global economy, so we didn't want to repeat too much here. But
if you're interested, you should be able to click to that on your screen now. Thanks for watching, mate. Bye.
