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Canwest News Service
Not everybody loses from Dubai's default. Sharp-eyed investors will scoop up Dubai's investment properties at prices lower than Dubai paid. And clear-headed thinkers can learn some important lessons about our 21st century world.
Through the Bush years especially, Dubai represented prime evidence of America's supposedly looming decline. It was building the world's tallest tower! It was buying American port facilities! It was emerging as the world's leading banking centre!
Much of this talk was obviously foolish. Tower boasting especially reminded one of that old Soviet-era joke: "Our Russian computers are the biggest in the world!" When the world's tallest buildings are suddenly showing up in Dubai, Kuala Lampur and Taipei, while Google,
Apple and Intel compete to build the world's greenest facilities, that tells you less about the shift of global power and more about Asian countries being fashion laggards.
But the claims for Dubai as a banking centre were not obviously foolish. They were subtly foolish.
Dubai acted more as a hedge fund than as a country. It borrowed on international money markets, to the tune of $80-billion. It used that money to finance a dizzying array of investments worldwide: in real estate, in port facilities, in retail, in casinos — you name it, Dubai bought it.
Perhaps you are slapping your hand on your forehead. Why didn't I think of that? Borrow big, buy big, and when it comes time to repay, borrow more — if that's all it takes, we could all be billionaires.
But because it was a country, Dubai came to the hedge fund game with in-built advantages. Sovereigns can tax — or choose not to tax. And sovereigns not only own land, but they also set rules as to how land can be used.
So here was the plan: Dubai would offer the planet's lowest tax rates — minimal business tax, no income tax, no sales tax, only a 5% social security tax for Dubai permanent residents.
Low taxes would attract businesses and individuals seeking to do business in the Persian Gulf. (It also helped that Dubai adopted an indulgent view of alcohol, gambling and prostitution.) The influx of newcomers would drive up land prices. The government's newly valuable landholdings would then act as security for its debts. A perfect circle! At the peak of the Dubai boom, the government's landholdings were valued at $350-billion.
But there was another element to the scheme, one that tended to go unmentioned — and one that casts doubts on the idea that economic power is shifting away from the United States.
Dubai was above all a banking centre. The one indispensable thing that banking centres must offer their clients is security. That's why the roll call of the great banking centers through history — Venice, Amsterdam, London, New York — is also a roll call of the supreme naval powers of their day. When smaller countries have wanted to play this game — Switzerland in the 19th and 20th centuries — they have developed sufficient military power of their own to make any potential aggressor think twice.
Banking centres that have not developed military power have tended not to survive very long: think Beirut in the 1960s.
Dubai is even more defenseless than Beirut ever was. Dubai's banking sector could exist only because it was backed by an implicit security guarantee from the United States. The credibility of that guarantee was spectacularly enhanced by the first Gulf War of 1990-91, and not so coincidentally Dubai took off soon afterward.
As with Dubai, so with so many other emerging economic powers, from South Korea to Chile. Their wealth depends on security provided to them by the United States.
Far from indicating a "post-American world," the skyscrapers of Dubai are symbols of that American world as much as the monuments of American cities. Arguably even more so: Every rich country has skyscrapers, but there is only one that can be counted on to defend the skyscrapers of others.
It's up to the rulers of Dubai now to seek accommodation with their creditors. They'll have to strike the best deal they can. But whatever happens, it will be a better deal than the deal they'll have to strike with their covetous neighbours, if the day ever does come when U.S. power recedes and American protection is withdrawn.
dfrum@aei.org
