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Troubles in Dubai

While we were all eating excessive amounts of food with our families in what I consider to be our 2nd greatest holiday (it is a symbol of cooperation and good will, 1st would go to July 4), troubles were brewing abroad.  Not paying attention to the news at all on Thursday, I expected Friday to be slow.  According to the articles I read, Friday’s trading would be slow and have a light up-tick by the market close.  As the market opened that morning, I was busy working on whatever I was working on.  But eventually I noticed the little quote thing at the bottom of my window had lots of red.  I decided to investigate to see if there was a glitch or if the market truly was down.  Google confirmed that everything was working properly; the market opened 2% below where it was on Thanksgiving.  Why?  The top news story was filled with all sorts of things about their being financial trouble with Dubai World and apparently some $59 billion in bad debt.

Wait!  Debt?

I’ve voiced my confusion to numerous people and everyone had the same impression that I did.  As oil prices were rising, it seemed like we were hearing more and more stories of the fantastic buildings being built in Dubai.  Putting 2 and 2 together made it seem obvious.  These folks had so much money and they didn’t know what to do with it.  So why not build the tallest building, tallest hotel, or the largest shopping mall?

I took a trip to my trusted source to get general information (meaning, this is probably correct-ish, but don’t bet your life on it), Wikipedia.  Turns out that these folks were hardly in the oil business; it only makes up 6% of their economy and their oil reserves are expected to run out in 20 years.  Knowing this problem, it looks like their leaders did the smart thing by trying to get into other markets.  According to Wikipedia, they were hoping to become a major financial and trading center like New York, London, or Hong Kong.  Because of their growth, lots of people were eager to get in on the action and help develop the next must-see place to visit.

What exactly is Dubai World?

Most articles that talk about the problems with paying back $59 billion are referring to Dubai World (not actually Dubai).  So who or what is Dubai World and how does that relate to Dubai?  Again, this all comes from Wikipedia.

In short, Dubai World is an investment company that manages all of the investments for Dubai.  Depending on where you read, Dubai World holds between 50 and  75% of Dubai’s total debt.  It had over 50,000 employees and owns real estate in the US, UK, and South Africa. Remember in 2006 when there was a stiff debate as to whether or not we should let non-Americans run some of our seaports?  Well the company that was going to run our ports was Dubai Ports World, one of the many companies held by Dubai World.

Why did this Happen?

All of this made me think back to a 3-part article I read by Greg Zanetti back in January 2009.  He was formerly a Brigadier General with the Army and was stationed in Guantanamo Bay.  Since then he has reentered civilian life and is running for Governor of New Mexico.  He is very level-headed and understands more about the economy than your average politician.  He was convincing my parents to buy gold back in November 2008 when it was just a hair over $700/ounce (1 year later it is now $1150/ounce).  His blog was titled, “Zanetti’s Strategic Outlook Reports – Financial advice with a historical perspective”.  I’d highly recommend you read everything he has written, but this one particular series relates very well to this topic.  Zanetti discusses what he considers to be traits of winners and losers and how it relates to wall street and terrorists.  Taking from what he says, Dubai fits in as a loser and the latest debt mishap should be of no surprise.  Below are what traits Zanetti considers to be required in a successful country.

Winning nations have transparency

Countries that block the free-flow of information are destined for trouble.  As Zanetti pointed out, it is impossible to compete with others who have unrestricted access to all of the available information.  He makes one mis-step in his article because he says that Dubai had transparency (as opposed to wall street’s lack of transparency).  In 2008, the chairman of Dubai World threatened to pull all of its finances out of Europe after the EU declared that it wanted to set new rules for transparency, predictability, and accountability.  Seems pretty anti-transparent to me.

Despite Dubai’s progressive and ostentatious image, censorship is common in Dubai and used by the government to control content that it believes violates the cultural and political sensitivities of the Emiratis. Homosexuality, drugs and the theory of evolution are generally considered taboo. (http://en.wikipedia.org/wiki/Dubai, 11/29/2009)

Winning nations don’t subjugate women

Just like with transparency, how could one country expect to compete with the rest of the world if only 1/2 of the population is allowed to create? Women in the Dubai are slowly gaining acceptance as workers, but they are still limited.  A quick google search will find numerous accounts of women who are abused for having a conversation with a man who is not in their own family…which must be very difficult to avoid in most professions.

Winning nations don’t allow domination of the government by a restrictive religion

Well why is it that women are having trouble entering the workforce in Dubai? Turns out their national religion, Islam, expressly forbids women from doing most things.  Reading about religion and government in Dubai makes me think back to the medieval times when a king was told that he could not be forgiven without giving the church lavish gifts.  In Dubai, the religious leaders still seem to wield power over the government.

Full Text

All of this has been a gross summarization of the work written by Greg Zanetti.  I highly recommend you read his articles in entirety:

What can we Learn?

There are people out there who recommend investing in China during the recession; Peter Schiff is the main proponent of this that I can think of. With what I’ve learned from Zanetti, I’ve decided to stay away.  China is very appealing because they actually make stuff and then sell it (just like we used to back in the day).  But when I think long and hard about it, what goods do they generate that I need for a recession?  I’m not buying electronics, I’m not buying trinkets, and I’m not buying gizmos.  I’m buying food, gas, and very very limited clothing.  None of those things are really all that dependent on China.  To top it off, China doesn’t allow a free-flow of information and it has human-rights issues.  The government isn’t run by a restrictive religion, but their communist government achieves the same effect.  Sounds like someone who did well because things were going good, not someone who will do well in all markets.

Although the US lost its way with fads to generate wealth (.com & real estate bubbles) and had an overindulgence in debt, I’m still going to bet on the US.  There are a surprising number of folks out there who will work hard to succeed and as far as our government and society go, there aren’t a lot of restrictions put on those people to stop them from working as hard as they need to.

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