This column by Indian academic Ajay Shah originally published in Financial Express offers some interesting analysis on the debt debacle in Dubai. You may also wish to read this extensive April 2009 report by Johann Hari, a commentator for The Independent newspaper in the UK.
A good airport, port, glass office towers, and computerized trading floors do not an international financial center make. The hardware may have been in place but lacking has been the critical software, particularly the rule of law, transparency, accountability and the free flow of information. Dubai’s party lasted two decades. The question is whether its ambitions to be a global financial hub can still be realized. There are lessons for Hong Kong in this tale of “puffery” so suddenly deflated.
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Unlike Dubai, Hong Kong has long been a global economic hub. Hong Kong’s a city that attracts investors and businesses for a variety of reasons that the professor included in this post. However lacking it may be in areas such as English language proficiency, in autonomy and law, (of course, these are debatable, but common themes running through this course), Hong Kong does have a long history of being one of Asia’s centre for finance and business, and that will not end anytime soon. Dubai, on the other hand, is in a region of the world that hasn’t been fully integrated into the global economy: in general, the Middle East is not a major player in the market, and was less badly hit by the financial crisis.
The author brings up a comparison between Dubai and China, where both were criticized for possibly building up a ‘sham’ economy. They both built up very rapidly. Shanghai is a wonderful example of this. A problem Dubai seemed to have was in attracting the proper investors who would make their investments profitable. Without that prior history, which Hong Kong has, it makes sense that Dubai didn’t have the economic growth it sought through building all its new developments.
The most important thing in these cases is to build and maintain sustainable software. Dubai thought that as it built up, people would come with, but that didn’t happen. Shanghai is one example where competition lies, but it also has to work on its software before it can be sustainable and successful. After all, a city can’t grow just one-dimensionally: without the cultural and historical foundations for economic growth (Hong Kong has had both), or at least good attempts at fostering it, the hardware can’t sustain itself.
Not that Hong Kong is a perfect city, though. It needs to know that it can’t follow these same mistakes of overbuilding. Frankly, as a foreign student here, I was distracted and somewhat unattracted to Hong Kong’s seemingly unnatural need for economic growth. As the article states, the ex-pats of the countries also need a reason to stay and contribute to the society. For me, there’s a philosophical notion of why the city’s growing that is lacking in Hong Kong, and I think that exists for Dubai and all the other cities in the world trying to expand hardware but not software right now. My friend told me that Singapore was even attractive because it had some form of moral guidance behind its laws. It may not just be software that needs to be intact, but some justification in the people’s minds as to why this growth is occurring.
I have a friend whose father has been working in Dubai for a construction company for years. Two years ago, after coming back from the visit to his father, my friend told me some interesting findings in Dubai. In his sayings, Dubai was actually creating housing bubbles.
“They are over-investing on the real estates. Many offices buildings are remained empty while other new buildings are being built.”, he claimed.
The Dubai government were pushing hard over the development of Dubai despite there were not clear demand, either existing or forecasted, for the buildings. They were putting their bet on the boom of the world economy at that time but unluckily it turned out to be the global financial tsunami one year later.
The current Dubai crisis comes to me as not a surprises. As the economy slows down and their over-investment fails to benefit from the global economy, these efforts just turn out to be in vain.
Worse still, unlike other emirates under UAE, Dubai has just 3-4% GDP coming from oil and its ability to be self-sufficient is questionable. The key to whether they can survive this crisis all depends on how much bailout they will received from other emirates.
Just one year ago, I had a field trip to Dubail orgainzed by the FBE. Interestingly, the imbalanced development within Dubai, The hotel we stayed at were located in a not very developed area which is just not far, 2-5 miles I guess, from the most luxurious hotel in Dubai, Abu Dubai, which was nicknamed as a “boat hotel”.
This level of imbalance came to me as another sign of too rapid development under the government planning. As Reyes pointed out, they are just too much following on the government on what to do and how to do. This is obviously running risks of inappropriate government planning and in the long run will undermines the city’s ability to substain and reinvent itself.
Like Patrick, Dubai’s collapse did not come to me as a surprise. I say this not just based on the worldwide reviews last year addressing its over-lending issue, but also personal experience when I went for a field trip to Dubai last year.
From Dubai, I saw a nation of pride. I was so impressed by their huge nationalized businesses and construction projects. But somehow I noticed that the city was too quiet to match up to its powerful hardware capacity. I could hardly hear any noise of construction despite sights of unfinished buildings. Modern facilities exist but barely a few people were there to use them.
As Reyes pointed out, Dubai dressed up itself with all the glamourous hardwares with its money, hoping that this is enough to lift itself to a top position in the world. But they’re going too fast, too aggressive, and too optimistic. All leads to the ending result that the city finally blew itself, and got hurt by its own pride.
Actually, I felt surprised when I heard this news, though I have read some news about the over-investment and difficulty in seeking financing in the construction in Dubai during the financial tsunami.
Like Trista and Patrick, I joined the fieldtrip to Dubai organised by FBE last year as well. I had a feeling of pride and agressiveness from the businessmen and government officials. Indeed, people in Dubai are ambitious in building the city as another world’s financial centre. However, just as the author mentioned, building up a financial centre out of thin air takes time and both hardware and software have to be taken care of. The failure of Dubai demostrates the importance of having software (more precise, professionals and systems). For me, Dubai has a long way to go in achieving this.
However, I am quite optimistic towards the future of Dubai despite this sudden financial crisis. After all, Dubai has a world-class international airport and logistic infrastruture that enabling herself to remain competitive. Instead, I am quite worried about the butterfly effect this incident may create on the world’s economic condition, which is already prone to any unexpected events. The debt default in Dubai has already aroused concern about the stability of other sovereign wealth funds in Eastern Europe like Turkey and Ukraine. Further plunge in any of the financial market will definitely deter the worldwide economy from recovering and adversely affect the small-opened economy like Hong Kong. I hope this won’t happen
The announcement of calling for a six-month debt standstill and restructuring from Dubai World has surprised the whole world these days. The upheaval quickly sapped investor confidence in Dubai’s ability to pay down its large debt load. Also, it brings the question that whether it is appropriate to adopt such a drastic economic move to Dubai by its government.
The ambition to become the IFC was backed up by heavy investment in infrastructure projects. Transportation network, free trade zones, tourism spots and real estate are all the hardware that the Dubai government hurried to build. However, like what Ajay Shah said, it is impossible to be the IFC without good software. Debts are accumulating with heavy and tremendous investment but software takes time to build up. Unlike hardware, it is not something that can be improved with just money
As pinpointed in the article of Financial Express, language barrier is one of the biggest concerns in making a world class financial centre. English is still the major language that used by the big financial centres like New York and London. As I recalled what Mr. Sebastien Fung has mentioned in the tutorial, the English proficiency of Japanese is relatively low which hinders Tokyo to become the regional hub of a strong financial centre.
However, Japan has its own position of success. For instance, the extremely strong innovative industries like animation and the large export quantity of goods. In addition, the rich cultural history of Japan also a critical factor to the success. Those factors combines together to create an initiative for foreigners to actively learn Japanese language in order to know more about their customs and cultures. A lot of overseas institutions both in Japan and outside Japan offer Japanese language courses for foreigners to learn. Japan can successfully promote its culture and language.
When we look at Dubai, the major language used is Arabic (correct me if it is not the case). There are very limited people who can speak fluent Arabic in Asia, Europe and America which hinder the development to be an international financial centre. What Dubai has are the fascinating infrastructure which are named the “hardwares”. “Softwares” as mentioned by the above comments like overseas talents and cultural heritage are limited. Given the lack of local English speakers, Dubai should seek for a position to themselves instead of only concentrating on the becoming the international financial centre. There should be promotion on its language and cultures overseas in order to offer more Islamic education opportunity for foreigners. The general impression of Dubai in the eyes of foreigners is that, it is a country of fascinating infrastructure and with plenty of oil resources. Dubai should position themselves as a unique place but not blindly making it an international financial centre which is not practical.
On 27 November 2009, the Asian stocks market faced its Black Friday. With the global outcry over the restructuring of Dubai World, Asian stock markets tumbled, with Hong Kong and South Korea stock markets plummeting by approximately 5 percent and the dollar continued its slide against the Japanese yen.
People queried: Is Dubai Debt the Beginning of Another Meltdown?
Unlike some of my fellow course mates above, I was not surprised by the news – not ever since the financial tsunami occurred last year. In fact, as indicated by the quick mounting of stocks price as soon as the first Monday after the drastic plummeting, I find the whole incident being shockingly exaggerated.
Dubai has had its share of obituaries as it suffers from a property bust from the global financial crisis. The emirate is no doubt stumbling when many of its state-owned entities are in debts. But with Newsweek toppling its headline saying: “Goodbye, Dubai.” – the death of Dubai has been announced way too soon.
Despite the economic instability, Dubai’s fundamentals as a regional hub of shipping, services, people, trade and capital have not changed. Dubai might have been ambitious on its infrastructures and miraculous man-made islands one after another but the core business model of Dubai remains sound.
I have been to Dubai three times, and the latest visit being only this August. Dubai’s economic power and strength are not only about the lavish hotels, skyscrapers and the stunning man-made islands in the sea. (Another new man-made island – ‘The World’ shall be ready to greet us in a few years time)
The key to Dubai’s success and how it will survive this turmoil lies in its commercial geography. Dubai is not solely an Arab state demographically or commercially, it is a commercial and tourist hub for a region that encompasses the growing markets of South Asia, Central Asia, the oil-rich Russia, the Gulf states, the emerging Africa, Europe as well as China. When one travels to Dubai, it will be rare to see real Dubai locals around. The kind of population currently in Dubai illustrates its ambition to be the Middle East’s economic powerhouse. The Dubai rulers, expatriate traders, service professionals, construction workers, bankers and techies made up 90% of the population. Like many entrepots, Dubai feeds from its nearby fuel and oil in the emirates. As predicted, the other banks and economic giants in the Arab region have already proclaimed their help to Dubai World and aid them through this crisis.
It may not be fair to compare Hong Kong, a small city to Dubai. Indeed, there is little Hong Kong can compare with Dubai in terms of economic capital or land for investment. Needless to say, unlike Dubai, Hong Kong cannot simply create an island out of no where and neither is there oil for Hong Kong to pump money from. However, what Hong Kong may still have as an edge over Dubai may really lie in our transparent and independent legal system, a higher standard of language efficacy especially in English, a competent banking and financial system which is more attuned to the innovations in the global capital markets and the honour for high autonomy and market freedom.
Hong Kong, yet again, marveled and edged over other cities by its softwares. Nonetheless, there is little which we should be happy for – as softwares can be always ‘upgraded’ as time goes by. And this edge, still enjoyed by Hong Kong at the moment, would no longer become one if we stumbled and failed to move forward.
Same as Andrew, Trista and Patrick, I have been to the 6days Dubai fieldtrip. We have visited a lot of leading firms in its major industries and the local government. We have been there in the early 2008, while the financial tsunami was yet to explode. At that time, Dubai as the Middle East Shangri-la, this rapid developing city gives me the impression of confident and determined in their plans to become one of the leading international cities. They would especially like to become the financial centre and the successful tourist spot. Therefore, as you can notice, they have developed fantastic ideas infrastructures such as the 7-stars hotel, the 2 Palm Island and the World Island, etc. When our coach was driven through the city, we can see that everywhere was construction sites and fabulous skyscrapers. If you have pay attention to the oil price level in recent years, you would definitely realize how could they have so much capital in building that golden city as persistent and historical high price of the crude oil raise funds for the government. Thus, in the early 2008, the atmosphere in Dubai was so hot about their future 5 years and 10 years development plans and people were so exciting and proud of their success. I still remember once we were visiting one of the firms (I forgot which on it was), one of us has asked what was the main reason that contributed to their success, and the senior of the company simply answered that ‘Others could do the same thing, why couldn’t we?’ At that time, I really appreciated and was impressed by their determination and confidence.
Compared to Hong Kong, I really think Dubai has its comparative advantage against us. Confidence and determination is simply what we lack of. Dubai people once they think of a plan and feel comfortable in it, they create it and put it into reality, they make their dreams come true by working it out. While Hong Kong Government always affected by the public and the mainland government, denying the responsibilities. There are lots of evidence in it, such as West Kowloon District has been idled for decades, Cultural and historical protection. Everything has been delayed and the efficiency of controversial issue is even low. It is now the point of letting the public to give opinion and suggestions but it is the matter of denying the responsibilities, officials hoping to delay it till the next term government. Universal suffrage is also one of the evidence. Hong Kong would certainly be a better place if our government could be more determine and more confidence in their act.
However, reviewing back to the Dubai world issue. Indeed I think there are somehow overconfident that they should have a better plan and contingency plan. Their rapid growth do need consolidation and their development should indeed base on a more concrete foundation such as a more sufficient capital as the oil price has driven down this year. But I reckon this event would not hinder Dubai’s development in the long term. If you have carefully examine, Dubai World and the local government had a lot of fixed assets and very sufficient capital in overseas. Therefore it is just a liquidity problem. Once they can solve this problem, they would certainly pick up their growth and dream. Over all, I think this incident is good for Dubai people in the sense that they are more rational in pursuing their dream city.
I am not quite convinced by the point that Dubai has comparative advantage than Hong Kong. First of all, what kinds of comparative advantage is it? Let me assume you mean Dubai has a better business environment (both software and hardware) than Hong Kong.
You mentioned that this is because Dubai citizens have a higher confidence and determination than Hong Kong. Actually I can’t agree on it. I doubt whether Dubai people are arrogant instead of confident… They know their country has many intangible things not up to standard, but they fail to admit the facts! As per determination, I have to say, we, Hong Kong people also have such determination. It’s not hard to see Hong Kong people further study master of post-graduate dip while they are full time workers after graduation. And the explanation that “Hong Kong people are harding, so Hong Kong succeeds” has nearly become an old sayings in the textbooks.
Dubai has long been perceived as a Middle East country of great potential, not only because of its natural resources make it relatively wealthier than other Middle East countries, as well as its determination to make a change. We can see that Dubai is determined to develop its city to be one of the top ones in international level. Yet, before Dubai can set off again for its goal, it must first deal with some problems identified in the city.
I believe the recent crisis was due to lack of regulation in controlling the investment activity in Dubai. As the government would like to build an international city, it allows buildings and infrastructure to be built everywhere. Without considering the demand for such constructions, I reckon this as too aggressive. Some people say that Dubai has actually planned for every of its move, however, I doubt. Even there are plans, they are not well planned. From the IBGM field trip to Dubai last year, I can see that many luxurious buildings were actually built in the middle of rural area. Many of the districts are not urbanized yet. Do you think there will be any companies choosing to station in such a building with limited transportation or other facilities to it?
I appreciate their determination, but not over-confidence or aggressive. I remember what the speaker from HSBC said too, “Others can do the same and succeed, why we can’t?” Perhaps really can’t, to be developing at such a fast pace like others, as Dubai seem to lack foundation and back up from nearby countries. Dubai does not has the same starting point like others, it does not have the software such as legal system, education system, well integrated transportation system etc. Its background is not very similar to Hong Kong which has a much bigger market including both domestic one and the China’s market, and HK is generally supported or backed up by the Chinese government.
Dubai should really slow down its development plan a bit and take its action more rationally. Instead of letting those high-class buildings to be scattered around the city, it might be a better option to pick an area and locate the construction plans to it. The government shall not forget about its existing competitive edge as well, companies like Emirates has been doing very well in aviation industry among the world. It’s important to learn from these companies’ successful stories. Not only focusing on its wish, the government should also consider what the residents and market wants.
Dubai has the potential, and much more potential than Hong Kong, or else there would not be so many investments into the region. However it would also be great if Dubai can better cooperate with Abu Dhabi or any other Middle East countries instead of having a rival relationship. It is much more difficult for a country to succeed on its own, Hong Kong has cooperation with others like signed the CEPA and policy that attracts foreign direct investment. Not to make people feel or perceive UAE is one identity but to really unite and help each other out. After all, there is a long way to go for Middle East countries to gain a position in the world’s financial market
I also think this crisis is a lesson for Hong Kong. Always remember the importance of regulations in such a complex city. We already had the experience from mini-bonds. Housing market bubbles can be really dangerous. Perhaps Hong Kong should really consider what IMF just suggested, to tighten policy concerning housing, or listen to the citizen who wish to have a continued implementation of Home Ownership Scheme. We should also plan if we get into the situation like Dubai, if limited support from outside ie.China, how are we to continue to survive with competitive edge?
I have once deemed Dubai as a prosperous place where Hong Kong should take it as a role model. It’s surprising to hear that this place could arouse global concern of liquidity and bankruptcy.
When we all IBGM students went for the field trip in Dubai, we were all delighted to see that Dubai has invested a lot in tourism and hotel industry, as well as financial industry. We all agree that this is the way how Dubai should develop and even one day can be a better international financial centre than Hong Kong.
The financial crisis raised by Dubai is actually an alarm to Hong Kong. An economy may look very good if the global economic trend is optimistic. However, this economy may be very vulnerable. We can see that over investment in a single industry or a series of related industries is not wise. A single problem in one of the industry may lead to a great depression in the whole economy. For example, Dubai has overly invested in hotel and tourism. A single failure in Dubai World can lead to such a great destruction in the whole economy. Hong Kong cannot commit the same mistake as Dubai. Hong Kong should maintain its competitive position in finance, but at the same time, should try to diversify the sources of income, such that financial crisis would pose a less menace to local economy.
As what many others have mentioned, I have also been to Dubai for once in a 6-day field trip organized by the Faculty of Business and Economics. To be frank, all 30 something of us are all surprised by the extent to which Dubai is developed. Those skyscrapers which stood high into the sky, those artificial islands which are part of the shape of a palm on the waterfront, those deserts, all these make Dubai such a paradise-like place. All of us were amazed, and thought there could be no place like Dubai which can offer such diversified experience ranging from professional financial supporting services to exciting exploration trips in the middle of deserts.
I still remembered that in the field trip, someone did tell us about the flaws under Dubai’s successful story, which is the large amount of national debt that Dubai is under. Only a few of us paid attention to that remark at that time since we were all overwhelmed by the exaggerated scenes right in front of us. Now looking back, that remark was so insightful.
I think that Dubai’s story is a timely alert to developing nations and regions around the world. On one hand, it is of course important that these developing nations and regions put enough attention and effort on their development, like investment in infrastructures. But on the other hand, it is as well important that these nations and regions also put enough attention on the development of the software of the countries, which includes the education level of the general public especially the labor force, the legal system, the financial system, etc.
If a balance between the extents of development of hardware and that of software cannot be strike, the disaster of Dubai is prone to occur again in other developing countries like BRIC. It is also very important for nations around the globe to help monitor their development progress, so that those development countries will not go too far astray.
When Dubai sneezes, the whole world catches a cold.’ That’s what the PR companies in Dubai Media City previously would pump out and now it sort of coming true.
When investment fund Dubai World called for a six-month moratorium on paying the interest bill on its loans, it looked like the game was up. Since Dubai World is, more or less, a government institution, it resembled an admission that the city-state itself was going bankrupt. Throw in the lack of transparency associated with Arabian Gulf sovereign wealth funds – hence the widespread suspicion that the same money is in constant rotation between a bewildering array of fronts – and the scope for panic grew.
Dubai World reminds the world Lehman Brothers. The bursting of the Dubai bubble has fuelled the idea that the fairytale kingdom might potentially drag other parts of the world economy down with it. Essentially, it reflects certain rule in financial world: all good things would come to an end. The world seems a bit unreal for me, especially when the end comes unannounced.
Critics has it Dubai had a toxic combination of vanity consumption and unsustainability. The authoritarian city-state – despite being more liberal than the six other Emirates – provoked a well of crocodile tears for the indentured labourers who probably make up the majority of the population. These migrant workers receive little care when they lived lives of grinding poverty in labourers’ camps like Sonapur and on to the consumer gravy train. Indeed, the labour issue has long been put on the table but no one care on the dark side .
Western commentators seem to apply one rule at home and another to Dubai. Redundancies and abandoned construction projects are good things to Dubai after the bubble. On the other hand, it would mean that those poverty-stricken workers would become poorer still, having been thrown out of work. If it is the case that Dubai’s explosive growth attracts clichéd anti-prosperity sentiments, it is indeed a good news to the sort of state the 1,241,000-plus population in Dubai.
Sheikh Mohammed said recently: ” I would like to tell capitalists that Dubai does not need investors, investors need Dubai…When I encourage you to invest, I am not asking you to put your money into a fire. I guarantee that your money will be invested in carefully studied projects.” I doubt whether he would still build an artificial archipelago in the shape of Arabic letters as he promised.
Dubai’s economic downturn shows the significance of software to become an IFC. No matter how many flashy shopping malls are built and how much income tax is exempted, a city can’t attract people and money if it doesn’t provide a social environment that ensures political freedom and equal social protection for various groups of society. Considerable number of people was marginalized under the autocratic social system of Dubai, which resulted in flee of expats and Dubai people who are valuable intangible assets for building a financial center. Hong Kong can therefore learn from Dubai’s case that paying a keen attention to maintenance and development of software (such as legal system and degree of press freedom) is vital to sustain a financial center.
However, it is early to say Dubai’s dream to be a financial center is not valid anymore. Within the region, Dubai is one of the few cities that have well-established economic infrastructure. The social “openness” is also high compared to other Middle Eastern nations. Unlike in other conservative Muslim countries, there is a college for women in which courses are all taught in English. The proximity to Middle Eastern financial and non-financial resources still is a great advantage of this city.
I think the past success of Dubai is built on the its clear identity as an international financial center in middle east with a lot of appealing attractions e.g. the well-known Burj Al Arab. And its identity as to be a luxurious place attracts a lot of investment as with the beautiful environment, it can successfully attract the wealthy people to spend their time there. But one must not neglect its most appealing factor to the investors – the oil which is believed is able to support its development so the investors are not worrying about their investment. In light of this background, its economy is largely built on the foreign investment which exposes the weaknesses when the investors’ money are greatly reduced due to the financial tsunami and thus Dubai’s entire economy would be suffered.
So basically I do not think that Dubai’s failure is due to its lack of rule of law or transparency or such. It is failure rooted in the inherent defect of the capitalistic global economy as its over reliance on foreign investment.
From this, I think, HK on one hand can learn from the factors contributing its success selectively with particular reference to a clear identity – whether a truly international financial center or a international financial center in China which our government has failed to address. And, if possible, we might also think of a distinct feature for Hong Kong, which might be able to attract foreigners and foreign investment as Dubai’s “luxurious oasis in the dessert”.
But on the other hand, HK should also bear the Dubai’s lesson in mind. A economy which is over relying on foreign investment is like a time bomb. What HK should do is to strike a balance between the development and the risk management. Though it is right to say that the world is so interdependent, when one of the big economies down, like US, the whole world will suffer, as a responsible government, HK should have some plans to mind to deal with that. As like China now, even the US is still suffering from the financial tsunami, China’s economy is still on a rise.
Dubai, the “Pearl of the Middle East”, had taken a hit from the global financial crisis and had to be financially rescued. It was striving to be a center of commerce, finance, and tourism. Dubai is similar to Hong Kong in this sense, except that Hong Kong has already established itself as a stable financial center. Dubai had a financial crisis after capital invested left and the place was no longer sustainable. The problem was that they built up Dubai’s too fast, but they did not have the people or investments flowing in. This sounds a lot like Hong Kong, in that people like to speculate on real estate. However, Dubai had taken risks to a whole new level, and for this, they paid the price. Dubai’s massive construction projects were all about greed. The world’s abundant liquidity jumped at the chance to make money and grew the bubble.
Dubai was not sustainable as a “construction economy”, which would make only speculative investors and construction companies rich. The economic boom in Dubai was partly dependent on maintaining the momentum and keeping more people and more investment coming. Hong Kong can learn from Dubai’s mistakes by not having too much reliance on one thing, such as real estate. Hong Kong also saw some crashes in their history, but it recovered and learned from its mistakes. Hong Kong is much more prominent now as a financial hub, and has the whole Asia to do business with. Dubai is no doubt in a very serious situation, but it is possible that it won’t be down forever.
What if Dubai actually started off by building a great software? Would it be possible?
It is an interesting topic to discuss, though. Rule of law, respect for ownership and property rights, lending terms just like the western world, and so on. If Dubai started by these things in the first place, will there be a lot of investors coming into the region and build a city as it is today?
I hardly think so. Why? Because I find two things stuck in the middle. The governance and religion.
First thing of all, politics. The ruling family simply cannot really give up their control to the nation. This is on the one hand backed up by the whole political system of UAE, but on the other hand, also backed up by the regional influence. Internal politics of the UAE should be much more complicated than what we can imagine, as there is an opinion that this debt crises are partly sponsored by the UAE government, to control the cash flow of the emirate. Even if Dubai would like to carry out a more westernized policy framework, it would have to put it in a sandbox, something like the Dubai Meida City or whatever city. But having a sandbox zone of freed policies does not give the guarantee of property rights and etc. So unless the UAE and Dubai carry out a bold move TOGETHER, it is unlikely that the software could be build easily.
Religion is another important issue. Islamic bonds and banking is a topic that the western banks are simply unfamiliar with, and sometimes business has to be built on religious belief and trust rather than the concrete contractual terms. It is hard to overcome this as well, because even the rulers could not change this. Therefore it is understandable that the government has to use other measures to back up the investment in Dubai (which is actually what they promised to do before), and now given there is a crisis, it is equally easy for the government to default from such a promise, not backing up the creditors any more.
Politics and religion are something that the policy makers in Dubai has to consider when they try to pull the city out of the crises.
Many people appear surprised that Dubai has finally fallen down. It is easy to understand why the emirate gets labeled a special case after constructing some of the most grandiose property projects as well as the tallest building in the world. However, last Friday we saw the Hang Seng Index lose 1,000 points from the potential Dubai debt default. The modern day castles built on Dubai’s sands have collided with the harsh reality of economics in a bubble aftermath.
Reviewing Dubai’s case, we can see many of ingredients of its problems are not unique. Overly ambitious property developments fuelled by plentiful and cheap money, resulted in asset prices increasingly detached from economic reality. Actually it sounds so similar– Hong Kong now is sort of under the same condition.
Recently we see the price of luxury property in Hong Kong skyrockets. Earlier last month Henderson Land basked in the acclaim of selling the most expensive property in the world. To get the property better sold the developer had altered the floor numberings in order for buyers to get lucky numbers, which is ridiculous. It might be a wealthy mainlander who got conned, but the for the most part, it is Hong Kong’s hard-working population who are systematically exploited.
However, it seems Chief Executive Donald Tsang doesn’t worry. He said in his recent policy address that there is no need to worry about surging luxury property. I think we can still remember in 1997, Hong Kong had a huge pre-Handover property bubble followed by a 60% price fall. All anti-speculation measures came too late,and the bubble overshot and eventually burst.
To learn from Dubai and also its past experience, I think HK government should take hard measures dealing with this property issue.
1. I agree with Annie, there is a huge different between Hong Kong and Dubai, it is not practical in applying Dubai’s situation to Hong Kong. Despite the English proficiency which many have been explained in details above, I support the argument from the Financial Express that Dubai lacks the software, which I think lacking of rule of laws is the most fundamental deficiencies. As we can see from the Independent newspaper, if there is no rule of laws in the countries, say, dictatorship, the citizens are not protected by law, then their human rights are not respected and many tragedies will emerge. Luckily, this is totally not the case in Hong Kong, we have freedom of speech, and the laws are well enforced. I believe no businessman is willing to invest in a country in long term without rule of laws if he/she realizes such a fact, and that’s why Hong Kong can be a global hub but not Dubai.
I would also like to propose there is surely a better allocation of resources in Hong Kong. In Hong Kong, there is market economy, resources are distributed through visible hands. On the contrary, many corporations, as stated in the Independent Newspaper, are state enterprises. This addresses why the government still built a lot of grandiose building without looking at the demand of this.
2. Unlike the rule of laws issue, I do not think that Dubai developed too quickly and the bubbles burst are the predominant factors contributing Dubai’s failure in being a international financial centre in the future. The only matter is how Dubai government gets from this economic downturn. Historically, many growing regions also faced a giant crackdown but still recovered afterwards. E.g. Great Depression in USA, market bubbles in Japan in the early 90s, and the Asian financial crisis. See, all these regions survives afterwards. Hong Kong is still able to maintain its global financial status in the world. What important is how we learn from the mistakes. Nevertheless, I am not optimistic towards Dubai because it seems to me that, the Dubai government is nothing open-minded and never admits their mistakes, they Emirates still deeply get drunk in their fantasies.
I agree that Dubai lacks software to become an international financial centre. Dubai relies too much on government. She cannot always wait for the government to release plans and development projects. I think the ‘big market, small government’ model of Hong Kong is a very good example for Dubai to follow. If Dubai is determined to become an international financial center, she surely needs to change her mode of operations. Being an invisible hand, market knows best about customers and suppliers and it also removes red tape. Efficiency and customer focus are of vital importance to the success of Dubai. Moreover, Dubai will continue to lack creativity and innovation if she follows the government only.
Moreover, from the 2008 field trip to Dubai organized by HKU, I discovered that Dubai has over-investment in tourism and hotel. I think the ambition of becoming a world-class tourism paradise is good but Dubai has ignored one very important point – customer demand. I visited many attractive and luxurious shopping malls but I cannot find many or enough visitors there. I can also say that there are very few tourists, if not none except me! There are too many construction sites in Dubai but I don’t see their projects are valuable for the time being. There is infrastructure but what’s the point having good infrastructure without customers? Dubai needs to work harder. The default crisis is a very good lesson for Dubai to learn. She cannot over-invest and she should choose to invest in profitable projects.
I just read the article from the Independent, and I honestly felt a chill go down my spine. Hari has described so extensively, a city that seems to sparkle and glimmer on the outside, but is built on a rotten foundation of ecological abuse, racism and human rights abuses. It’s hard to see how Dubai can keep attracting “expat talent” once its problems become apparent to the world.