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Tuesday, December 01, 2009

The Ascent, Fall, and Limits of Dubai

Kenneth Rogoff and Edward Glaeser on Dubai. They are both more optimistic about Dubai's future than I thought they'd be:

The Limits of Dubai, by Kenneth Rogoff, Commentary, Project Syndicate: Global investors are in a giant huff over Dubai’s decision to allow ... Dubai World to seek a six-month standstill (implying at least partial default) on payments on some $26 billion in debt. What exactly did investors expect when they purchased bonds in companies with names like “Limitless World,” one of Dubai World’s bankrupt real-estate subsidiaries? Talk about a bubble mentality. ...
There are those that revel in what they see as a come-uppance for brash Dubai’s outsized ambitions. I, for one, do not share this view. Yes, Dubai, with its man-made islands, hotels simulating Venice, and roof-top tennis courts, is a real-world castle in the sand. Yet, Dubai has also shown the rest of the Middle East what entrepreneurial spirit can accomplish.
Its airport has become a global hub... And, with its relatively open goods and capital markets, Dubai has become a trading hub not only for the entire Middle East, but also for parts of Africa and Asia. ... Yes, Dubai is certainly an autocratic state where finances are tightly and secretively controlled..., a central reason why the Dubai World default came as such a shock.
But, in many ways, Dubai’s rulers have been remarkably tolerant of free expression. ... Anyone familiar with Dubai understands that ... a much broader embrace of creativity that has allowed the country to court elite foreign professionals in finance and other industries. ...
Unfortunately, Dubai ultimately proved subject to the laws of financial gravity. This time was not different. Massive speculation and borrowing led to excessive debt burdens and ultimately, to default.
Is this the end of the road for Dubai’s epic growth? I doubt it. Countries throughout the world and throughout history have defaulted on their debts and lived to talk about it, even prosper. ...
Will there be contagion to vulnerable countries in Europe and elsewhere? Not just yet. While the Dubai case is not different, it is special, so the effect on investor confidence should remain contained... But investors are learning the hard way that no country’s possibilities and resources are limitless.

Edward Glaeser:

The Ascent, and Fall, of Dubai, by Edward L. Glaeser, Economix: Last Wednesday, the government of Dubai announced the restructuring of Dubai World...
Dubai World has more in common with ambitious American real estate developers than with the sovereign wealth fund of neighboring Abu Dhabi, which takes ... vast oil earnings and invests them worldwide. Dubai has few petrodollars and Dubai World is borrowing billions to build a glittering commercial metropolis on the edge of sand and sea. The glint of hubris has long shone off the glass walls of Dubai’s soaring skyscrapers, but overreaching ambition always lies behind the creation of great cities. ...
In 1985, the emir decreed the opening of the Jebel Ali Free Zone, which is now also part of Dubai World. The Free Zone offers easy permitting, good infrastructure and little taxation, right next to a port with easy access to the Middle East and to India. ...
Dubai’s leader, Mohammed bin Rashid al-Maktoum, has long understood that in an age of mobile talent, Dubai must be an attractive place for consumption as well as production — a consumer city. Dubai’s long-run success depends on attracting skilled workers who will not stay in a city that offers only sun-baked purgatory. For a decade, the sheik has tried to promote ... Dubai ... into a place of pleasure with soaring skyscrapers, vast malls and spectacular luxury hotels. ... Dubai recognizes the opportunity that comes from the strictness of neighboring Islamic states. Pleasure can be a comparative advantage of Dubai...
While Dubai’s good infrastructure, pro-business government and consumer amenities may enable the city to eventually succeed..., Dubai has now massively overbuilt relative to the level of current demand. Dubai now has the tallest building in the world, and 11 skyscrapers that are taller than any European building.
Fifty-story buildings are an efficient way to deliver plenty of space, but extreme height is far more expensive and a bellwether of irrational exuberance. ...
Great cities have long been built by great gamblers, and Dubai’s sheik may well be the second greatest city-builder — after the Chinese government — of our age. Many of those gamblers have ended up bankrupt, but their structural legacies remain, providing the space that connects humanity and facilitates the success of our urban world.
Even if Dubai’s real estate prices continue to drop, which is certainly quite possible, there will remain a strong incentive to fill its buildings. If the structures remain occupied, then Dubai, and its sheik’s dream of a great metropolis, will survive.

    Posted by on Tuesday, December 1, 2009 at 06:39 PM in Economics | Permalink  TrackBack (0)  Comments (20)


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