The Arabian Gulf region has experienced an unprecedented period of economic activity over the past decade, especially here in Dubai, which has succeeded in reducing its reliance on oil to a point where its economy does not seem to depend on that sector for survival.

Whether this massive expansion is sustainable is a topic many who have poured investment funds into the region do not want to discuss. But are they simply burying their heads in the sand?

Eckart Woertz, economics program manager at economics think-tank Gulf Research Centre, told reporters recently that overseas acquisitions by the region’s investment vehicles in the name of economic diversification were sound in theory but also represented a “risky strategy because there is a lot of debt involved.”

To counter this, the Gulf Cooperation Council (GCC) is part of a new initiative dubbed GulfGrowth. This “aims to create a network of key decision makers from the public and private sectors to explore the possibilities of the GCC joining the international list of rapidly growing countries such as Brazil, India, Russia and China.” The initiative, continues the GCC, intends to “challenge the presumption that current growth is a passing phenomenon due to high oil prices.”

What some economists regard as something of an artificially created boom in the Gulf is also likely to prove dependent on a lack of protectionist actions from other parts of the world. These factors could include the liberalization of other air transport markets and the ease with which overseas companies can be acquired.

For example, last year the U.S. blocked Dubai’s bid to acquire leading U.S. port operator P&O. At the end of August, the United Arab Emirates introduced new legislation to ban or restrict shipments of goods that could have adverse national security implications, a move the Bush Administration advocated in a bid to stop the flow of equipment into Iran that it believes has been used to arm insurgent groups attacking U.S. forces in Iraq.

Also this year, Dubai Aerospace Enterprise’s acquisition of Standard Aero/Landmark Aviation from the Carlyle Group appears to have gone through more smoothly, although reportedly it resulted in a $400,000 lobbying bill from the law firm Akin Gump Strauss Hauer & Feld. And, according to sources close to both sides of the deal who spoke to AIN on the condition of anonymity, in order for the acquisition to be cleared by the U.S. government, DAE agreed it would sell the Landmark FBO chain right after the deal was completed. The official reason given by DAE for reselling Landmark right after approval of the acquisition was that the Landmark FBOs do not fit the group’s overall investment priorities. As of press time, DAE was still looking for a buyer for the Landmark FBOs.

Another potential deal for DAE, its bid for Auckland International Airport in New Zealand, was blocked in mid-September because of protests from local shareholders and the New Zealand public. This may be a blip or could be a sign of the struggles to come, although few seem that worried for now as it comes against a backdrop of rapid growth.

As part of that rapid growth, according to IATA, the Middle East’s airlines could post a combined profit of $300 million next year, having doubled their share of the world’s air transport market from 4 to 8 percent over the past three years.

But what if global demand does not favor Dubai’s aggressive bid to become the world’s aviation hub? Negative demand could result if growth in the Asia Pacific region relegates the Gulf to an area an airplane flies over from Europe or North America, or there could be a flare-up of violence in the region, making it less attractive to tourists or inward investors. In this context, the property boom in the UAE could be increasingly self-inflating, as people buy for capital gain rather than because they really want an apartment there–no matter how many attractions and activities are created.

Another factor is the attitude of foreign players, such as banks and investors. A key indicator of possible sustainability will be how keen foreign investors are to commit to the long term. There is certainly no shortage of advisors and contractors from the West willing to soak up the remaining oil money, but many have no long-term stake in the Gulf.

The region may also be in danger of becoming a victim of its own success. Don Bunker, a lawyer who has been involved with the Dubai aviation finance market since the early 1990s, has suggested that the cost of living is causing problems in Dubai, with many banks finding it very expensive to afford the packages–including housing and school fees–they need to attract employees.

Bunker is also skeptical of low-cost carriers, which have started to emerge in the Middle East. The success of some carriers, such as Air Arabia, is partly due to the huge number of temporary migrant workers traveling back and forth, so if economic confidence took a nosedive, these carriers likely would be the first to feel it.

“Some bubbles might burst,” said Bunker, who observed that “the curve goes for eight years, but lots of people can’t remember…and lots of people don’t care because of ‘short-termism.’”

On the flip side, Bunker thinks liberalization of overseas markets will happen, like a domino effect, and that it is “just a case of who is going to jump first.” India, for example, which has very strong ties with the UAE, is a boom waiting to happen, he predicted.

Demand for business jets in the Middle East seems to have soared during the past year or two. Indeed, Bunker said these assets are currently the mainstay of his firm’s business in the region. Similarly, Mary Schwartz, global head of aircraft finance for Citigroup, said growth in demand for business jet finance has been rapid. She sees it as a long-term trend, with the Middle East being part of a wider aviation boom.

According to Glenn Matheson, partner in international law firm Norton Rose, “anyone involved in the Middle East should be spreading their risk and getting good advice, and these are the investors that are taking a long-term view.” He believes that when people first look at the region all they see is bad news, but then they take a view as to the overall stability. This begs the question as to whether some are ignoring the wider risks because of their desire not to miss hot investment opportunities.

According to Donal Boylan, head of aerospace and defence structured asset finance for Royal Bank of Scotland (RBS), “there has been a mad rush to be in Dubai, but by people who want to take money out, not to put money in.” The private banks are taking money out of the Middle East and investment banks are coming in on the back of initial public offerings but by raising finance and not putting in their own money. RBS, however, can claim to be in a unique position, said Boylan, as it is using its own balance sheet for project and asset finance in the region. “We are playing a positive role in developing the economy by putting our own balance sheet on the table,” he said.

So it seems that there are mixed messages coming out of the Gulf region with respect to whether the current economic boom can last. One thing seems clear, however: Once the first domino falls, if it does, there could be a rapid implosion.

The question for the GCC states is whether they can throw enough money at development fast enough to create a self-perpetuating situation, which is irreversibly linked to the global economy and robust enough to survive a severe downturn. Few seem to want to confront this question head on, while others acknowledge they are simply “making hay while the sun shines.”