Dubai crisis is the Arab economy’s opportunity
What began as a pharaonic construction site is suddenly sinking in economic quicksand, its future as an archeological attraction possibly more promising than its pretensions as a global financial center.
Dubai, which until last week loomed tall – literally – as an enterprising, cosmopolitan, glitzy and happy antithesis to the Middle East’s economic stagnation, has now emerged as a sad monument to all that is ill about the pan-Arab economy, which includes more than a quarter-billion people but is smaller than Spain’s.
Once the dust settles over Dubai World’s debt-default announcement last week, its many Western victims would do well to probe not only the way the emirate’s authorities treated their money but also the relationship between the entire petrodollar elite and the pan-Arab economy.
The Dubai crisis originated in a brave dream: that the Gulf’s oil riches would buy rather than produce a great financial center.
Had this transpired, it would have defied historical precedent, whereby the great modern financial centers — from London, Frankfurt and New York to Tokyo, Hong Kong and Singapore — both followed and fed monumental industrial revolutions.
Those financial centers rose after millions had moved from the countryside to factories, where the process of their economic empowerment began, eventually giving rise to the broad, educated, affluent and socially mobile middle classes that are the backbone of healthy economies.
Metropolis in the Dunes
In the Gulf, despite the complete absence of middle classes and an industrial base, a financial metropolis was emerging from the Arabian dunes.
Dominated by Burj Dubai, the $1 billion turret that at 2,500 feet is the world’s tallest structure and by its trademark palm-shaped system of artificial islands, Dubai invested $200 billion in tourism infrastructure. On top of that, it put $20 billion into a property venture that included 30,000 houses, luxurious hotels and an artificial lake, and an additional $4 billion for 300 artificial islands.
Dubai’s emir, Sheikh Mohammed bin Rashid al-Makhtoum, openly spoke of the need to prepare for the morning after oil, which some suspect will arrive within several generations, whether because the resource will be exhausted or alternative energies will take precedence.
But the construction frenzy transcended Dubai. To the north, the Bahrain Financial Port was planned to employ 8,000 bankers and insurance agents, while at the other end of the Arabian Peninsula the Saudis laid the cornerstone for the $27 billion King Abdullah Economic City.
And real estate was but the most visible aspect of a spendthrift Zeitgeist that swept the entire Gulf area during this decade’s seven fat years of record oil prices.
It was the time when Emirates Airlines bought a $37 billion fleet including 45 state-of-the-art double-decker Airbus A380s; when Abu-Dhabi-based Mubadala Development bought a stake in Ferrari, and Dubai International shopped for U.S. seaports while other Gulf sheikhs bought skyscrapers in Manhattan and a chunk of London’s Madame Tussaud’s Wax Museum.
No one abroad, let alone locally, seemed to ask who makes all those decisions and how, why and at what social cost, just as western governments never questioned their steady supply of Saudi Arabia’s estimated $20 billion annual military spending — about the size of Russia’s defense budget — and its social costs.
Westerners preferred to look at the happy side of all this financial momentum, which besides welcoming rich foreigners included a genuinely progressive quest, like Qatar allowing U.S. universities to open local campuses for Arab students, a large number of them women, and like Saudi Arabia earlier this decade launching a $50 billion plan to build new roads, hospitals and schools.
Economic alchemy
Alas, it was all part of one big exercise in economic alchemy.
Financially, the Dubai crisis is rooted in the region’s disbelief in transparency. Until this moment the extent of Dubai’s debt and resources remains unclear. And the suddenness of its default announcement was in keeping with the local idea of corporate governance, which recently saw the emir of Dubai sack the Ivy-League-educated chairmen of Dubai World, Dubai Holding, and Dubai International Financial Center, and replace them with his relatives and cronies.
With more transparency, the markets might have made the usage of the region’s minerals a bit more prudent and balanced. Yet that drawback is dwarfed by the Gulf vision’s social aspect.
Bluntly put, the great development along the Arabian coastline was part of an effort to freeze the Middle East’s deformed social structure, whereby hundreds of millions of impoverished and uneducated Arabs live almost immediately under a well-born moneyed elite, with hardly any middle class between them.
That is why the Gulf’s Arab oil producers did not use their wealth to build — in their own lands, let alone elsewhere in the Arab world — the kind of assembly lines that revolutionized the economies of China, India and Brazil. That is why Dubai and its neighbors import millions of Pakistanis, Indians and Bangladeshis as their unskilled workforce, even though nearby Egypt and Syria have chronic labor surpluses.
That is why a place like Dubai at any given time has more foreign residents than locals; and that is why the burgeoning financial center’s profits (while they were still being made) went abroad rather than where they were needed most: in the slums of Cairo, Casablanca, Damascus, Khartoum and Sana’a, where hope is as close to the destitute masses as the Burj Dubai’s 160th floor is to the ground.
Like Pharaoh’s Egypt, the Gulf economy rested on abundant resources, cheap labor, and a disregard for social solidarity. Economically or morally, this was no way to build a modern financial center.
The fact that Western institutional investors happily flocked to the Gulf should surprise no one, although one wonders just what all the bankers who are now fuming at Dubai’s leader were thinking when they signed deals with him. Did they think that the laws of economic gravity would not apply where islands were being imposed on the sea and castles were being planted in the sand? The bankers’ short-sighted attitude in this theater is but an extension of their failings during the era of greed that preceded the meltdown in Wall Street. Chances that they will now fix what they helped ruin are therefore low.
The ones in a position to make the repairs are Europe and America — if not because they care for social justice then because they care for the poverty that feeds Europe with a Middle Eastern immigration it does not want and Islamist terror with the fresh recruits it very much wants.
Europe and America can therefore use this moment of perplexity to help restore confidence in the vision of a financial center in the Gulf, but the proper way: with more transparency, social concern and regional investments, with less extravagance and with a real economy attached to it.
Amotz Asa-El is a former executive editor of the Jerusalem Post.
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