You sort of just knew Dubai was going to implode. Or if you didn't, you sure should have.
Dubai is shaking investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.
The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Bonds of its property unit, Nakheel PJSC, mature Dec. 14. Dubai contracts climbed 124 basis points to 564, the most since they began trading in January, adding to 122 yesterday, CMA Datavision prices showed.[fn]Laura Cochrane and Tal Barak Harif, "Dubai Debt Delay Rattles Confidence in Gulf Borrowers," Bloomberg, November 26, 2009.[/fn]
Goldman had this to say:
The Dubai Government announced yesterday that it has asked investors to extend the maturity of upcoming debt amortisations of two of its state-owned companies, Dubai World and its real estate development arm Nakheel, until 30 May 2010. Subsequently, the Dubai government has authorised Dubai Financial Support Fund to "restructure Dubai World with immediate effect".
Dubai World is a 100% state-owned holding company that owns Nakheel (100%), a real estate developer; DP World (77%), one of the world's largest port operators and a listed company; Drydocks World (100%), a shipbuilding and maintenance company; and Limitless LLC (100%), a real estate developer which owns various assets in Europe, Africa, Asia and the Middle East. The government of Dubai also owns a number of other entities directly or through other structures.
The signs of future troubles were not subtle in Dubai, outlined, for example in the finem respice piece "Redefining Capitalism To Suit Anti-Capitalists," April 14, 2009, which, at risk of being self referential, we reproduce below:
I spent a good deal of time reading and absorbing The Independent's stark and haunting take on Dubai,[fn]Johann Hari, "The Dark Side of Dubai," The Independent (April 7, 2009)[/fn] nicely cited today by Megan McArdle.[fn]Megan McArdle, "Why Bankruptcy Matters," Asymmetrical Information (April 14, 2009).[/fn] I have spent quite a bit of time in Dubai and seen a number of sides of the "Middle Eastern Shangri-La," not least of which being the experience of a female expat in the jurisdiction. I can only describe this last as characterized both by the constantly disconcerting presence of an ill-defined malice (perhaps best understood as a sort of ambient white noise of potential danger) and the occasionally terrifying and instant materialization of real, even mortal danger from this shapeless white snow of audio. (This last I know only second hand, having watched the arrest of a friend without accompanying her into custody).
I was more than dimly aware of the plight of the lowest underclasses in Dubai, but it took Hari's article to click-sift the signal from the noise. For Westerners, the threat truly is an ill-defined background noise that requires of one only moderate effort to ignore- perhaps as the droning of engines on an aircraft, or a light ringing suggestive of tinnitus- until someone like Hari asks suddenly and aloud in an elevator car "do any of you hear that noise too, or is it just me?" With that attention what was a rather well concealed- or perhaps one should rather say "well ignored"- and insidious oppression becomes alarmingly clear.
On reflection, it is eminently clear that Hari is not exaggerating when he articulates the role of a "slave class," that being the caste of indentured servitude that has built Dubai's gaudy pyramids- and with alarmingly similar cost. But something about both Hari's article and the rest of the expositive work on Dubai that has surfaced in the last year has nagged at me subtly for some time. This was something I could not perfectly articulate until recently, when I finally found it early on in his piece, a single lunge closing his introduction with sharp and driving finality:
Few places in the world manage to visually represent the current failure of global neo-liberal capitalism as starkly as the Gulf Emirate of Dubai.[fn]Ibid.[/fn]
It is a misconception so bold and so brazen that it, in the fashion of hiding in plain sight, dares one to challenge it- and, Dubaiesque, finds few takers. Ironically, it is a concept as insidiously seductive for some as Dubai's own marketing mirage. And as to the complexity of this mirage, it says something that the vast majority of "pictures" of Dubai returned in any search turn out to be artist's renderings of future skylines rather than actual photographs of present or past skylines. It takes only a little reflection to recognize that illusion is Dubai's first and most lucrative export, and that efforts to perpetuate it are, at once, very extensive and well practiced. This willingness to accept mirage as image, both in the case of Dubai and in the form of Hari's prose, is indicative of an increasingly prevalent attitude that bears both some scrutiny, and more than some debunking: that Dubai bears even the faintest resemblance to "global neo-liberal capitalism," whatever that is.
As a showcase for the evils of capitalism, Dubai has become something of a common display. From the more blatantly dishonest intellects:
Milton Friedman's beach club: Dubai, in other words, is a vast gated community, the ultimate Green Zone. But even more than Singapore or Texas, it is also the apotheosis of the neo-liberal values of contemporary capitalism: a society that might have been designed by the Economics Department of the University of Chicago.[fn]Mike Davis, "Fear and Money in Dubai," New Left Review 41 (September-October 2006).[/fn]
To what has become the almost trite offense of culturally indoctrinated xenophobia:
Welcome to the ultimate sociopolitical model for the 21st century: a Blade Runner-esque melting pot of neo-liberalism and "subterranean" economy, Sunni Arab Islam and low taxes, souks and artificial islands, a giant warehouse and a tourist paradise, life in the fast lane and post-modern slavery. The model spells out an apolitical, consumer-mad, citizenship-free society.
Dubai represents the essence of globalization at work - globalization, of course, interpreted as the ineluctable triumph of Western laissez faire, where world trade means economic rights trump political rights.[fn]Pepe Escobar,"Dubai Lives the Post-Oil Arab Dream," Asia Times (June 7, 2006).[/fn]
It defies explanation how a state with debtors' prisons, no bankruptcy proceedings to speak of, slave labor punctuated by the seizure of workers' passports and brazenly broken employment contracts left unenforced by local authorities, almost non-existent freedom of the press, arbitrary and draconian drug enforcement, a ban on homosexuality punishable by lengthy prison terms, government filtering of the internet, rank favoritism in the form of selective enforcement against non-citizens, massive subsidization of the Emirati caste for everything from housing to education, labor laws that make it near impossible to fire a citizen but that grant effectively no rights at all to expatriates, academic oppression by the secret police, no religious freedom of any kind, no woman's suffrage, no men's suffrage, massive, unchecked deficit spending, and, to top it all off, a totalitarian monarchy with what amounts to unlimited power, could even remotely be described as "global" "liberal" "neo" or "capitalist," much less a poster state for "global neo-liberal capitalism." The only real laissez faire aspects of Dubai's existence are lax immigration policies (until one is unemployed) and the absence of income tax. Hari is so taken with the Dubai-as-capitalist-paradise theme, and just to make sure we didn't misunderstand his prose as something other than an indictment of capitalism- or perhaps because he just can't help himself- he closes by intoning in sarcastic context "Dubai is Market Fundamentalist Globalisation in One City."
And, really, could there be anything more absurd than associating Dubai with Milton Friedman in any way other than to highlight Friedman's belief that economic freedom, true economic freedom, has the effect over time of corroding authoritarian regimes? In this connection it isn't particularly hard to point out that the widespread exposure to the citizens of more liberal democracies (France and Great Britain in particular) has, in the case of Dubai, managed to do at least some good- though it seems quite small in comparison to the massive walls of oppression that still dominate.[fn]The first inklings that homosexual rape might actually be a crime and recognition, grudgingly accepted after rather pointed French boycotting efforts, of AIDS as a real and serious problem in Dubai, are both recent examples of social progress in Dubai forced by exposure to Western ideals and the financial pressures of a state dependent largely on tourism and foreign capital for prosperity.[/fn]
I have grudgingly come to the conclusion that the prevalence of this error is mostly inadvertent. That capitalism has become so aligned in the minds of its critics with conspicuous wealth or excess, that the two are linked wherever wealth and excess is found. A sort of sloppy disregard for causality, as it were, such that concentrated wealth must, a priori derive from the evils of capitalism (rather than a source so obvious that you were able to write 4 pages on it before running badly aground: a totalitarian, slavery-subsidized, theocratic state). In a sort of crude way this perverse and wordy haiku is a great compliment to capitalism, though possessed of neither the wit of brevity nor the elegance of meter. There are fates much worse than being associated, albeit erroneously, with the quick accumulation of wealth wherever it is found- provided wealth in and of itself does not, as any annual income above £25,000 obviously does Hari,[fn]Johann Hari, "The One Lesson of This Crisis is the Need for a More Equal Society," The Independent (April 15, 2009).[/fn] intrinsically offend you, that is.
We find it absurd that what amounts to a proxy extraction economy funded by massive deficit spending would ever have attracted the degree of foreign capital and labor that Dubai has managed to bubble into existence, particularly given that a number of basic systemic problems should have warned off investors long ago. That 5 year Credit Default Swap protection on Dubai's sovereign debt could ever have been trading at 200 point spreads (GE 5 year protection currently sits at 213 or so) requires serial and near pathologic suspension of disbelief by investors in multiple areas including:
A Total Discount of the Importance of Institutional Strength
It has been no secret for the last many years that the legal system in Dubai, despite its western appearance and facade of impartiality, is entirely arbitrary and capricious. For years Dubai has touted the benefits of its "moderate" and "western" legal system to attract foreign white collar workers (primarily from the UK), a judicial sell-side pitch that belied the jurisdiction's naked favoritism for the local Emirati caste and the fact that a thick layer of Anglo-Saxon foundation in fact just powdered a bulbous Islamic judicial system.
2008 GDP for all of the UAE was around $270 billion. This makes Dubai's debt alone nearly 30% of UAE's GDP on top of the 22% public debt:GDP ratio that the UAE already endures. This doesn't even count another $75 billion of external debt floating around. Fortunately for the UAE it enjoyed about a $40 billion surplus in 2008 owing to the benefits of being an extraction economy. Further, a slug of $65 billion in direct foreign investment buoys the entire UAE. Wonder how sticky that is.
Despite this, Dubai itself enjoys almost none of the benefits of other area extraction economies. It's organic oil revenue is small to non-existent.
A Deleterious Disregard for Even the Most Basic Fixed Cost Analysis
You are building an oasis in the desert. Let us repeat that. The desert. They run the UAE Desert Challenge race there. It is an adversary that never sleeps and is constantly fighting to reclaim for its accretive redish sands the human footprint in the region. Simply keeping the roads clear, much less maintaining infrastructure that approaches what western Europeans would consider a "resort" is a obscenely expensive endeavor.
Dubai was already chalking up records for the most power consumption per capita (on the order of 20,000 kWh per year) and the highest water consumption per capita (the desert, get it?) in 2007 and still hitting 15% annual gains in both figures with ease. We won't even comment on Dubai's 2005 distinction for the world's largest per capita carbon footprint. If you can imagine this, over the last ten Dubai contracted three separate consulting firms to study the feasibility of supplementing their power needs with solar technology. None resulted in a report that suggested even highly subsidized solar power would generate net energy returns on investment. (Given the local weather, this bodes poorly for solar power).
U.S. Levels of Entitlement Accounting Delusion
The Emirati caste enjoy nearly 100% subsidies for housing, higher education (up to the PhD level along with 100% coverage of foreign travel and living expenses to study abroad) and what amounts to lifetime employment guarantees. It is no accident that a large fraction of Emirati work in government jobs. Firing an Emirati is so difficult even United States Postal Workers and Teacher's Unions would be envious.
Something Approaching a Wholesale Overappreciation of Local Construction and Engineering Competence
Dubai depends almost entirely on an extremely base foreign worker class for construction. This has given Dubai the distinction of mounting the most expensive (even size and scope adjusted) projects in the world. Presented for your review, one of many such examples:
Gee, that looks sort of expensive.
An Oddly Willing Embace of Perpetual Growth Valuations
Back in 2007 (it makes one almost misty) one could watch Dubai wax an impressively deadpan muse that sustained double digit annual gains represented "modest growth," mostly predicated on a wanton dedication to consumerism that rivaled even the United States.
The only real question anymore is: Why was anyone surprised?