Today came news that Dubai World, the state holding company of the United Arab Emirate of Dubai, is seeking to defer $59 billion in loan repayments to its creditors. According to The New York Times, http://www.nytimes.com/2009/11/28/business/28markets.html?_r=1&hp,the, emirate “like many Western consumers during the good times, […] gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn.” Just a few years ago, Dubai was experiencing a boom, as oil prices and the skyline of the city soared together. Showing off its new-found wealth the state embarked on several ambitious projects, notably, the construction of palm-shaped islands off its coast. Gorging on expensive oil and unsustainably expanding its metropolis, Dubai was poised for collapse. The straw that broke the camel’s back was the global housing bubble, as the emirate was caught on the unawares spending decadently while putting away no money for the economic winter.
Today this reality is demonstrated painfully on the streets of Dubai where foreclosure rates have skyrocketed as developments are abandoned and workers flee the once thriving city. The artifical islands, once the symbol of Dubai’s prosperity lie empty as the real estate market implodes.
Dubai and countries of its ilk must take an important lesson from this downturn. They must realize that an economy cannot be premised on petrodollars which arrive with frightening irregularity. They must learn that oil is not sustainable and they must cultivate their human capital with one-time oil revenues. They must use their oil wealth as a stepping stone to a higher level of economic existence and not as an unbottomable purse with whichf to finance real-estate projects. The UAE has a serious problem when it has skyscrapers that rival New York’s yet its ranks 95th in literacy world-wide.