Saturday, January 31, 2009

Dubai can serve as a model for a new global financial structure

The “build and they will come” ethos has been the foundation of Dubai’s success ever since the deepening of the Creek’s shallow waters allowed the city to emerge as one of the world’s leading port operators competing head-to-head with Rotterdam and Singapore.

At the end of January each year, the world’s business and political elite gather in the Swiss resort town of Davos to discuss the economic and political challenges facing the world. The forum’s primary objective has been to promote a global policy agenda fostering innovation, free trade and deregulated markets as a panacea for economic growth.
There are three questions that have dominated this year’s summit: how did we get ourselves into an economic crisis of such unimaginable proportions? What will reignite the engine of global growth? Lastly, what is the best reform prescription for future economic governance?
As controversial as it sounds, Dubai may provide the answers.
In the eyes of some observers, Dubai is the archetypal example of an asset bubble. According to its critics, dramatic construction projects represent a self-inflicted plight to keep the momentum going – often beyond real demand.
The “build and they will come” ethos has been the foundation of Dubai’s success ever since the deepening of the Creek’s shallow waters allowed the city to emerge as one of the world’s leading port operators competing head-to-head with Rotterdam and Singapore.
But the global credit shock has exposed Dubai’s dependency on outside finance, non-oil economic diversification and an influx of expatriate talent. Indeed, during the past 10 years, Dubai has become the spiritual home for a rootless can-do generation.
The title of my book, Generation Dubai: Exit, Voice and Loyalty, captures how Dubai has set the template for an emerging generation, one concerned with economic emancipation. It is a generation indifferent to location, religion or, to some degree, government. This generation has opted to migrate from overtaxed and over-regulated western market democracies to a city promising a more prosperous future.
The entrepreneurs of Dubai have an uncompromised pragmatism which has little loyalty to any economic system, place or ideology. Their mission is to conquer and move beyond conventional boundaries.
The view from Dubai notes that the mature democratic system of the West has been allowed to rust by lobbyists and politicians who group around single causes. Instead of placing an imperative on private wealth creation, personal self-fulfilment and competitive public services, the western business model has been found lacking in countries like the United Kingdom and America.
A country’s long-term economic prosperity is dependent on openness, low taxation and long-term growth based on public-private partnership. Bureaucratic reflexes, however, suffocate all these elements of economic competitiveness. One consequence of the credit crisis will see the imposition of more legislation on the business world. But more regulation alone cannot be the answer. There is also the added danger that the biggest casualty of the credit crisis will be the retrenchment of the private sector.
At a time when the world appears to be in search for substance and certainty, it may seem counterintuitive to look towards Dubai for a blueprint to reignite growth. But Dubai’s rapid economic development can shed some light on the subject. Low taxation and free-trade zones have been critical to Dubai’s economic success since the 19th century, when discontented Persians left their home country to pursue their trade in the non-invasive business environment that Dubai had to offer.
Western democracies must neutralise offshore tax havens through competitiveness. This should allow the reallocation of resources that are currently spent on tax mitigation and law enforcement. Resistance will be overwhelming and few politicians are prepared to risk their career. But tax reductions alone as a measure to stimulate the economy are futile in the long-term. Interest rates and taxes will have to rise eventually to finance a growing budget deficit.
Dubai’s success is based on the understanding that long-term investments will pay off as they provide the basis for sustainable economic growth.
In the absence of large oil reserves, the city has engaged the private sector for financing by way of providing an adequate regulatory framework securing financial returns. Competitive public transport, health and education systems require enormous amounts of capital that governments cannot finance on their own.
As Dubai has shown, the private sector must play a pivotal role in this; it not only improves resource allocation but will allow the lowering of taxes. Today’s global economy is at the heart of Dubai’s success. Elsewhere, though, there is a real risk that a global economic slowdown will revive protectionism. The Doha round of trade talks appears to have failed. World leaders should commit to a more open economy which is likely to generate sustainable growth.
Political leadership has to be prepared to dare the improbable – as Dubai once did to survive.The frustrations of those who live in the West – the number is likely to increase as a result of the evolving economic crisis – is directed against capitalism’s modern bête noire: globalisation and high finance.
The true culprit, however, is a political system that has belittled the individual to a level where self-confidence and faith in the future have been compromised by the politics of fear. Generation Dubai is counter-reactionary.
As millions across the world turn against the financial services sector, there is a danger of a serious mental setback in our approach to business. What is challenged is our collective readiness to question, to dare and to risk in unchartered territories. In modern times few places other than Dubai have demonstrated this so memorably; the city aspires to the improbable.
Whether Dubai will eventually fall victim to an asset bubble will be a topical question for some time. The city is well positioned to navigate a path through the stormy economic challenges ahead of us, in particular with Abu Dhabi’s strong financial backing.
As the financial centres of London and New York struggle to overcome their problems, Dubai can take the initiative. Islamic finance is set to take an increasing share of the global banking market. And the world’s economic epicentre has shifted eastward. While capital flow from the West to countries such as India, Pakistan and Russia will slow over the next one or two years, Dubai will emerge stronger. Dubai has substance in its own right – the credit crisis will be a good opportunity to prove it.
The world is about to radically change. Generation Dubai is redefining all notions of aspiration. We will not overcome the challenges we face today unless we are prepared to question our blind faith in the market democracy as it currently stands.

Bijan Khezri is a corporate financier and author of Generation Dubai: Exit, Voice and Loyalty, published by Khezri Collection.

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