Real estate or a real economy?

What would Ibn Khaldun make of the UAE in 2008? For those who don't know, Ibn Khaldoun was a prominent Arab thinker living in Tunisia and Egypt about 700 years ago. Some (including Wikipedia, no less) regard him as the father of economic growth theory, through his book Muqaddimah. In it, Ibn Khaldun explained how a society can emerge from a basic "sustenance" economy to one that can enjoy luxuries. His magic formula: Human labour creates value by making and doing things. It may not sound radical today, but it pre-dated Karl Marx's labour theory of value by half a millennium or so. I mention it because it's worth taking a step back, to look at the UAE's extraordinary economic growth today, particularly in Dubai and Abu Dhabi. And to ask whether we're going about it in exactly the right way, particularly when it comes to real estate.

I think perhaps not – which is why I'm investing in a host of companies outside the property sector.

First, let me stress that I'm no anti-real estate campaigner. I was one of the first to buy my home in Dubai back in 2003, and made a tidy profit when I sold it last year. Lucky me. Now I'm renting an apartment, and I'd be a rich man if I had a dirham for everyone who's said to me: "Ooooh, you must regret selling out last year – look how much it's gone up in value since then."

This worries me. Because I get a sense that too many people in the UAE have developed a single-minded obsession with real estate investment/speculation, at the expense of true entrepreneurial zeal. If that mentality persists, the city is in danger of becoming a giant housing estate and office block, rather than a thriving knowledge economy.

Here's an example. I invested some profit from my flat in start-up human resources consultancy. We launched in Dubai last year, it's turning a modest profit and who knows, maybe in a few years it'll be worth something. When I tell people this they smile politely, but I can tell they're really thinking, "Nutter. He could have made an extra million dirhams if he'd hung onto that place in The Greens."

Now we're setting up a new division, training people and companies in communication skills. Again, when I tell people this, I can hear the same arguments in their head. "You'd be better off using that cash for a deposit on an off-plan villa."

The current real estate frenzy reminds me of my economics degree; in particular the classes on economic development. We learned then of the dangers of over-investment in real estate – not because a bubble may burst, but because it crowds out investment in other, more important industries. I won't bore you with the theory of what constitutes "key sectors" in promoting a strong, diversified economy (Google Albert Hirschman if you're really interested). Suffice to say that building an endless array of skyscrapers isn't exactly what he had in mind.

So much for theory. Look at the development of Dubai over the past decade: what laid the foundations for the great real estate boom we see today? Dubai invested in a thriving knowledge economy, built around clusters such as Dubai Internet City, Dubai Media City and Dubai Knowledge Village – later followed by Dubai International Financial Centre, Dubai Silicon Oasis, Dubai Healthcare City and so on. The point was hammered home last year by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai. He set up a $10 billion Foundation to invest in the region's knowledge economy, with these words: "The challenges we face in the Arab and Islamic worlds are challenges of survival, not only of reform and development. Our knowledge level will determine, to a large extent, our ability to bypass these challenges." Don't get me wrong. I'm not investing in human resources and communications training out of charity – I want to make money. So does Sheikh Mohammed's Foundation. So do real estate developers, and I truly hope they succeed. But real estate cannot sustain an economy single-handed, and it certainly cannot create the 80 million or so jobs the region needs over the next decade. Maybe I'm wrong. Maybe Ibn Khaldoun would have approved of the current obsession with real estate. Maybe we should name a shopping mall after him. But I suspect a little investment in the real economy would be somewhat closer to his heart.

The writer is a freelance journalist. He has worked as a correspondent for Reuters, the Financial Times and The Economist, and as a presenter of The Business Breakfast on Dubai Eye 103.8.