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LATEST NEWS UPDATES | Bye-bye Dubai? by Jayati Ghosh

Bye-bye Dubai? by Jayati Ghosh

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published Published on Dec 1, 2009   modified Modified on Dec 1, 2009


There is much about Dubai that is artificial and based on illusion: the man-made islands designed to represent a map of the globe; the indoor ski slope in the midst of desert; the incredible hotel with glass walls looking onto a sea aquarium mimicking the surrounding ocean. Dubai had also become synonymous with excess: building the tallest tower in the world and the biggest and most expensive luxury hotels, residences, shopping malls and office complexes; providing the market and the sales venue for the most outlandish and flamboyant luxury goods.

It’s very brashness was both a sign of and a cause for its success. Even the opacity that has characterised its political system became a source of economic magnetism. Expatriates flocked to its dynamic construction and tourism industries and relished the tax-free incentives. And Dubai emerged as one of the developing world’s new global financial centres.

In the early phases of the global financial crisis, all this even seemed to be an advantage, as investment activity and construction continued at their feverish pace. For example, plans for constructing the world’s most newest tallest building (near its closest competitor Burj Dubai) were unveiled just after Lehmann Brother collapsed in the US. Continued growth in Dubai was heralded as another sign of Asian economic "delinking" from the problems in the core of international capitalism. But now it turns out that this too, like so much else in Dubai, was based on illusion. The sudden declaration that the state-owned conglomerate Dubai World, which typified the apparently insatiable appetite for accumulation in the small Gulf Emirate, would unilaterally suspend its debt payments for at least six months came as a sign that the improbable honeymoon is finally over.

Dubai is one of seven small states that make up the United Arab Emirates (UAE), and it is second to Abu Dhabi (which is the richest and has most of the oil reserves) in terms of the size of its economy. Although its economy was originally built on oil, currently oil revenues account for less than six per cent of its total revenues. In any case Dubai’s oil reserves have diminished significantly and are expected to run out within the next 20 years.

Dubai’s strategy has been to diversify its economy away from oil to trade, tourism and finance. It encouraged its state-run conglomerate Dubai World to buy up companies around the world and invited multinationals to use Dubai as the Middle Eastern base for their activities in Asia and elsewhere. A subsidiary of Dubai World (DP World) purchased the British ports operator P&O in 2005, bought the department store group Barneys New York in 2007 and invested heavily in construction projects in Las Vegas in the United States. Dubai World also includes the property developer Nakheel, which is behind some of the most ostentatious commercial projects ever built on this planet.

Of Dubai’s resident population, more than 80 per cent are expatriates, including around 1.5 million from India. Indian tourists — from the Bollywood crowd to newly affluent middle classes — have also contributed to Dubai’s boom.

Is there a relation, as some have argued, between height and hubris? In any case it is clear that Dubai is an apt symbol of the recent over-extension of capitalism, and the over-accumulation that typically characterises unfettered market behaviour in any period of boom.

With the financial crisis, global markets for luxury goods and services and for real estate both shrank simultaneously. Dubai’s fall began with the exodus of capital. Thereafter, the collapse of non-tradeable sectors, especially real estate and construction, was swift. Property prices in Dubai have fallen by more than 50 per cent in the past year. Many construction projects have been held up or abandoned.

The economy slumped from the second half of 2008. At the start of the financial crisis, gross domestic product growth expectations in 2009 for Dubai were four per cent, but this was lowered to two per cent in the middle of the year. By late 2009, the crisis loomed. On November 26, Dubai World announced that it was seeking a debt standstill for $15 billion of repayments on its $59 billion of external debt until May 2010, and had hired Deloitte to help it restructure to move into financial viability. This surprise announcement, coming on the eve of the Bakri-Id holiday, reverberated across global markets.

The official estimate of the UAE’s sovereign debt is $80 billion, but some analysts say it is could be even twice that amount. Some Indian banks (like Bank of Baroda) and companies (Nagarjuna Constructions, Larsen & Toubro, Punj Lloyd, Voltas, Omaxe, Aban Offshore, Spicejet and Indiabulls Real Estate) have exposure in Dubai, but they have generally rushed to declare their exposure to be marginal. But the most direct impact on India is through workers. Most of the 1.5 million Indians in Dubai are blue collar workers in construction or low grade services, who typically have temporary contracts. In a country with no unions, it is easy for companies to lay off workers. It is estimated that tens of thousands of workers in the construction and real estate market alone have lost their jobs over the last few months.

Dubai is relatively fortunate, however, in that investors still believe that it will ultimately be bailed out by its "elder brother" Abu Dhabi, which already granted Dubai a $10 billion loan in February 2009. Some analysts have argued that it is not a question of whether, but when, Abu Dhabi will step in. After all, Abu Dhabi’s sovereign wealth funds have reserves estimated at over $700 billion and it cannot afford damaged financial credibility in the region.

But even if Dubai manages to survive the current crisis, broader questions remain. Dubai is not unique in being tripped up by its earlier irrational exuberance, especially in housing and real estate. The rotten fruits of the earlier phase of over-accumulation are still waiting to be collected, and as a result there are plenty of potential banana skins waiting to trip up investors in financial markets across the world. Real estate prices in the US continue to fall, especially in luxury markets such as Florida, and default and dispossession continue to increase. Elsewhere too, the multiplier effects of the collapse of the construction and real estate sectors are still working their way through the economy. The latest fear of sovereign default is from Greece, and Ireland is also in trouble.

So financial markets may have good reasons for reacting the way they have. The collapse of the Dubai dream is not a sui generis event without any implications for wider markets. Rather, it may be a straw in the wind indicating that the travails of finance capitalism in the current period are far from over.

The Asian Age, 1 December, 2009, http://www.asianage.com/presentation/leftnavigation/opinion/op-ed/bye-bye-dubai.aspx
 

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