Wide Angle 23 - Dubai

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

Chairman of Berkshire Hathway during the course of a different market boom

Hello All,
The quote above is regarding stock market or any such bubbles and their subsequent crashes. Everyone knows who the Chairman of Berkshire Hathway is – the legendary Warren Buffet. The principles that apply to stock markets or Enrons or Satyams or Housing bubbles are essentially the same – relentless greed that makes everyone crazy and hampers their capacity to know when to stop. This results in over capacities or unrealistic valuations and investment based purely on “hope” and not on “substance” which then lead to it all coming crashing down when “reality” sinks in. This is also true of national economies and nations as well. I just came across a very well researched and written article by a journalist/columnist for the Independent called Johann Hari. The article is called “The Dark Side of Dubai” and is written on his experiences and observations after spending time in Dubai and meeting all sorts of people there. We have read about Dubai and its slave ways in relation to the way Indian workers are treated there but this article shows the picture from all angles and that is what impressed me and prompted me to write about it.
Dubai, the name invokes images of the “Burj-Al-Dubai” the boat shaped hotel, the Palm shaped islands, the artificial ski ranges, artificial beaches, swanky malls, duty free shopping festivals. To many it is a Disneyland where all dreams come true. This city is a marvelous achievement – thirty years back, it was a desert, tribes roamed there with no water to speak of. People lived primitive lives. The city was founded as a small village in the mid 18th century and it served as a trading post for people from all over. It was named after a local locust called “Daba”. The British controlled it till 1971 post which they gave up control of it. As the British were leaving, Dubai the town decided to align itself with six neighboring states like Abu Dhabi and the United Arab Emirates was created. A dribble of oil was discovered there around that time though it was nothing much compared to neighboring Abu Dhabi. Sheikh Makhtoom who took charge was perplexed as to what to do since most of the population there was of tribal nomads and there was very little oil.
The solution that he devised was brilliant as well as ingenious – he decided to build something that would be ever-lasting and keep generating revenue long after the oil was gone. He decided to open Dubai’s arms to the world – a city of tourism and financial services. The companies all over the world were invited to invest in Dubai with very low taxes, friendly policies and superb infrastructure. Millions of dollars, pounds poured in along with talented people and almost swamped the local populace – which forms only 5 percent of the population of Dubai now. The city almost fell from the sky in three decades and Dubai went from the 18th century to the 21st century in a generation. It is a shining model of Arab enterprise and is looked at as an enlightened society as compared to the fundamentalist region around it. Behind this success story are some very inconvenient truths which Hari has exposed in his article which I will now portray and will conclude with my thoughts on the subject which will tie in with the opening quote.
Essentially Dubai consists of three classes in its population – the expatriates i.e. mostly Westerners who form the upper class of the city, the local Emiratis – headed by Sheikh Makhtoom and then the huge foreign underclass that has and continues to build the city and are trapped there. The third class is hidden from plain view though being omnipresent in blue overalls. Hari tells tales of all the three classes by talking to them and living amongst them. He also tells the tale of the economy and the facilities built at ridiculous costs that are now unused due to recession. Finally he talks about the environmental degradation that the enormous growth is causing to the city. Let us look at the tale of the three classes first:

Expats – This word is mostly used to describe people from the Western/Rich Asian countries coming to Asian/African companies and serving in high positions. It always amuses me that when these people leave their countries and take up a job with us, they are “Expatriates”, whereas when we leave our country and take up a job with them, we are called “Immigrants”. Double standards anyone? Anyway, these expats are offered fantastic salaries as CEOs, COOs, CFOs of the Dubai branches of multinationals o the tune of 40,0000 pounds per month etc. They often do now work which is done by the Asians under them. There are virtually no taxes to speak of which means life is one big party for them. They frequent malls where they can blow their money on 24 million $ diamonds or a 10000 $ fur coat and go to specialty restaurants and hotels – it is like they are enjoying their first world pleasures at astronomical salaries and having a ball. However, the thing that pleases them the most is the availability of a large servant class. It is like they have to do nothing since they are surrounded by maids (mostly Fillipino but with the recession they have become expensive so it is Ethiopian maids who are in demand now).
Hari met an English couple who were laughing and were thrilled that they had to do “nothing” since the servants would do “anything” for them. The gentleman said, these folks would even follow you into the bathroom and help you pee if you asked them to. The expats don’t get this back home and so they love it. The slavery of the underclass doesn’t bother them, they have learnt to ignore it. However, there are countless people like Karen who are stuck in Dubai with no money and survive on the charity of strangers. Karen is a Canadian who came to Dubai with her husband who got offered a big post in a MNC. Life was a party for them until her husband got in debt. In Dubai, if you are in debt and can’t pay it off, you are arrested and have to serve prison time. This is what happened to her husband and she is now waiting for him to be released from prison and spends time sleeping in cars in parking lots at the mercy of Bangladeshi attendants.

The slave class – This is the world of the people who have built the fancy buildings of Dubai. This also consists of the countless maids and other workers in the country. The story is similar – they are all brought to Dubai by agents who promise them much more money than they earn at home (e.g. one Bangladeshi was offered 400$ a month). The moment they land here, their passports are taken away by their employers and they are paid a fraction of what they were promised (the same Bangladeshi is paid 90$). Most of them take loans to come over so the first few years go in collecting money to repay the loans. Working conditions for the construction workers are horrible with them having to work hard for 12 hours in 50 degrees heat. The living conditions are even worse with them being housed in cramped tin rooms which become extremely hot during days and are equally hot during night. Water given to them is not properly desalinated so they drink it salty. At that heat, all the fluids of the body are let out through sweat which makes it impossible to urinate for days. It is the same heat in which the expats and locals don’t spend more than a few minutes out in the open – the slave class works in it till their back breaks.
Pay is held up many times and strikes are brutally broken with water cannons and imprisonment. For the maids life is even worse. When they start employment with the Expats or locals, the practice is to take away their passports. They are made to work from 6 am to 1 am in the night with little food. Many of them are beaten and tortured if they make mistakes. This is where the hypocrisy of the Western world is exposed isn’t it – they preach to us about human rights but their own citizens do the same to others in other countries which is never mentioned. The labor class is housed in shanty towns away from the city and they are ferreted in metal buses which roast them inside.

The Emiratis – These are the locals who are completely pampered by the government. Their income is tax free and education up to PHD level is free. Employment is guaranteed in government positions and you are almost never fired. They have a gala time in the malls and cafes. There are many who feel that the populace is too molly cuddled and that makes them lazy but no one is really complaining. The one thing no one has is political freedom but not many people mind that since the argument is “My mother used to carry pots with water over miles in the desert and look where we are now, the Sheikh has given us everything, why should we complain?”. The clincher argument given to Westerners if anyone points out the slave class is “Do you want Dubai to go the Iran or Saudi way? We are the modern face of Arabs and everyone in this region aspires to be like us so you have to support us!”

Recession, environment and impact – The recession has pulled the rug under Dubai’s feet though. Most of the ambitious construction projects have stopped. The posh hotels e.g. Atlantis run empty where they used to be packed pre-recession. Most of the malls are deserted these days with traders in a state of panic. We all know what happened to Dubai World with its debt problems. Debt is what Dubai was built on and its debt is 107% of its GDP. The economy was rescued by Abu Dhabi’s oil money and to keep them happy, lot more restrictions have been put in place in the society now.
The environmental impact of this colossal building activity is huge. There is virtually no water in Dubai since it is in the desert (its next to the sea of course on one side which makes it a tourist attraction) with scanty rainfall. They however have large golf courses that need four million gallons of water to be pumped on the grounds every day, they have lawns that have to be sprinkled with water all day, they have mountain sized freezers where they have built a ski slope with real snow. How is this water provided for? It is desalinated from the sea – there are large desalination plants across the gulf which belch out more smoke than factories put together. The water they produce is the most expensive in the world which is when wasted on frivolous expenses like swimming pools in rooms and shark tanks looking onto hotel suites etc. The city has expanded so much that the sewage is simply dumped into the sea which then washes on to the beaches and makes everything unsafe. Journalists writing about this as banned or put in prison and foreigners talking about it are threatened with deportation.

Conclusion:
What Johann Hari sees is a city built with reckless abandon and which is in a real danger of being overtaken by its debt, the desert, the sea and unrest from its slave class. He leaves the article at that and leaves everything for the future to decide whether things will continue the same way or whether there will be a fast decline. Since the world is not spending now, who is going to buy those fancy islands, the lavish apartments, stay in the fancy hotels, shop at the swanky malls. And worst of all, this has been built with borrowed money. Will this Shangri-la last, no one knows. The facts are quite eye opening and prove the adage that “All that glitters is not gold”.
My two cents – Dubai is simply a super-projection of what happened in Enron, Satyam or anywhere else. You have a good idea and are initially successful. Then you start making money and ostensibly start getting creative with it trying to be rich faster – the slippery slope begins here. This is when you don’t know when to stop and you continue to slide further till the point of no return passes and then boom – one day it all comes crashing down. At a microcosmic level, it happens to individuals who invest in stocks, or gamble or bet on something – taking risks is good but taking foolish risks and not knowing when to stop is suicidal. The successful countries/organizations are those that base their wealth on something concrete and productive and always stay in touch with the ground realities and never go “over the top”. There is also a danger that an organization becomes only number-focused which makes them lose sight of their real “business” and the focus starts shifting towards what is on paper – this is what happened with Andy Fastow coming up with crazy financial models in Enron or the bizarre credit packages that the investment bankers designed on Wall Street. This is what shifts you away from ground reality and ultimately destroys you.
Enough gloom for the day – hope Dubai doesn’t really go down and we all visit it and enjoy it someday but it is really a sobering thought that even such successes have a dark side. This is what I wanted to highlight - hope I was also able to make my analysis clear. There will be some more thoughts on the last paragraph in later Wide Angles. Till then, Cheerio.