The Dubai lesson

Twilight in the desert kingdom?

Four or five years ago I became aware of the massive economic boom taking place in Dubai after seeing a picture of a sea of construction cranes employed there. Researching further I discovered a place of superlatives. Dubai was said to be home to a quarter of the world's construction cranes (a statistic later proven false). The desert kingdom opened an indoor ski lift. It had the world's only seven star hotel. They were literally building The World.

But what was driving all of this economic activity? Yes, it was home to a free trade zone, taxation was almost non-existent and regulation was rather lax. But what was driving all of the demand? Friends of mine who have traveled there describe a place that is hot, dusty and aesthetically ugly. It's an unholy cross between New York and Las Vegas without the seamier side. Can an economy really suck up so many resources which is based on a nice airport and a large financial services industry?

According to 60 Minutes much of the development was being driven by the government and its ego maniacal leader Sheikh Mohammed bin Rashid al Maktoum:

Next door is the Burj Dubai development, where the largest shopping center in the world is under construction at the base what will become the world's tallest building. It is being built by Emaar Properties, by some measures the world's largest real estate developer.

It is one-third owned by Sheikh Mohammed and the Dubai government, which has a financial stake in almost all of the development in the emirate.

...Alabbar, educated in the United States, is one of Sheikh Mohammed's young lions, protégés hand picked by the sheikh to run one of his largest enterprises. Another is Sultan Ahmed bin Sulayem, the chairman of Dubai World, who also runs a significant part of Sheikh Mohammed's business empire.

"I think he looks at Dubai. What does Dubai need? What is missing in Dubai? And when he thinks there's something missing, we're gonna do it," Sultan Bin Sulayem says.

...Eight years ago, Sheikh Mohammed decided what Dubai needed was more waterfront property and beaches for all the tourists who are going to come. Dubai only had 60 miles of coastline, so ordered Sultan Bin Sulayem to create more.

"After two months, I came to him and I showed him this picture, of a perspective of a picture of an island. He said 'How much beach is this going to give us?' I said seven kilometer. He said 'Why not 70?' You know he always ask you the impossible. Not what you are able, but what you cannot do," Sultan Bin Sulayem remembers.

..."A number of people have described you as the chief executive officer of a huge business enterprise. Is that an accurate way of describing what you do?" Kroft asks the sheikh.

"Actually, yes. I change the way of government to make it like a big company," Sheikh Mohammed says.

Except government can not be run like a business. It has little capacity for making informed decisions about how best to allocate resources in an efficient manner. It should come as no surprise that Sheikh Mohammed's island project has been suspended and Dubai World has run into severe financial difficulty:

Dubai’s once-booming economy has deflated and its property sector, with its ludicrous architecture and record-breaking buildings, has collapsed. An estimated 400 projects worth more than $300 billion (£180 billion) have been cancelled, shut down or are on a go-slow as developers try to cope with property prices that are down as much as 60 per cent.

Long-term residents and even the Government of Dubai have often seemed to be in denial about the seriousness of the situation but it was rammed home yesterday when Dubai World, the state-owned conglomerate, said that it was seeking a six-month standstill on its debts.

Real prosperity must occur organically. It is not something which can be centrally planned or ordered on a political leader's wim. The role of government is to create a system of rules which protect individual and property rights, setting the stage for the collective knowledge of the market to provide economic growth. The government of Dubai arrogantly believed that it knew the best way to grow its economy and allocate resources, and is now paying for its hubris.

It's a lesson we should heed next time we hear a politician urge greater "investments" in various economic sectors such as alternative energy. Their knowledge and insight is but a fraction of that of the free market, and the invariable subsequent failure of such spending should surprise nobody.