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Gay sits on the board of several large construction firms, and like most senior players in the industry, he spends a lot of time in Dubai. He recalls driving downtown from the airport with the head of a large American telecoms firm and reports that, although he came from the country that invented the skyscraper, the American was overwhelmed when he saw the city's skyline for the first time. On his next trip he will probably be impressed all over again – Dubai is putting up towers at a rate of one a week.

Dubai wants to be the Singapore of the Middle East. It plans to grow its population from 750,000 to 5 million in the next decade. The airport expansion will accommodate an expected increase in passengers from 5 million today to 40 million in 2015. The hundreds of towers that go on site this year will include the 150-storey Burj Dubai, billed as the world's tallest building. The most ambitious project of all is the Palm Jumeirah, an artificial peninsula shaped like a stylised palm leaf that will add 60 km to the length of the emirate's coastline. And that's just for starters – a bigger version, the Palm Jebel Ali, is due to be completed in 2008.

There is no precedent for what Dubai is trying to achieve. Its development is the ultimate example of the "build it and they will come" model pioneered on a smaller scale by Las Vegas, Miami and Blackpool, and it's too early to say whether it is working. Architects, builders, property developers and hangers-on have flocked to the city, and most expats are doing very well there. Dubai's buzz is attracting people and money from around the world, but the fact remains that the city is taking a gigantic gamble. Its population and economy are growing much more slowly than its infrastructure. With a population the size of Leeds, it spends more on construction than the whole of Scotland. Can it last? The laws of economics say no, but history gives reasons to be optimistic.

The region was at the mercy of pirates until it became a British protectorate in 1820. When the British withdrew in 1971, seven local dynasties formed the United Arab Emirates, a loose confederation in which Dubai's ruling family has complete control of internal affairs. The first step towards greatness was the dredging of Dubai's harbour, the Creek, enabling it to take bigger boats. (Today it can hold vessels with a dead weight of up to a million tonnes – the largest ships in existence carry a dead weight of only 500,000 tonnes, which show the extent of the emirate's ambition.) Since then, it has enjoyed an almost uninterrupted construction boom, slowing only when the oil price plummeted in 1985 and 1998. In the early 1990s, the tourist trade and skyscraper mania really took off.

Dubai has been built on a curious economic model, which can be described as centrally planned capitalism. Take the current airport expansion: just as the project was going out to tender in June, the Dubai-based Emirates airline placed an order for 67 planes, including 12 Airbus A380 superjumbos. The idea is that the airline will fly more planes into the region, bringing more people to the airport. These passengers will stay in hotels, and some will even set up local offices, justifying the vast number of office towers and hotels under construction. It all works beautifully in theory – provided you can fill the 555 seats on each of those superjumbos.

The annual demand for luxury apartments in Dubai is 7000 to 8000, but they are building 38,000 a year

The ruling family, the all-powerful Maktoums, possesses a weird combination of unchallenged authority and business acumen. "They are extremely shrewd, and surprisingly mature in their investment outlook and approach to real estate," says RICS president Nicholas Brooke, who worked for the family in the 1970s and still has contact with them. "One or two generations ago they were Bedouin in the desert; they went from foraging and trading to being fabulously wealthy."

The Maktoums were quick to realise the dangers of relying on oil, a finite resource whose price fluctuates unpredictably. They used their petrodollars to develop other aspects of Dubai's economy, starting with Port Jebel Ali, the world's largest man-made harbour. Sheikh Rashid bin Saeed al Maktoum, the founding father of modern Dubai, died in 1990, and now his sons are in charge. The eldest son is the official ruler, and the second son runs the city council. But the driving force behind Dubai's phenomenal growth is the crown prince Sheikh Mohammed, a former Sandhurst cadet and now the UAEs' defence minister. "Initially, he looks somewhat fierce and hawk-like, but underneath he's a very warm person," says Brooke. "I've always found him very approachable."

The family has long relied on Western advisers. Brooke was working for Cluttons when, in the 1970s, he helped them build up their property portfolio both in Dubai and abroad. He says: "They have long-term advisers and reward loyalty." Today they have some famous names on their side: management consultant McKinsey advises them on strategy, and Ernst & Young helps with specific projects. But despite his bevy of advisers, the crown prince takes a hands-on approach: he personally inspects plans for every large development, and often makes his own alterations before giving approval. "He's the visionary, he has omnipresence and he seems to be universally liked and respected," says Richard Clare, chairman of quantity surveyor EC Harris. "He has absolute power, and that's very magnetic."

In a recent interview, Sheikh Mohammed illustrated his supply-driven approach to economic development with an anecdote about one of his pet projects, Dubai Media City. He said: "I asked Mohammed Al Gargawi, who was in charge, 'Why don't you start executing the project since you have everything ready?' He looked a little scared and said, 'Let's present it to the top international IT companies and sign contracts with them before starting construction.'" The crown prince told him to start work the next day and worry about finding tenants later. His story triumphantly concluded: "All the top companies are there now. If people don't see something that exists on land, you cannot sell anything."

The Media City is just one of many developments the ruling family has created by fiat. "They have a long track record of making their dreams come true," says Ernst & Young partner Richard Smee. "ºÃÉ«ÏÈÉúTV is very easy, because it's all virgin desert, so it's one big greenfield site – well, yellowfield, I suppose – owned by the Maktoums. The only concern is construction capacity; there's no shortage of labour, but a potential shortage of skills and materials."

A series of themed cities is under way, such as the £1.1bn Health Care City, which aims to attract top doctors and rich patients from around the world. Work has also started on the £1bn first phase of Festival City, a pleasure dome containing an 18-hole golf course, a marina and plenty of restaurants and nightclubs. There are also plans for a Formula 1 race track and an 1800-seat opera house elsewhere in the emirate.

Dubai's free-flowing alcohol and the freedom it allows women are in stark contrast to nearby Saudi Arabia, and its reputation as the party capital of the Middle East is essential to its burgeoning tourist industry. Visitor numbers are growing fast, and should reach 4 million this year. The proliferation of five-star hotels makes the resort an upmarket destination. For the grandest hotels, five stars are not enough. In typical Dubai style, the Burj al-Arab, the world's tallest hotel, has seven stars. Dubai's geographical location makes it popular for international conferences and one-night stopovers for long-distance travellers, which explains why the average hotel guest stays 2.3 nights.

The nightlife, of course, attracts more than just tourists. "The banking fraternity prefers to be at the centre of things," says Smee. He predicts that Dubai's cosmopolitan glamour will help draw the multinationals to its upcoming financial centre, in the same way that London's West End helps to make the City a more attractive base than Frankfurt. Last month, a government decree created a financial services free-trade zone. Smee predicts that the lifestyle, combined with generous financial incentives offered by Dubai's government, will help Dubai to replace Bahrain as the region's financial capital: "Once the financial centre is built, it's bye-bye Bahrain."

All this development requires foreign investment, and Dubai is attracting plenty. Legal reforms two years ago allowed foreigners to buy property, and many have done so. Holiday homes on the Palm Jumeirah have been sold to David Beckham, 10 of his England team-mates, and, rumour has it, Bill Clinton. Russian businessmen find Dubai a good place to invest their newfound wealth, and the emirate also receives significant funds from closer to home: more than one-third of the money behind the 50 (yes, 50) million ft² Dubai marina development comes from Iran.

If you're reading this and wishing you had an office in Dubai, take heart. "It's not too late to get out there," says Smee. "There's tons of stuff to do." Recruitment consultant Hays Montrose reports a particular shortage of quantity surveyors and project managers. But you can't just turn up and start work: it takes time to develop relationships with local clients. "You've got to be there for a long time – we've been there for three years, and it was only in the last year that we started to reap the rewards," says Richard Clare of EC Harris. "We now have 30 people there, and it's going to grow more and more – it could be absolutely enormous."

Not everyone is so bullish. Old hands remember Laing and Wimpey losing a fortune in the region during the 1970s. Beneath the wave of investment, there is an undercurrent of scepticism. Nick Sweet, a director of multinational architect Aukett, visited the region three times in the past six months with a view to setting up an office or joint venture there. On reflection, he decided to steer well clear. He explains: "There's an element of a bubble about it. There's a huge amount of development that's frankly absurd, and there are problems with whimsical design. It's become the decadent hub of the Middle East, and I'm sure they'll reach a point where they've gone too far."

Sweet's critique is tinged with architectural snobbery towards Dubai's arriviste extravagance – of the Palm Jumeirah he says: "You'd have to be a footballer to like it." But he also points out the danger inherent in the rapid, high-rise tourist development: Dubai could become another Benidorm. What's more, he reckons the vision of Dubai as the Arab Singapore or Hong Kong is a long way from reality. He says: "I question whether they are yet able to produce a sustainable job market. There are some unrealities kept going by the government perpetuating a myth."

The figures look bad. Although one-third of Dubai's 30 million ft² of office space is empty, a further 10 million ft² is coming on the market. Port Jebel Ali, already the world's largest man-made harbour, will triple its capacity by 2020, even though it uses little more than half its capacity today. The annual demand for luxury apartments is 7000 to 8000, but they are building 38,000 a year. And 47 hotels are planned for the Palm Jumeirah alone, even though the occupancy rate for existing hotel rooms is 60%. A management consultant at McKinsey says: "That doesn't sound very healthy at all. It's a classic white elephant." He shares Sweet's doubts about the job market, arguing that Dubai has invested in its infrastructure but neglected its education system, leaving many rich young citizens unqualified for high-paid jobs and unwilling to take low-paid ones. So far, they have relied on well-educated foreigners, but the consultant warns: "I don't see the part of their business model that relies on importing expats as sustainable. Keeping expats happy is incredibly expensive."

Despite these figures, most people pay attention to the overwhelming quality and quantity of development. Asked about the state of the market, Andrew Gay replies with a single word: "Overheating." But once he's expressed his fear that the supply of office and commercial space far outstrips demand, he can't help waxing lyrical. He says: "It's a fantastic and safe place to centre a business for the Middle East, which is a growing market – especially Iran, Iraq and Syria. The quality they've built into the place is amazing." Even Marc Faber, a maverick economist who publishes a notoriously pessimistic newsletter called The Gloom, Boom and Doom Report, is pretty upbeat about Dubai. He says: "Prices went crazy in the 1970s, but this time it hasn't happened. The fact that there's lots of supply means that real-estate prices have stayed quite reasonable compared with other cities, which is attractive to investors."

Even if oversupply makes office rents and hotel rates tumble, Dubai can weather the storm better than most cities. "It's not like the UK where the party stops," says Peter Cooper, editor of the regional business website AME Info. "They don't need to rent places out, because they're so wealthy they can get all the money they need from other sources." A sharp drop in the price of oil is a perpetual worry, but even that is likely to be just a temporary setback. Lots of large projects were cancelled when prices fell to £6 a barrel in 1998, but within 18 months the oil price had tripled and everything was back on track.