Dispatches from the collapse
For the city whose solution to every problem was money, there would eventually come a day when money became the problem
It is tempting to blame consultants and their ilk for the troubles that Dubai faces today. Surely, if my experience was at all typical, Western consulting firms are derelict in their duty as advisers to the United Arab Emirates. But I would argue that consultants are a product of their surroundings, not the other way around. Prior to the recent meltdown, which had commentators everywhere wondering if Dubai would destroy the fragile recovery that the banking sector has eked out, Boston Consulting Group’s top brass was extolling the virtues of the Middle East and the stability it would provide to the world’s financial markets. And why not? Every recommendation that encourages more expenditures by clients offers up greater opportunity for future cases. If Dubai’s companies lack the internal resources or motivation to poke the conclusions made by their rented consultants, if they reward optimism and penalize pessimism, they should not be surprised when they receive cheery, but flimsy advice.
On some level, it is hard not to sympathize with the Emiratis. The executives I met all showed pictures of their youth, reminding me that just a few decades ago, their country was nothing more than sand, tents, and simple stone. Maybe they held on to the pictures to impress upon me the great progress Dubai has made, maybe they held on to them to reassure themselves that life would go on even if they had to return someday to their tents. Personally, I took the pictures as a reminder that the men running Dubai’s gargantuan companies had been given an upbringing that could not prepare them corporate management. I could criticize, but I had the benefit of rigorous secondary and college education. Had I shared their circumstances, could I have done any better than them, and if not, how much blame could I really place on their shoulders?
Nonetheless, whatever disadvantages Dubai’s natives may suffer from, my judgment is that their failures were entirely avoidable. I am not convinced that they were well-intentioned or trying their best. My impression of the average Emirati businessman varies between apathetic and self-important. They are running businesses much in the same way a teenager would buy clothes with a swoosh on them — they aren’t trying to generate profits so much as they are adopting a lifestyle brand. Their empires are not built for power, they are built for image. When you are born with everything, the one thing that you cannot buy is the sense that you earned your status. But it is counter-productive to try and scrub off the image that you lucked your way into wealth — trying to overstep one’s limitations only highlights them.
Perhaps it is too late for Dubai. Their oil reserves are gone, and depending on the seriousness of their financial troubles, so too might be much of the money they made from the past sale of oil. But for Dubai’s neighbors, such as Abu Dhabi, who still have seas of petroleum at their command, the collapse may prove to be a teachable moment.
Abu Dhabi needs to review the business case for locating industry in the UAE. Labor is not cheap — there is little of it natural to the area, and that which is imported (both of the skilled and non-skilled variety) typically costs three times more than what it would cost in its native country. Energy is not cheap — lacking coal or dammable rivers, the UAE is powered by natural gas, itself often imported from neighbors like Qatar or Saudi Arabia at high cost. Equipment, buildings, and other capital are no cheaper in the UAE than elsewhere — indeed, if anything the relatively harsh environment is more costly to build and operate in. Water and food supplies are more expensive. Even the things that the UAE has in spades, sun and sand, are no great benefit — solar insolation is impeded by the frequent presence of dust clouds, and the sand is unsuitable as a feedstock for silicon or glass production. The one natural resource available is oil, and the ease of transporting that liquid makes it easier to locate industry elsewhere and export the crude.
The basis for Dubai’s “ambition” seems little more than an optimistic interpretation of New Trade Theory. Much as Silicon Valley has established itself as high technology cluster, and New York has become a finance hub, Dubai hoped that through the might of its wealth it would become a world center for something and maintain its position through inertia and network effects rather than natural advantages. Even if this strategy were feasible (and there is much to suggest that it is not), it was executed poorly — Dubai made little attempt to understand the clustering phenomenon it hoped to take advantage of, invested in a scattershot manner, and left its holdings to be managed incompetently.
I laugh whenever I read one of Thomas Friedman’s “Gosh Golly, Globalism!” theses, but his turn of phrase, “The World is Flat” sounds to me like a particularly apt summary of Dubai’s downfall. Some clustering effects aside, most sourcing of production is governed by underlying cost factors. If your labor, capital, and feedstock materials all cost more than your competitors’, and all locales compete at rough parity, what hope does one have of forcing industrial growth? More to the point, why would you even want industry to be located in Dubai? Why not simply take the money made from selling oil, and invest it? If the rate of return on industry elsewhere is higher than the rate of return on industry in Dubai, the returns to equity will be greater as well.
There is a natural resistance to simply investing oil wealth in a sovereign wealth fund that I don’t entirely understand. Many of the consultants and Emiratis I met derided such an option as risky. Yes, maybe investing their petrodollars in financial assets would yield a greater rate of return than building steel mills at home. But what if they invested all their wealth, only to have it stolen by a Swiss bank? Better to take the steel mill — it might be inefficient, but it could not be stolen with the swish of a pen.
The risk argument sounds solid, but after a little digging doesn’t make any sense. For one, a steel mill, run poorly, is a terrible investment. One might as well hold on to the oil in the first place. More to the point, physical assets are just as vulnerable to theft or destruction as financial assets. The UAE is a small country. Realistically, if some bigger power decided to bomb its factories or invade and carry off its wealth, what recourse would the UAE have against such an attack that it would not have against having its financial assets stolen?
If one really boils down the problem of asset security, one comes to a conclusion that I find altogether reasonable. There is one asset that is nearly impossible to take away, and that is human capital. For all the resources that the Emiratis have sunk into developing tourism and industrial goods, they would have done just as well to spend that money on education. Even if one were convinced that industrialization was necessary, why rush to build factories before the next generation is ready to manage them? Education is empowerment, and I put more faith in the ability of individual Emiratis to decide their future than I do in their government.
Epilogue
As a student, I remember being fascinated with pictures of Detroit, overgrown by vegetation. In some areas of the city, so many people have moved off that nature has reclaimed entire neighborhoods, encasing their buildings in weeds and ivy. When thinking about Dubai, I am reminded that it took years for vegetation to reclaim the abandoned parts of America’s rust-belt, while it takes a single windy week to submerge the emirate’s sidewalks beneath dunes of sand. Just as quickly as it has been built, Dubai could fade away.
I’m not optimistic about the prospects of Dubai. But I do hope for the best. All its faults aside, Dubai represents something unique. In drawing together so many disparate cultures, Dubai is a sort of grand social experiment. Even if I don’t believe it will happen, it would say something positive about human nature if Dubai overcame its troubles and thrived.
As for myself, I am more optimistic. I may not retire at 35, but who cares? Working does not preclude one from finding love, raising a family, or enjoying the simple pleasures of life. I lost my job and survived — I consider it just one more piece of evidence that happiness is a state of mind, not a state of being.
And I am happy.
This is the last in a four-part series on the author’s experiences as a consultant in Dubai.