Translated from GegenStandpunkt 1-10
The economic miracle of Dubai and its crisis:
An object lesson on the power of international credit
Nakheel, the Emirate of Dubai’s state-owned real estate holding company, announces in late 2009 that it was suspending tens of billions of dollars in debt service owed to its creditors.
The same journalists who previously couldn’t rave enough about the economic miracle in the Persian Gulf – “Anything seems possible” – abruptly switch in unison to a version of “all that glitters isn’t really gold,” it’s all a “crazy mirage” meant to obscure the fact that nothing has any solid foundations there. The reader is left with the impression that the sheikhs threw shovels full of desert sand in the eyes of our good Western investors so they could get their hands on our money and then squandered it to their hearts’ content.
Both the older, admiring expert reports and the newer, opposite commentaries offer sufficient evidence that it was not some Orientals dominated by exuberant fantasies of growth who swindled other people’s money, but rather that Oriental Dubai was and is a perfectly normal case of financial capitalist money making and its crises.
“It was like an economic dream from the Arabian Nights. For years, everyone who wanted to describe the economic situation of the small emirate of Dubai had to resort to superlatives: There was talk of the largest construction site in the world, of sheer endless growth, and of really fast money anyway. (…) To this end, the Emir not only built the largest port in the region, but also opened up his empire to the big wide world more than any other country in the Gulf. On the one hand, this ensured that international investors flocked to Dubai and further fueled the boom. On the other hand, Dubai financed most of its growth on credit and raised the money from international investors.” (Der Spiegel)
Apart from the crazy “on the one hand foreign investors – on the other hand foreign investors,” this is the plain language of the “economic dream”: This ‘economic miracle’ is based on and consisted of essentially nothing but almost endlessly growing business opportunities for potential investors. International credit is active there, i.e.: capital in money form, invested in order to increase itself. Financial capitalist companies discover and use Dubai as a means of enriching themselves – and for years the midget state in the Gulf excellently suits them for this purpose. Their “financial engagements” – in the form of bank loans, fund shares, real estate purchases ... – pays off; they successfully book the capital invested there as growing assets because international financial investors, for years and to an increasing extent, mutually accept the equation that their investments in Dubai, i.e. their speculations on its economic development and expansion, are quasi-automatically growing financial assets. This equation was the whole reason and purpose for the boom, which was able to come up with so many eye-popping superlatives on its factual-technical side.
It was the speculation on a guaranteed increase in the value of the financial capital invested in securities and other objects of investment, the profit expectations of investors who, with their demand, turned such promises of profit, considered to be credible, into coveted financial capitalist assets, that was not only the whole reason why, but at the same time the only sufficient with what for realizing this “economic dream from the Arabian Nights.” The Emirate is a prime example of the fact that nothing else is needed for a capitalist economic upswing other than: Credit, i.e. financial capital willing to invest, which accounts for and treats the debt relationships it enters into and creates as currently existing, increasing assets. Its expectations of growth mobilized financial resources and created the credit that alone moves millions of workers, ranging from Asian construction slaves and prostitutes to engineers and managers from Europe, Japan and the USA, in the direction of the Gulf. Credit ensured that the material foundations were rolled out on-site and that all the hardware was hauled there after it has been screwed together in the globally distributed locations of capitalist industry and sold there at a profit. That is what debts are and can do in a capitalist world. Neither the material nor the economic use value of the labor power and products and means of production suffer from the fact that these are not “organically evolved” results of a “sustainable location development,” as is now retrospectively claimed – in view of the devaluation that has occurred. It’s the other way around: Everything that comes about in terms of location development and capitalist construction is the work of speculation, which supplies the necessary credit amassed for this construction work; the work of finance capitalists, who scoure the globe for prospects of wherever they can make profitable credit transactions and speculative investments for themselves. They found what they were looking for in Dubai.
The prospects for profitable speculation in Dubai are excellent, according to the long-standing opinion and practice of international finance capital. The evidence it has for this is neither a secret nor particularly exotic:
First, the huge ability to pay comes into view: The state on the Persian Gulf – Dubai in the narrower sense, the United Arab Emirates in the broader sense – has amassed considerable sums of money from decades of ongoing oil sales. After a period of rock-bottom prices in the 1990s, the price of oil rose to ever new “all-time highs” at the beginning of the new millennium. At the same time, the neighboring oil giant Saudi Arabia decided to use its petro-billions for a gigantic capitalist industrial development program. Within a few decades, the kingdom wants to develop into a leading global location for high-tech chemicals, aluminum processing and new materials, among other things, so that the Arabian Peninsula will become a destination for consumer goods and means of production in ever newer dimensions; imports and exports increase rapidly, and with them the corresponding revenues, which get snagged in the hub of this trade – Dubai. Large international industrial and commercial capitals set up branch offices with huge warehouses and increasingly final assembly facilities in the free economic zones surrounding the port. For the financial world, this is all confidence-inspiring data that vouches for the reliability of a speculation on profitable and safe financial transactions.
Second, the Emirates are embarking on a large scale state program to develop new sources of national wealth. Their own ambition is to develop from a pure oil and gas exporter and a merely regionally significant trading center into the hub for people, commodities, and capital between Europe and the Near, Middle, and Far East, further into a new global “tourism hotspot” and, last but not least, into a settlement of modern, profitable industry. The sheikdom’s desire to take off nationally, to become a location for growing capitalist business, makes it highly “interesting” for the money investors of this world. The fact that the rulers use their power to open up a whole new business location and create a “favorable business climate” makes the speculation really bomb-proof, in the opinion of the speculators.
Thirdly, what finance capital finds so convincing about this capitalist development program is its dimension, which is stitched together entirely in accordance with the logic of capitalist growth: the sheikhs willing to build are determined and the financiers willing to invest only find it plausible that the performance of the world market leaders in the respective sphere or industry is the only suitable benchmark for establishing Dubai as an internationally competitive business location and that the scale of the development projects must be consistently geared toward future growth –“Welcome to Tomorrowland.” As the hub of a commodity trade with the largest seaport in the world? Sure! As an air traffic hub with the world’s largest airport? Of course! As a tourist center with the largest hotel and even the invented category of a 7-star hotel? What else?! The financial capitalists effortlessly calculate all this into a gigantic need for credit, i.e. into gigantic prospects for their credit transactions with sufficient collateral; and to the extent that the investors see the high-flying development projects as “promising for the future” – vulgo: promising profit – they give credit. This in turn spurs the planners of such projects on to ever newer, ever larger ventures, for which they solicit the world’s credit. In this way, the sheikhs who try to develop a location that is successful in international competition and the international financial mafia spur each other on to the gigantomania which we are now supposed to know was always a sign of imminent collapse – “the new Babel.”
Fourthly – as is always the case in this sphere – the most important point of reference for speculators to rank the emirate “top” and invest their money there is the fact that their peers are already massively doing so with success. In this respect, the rulers of the Emirates are themselves pioneers. For its part, the oil money earned has long since been transformed into financial capitalist investments: in American government bonds, Japanese or European shares, etc. With the enormous growth in this activity during the years of the recent oil price boom, the oil sheikhs as global investors have gained both the interest and the power to make this form of financial capitalist enrichment into the starting point for transforming themselves, their emirate, into a prospectus and investment object of speculators willing to invest. To this end, in 2002 they announced the construction of the Dubai International Financial Center – and immediately added that they wanted to catch up with the financial centers of New York and London in terms of size and international importance in the long term. To make itself into an internationally competitive financial investment center – that is the actual core of the “future vision” of Dubai’s ruling dynasty. It boldly moves forward in this direction and cordially invites all the world’s financial investors to join in. And they come in droves. The big funds and banks, both local and international, lend money, set up branches, move entire departments “offshore,” and so on. This then provides additional fuel for the construction boom which in retrospectis is declared to be hubris. Banks, funds, etc. do not simply rent an office in Arabia either, but present their confidence-inspiring wealth to the public with all the pomp that contemporary architecture is able to achieve; at the same time, the banks, hotels and other palaces are not simply costs, but in turn investments whose appreciation they can successfully speculate on with the ongoing boom. In line with the logic of financial capitalist expansion, Emirati financial funds use this success as a financial investment center to multiply their global investments: they buy into port companies, banks, automobile capitals, etc. around the globe, make strategic investments that are in turn calculated to strengthen the domestic investment center...
In 2007/2008, global finance capital plunges into crisis. Regardless of where and how it may have started, it consists in the fact that investors no longer accept from each other the equation that they made their business out of in the first place. Out of securities: future promises of returns which represent growing assets, capital, because they are treated and traded as such, become mere promissory notes as soon as the speculation turns around and financial securities are to be redeemed en masse: Claims that prove uncollectible for this reason and lose their value. And because Dubai has become exactly what it wanted to be, namely a branch of international capital, the few real or presumed peculiarities of its rise do not protect it from becoming a branch of this crisis either:
First, the crisis on the financial market caused world trade to collapse by more than half because production and trade are based on credit and represent one financial capitalist investment sphere among others, which is deprived of its basis by the financial capitalist woes. The trade hub Dubai feels the effects accordingly.
Second, the Arabian souvereign wealth funds are involved in the global devaluations to the same extent that they have established themselves as global players: They lose tens of billions of dollars in their European and especially US investments, and to that extent are weakened as potent investors in the domestic financial market in the Gulf.
Third, because foreign investors must settle their claims, they liquidate their investments en masse, including in Dubai. There is a lack of interested parties for additional investments; so planned new issues totalling in tens of billions are canceled, an unprecedented occurrence in Dubai – and therefore, in the narrow-minded view of financial investors, not thought possible. More and more projects are cancelled, delayed, scaled down in size ... So the decisive data for speculation on Dubai’s unbroken growth turns negative – and speculation collapses.
At some point, the creditors finally refuse: Nakheel, the state holding company, which has already been the subject of much gossip, is unable to roll over loans that are falling due, a process that has so far been easy-going, technically described as “follow-up financing,” and from one moment to the next, the potent moneybags from the Orient, whom “we” had been counting on to deal with “our” crisis, turn out to be cash-strapped themselves.
In view of this, the press describes to its audience in great detail how the Dubai boom worked this way all along, in such a way that old debts were paid off by taking on new debts, and unanimously screams “Ponzi scheme!” While the boom and bust of the Dubai speculation are a lesson that the whole difference between a solid “economic miracle” and a “Ponzi scheme” lies solely in positive speculation on its success, the media discovers in Dubai’s upswing – as always in retrospect – a violation of the principles of solid speculation and moderate indebtedness and attributes this case to the megalomania of the Emirati rulers, who are said to have duped and seduced much too trusting investors into unsound business.
In contrast to the experts in the economic editorial offices who are looking for culprits for the ‘derailment,’ the investor community involved in Dubai’s upswing and crisis has the practical concern that their “Ponzi scheme” does not blow up completely, but that as large as posible a part of the invested money continues to be utilized in the future or is utilized again as capital. It is therefore looking for a rescuer who can stop the “devaluation spiral.” To their delight, in December the ruler of the Emirate of Abu Dhabi decides to jump into the funding gap. The fact that it is yet another Oriental oil monarch who is stepping up to buy Dubai out of its embarrassment, i.e. the international investors out of their embarrassment, does not dampen their hopes – they don’t have any other hope at the moment anyway. The bailout actually succeeds – for the time being – because the international financial mafia is willing to believe that the financial potency of the neighboring sheikdom really does consist of real assets that do not run the risk of turning out to be a mere illusion. What leads them to this belief? Its oil revenues, its global financial operations, its gigantic investment and development projects …