Fly Bye Dubai - Kevin Mendonca

As far as I remember I have been bearish about Dubai’s real estate market compared to most people from Dubai. Perhaps my bearishness was just relative, but I have always felt the bottom was going to be harsh and that it would take nothing short of a miracle to save Dubai.

Most of what Dubai did was copying the successes, and trying to avoid the failures, of the developed world, over the past 200 years. This is the same thing that many new developed countries have done, and what India and China are doing. Of course the larger countries have had to adopt western models more due to size. However they happened to fall for the one stupid piece of financial advice that has been repeated from asset bubble to asset bubble: “This time is different.”

Few things strike out when observing the Dubai scenario:

1. Abu Dhabi has not bailed out/bought Dubai;
2. The Dubai government has more debt than anyone knew (or cared to know);
3. Dubai has no oil.

While I totally agree with the real estate price pressures Dubai is facing, the theory that is Dubai descending in to oblivion is a bit too much for my taste. However, I think things are going to get tough—a sort of Japanese lost decade is more likely.

So, what went wrong with the El Dorado of the Middle East?

The biggest problem with Dubai is that they want to have the biggest “dick” in town. Resource allocation for the last seven years was always skewed in favor of an asset that contributes virtually nothing to long-term capital formation—real estate— yet had the debt baggage that stays around for a long time. The “sexiness” of having the largest tower, man-made islands, and God knows what else, meant that people took unnecessary risks. While these things do bring in tourists Dubai’s emphasis on tourist attractions was excessive.

Dubai instead should have focused on being more of an export economy. It has great infrastructure, zero taxes and availability of cheap labor; it could compete with China, but alas, manufacturing and textiles are not as attractive.

Another area of concern is the rules of living, which while being relatively liberal in comparison to the region, still had a trait of denigrating its expatriate work force. Such things work well when times are good, and people are willing to live with them, but when times are tough, the tolerance of discrimination changes. Dubai wants to be Singapore, but with its quasi-feudal system.

So how does Dubai extricate itself from the current imbroglio? Several factors can contribute its resuscitation:

• If Abu Dhabi takes over everything, then it could continue to make average economic decisions and still have loads of money.

• Dubai gets its act together and realizes that it cannot be the West without acting like the West. There is virtually no bankruptcy law and bouncing a check is a federal crime! Also, the lack of reputable statistical information is a serious concern.

Due to Dubai's political structure, the real role model will have to be Singapore. Singapore and South Korea were countries that started Authoritarian Capitalism, now emulated by the Middle-East, China, and I am sure, soon a bunch of African countries would follow. Authoritarian capitalism proves that anyone can have a great economy–all it takes is political will (authoritarian or democratic) and education to sustain it.

Whatever happens to Dubai, South Asians and poorer Arabs will continue to come because they can make more money here. Statistically, it makes economic sense for them, and at the end of the day people need a decent standard of living. This will stay relatively constant in Dubai and this is what matters to the majority of people.

As far as its position in world economy goes, Dubai is always going to be insignificant: the world’s largest economies come down to three things: market economics, education and population. Despite people talking about Dubai as if it was the new Rome, the maximum it can ever achieve is becoming a Singapore, or Monaco, or Luxembourg, or some other tax haven, playboy paradise, or mini financial center.

And no matter how much I love Dubai, considering I was born and grew up here, as I grow older, it will become harder to defend its backwardness, both economic and social.