On the face of things, the financial collapse of the United Arab Emirate of Dubai would seem to be, in the broad world of sovereign debt, what the collapse of Fannie Mae and Freddie Mac were in the U.S. credit system. Now that the markets have absorbed the initial shock, we are entering the denial phase—“this isn’t as big as you think it is”—with worse to follow. Or so I gather from the same jaded financial observers who told me the U.S. meltdown was coming.
At root they are comparable only because all financial catastrophes are comparable. There is an essential law of supply and demand; that was not invented by human beings. Like gravity, it does not turn off and on. It is a constant. And, as the old Scottish jurisprude explained, you cannot break the laws of nature. You can only be broken by them.
“Dubai World,” the obscenely grandiose waterfront development, might as well have been designed to break a few banks. For all the external glitz, Dubai, like all the other Gulf States, and indeed like Saudi Arabia, has an economy that depends entirely on the price of oil. There is no real enterprise, and no deep, variegated cultural history of enterprise. The oil would still be in the ground had it not been for foreign investors with foreign technology and foreign habits of mind, as well as foreign uses for the oil. (Before oil, it was pearls.)
It may well be politically incorrect to point at this big obvious fact, but the failure to do so is, I think, behind miscalculations of foreign bankers, and of the Arab rulers.
They did not look clearly at the viability of the project they were financing, only at the oil money. They further assumed—despite everything that should have been learned through the last few decades—that Dubai’s sovereign debt was ultimately secured by the mutual loyalties of neighbouring emirates. Fools!
There may have been a time (we can’t be sure) when even merchant bankers were capable of analysing an investment in the round. That is, by seeing through the numbers, to the thing itself, and asking, “Does this look sound?” If the answer is no, don’t lend money.
The “problem” with thinking “outside the number box” is that it puts you in irreducibly moral territory. Here I mean moral in the broadest sense, incorporating all cultural norms. As I’ve suggested before in this space, perhaps a little too meekly, Dubai World represents the flip side, within Arab culture, of the phenomenon now known to us as Islamism.
Put it this way. There are two, and only two ways, to survive in nature. One is by diligent work, and one is by appropriating the work of others. The piratical approach works well for the larger predatory animals in the wild, but only so long as the diligent little creatures on which they depend for their sustenance can themselves multiply.
In human affairs, a whole social order based on someone else working is what we might call “ecologically fragile.”
The whole social order of Arabia has been adapted from ancient principles that we will not discuss to modern ones dependent on foreign labour, right down to the “guest workers” who in many places outnumber the underemployed natives.
And all this thanks to the accident of oil under the ground and to the further accident that it is in a form easier to pump than, for instance, the much larger reserves under North America.
Al-Qaeda is one of the stranger manifestations of this “grand idleness”; Dubai World is another.
Of the two megalomanical displays, of course Dubai’s is not malicious, and yet, the financial collapse of one Arab oil state after another will do more damage than terror strikes. Perhaps not as much as Iran with nuclear missiles, but there you go.
Put it another way. Foreign investment in “sovereign debt” is not different from foreign aid, in one important respect. In order to see a return, we must count on the money being used wisely.
The reconstruction of Europe and Japan, after the Second World War, through the Marshall Plan and similar devices—and later the lifting of such “Asian tigers” as Taiwan and South Korea out of abject poverty—worked because the help went to enterprising cultures. There was even some show of gratitude.
Constitutional government was also successfully exported because it was compatible with cultural norms in each of the countries subject to our western ministrations.
Whether in the optimistic schemes to bring democracy to Iraq, Afghanistan, Palestine—or through investments in infrastructure to create broad modern economies throughout the Middle East—we have simply assumed a cultural norm in both West and Far East: “Work hard, make money.”
Perhaps we should think again.
- Robin Hoodism is on the rise - Sunday January 2, 2011 at 9:35 am
- Taking on the Reformation - Wednesday December 29, 2010 at 8:53 am
- The miserly Canadian - Wednesday December 22, 2010 at 5:23 am
