Sunday, December 27, 2009

Which side am I on?

The recent Dubai debt crisis has produced two distinct types of analysts: the Dubai Schadenfreude Corps as well as the Dubai Cheerleading Squad. I’d like to try to split the difference. I’d say that generally I think the Schadenfreude Corps is inclined to go a little overboard. Like it or not the borrowed money that cannot be repaid did go into building world class infrastructure that will be virtually impossible for international creditors to repossess and would be of dubious value even if they did. If you have been to Dubai and the other major GCC commercial centers there is a substantial qualitative difference between Dubai and the other cities.

At the same time the arguments of Dubai Cheerleading Squad are equally not compelling. True the infrastructure of Dubai is excellent but infrastructure is a capital intensive business and given that Dubai is likely to face a significant disadvantage with regard to the cost of capital vis a vis its’ GCC rivals for the foreseeable future this advantage is not sustainable. The other arguments about the entrepreneurial spirit of Dubai hold some water but overlook the fact that most of the entrepreneurial spirit that has not relied on the largesse of the Government of Dubai has been from foreigners. For foreign entrepreneurs to succeed in Dubai there needs to be access to capital and faith in the legal protections of the government or at least protection from outright expropriation. This is why I have, and will continue, to write so much on the theft from the Damas shareholders by an Emirati merchant family with zero action by the authorities. This fact, far more than the crushing debts, is what stands to undermine Dubai long term.

Looking back over what I have written thus far I think it might be a little too easy to paint me into the camp of the Schadenfreude Corps. I don’t consider myself that way. I am deeply saddened by the situation of Dubai. Love it or hate it Dubai was on a path to becoming the Arab New York: a place where people from all over the Arab world could come to seek their fortunes and reinvent themselves. The Arab world is in desperate need of this sort of thing and if Dubai truly is crushed under the weight of this crisis the Arab world as a whole will suffer. Abu Dhabi or Doha may well succeed Dubai as the financial/cosmopolitan capital of the GCC (I'd say Mecca has a lock on the cultural capital and Riyadh the political capital) but this is not yet certain and if Dubai does come apart there will be a lag before somewhere else is able to be what Dubai is.

In my opinion for Dubai to survive the current crisis and recover the area on which it must focus is efficiency of its’ financial system and the Rule of Law. My next few posts will focus on these topics interspersed with analysis of the ongoing crisis.

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