DUBAI doesn’t do discreet. The emirate welcomed in the new year with a huge fireworks display that engulfed the Burj Khalifa, the world’s tallest building, in time to a live performance by the Prague Philharmonic Orchestra. In a video that runs in the Burj Khalifa’s visitors’ centre, an executive at Emaar, the developer behind the skyscraper, explains why it had to go that high: “You have to do something impossible, otherwise you’ll be like any other company, or person. We have to grow higher and higher—grow like Dubai.”

The emirate’s latest wheeze is to create a city within the city, a development bigger than anything that has gone before. Mohammed bin Rashid (MBR) City will feature more than 100 hotels, the Middle East’s largest entertainment centre, a park bigger than London’s Hyde Park and the world’s biggest shopping mall, appropriately named “Mall of the World”.

Plans for the supersized project, named after Dubai’s ruler, were unveiled in November and are meant to signal that Dubai is back in business only three years after a near-death experience. In late 2009 Dubai World, a big government-controlled investment firm, announced it could no longer repay its debts, threatening to bring down the entire economy. The emirate was bailed out by Abu Dhabi, an oil-rich fellow-member of the United Arab Emirates (UAE), and the UAE’s central bank.

Dubai has come a long way since then. The IMF estimates that GDP was up by 4.1% in the first half of 2012 compared with the same period of 2011. Trade, transport and tourism are buoyant. Imports of food and vehicles rose by 20% in the first half of 2012; in the year to August the number of passengers at Dubai International Airport was up by nearly 14%; and occupancy rates of Dubai’s hotels reach 80%, among the world’s highest. The property market is showing signs of renewed exuberance. In September Emaar put a 63-storey tower with 542 flats on the market and sold them all on the first day.

But Dubai is more than a story of skyscrapers built on sand with borrowed cash. Because the emirate’s oil reserves were limited, its rulers decided decades ago to diversify. Emirates Airline is the best-known result of this strategy: it started in 1985 and now ranks among the world’s leading carriers. The Jebel Ali Free Zone is one of the world’s biggest transit ports and the Dubai International Financial Centre the Middle East’s financial hub.

This role as a regional hub—and a policy of being open to almost any kind of business—explains why Dubai has been, at least economically, the main beneficiary of the Arab spring. Instability in the rest of the region has diverted capital, commerce and people to the emirate. When neighbouring Saudi Arabia upped its social spending to pre-empt protests, for instance, much of the cash ended up in Dubai’s shopping malls. More important, the emirate has clearly established itself as the region’s safe haven. “Dubai has created an environment where companies and expatriates want to be based,” says Monica Malik of EFG Hermes, an investment bank.

Yet the renaissance masks continuing problems. During the property frenzy, developers piled up debt as if there were no tomorrow. This was particularly true of those controlled by the three government-related holding companies known collectively as Dubai Inc: Dubai World, Investment Corporation of Dubai and Dubai Holding. Even now it is not clear how much debt was amassed. The IMF estimates that the government and related entities still owe $130 billion, about as much as Dubai’s GDP.

To deal with the debt pile Dubai has pursued what Ahmad Alanani of Exotix, an investment bank that specialises in distressed debt, dubs its “four Bs strategy”. The government bailed out bondholders, who were paid back fully and on time; as a result, the emirate has preserved its access to the capital markets and credit-default spreads have come down steadily (see chart). And Dubai burned the banks, which had financed much of the emirate’s property boom. More than two-thirds of $34 billion in troubled bank loans to Dubai Inc has now been restructured on tough terms: on average, maturities were stretched out by five years and interest rates cut to 2%. The decision to target the banks reflects the fact that they were less likely to walk away than bondholders. International banks are wary of risking their relationships not just in Dubai, but in the entire region. Only four foreign banks have taken legal action. Any ruling could probably be enforced only against assets abroad: a Dubai court has to confirm the decision and is likely to declare any assets in the emirate off-limits. Local banks have even less freedom of manoeuvre. The government has big stakes in most lenders (56% in the case of Emirates NDB, Dubai’s largest). It would be one thing if asset values recovered enough to allow the developers to repay their debts. But markets expect another round of restructuring on the renegotiated loans. Dubai World’s debt, for instance, trades for about 50 cents on the dollar. Crunch time will come in 2014 and 2015 when Dubai Inc has to repay bank loans of $8.4 billion and $7.9 billion respectively, according to IMF estimates. “Foreign banks won’t accept the same sort of treatment in a second round,” says Mr Alanani. The recovery in property is confined to small segments of the market, says Craig Plumb of Jones Lang LaSalle, a consultancy. A project like MBR City concentrates on areas where demand is strong: luxury housing, shopping and entertainment. Other assets are still performing sluggishly. Even as the economy rebounds the proportion of non-performing loans at Dubai’s largest banks has kept rising. Moody’s, a ratings agency, downgraded three of them in December and put another on notice for a downgrade. That suggests money for new developments will be hard to come by. Some doubt that MBR City will find it easy to finance itself.

Behind the question of whether Dubai could relapse lurks a bigger one: whether it needs to change its growth model. Before the crash, it grew mainly by sucking in capital, resources, ideas and people. As a result less than 10% of Dubai’s working-age population are nationals, or “Emiratis”.

Such an input-driven model is not sustainable, argues Farouk Soussa of Citigroup. Leaving aside the environmental issues, even Dubai can build only so many MBR Cities. Either the emirate’s rulers accept that it can grow over the long term only as fast as its core sectors of trade, transport and tourism—meaning in line with global growth—or Dubai needs to build a new engine of expansion.

The government seems to recognise this, and is pushing its credentials as an entrepreneurial hub. In December, for instance, it hosted a “Global Entrepreneurship Summit”. MBR City will include a “world-class technology campus”. But Dubai has been slow to create a helpful legal infrastructure for start-ups. It still has no bankruptcy law, meaning entrepreneurs that fail risk going to jail. Even a single bounced check can land you behind bars for three years. With few rights, expats have no incentive to create something new. Dubai needs to do more institution-building, to go with the actual building.