Dubai's Crisis

Hindsight is always 20-20 so it is obvious that anyone claiming to have known all along that the Dubai's fast growth was bound to come to an end says nothing that is useful. A full year after the international financial crisis and the chastening lessons that it delivered to business forecasters and those who claim to know where the next boom will rise, the magic of Dubai seems to be fading too. Reading Daniel Gross in Slate magazine here, he argues that Dubai is more akin to Lehman Brothers than many realize or admit. Among the reasons for stating this similarity is the fact the leaders of both the principality and the corporation have been accorded great wisdom in financial management but this myth is now unravelling in a moment of crisis.

Adding my thinking to all this, Dubai was built on the sound premise that natural resources were not necessary to create prosperity for its people. However, unlike many who have maintained the chorus of platitudes about Dubai, I found its aim of growing pretty fast to be incompatible with serious curbs on individual freedom and the rights of immigrant workers providing labour at the construction sites. Sooner than later, there was going to be a formidable clash between the quest to grow quickly and the maintenance of a police state. Secondly, it is now clear that one of the main lessons of the financial crisis last year and the Asian Crisis of a decade ago are so difficult for many business professionals to grasp that they are repeated regularly. And that lesson is that a financial services hub cannot be created by executive fiat and also that real estate construction and investment is dependent on realizable demand. Huge investments in commercial real estate are effective ways of flaunting short-term prosperity but the debts that finance them should be carefully reviewed. I would guess that a significant proportion of the money lent for commercial construction in Dubai has been lost.

Now, these conclusions do not mean that Dubai is not capable of great growth in the future. Instead, it means that the sources for its growth will have to be diversified and that there will be a real estate overhang for a long time even after the city state recovers its growth. Building the world's tallest building for its sake can guarantee prestige for a while but it could turn out to have been a waste of resources and an effective destruction of wealth.