Dubai crisis rings bells of prudent investment

Untill last month, Dubai was acclaimed worldwide as an exotic Manhattan on the sea, with huge skyscrapers towering in desert sands alongside golden beaches crowded with stunning hotels and upscale shopping malls.

Unsurprisingly, news of the financial collapse of the emirate's key construction firms came as a shock to many, but as far as regional economists were concerned, the Dubai bubble had been ready to burst for some time.

It is an experience that no country wants to see repeated within its borders. Israeli economists stressed over the weekend that lessons must be learned from the crisis, among which are modesty and caution.

SYMPTOMS

The prevailing view in Israel is that Dubai was simply putting all of its eggs in one basket. Its failure to diversify meant that a meltdown was likely to occur at one point or another.

Diversification of an economy is so important," said Yishay Yafeh, an expert in financial systems at the Hebrew University of Jerusalem.

"You can't base an entire economy on one sector," said Dan Catarivas, director of international relations at the Federation of Israeli Economic Organizations.

Dubai had a bold vision. It took a pearl-fishing village on the edge of the Arabian Desert and transformed it within a matter of a lifetime. Israeli economists told Xinhua they believe that while the dream of Dubai's founder was ambitious and praiseworthy, it was converted over the years by his successors to something that became unsustainable.

Massive investments in real estate led to an overheated economy, and despite government involvement in all the major development companies.

The economy also lacked an export base. In 2006, Dubai's imports totalled some 60 billion U.S. dollars, while exports stood at 5 billion dollars.

"The lesson is that they went too far. It's as simple as that," said Arie Melnik, a professor of economics at the University of Haifa, adding that he believes the "hubris" of the Dubai leaders was at the center of the crisis.

PREVENTION

Catarivas said Israel has got the mix just about right, which is why the country survived the international financial crisis better than most.

Noting that Israel, like Dubai, has virtually no raw materials, local experts said Israel's success is based on human capital.

Meanwhile, they said that Dubai's decision to move the economy in the direction of luxury villas lacked forethought and long-term feasibility.
In Israel, the high-tech industry may be a major force in the economy, recognized as a world leader, but it is not the only basket. Medical supplies, diamond polishing, agriculture and water technologies all rank high.
In Dubai, it was a very different case. "They thought they could do all this even if they couldn't see money at the end of the tunnel. Every small-time builder knows there is one simple rule, you don't begin building if you don't have buyers," said Melnik.

An economy must be diversified, it should be transparent, and a country's leaders should not plan too ambitiously and thus can avoid overextension, said the leading Israeli economists who spoke to Xinhua over the last few days, among other suggestions they offered to ensure no repeat of the Dubai crisis.

"It's about modesty and caution. There, the bubble was behavioral," suggested Moshe Justman, a professor of economics at Ben-Gurion University of the Negev in southern Israel.

FOREVER BURSTING BUBBLES

The Israeli analysts are of the opinion that the Dubai crash will have limited impact on the global stage. However, they cautioned that other crises may be around the corner.

The trouble is how to predict them. "I wanted to call this a million-dollar question, but of course it's worth much more," said Yafeh.

One needs to examine a state's investment portfolio to check whether it is diversified. Then there are the sums involved, said Justman.

There have been bubbles throughout recorded human history, said Yafeh, noting that similar hard times have been occurring for centuries, including the dotcom bubble in recent years.

However, nations tend to survive these difficult moments. The United States may have taken a beating over the last 18 months with the sub-prime crash, but its economy is resilient and large enough to have survived.

Israel and Australia may have growing bubbles right now, but their central banks are playing the game right by adjusting their lending rates accordingly, said Melnik.

At the end of the day, people will view Dubai's financial crisis as nothing more than "a curiosity," according to Yoram Landskroner, an expert on international debt at the Hebrew University of Jerusalem. "Dubai has nothing that links it to any group of nations. It's neither a developed state nor an emerging market."

As a result, little can be applied to other countries from the Dubai experience, other than to say that sometimes caution is the better part of valor.

However, in consideration of previous financial crises in emerging economies, it is safe to predict that some potential investors will no longer put their cash in high-risk, low-rated markets and will return to the days when making a small prudent profit was regarded as far more sensible than a rash gamble on a chancy but exotic option.

David Harris

http://news.xinhuanet.com/english/2009-12/07/content_12601713.htm