Dubai: Fine?

So, I’ve decided to retool this a little and begin blogging again. I left up a couple old posts, but for the most part they were eliminated for one reason or another. We’ll see what sort of consistency I can arrange for postings, but I have enough ideas to write about, as some of you no doubt know. With that said, a new post.

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“Dubai and Abu Dhabi and the rest of the emirates are fine.”

This was the pronouncement of Sheikh Mohammed this past Thursday. Needless to say, it is justifiable to have some doubts about how accurate an assessment this really is. Of course, it is necessary for national leaders to act as cheerleaders for their countries in one way or another. It would not do to have one’s leader act like there will be no positive change (as people often wrongly accuse Carter of doing in the “malaise speech”). Markets, amongst other characteristics, can be extremely open to psychological manipulation—a topic within the field of behavioral economics—and the cheerleading, or message-shaping, or what-have-you that surrounds a country’s (or company’s) economic endeavors can certainly have a real and independent effect on the ultimate economic success achieved. However, Sheikh Mohammed may be playing this hand a bit too strongly, given the circumstances.

The fantastic growth of Dubai in particular depended on significant and consistent foreign investment—especially in the real estate market—and loose banking habits. A situation like the past is unlikely to emerge again soon, if only because there is simply a lot less money available out for investment purposes there than there used to be. The relatively anemic recoveries so far in the United States and Europe underscore this point. A lot of on-paper money went away over the past two years, and even as it comes back, it is likely that much more will be held onto instead of rapidly (or rashly) invested.

Of course, one could say that Europe and the United States are the past, economically-speaking. The general line of this argument holds that the major center of future foreign investment will be China. Of course, China is certainly pouring money into the Middle East, Africa, and Central Asia, trying to stake out economic claims, so to speak, while the Western countries deal with the consequences of their latest round of excesses. One problem, however, is that China is likely itself to come under increasing economic strain soon—speculation continues about the potential fallout of a collapse in the very hot real estate market in major cities; the export-obsessed economic model that has provided China its growth in the past is likely to need a retooling, which even they now admit and which will likely entail a period a reduced prosperity; and the country will soon need to ramp up its efforts to deal with an increasingly-aged population even as the country continues to develop, the consequence of initiating the one-child policy in 1979. Of course, this last issue is less relevant at the moment, but it remains something to be aware of over the next 15 years, as the aging of China becomes more acutely apparent.

So, the era of easy foreign money that enabled the incredibly rapid development of Dubai is unlikely to be encountered again in the near future. Does this mean that Dubai will be unable to get itself back on track? Not necessarily, but it does suggest that the track may have to be adjusted—the flashy real estate projects and other such investments cannot reasonably be continued in the near future. What is needed is a program to develop a domestic economy that is far more self-sustaining than the previous one was. This is a problem more or less common to all of the Gulf countries, as they are all facing the need to diversify their economies in order to make them more resilient and, thus, less reliant on the good graces (and good fortune) of external economic actors and the ups-and-downs of the oil market. Dubai needs to be able to give the world something besides man-made islands and the tallest building for sustainable economic development.

Is Dubai’s economy “fine?” I wouldn’t say so—that is too cavalier an assessment. Is it doomed? Certainly not. Rather, it is in that middle stage between falling-out and getting back on its feet, and it fortunately has a big brother around to lend it money. The current period of adjustment, financed by Abu Dhabi, will have to result in Dubai getting used to a more pedestrian lifestyle, and significant work will be needed to get the emirate back on a solid footing for future growth, but one could certainly imagine worse fates.

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