Chris Mayer, currently in Dubai with Addison Wiggin, sends us this note:
“The real boom in Dubai really only kicked off recently. After spending some time here and chatting with those who live here, I would boil down the more important ingredients to these:
- Low regulations, low tax. This has probably been a Dubai advantage for a hundred years, but people here told us repeatedly how easy it is to set up shop in Dubai and how your privacy is protected. There are also no income, property or corporate taxes. Zero.
(The city funds itself with taxes on hotel occupancy, liquor sales and restaurant meals, as well as permits for roads and such. Part of the budget also comes from the Sheikh’s business interests – such as Emirates Airlines and the aluminum smelters.)
- The introduction of freeholds. In 2002, Dubai allowed foreigners to own property in so-called freeholds. That was a big milestone that kicked off a wave of immigration. So now there are these freeholds where the Penthouse Gypsies live in high style and in very nice communities.
- The backlash of 9/11. Before 9/11, Middle-Eastern exporting countries re-invested $25 billion a year in the US. After 9/11, that slowed to about $1.2 billion a year. Arabs no longer felt welcome and feared what might happen to their wealth. So guess where the money went?
Arab wealth started flowing back to their own countries. The economies of the eight states of the Gulf Coast grew 60% between 2001-08, compared to 18% for the US. ‘Cash poured into Dubai,’ Krane writes. And Dubai’s growth rate topped China’s, averaging 13% per year.
Essentially, the repatriation of Arab wealth in the US was a big driver and still continues to today. As the Middle East region gets wealthier, a good chunk of that wealth will flow through Dubai.
- Finally, the UAE fixes the value of its currency to the dollar – at least for now. What this means is that as the US printed dollars the effects were exported to Dubai, too. That is where Dubai got into trouble. Lots of speculative capital flowed to building islands in the shape of date palms or creating residential communities with robotic dinosaurs from Japan. Now Dubai is suffering through a massive real estate bust as a result.
“Still, Dubai’s important position in world trade is many layered, like a wedding cake.”
for Markets and Money