I won’t have the time to cover this story in full details. Duncan has some good commentary and further links. But the knock on effects of Dubai’s attempted debt reschedule are really impressive on their own. FTSE down many % (and the LSE computers screwing up); the Dow and S&P flooring, a flight to quality. Classic panic – and a worrying sign that things are not as calm and post-crisis as we might have helped. As Megan says, global markets are not robust enough to take many more shocks.
The stories about Dubai are now all about how it was a crazy boom, how the building makes no sense, how it was all bound to end in tears, a classic real estate bust, and so forth. I share some sympathy. On the surface, it is all opulence and multicultural charm. Service-sector jobs seemed very good. At the Wild Wadi, you find people from every possible nationality working, and it is possible to believe that Dubai has found some ultra-globalised future way of business, that scoops up the wealthy from one corner of the world, the eager to work from another, and brings them all together for their mutual benefit.
But several concerns bubbled below the surface whenever I went there. We swanned around far from the building sites. There is a persistent rumour of terrible working conditions: see Johan Hari, for example. All in all I think ‘slave state’ is melodramatic, and I have little doubt that the jobs were in high demand and better than the alternatives back home in India, Sri Lanka, Pakistan and other places. However, you come away more than ever aware of how being rich means making the most of people elsewhere who are grateful for opportunities you would regard as intolerable toil.
Environmental concerns are another: how so much water and fruit gets into a place little more hospitable than the surface of the moon gives one pause. This is the most environmentally crazy idea I have ever seen.
Finally, there was the “who buys” concern. The buildings all looked fine. Whenever I went there, I was simultaneously impressed by the gorgeousness of the architecture, and the sheer uninhabitability of the landscape without massive artificial help. The Burj Al Arab is still the most beautiful building I have seen, and the Jumeirah Beach Hotel the most comfortable, welcoming and child-friendly hotel/resort I could imagine. The attractions of living there outside the summer months palpable, if you don’t mind a slightly culture-free existence. But how much can really be made from finance, real-estate and being an entrepot?
But I would like to temper some of the gloom. Yes, they have overbuilt, but they at least have assets at the end of this. The Burj Dubai is a real thing; so is the airport, the harbour, and the fact of the whole area being a bustling, middle-of-the-world sort of place. Like David (see comment below), I am a somewhat believer in the entrepot model. Dubai’s ethos is basically sound – well, I prefer it to Saudi Arabias – though the ‘jail the bankrupt’ rule seems rather harsh (will they now jail the Dubai World crew?)
People should not get investment losses confused with real losses: like the overbuilding of railways in the UK in the C19, the Emirates are left with large assets, just not the sort that yield much of a profit to the original investors. The externalities will accrue to other people. I doubt it will lose its sporting events, its entertainment complexes, its low rate of crime.
That is my hope, at least. Compared to the oil-dependent nastiness of so many other Middle Eastern Regimes, Dubai seemed to show another way forward, and I think there was some substance to it. But the next few years will be rocky for the bondholders. (Buiter, as ever, is dead set against bailing them out).