Dubai and the 'Rules' for Being a World Class City

To anyone involved in the world of real estate, there is an intricate connection to economic development.

Increased density of people, driven by an increased density of economic activity, drives real estate prices upward because of the importance of “place”. Real estate in and of itself does not really create value as much as providing a home and space for it. It is a lagging indicator, but can through it presence bring together people who do create value (in offices, shopping centers, warehousing/industrial, residences, and hotels) IF the conditions are right.

Just look to the government funded real estate disasters in Detroit and other US Midwestern states, as well a the sports facilitities built in Greece in 2004 for a cautionary tale that “the build it and they will come” theory is a triumph of hope over reality than results only in wasted money. Economic development is governed by a set of societal choices, and can take various forms based on geography- industry in China, services in Singapore.

There is a powerful interplay of land use policy and government regulation/finance policy that also drives how real estate plays into the society. For example, free-market policies on land use have resulted in cities such as Houston and Dallas having a “horizontal “ development pattern with land being inexpensive and a government commitment to build roads out to them. The contrast to Toronto (where government land use policy has prohibited the use of the “garden style” apartment complex) and Manhattan (where rent control regulations have created an artificial supply constraint) could not be more stark.

The question then for someone interested in Dubai’s well being, it what can be learned from other people’s experiences?

A great background is “Who’s Your City”, by Richard Florida. He basically lays out a thesis that economic activity is increasingly based around major cities and is “spiky” because intellectual capital is more valuable to the extent is has a chance quickly move between companies and affiliated industries. The concept applies to both industrial and service industries, and seems to be pretty well borne out. I thought to apply this basic approach to lay out a set of “rules” for the progress and development of small city-states that lack access to large amounts natural resources through their national home markets (i.e Singapore, Hong Kong), and to evaluate Dubai using those criteria.

The overarching objective is the development of metropolitan center that becomes a hub of high value added intellectual capital—financial services, commercial services (advertising), communications media, IT, tourism, and law ( law is always last because, like real estate, it doesn’t create value, at best it enables it). Real estate is then an industry that facilitates the space needed to house these economic/cultural activities.

1) Established rule of law- sanctity of private property and contracts

2) A philosophy of limited government and low, stable taxes –preferably as a percent of final sales or local income earned—look to the Eastern European countries for a great model

3) Efficient regulations on business activity and an honest civil service (adequately paid, but never more than the opportunity to earn money in the private sector).

4) No “Ponzi” scheme government programs based on deferring pain into future generations- Chile’s private sector pension program is a great model (please, don’t even think of looking at US Social Security!)

5) A Tolerant Society allowing diversity of thought, religion, and freedom of speech, including dissent and assembly

6) Open Immigration and Open, Flexible Labor Markets

7) Transparent, open capital markets and a currency that is a stable store of value.

8) Transportation facilities- land, sea, air with minimal restrictions (sufficient for security purposes).

9) A good education system (both primary and secondary) that provides both technical knowledge and a grounding in ethics and a tolerance for other people, and a respect for private enterprise. (The great asset of the US was universal education, and its greatest disaster was the unionization of the teachers)

10) Competent infrastructure- electricity, telecom, roads that utilize free market principals the greatest extent possible.

11) Culture/Tourism - the arts, entertainment, etc---always follows economic wealth creation in cities that reach economic “escape velocity” (sustained growth). Dubai is fortunate to also have great weather and a seacoast to enable a tourism industry as well. However, Tourism creates low value added jobs, and should not be viewed as a way to enable sustained economic development.

So how does Dubai perform on these criteria? Actually pretty well- which is why once should not be overly concerned about the “boom-bust” cycles in real estate, even Dubai’s. When busts do occur—quick bankruptcies and liquidations are the best way to clear the financial debris away. Prolonging the devaluation process- be it in Japan or the US, only makes recovery and rebirth longer and more painful.

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