As it happened, I returned to Mumbai from Dubai on November 25 after a lecture engagement. The debt bomb exploded later the same day. My acquaintance with Dubai goes back more than two decades: On the first visit, I came back dazzled by the quantity of gold — and Rs 500 notes in piles several inches high — lying apparently unguarded in many shops in the gold souk. Those were the days when gold import was banned — and smuggling and the havala market flourished.
An interesting recent development is the stand taken by the Government of Dubai that it is not responsible for the loans of corporate entities like Dubai World and its subsidiaries. Technically, the stand is correct. The question is to what extent western banks and the governments concerned will pressure Dubai for a change in its stand. One parallel which comes to mind is the case of the Bank of Credit and Commerce International (BCCI), which went bankrupt a couple of decades ago. Abu Dhabi had a significant interest in BCCI, although it had very little to do with the management. Nevertheless, if memory serves me right, western governments and banks pressurised Abu Dhabi to put in a few billion dollars to help the creditors of BCCI. Are we going to see history being repeated in Dubai? In the case of Dubai too, its ability to service its debt depends on the extent to which rich neighbours like Abu Dhabi and Qatar would help. The former has already lent $15 billion, a third of that just before the debt moratorium was declared.
Another interesting point is the contrast between Hong Kong, Singapore on the one hand and Dubai on the other. The similarities are obvious — all are city-states, have few natural resources and Dubai obviously had ambitions to replicate the success of the two eastern centres by becoming a modern financial and services hub. One major difference is that Hong Kong and Singapore had significant, globally-competitive manufacturing activity before they developed into predominantly service economies, and that too over a few decades. Dubai tried to skip the manufacturing phase of economic development, to become a services-based rich economy, based on real estate, tourism, shopping and trading, and financial services — which constitutes 85 per cent of the $80-billion domestic economy. (One obvious parallel from the region, and a successful one at one time, was Beirut, till the sectarian conflicts erupted in the second half of the 1970s.) Sanctions against Iran also helped Dubai as a lot of goods meant for Iran passed through it. The economy did boom for several years before the bursting of the debt bomb: The external debt is roughly equal to the GDP. One wonders whether the problem started with the collapse of Lehman — and the banking system’s unwillingness to lend, particularly for property.
A similar case is the Saad Group in Saudi Arabia, where regional and global banks have faced huge losses. Problem is that “name lending”, instead of cash-flow based lending, is very much prevalent in the region — and these lending practices obviously have their own risks.
Services-based growth in India
Some observers of the Indian economy consider the predominance of services in India’s GDP as a positive feature, as compared to, say, China with its growth underpinned by manufacturing and exports — we have, they argue, leaped over the industry-dominant stage to join the services-dominated economies like the UK and the US. An example of the neglect of manufacturing is the way our political masters ignore the question of land needed by industry. Populist politicians, often joined by do-gooders, manage to ensure that land is not given for industry and this has held up a huge amount of infrastructure and industrial investments.
To put the issue in perspective, the area of land needed for industrial growth is a very small fraction of the total agricultural land; services growth is not sustainable without manufacturing growth; a very large number of people need to move from agriculture to industry and services if the problem of rural poverty is to be put on the road to a solution. And yet, our political leadership prefers to maintain a studied silence on the subject rather than making a case for industrial land. If even an island nation like Britain is finding that services-based growth is a mirage, then a much bigger and poorer India can hardly afford to neglect manufacturing.
The second manifestation of our not-so-benign neglect of manufacturing is the exchange rate policy, a point I will revert to later.