Quicksand economics

Dubai’s borrowing and deep national debt should caution easy growth

The tiny Persian Gulf emirate of Dubai waited until Americans were distracted by the Thanksgiving holiday before dropping a financial bombshell. Its main sovereign investment holding company, Dubai World, requested a global standstill on repayment of almost $60 billion in accumulated debts, 60 percent more than the value of its entire economy. The global economic meltdown last year halted the countryâÄôs decade-long construction binge, but the debts linger like a bad hangover. Even in a world of financial excess, Dubai stood out for its extravagant projects and ambition to transform from sleepy trading post to global titan within a single generation. A debt-fueled real estate boom spawned the construction of endless glass and steel towers and artificial islands. After a bid to attract the worldâÄôs well-heeled upper crust, the downturn of global trade and travel has left Dubai with untold acres of unused real estate and a population made up predominately of imported immigrant labor. It appears that Abu Dhabi and DubaiâÄôs other, less profligate United Arab Emirate neighbors will essentially be bailing the city out, likely sparing the world from a wider fallout. Even if Dubai doesnâÄôt fully collapse under its own weight, it remains a striking lesson in how not to grow an economy. Rather than investing in productive assets like factories and ports, Dubai has been fueled by speculators and easy credit. The case is a troubling reflection of our own and a potent reminder that the United States has so far failed to crack down on speculators and rising debt. Prudent, sustainable growth requires saving and reinvestment during good times in order to weather the inevitable economic storms.