The wide, smiling face of Sheikh Mohammed – the absolute ruler of Dubai – beams down on his creation, his image displayed on every other building. This man has sold Dubai to the world as the city of 1,001 Arabian Lights, a Shangri La in the Middle East insulated from the dust-storms blasting across the region. He dominates the Manhattan-manqué skyline, beaming out from row after row of glass pyramids.

But something has flickered in Sheikh Mohammed's smile. The ubiquitous cranes have paused on the skyline, as if stuck in time. There are countless buildings half-finished, seemingly abandoned. In the swankiest new constructions – like the vast Atlantis hotel, a giant pink castle built in 1,000 days for $1.5bn on its own artificial island – where rainwater is leaking from the ceilings and the tiles are falling off the roof. This Neverland was built on the Never-Never – and now the cracks are beginning to show. Suddenly it looks less like Manhattan in the sun than Iceland in the desert. Once the manic burst of building has stopped and the whirlwind has slowed, the secrets of Dubai are slowly seeping out. This is a city built from nothing in just a few wild decades on credit and ecocide, suppression and slavery. Dubai is a living metal metaphor for the neo-liberal globalised world that may be crashing – at last – into history.

I. An adult Disneyland

Karen Andrews can't speak. Every time she starts to tell her story, she puts her head down and crumples. I find her in the car park of one of Dubai's finest international hotels, where she is living, in her Range Rover. She has been sleeping here for months. This is not where she thought her Dubai dream would end.

Karen came here from Canada when her husband was offered a job in the senior division of a famous multinational. She had her reservations, but all her worries melted when she touched down in Dubai in 2005. "It was an adult Disneyland, where Sheikh Mohammed is the mouse," she says. "Life was fantastic. You had these amazing big apartments, you had a whole army of your own staff, you pay no taxes at all. We were partying the whole time."

Her husband, Daniel, bought two properties. "We were drunk on Dubai," she says. But for the first time in his life, he was beginning to mismanage their finances. "We're not talking huge sums," she says, but the debts were growing. In Dubai, there is no concept of bankruptcy. If you get into debt and you can't pay, you go to prison.

"When we realised that, I sat Daniel down and told him: listen, we need to get out of here. He knew he was guaranteed a pay-off when he resigned, so we said – right, let's take the pay-off, clear the debt, and go." So Daniel resigned – but he was given a lower pay-off than his contract suggested. The debt remained. As soon as you quit your job in Dubai, your employer has to inform your bank. "Suddenly our cards stopped working. We had nothing. We were thrown out of our apartment."

Daniel was arrested and taken away on the day of their eviction. It was six days before Karen could talk to him. He was sentenced to six months in jail at a trial he couldn't understand. "Now I'm here illegally, too," Karen says. I've got no money, nothing. I have to last nine months until he's out, somehow."

She is not alone. All over the city, there are maxed-out expats sleeping secretly in the sand-dunes or the airport or in their cars.

"The thing you have to understand about Dubai is – nothing is what it seems," Karen says. "Nothing. This isn't a city, it's a con-job."

If you take the Big Bus Tour of Dubai you are fed the propaganda vision of the desert dream. "Dubai's motto is 'Open doors, open minds'," the tour guide tells you in clipped tones, before depositing you at the souks to buy camel tea-cosies. "Here you are free. To purchase fabrics," he adds. As you pass each new monumental building, he tells you: "The World Trade Centre was built by His Highness..."

But this is a lie. The sheikh did not build this city. It was built by slaves. They are building it now.

II. Hidden in plain view

There are three different Dubais, all swirling around each other. There are the expats, like Karen; there are the Emiratis, headed by Sheikh Mohammed; and then there is the foreign underclass who built the city, and are trapped here. They are hidden in plain view. You see them everywhere, in dirt-caked blue uniforms, being shouted at by their superiors, like a chain gang.

Every evening, the hundreds of thousands of young men who build Dubai are bussed from their sites to a vast concrete wasteland an hour out of town, where they are quarantined away. Sonapur is a rubble-strewn patchwork of miles and miles of identical concrete buildings. Some 300,000 men live piled up here. In the first camp I stop at – riven with the smell of sewage and sweat – the men huddle around, eager to tell someone, anyone, what is happening to them.

Sahinal Monir is a slim 24-year old from the deltas of Bangladesh. "To get you here, they tell you Dubai is heaven. Then you get here and realise it is hell," he says. Four years ago, an employment agent arrived in Sahinal's village in southern Bangladesh. He told the men of the village that there was a place where they could earn 40,000 takka a month (€450) just for working nine-to-five on construction projects. It was a place where they would be given great accommodation, great food, and treated well. All they had to do was pay an up-front fee of 220,000 takka (€2,600) for the work visa – a fee they'd pay off in the first six months, easy. So Sahinal sold his family land, and took out a loan from the local lender, to head to this paradise.

As soon as he arrived at Dubai airport, his passport was taken from him by his construction company. He has not seen it since. He was told brusquely that from now on he would be working 14-hour days in the desert heat – where western tourists are advised not to stay outside for even five minutes in summer, when it hits 55?C – for 500 dirhams a month (€100).

Sahinal was in a panic. His family back home – his son, daughter, wife and parents – were waiting for money, excited that their boy had finally made it. But he was going to have to work for more than two years just to pay for the cost of getting here – and all to earn less than he did in Bangladesh.

He shows me his room. It is a tiny, poky, concrete cell with triple-decker bunk beds, where he lives with 11 other men. All his belongings are piled onto his bunk: three shirts, a spare pair of trousers, and a cellphone. The room stinks, because the lavatories in the corner of the camp – holes in the ground – are backed up with excrement and clouds of black flies. There is no air conditioning or fans, so the heat is "unbearable. You cannot sleep. All you do is sweat and scratch all night."

The water delivered to the camp in huge white containers isn't properly desalinated: it tastes of salt. "It makes us sick, but we have nothing else to drink," he says.

The work is "the worst in the world," he says. "You have to carry 50kg bricks and blocks of cement in the worst heat imaginable... This heat – it is like nothing else. You sweat so much you can't pee, not for days or weeks. You become dizzy and sick but you aren't allowed to stop, except for an hour in the afternoon. If you take time off sick, your wages are docked, and you are trapped here even longer."

Does Sohinal regret coming? All the men look down, awkwardly. "How can we think about that? We are trapped. If we start to think about regrets..." He lets the sentence trail off.

Since the recession hit, they say, the electricity has been cut off in dozens of the camps, and the men have not been paid for months. Their companies have disappeared with their passports and their pay. "We have been robbed of everything. Even if somehow we get back to Bangladesh, the loan sharks will demand we repay our loans immediately, and when we can't, we'll be sent to prison."

This is all supposed to be illegal. Employers are meant to pay on time, never take your passport, give you breaks in the heat – but I met nobody who said it happens. Not one. These men are conned into coming and trapped into staying, with the complicity of the Dubai authorities.

III. Mauled by the mall

Within a 10-minute taxi-ride, I have left Sohinal and I am standing in the middle of Harvey Nichols, being shown a €25,000 taffeta dress by a bored salesgirl. "As you can see, it is cut on the bias..." she says, and I stop writing.

Time doesn't seem to pass in the malls that seem to stand on every street in Dubai. Days blur with the same electric light, the same shined floors, the same brands I know from home. Here, Dubai is reduced to its component sounds: do-buy. In the most expensive malls I am almost alone, the shops empty and echoing. On the record, everybody tells me business is going fine. Off the record, they look panicky.

Between the malls, there is nothing but the connecting tissue of asphalt. Every road has at least four lanes; Dubai feels like a motorway punctuated by shopping centres. You only walk anywhere if you are suicidal. The residents of Dubai flit from mall to mall by car or taxis.

How does it feel if this is your country, filled with foreigners? For natives, this is a Santa Claus state, handing out goodies while it makes its money elsewhere: through renting out land to foreigners, soft taxes on them like business and airport charges, and the remaining dribble of oil. But do all Emiratis believe in the Dubai model? Can it really be so sunny in the political sands?

In the sleek Emirates Tower Hotel, I meet Sultan al-Qassemi. He's a 31-year-old Emirati columnist for the Dubai press and private art collector, with a reputation for being a contrarian liberal, advocating gradual reform.

"People here are turning into lazy, overweight babies!" he exclaims. "The nanny state has gone too far. We don't do anything for ourselves! Why can't a mother and father look after their own child?" And yet, when I try to bring up the system of slavery that built Dubai, he looks angry. "People should give us credit," he insists. "We are the most tolerant people in the world. Dubai is the only truly international city in the world. Everyone who comes here is treated with respect."

I pause, and think of the vast camps in Sonapur, just a few miles away. Does he even ? know they exist? He looks irritated. "You know, if there are 30 or 40 cases [of worker abuse] a year, that sounds like a lot but when you think about how many people are here..." Thirty or 40? This abuse is endemic to the system, I say. We're talking about hundreds of thousands.

Then he smiles, coming up with what he sees as his killer argument. "When I see Western journalists criticise us – don't you realise you're shooting yourself in the foot? The Middle East will be far more dangerous if Dubai fails. Our export isn't oil, it's hope. We're very important to the region. We are showing how to be a modern Muslim country. We don't have any fundamentalists here. Do you know what will happen if this model fails? Dubai will go down the Iranian path, the Islamist path."

IV. The Dunkin' Donuts dissident

But there is another face to the Emirati minority – a small huddle of dissidents, trying to shake the Sheikhs out of abusive laws. Next to a Virgin Megastore and a Dunkin' Donuts, I meet the Dubai dictatorship's Public Enemy Number One. By way of introduction, Mohammed al-Mansoori says from within his white robes and sinewy face: "Westerners come her and see the malls and the tall buildings and they think that means we are free. But these businesses, these buildings – who are they for? This is a dictatorship. There is no freedom here."

We snuffle out the only Arabic restaurant in this mall, and he says everything you are banned – under threat of prison – from saying in Dubai. Mohammed is head of the Jurists' Association, an organisation set up to press for Dubai's laws to be consistent with international human rights legislation.

Horrified by the "system of slavery" his country was being built on, he spoke out to Human Rights Watch and the BBC. "So I was hauled in by the secret police and told: shut up, or you will lose your job, and your children will be unemployable," he says. He was stripped of his lawyer's licence and his passport – becoming yet another person imprisoned in this country.

Why is the state so keen to defend this system of slavery? He offers a prosaic explanation. "Most companies are owned by the government, so they oppose human-rights laws because it will reduce their profit margins. It's in their interests that the workers are slaves."

Sheikh Mohammed has turned Dubai into Creditopolis, a city built entirely on debt. Dubai owes 107% of its entire GDP. It would be bust already, if the neighbouring oil-soaked state of Abu Dhabi hadn't pulled out its chequebook. Mohammed says this will constrict freedom even further. "Now Abu Dhabi calls the tunes – and they are much more conservative and restrictive than even Dubai. Freedom here will diminish every day." Already, new media laws have been drafted forbidding the press to report on anything that could "damage" Dubai or "its economy".

Everybody here waves Islamism as the threat somewhere over the horizon, sure to swell if their advice is not followed. Today, every imam is appointed by the government, and every sermon is tightly controlled to keep it moderate. But Mohammed says anxiously: "We don't have Islamism here now, but I think that if you control people and give them no way to express anger, it could rise. People who are told to shut up all the time can just explode."

V. The lifestyle

All the guidebooks call Dubai a "melting pot", but as I trawl across the city, I find that every group here huddles together in its own little ethnic enclave. One night – in the heart of this homesick city, tired of the malls and the camps – I go to Double Decker, a hang-out for British expats.

I start to talk to two sun-dried women in their 60s who have been getting gently sozzled since midday. "You stay here for The Lifestyle," they say, telling me to take a seat and order some more drinks. All the expats talk about The Lifestyle, but when you ask what it is, they become vague. Ann Wark tries to summarise it: "Here, you go out every night. You'd never do that back home. You see people all the time. It's great. You have lots of free time. You have maids and staff so you don't have to do all that stuff. You party!"

They have been in Dubai for 20 years, and they are happy to explain how the city works. "You've got a hierarchy, haven't you?" Ann says. "It's the Emiratis at the top, then I'd say the Westerners. Then I suppose it's the Filipinos, because they've got a bit more brains than the Indians. Then at the bottom you've got the Indians and all them lot."

A 24-year-old British woman called Hannah Gamble takes a break from the dancefloor to talk to me. "I love the sun and the beach! It's great out here!" she says. Is there anything bad? "Oh yes!" she says. Ah: one of them has noticed, I think with relief. "The banks! When you want to make a transfer you have to fax them. You can't do it online." Anything else? She thinks hard. "The traffic's not very good."

When I ask the British expats how they feel to not be in a democracy, their reaction is always the same. First, they look bemused. Then they look affronted. "It's the Arab way!" a young man shouts at me, as he tries to put a pair of comedy antlers on his head while pouring some beer into the mouth of his friend, who is lying on his back on the floor, gurning.

Later, in a hotel bar, I start chatting to a dyspeptic expat American who works in the cosmetics industry and is desperate to get away from these people. She says: "All the people who couldn't succeed in their own countries end up here, and suddenly they're rich and promoted way above their abilities and bragging about how great they are. I've never met so many incompetent people in such senior positions anywhere in the world." She adds: "It's absolutely racist. I had Filipino girls working for me doing the same job as a European girl, and she's paid a quarter of the wages. The people who do the real work are paid next to nothing, while these incompetent managers pay themselves €50,000 a month."

With the exception of her, one theme unites every expat I speak to: their joy at having staff to do the work that would clog their lives up Back Home. Everyone, it seems, has a maid. The maids used to be predominantly Filipino, but with the recession, Filipinos have been judged to be too expensive, so a nice Ethiopian servant girl is the latest fashionable accessory.

The only hostel for women in Dubai – a filthy private villa on the brink of being repossessed – is filled with escaped maids. Mela Matari, a 25-year-old Ethiopian woman with a drooping smile, tells me what happened to her – and thousands like her. She was promised a paradise in the sands by an agency, so she left her four year-old daughter at home and headed here to earn money for a better future. "But they paid me half what they promised. I was put with an Australian family – four children – and Madam made me work from 6am to 1am every day, with no day off. I was exhausted and pleaded for a break, but they just shouted: 'You came here to work, not sleep!' Then one day I just couldn't go on, and Madam beat me. She beat me with her fists and kicked me. They wouldn't give me my wages: they said they'd pay me at the end of the two years."

One day, after yet another beating, Mela ran out onto the streets, and asked – in broken English – how to find the Ethiopian consulate. After walking for two days, she found it, but they told her she had to get her passport back from Madam. "Well, how could I?" she asks. She has been in this hostel for six months. She has spoken to her daughter twice. "I lost my country, I lost my daughter, I lost everything," she says.

VI. The end of the world

The World is empty. It has been abandoned, its continents unfinished. Here, off the coast of Dubai, developers have been rebuilding the planet. They have constructed artificial islands in the shape of all earth's land masses, and they plan to sell each continent off to be built on. But the people who work at the nearby coast say they haven't seen anybody there for months now. "The World is over," a South African suggests.

All over Dubai, crazy projects that were under construction are now under collapse. They were building an air-conditioned beach here, with cooling pipes running below the sand, so the super-rich didn't singe their toes on their way from towel to sea.

The projects completed just before the global economy crashed look empty and tattered. The Atlantis Hotel was launched last winter in a $20m fin-de-siècle party attended by Robert De Niro, Lindsay Lohan and Lily Allen. Sitting on its own fake island, it looks like an immense upturned tooth in a faintly decaying mouth. Water is leaking from the roof, and tiles are falling off.

A South African PR girl shows me around its most coveted rooms, explaining that this is "the greatest luxury offered in the world". We stroll past shops selling €25m diamond rings around a hotel themed on the lost and sunken continent of, yes, Atlantis. There are huge water tanks filled with sharks, and more than 1,500 rooms, each with a sea view. The Neptune suite has three floors, and – I gasp as I see it – it looks out directly on to the vast shark tank. You lie on the bed, and the sharks stare in at you. In Dubai, you can sleep with the fishes, and survive.

But even the luxury is being abandoned. I check myself in for a few nights to the classiest hotel in town, the Park Hyatt. It is the fashionistas' favourite hotel, where Elle Macpherson and Tommy Hilfiger stay, a gorgeous, understated palace. It feels empty. Whenever I eat, I am one of the only people in the restaurant. A staff member tells me in a whisper: "It used to be full here. Now there's hardly anyone."

Rattling around, I feel like Jack Nicholson in The Shining, the last man in an abandoned, haunted home.

VII. Taking on the desert

Dubai is not just a city living beyond its financial means; it is living beyond its ecological means. You stand on a manicured Dubai lawn and watch the sprinklers spray water all around you. You see tourists flocking to swim with dolphins. You wander into a mountain-sized freezer where they have built a ski slope with real snow. And a voice at the back of your head squeaks: this is the desert. How can this be happening? How is it possible? The very earth is trying to repel Dubai, to dry it up and blow it away. The new Tiger Woods Gold Course needs four million gallons of water to be pumped on to its grounds every day, or it would simply shrivel and disappear on the winds.

Dr Mohammed Raouf, the environmental director of the Gulf Research Centre, sounds sombre as he sits in his Dubai office and warns: "This is a desert area, and we are trying to defy its environment. It is very unwise. If you take on the desert, you will lose."

Sheikh Maktoum built his showcase city in a place with no useable water. So Dubai drinks the sea. The Emirates' water is stripped of salt in vast desalination plants around the Gulf – making it the most expensive water on earth. It costs more than petrol to produce, and belches vast amounts of carbon dioxide into the atmosphere as it goes. It's the main reason why a resident of Dubai has the biggest average carbon footprint of any human being.

If a recession turns into depression, Dr Raouf believes Dubai could run out of water. "At the moment, we have financial reserves that cover bringing so much water to the middle of the desert. But if we had lower revenues – if, say, the world shifts to a source of energy other than oil..." he shakes his head. "We will have a very big problem. It would be a catastrophe. Dubai only has enough water to last us a week. There's almost no storage. It would be hard to survive."

Global warming, he adds, makes the problem even worse. "We are building all these artificial islands, but if the sea level rises, they will be gone."

In the looming century of water stresses and a transition away from fossil fuels, Dubai is uniquely vulnerable.

VIII. Fake plastic trees

On my final night in the Dubai Disneyland, I stop off on my way to the airport, at a Pizza Hut that sits at the side of one of the city's endless, wide, gaping roads. It is identical to the one near my apartment in London in every respect. My mind is whirring and distracted. Perhaps Dubai disturbed me so much, I am thinking, because here, the entire global supply chain is condensed. Many of my goods are made by semi-enslaved populations desperate for a chance 2,000 miles away; is the only difference that here, they are merely two miles away, and you sometimes get to glimpse their faces? Dubai is Market Fundamentalist Globalisation in One City.

I ask the Filipino girl behind the counter if she likes it here. "It's okay," she says cautiously. Really? I can't stand it. She sighs with relief and says: "This is the most terrible place! I hate it! I was here for months before I realised – everything in Dubai is fake. It's like an oasis. It's an illusion, not real. You think you have seen water in the distance, but you get close and you only get a mouthful of sand."

As she says this, another customer enters. She forces her face into the broad, empty Dubai smile and says: "And how may I help you tonight, sir?"

Some names in this article have been changed