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Dubai: A disadvantage of a living under a “benevolent dictator.”

This is a guest post by Mark Edwards

Dubai did not escape the credit crunch. Given that defaulting on debt is a crime punishable by prison sentences, expatriates in their thousands, laden with debts, drove their cars to the airport, left the keys in the ignition, skipped the country and left their debts behind them.

Rising property prices led to speculators rushing to buy apartments off plan in the hope of making a quick profit as they sold their acquisition on to someone else before completion. Westerners borrowed money from the banks to make these purchases and used their credit cards to spend money that was not theirs in the glistening shopping malls, bars and restaurants of Dubai. Live-in servants were installed in these gleaming apartments, paid a pittance and made to work exceptionally long hours in order that the good life could be lived. Time was whiled away when not working in a shiny glass office, swimming in the pool or wandering aimlessly around the mall that they had driven to in their gas guzzling four by four looking for shops where  effective use of their credit cards was made.

The credit crunch hit hard. Demand for luxury properties in Dubai slumped while the supply was ever increasing. One only needs to be familiar with the most basic rule of economic theory to know the consequences of this, prices fall. And fall they did. Luxury apartments at the Palm Jumeirah fell 50% by February 2009, other developments fell similar amounts and prices continued to fall. The expatriate property speculators were committed to purchasing properties at prices they could not afford and they could not sell the properties at anywhere near the price they paid. With no way out of the bleak position they were in, it is not surprising that escaping the country became the attractive option.

With an orgy of spending, the ruler of Dubai aimed to turn his emirate into a global tourist and financial centre. Super luxury hotels were built with staff to cater for every whim of the guests. An indoor ski slope and golf courses were constructed in an area that was not that long ago a desert and man-made islands appeared in the sea where wealthy expatriates could live in magnificent villas in a zero taxation environment. The Dubai Mall, billed as “the world’s largest shopping and entertainment destination” could be built as well as a fountain that shoots water 500 feet into the air. Another project, due to be opened next month, has been the Burj Dubai, the world’s tallest skyscraper. An opera house. More hotels. More man-made Islands. Construction everywhere. Spending, spending, spending.

The credit for the recent expansion was given to Sheikh Mohammed, the absolute ruler whose image is visible on massive billboards and in hotel lobbies throughout Dubai. “If you build it they will come” was a mantra that he seemed to live by and so they kept building: bigger, better and more luxurious.

Such extravagancies have to be paid for and unlike Abu Dhabi, Dubai only had a trickle of thick black liquid money gushing from the ground. The construction was paid for with debt and the labour carried out by imported workers treated like virtual slaves who live in squalid labour camps, work in the searing heat and denied the right to a union or to strike.

As well as the general population and expatriates who felt the effects of the credit crunch, the government itself, through its reckless spending in related entities, found itself with too much debt and not enough income to service the debt. On November 25, Dubai World and its subsidiary Nakheel announced a “restructuring” of its debt obligations. This is what market participants commonly refer to as a default. But a stark difference is noticeable from a default by a government related entity and a default by a citizen of Dubai. In the latter case, as I have mentioned, the punishment can be a prison sentence, in the former case, even criticism of the ruler of Dubai is inappropriate.

Whereas in the UK and other democracies, if the government defaulted on debt, opposition leaders and headlines in the newspapers would be calling for the government to resign, this does not happen in Dubai. There is no opposition party and there will not be a headline such as “Sheikh Mohammed: Time To Go” in a local newspaper. Criticism of the royal family in such a manner would be unthinkable. The population can talk about a disaster and the possible effect on the economy, but publicly blaming the person most responsible for the mess is a taboo.

There are some that are prepared to sacrifice democracy and live under a “benevolent dictator” for the benefit of a zero rate of tax but that does not mean to say that everyone would do the same. Consider a theoretical example: Imagine in the UK a political party stood on a platform which said that they would cut income tax to zero percent and people could continue to live their lives with two exceptions: 1. The ruling party could not be criticised, 2. There will be no more elections as the ruling party will stay in power indefinitely. I would like to think that the party would get even less votes than the BNP if they stood for election. Am I right?