Dubai crisis rings bells of prudent investment

by David Harris

JERUSALEM, Dec. 6 (Xinhua) -- Until 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.