Cospicuous Consumption or Capital Investment?

Dubai Tower Now World's Tallest Building


Eventually the oil will run out in the Middle East. Not any time real soon, of course, but almost certainly in the next 50 years. It will likely start declining in the next 30 years, maybe sooner, but as someone who has heard and read such predictions of a sudden shortage occurring in 10 years for roughly the last 30 years, I don't want to make to rash a prediction.

Here is the question though regarding the recent construction of the world's tallest building. There is something called "Dutch Disease" by economists, somewhat unfairly against the Dutch, but it applies primarily to countries that have large natural resource reserves. What appears to happen in these countries is that because so much wealth initially flows from natural resources, the economy develops around exportation of those resources at the expense of manufacturing or other productive industries. The resulting economy is therefore built on a foundation that will ultimately one day collapse through the disappearance of a limited resource.

The problem can witness right now in countries like Iran where, ironically, gasoline is relatively expensive, because so much of the refining of their oil is actually done outside of the country. Other oil wealthy countries seem to suffer the same problem of a lack of other industries because everything is focused on the oil. A roughly similar problem happened historically with Spain. It was noticed that Spain was a wealthy country that was buying up and importing from other countries in Europe and the world beyond, but that this was based primarily on the wealth being taken from Latin America, primarily in the form of gold and silver. Because of this Spain's economy moved to one dependent solely on that supply of money (which was not even produced from other capital such as farming or manufacturing). When the supply of money eventually ran out, Spain's economy collapsed because their natural resource in the form of gold and silver dried up.

The question with Dubai is this: is this building (and the other development in Dubai) really adding to the assets and capital of the country or is just conspicuous consumption. The question is who is going to be occupying those offices and apartments. If they are all solely connected to the oil wealth, than this will be an empty shell in about 50 years. If, on the other hand, Dubai hopes to become a Honk Kong or Singapore (which it can undoubtedly do with the leverage it has now) then we may see a wealthy Arab country looking toward its future.

The problem now with most if not all of these wealthy Arab countries is that they use their money to buy consumer goods and luxury housing for themselves. They do not actually produce anything but oil. This has made the owners of the oil and those closely connected to the owners wealthy, but it has resulted in a country where cheap labor has to be imported from other countries and where there are very few modern jobs in other sectors of the economy.

I realize I don't have any facts to back this up, but when is the last time you saw or heard of anything for sale manufactured in Saudi Arabia? Why are there no major stock exchanges or financial international companies in the Arab World? We all know about Arab sheiks who own luxury real estate in this country and who gamble in Monte Carlo and Vegas, but even what they own eventually will depreciate. Even real estate can become a drain on finances if it is a white elephant not generating any rental income.

I have referred to this type of conspicuous consumption in the oil-rich states as "Elvis Syndrome" because they, like Elvis, suffered from the problem of getting too much wealth too quickly with relatively little effort. Those who don't work hard enough for their money tend to spend it on extravagances that border on the tasteless and gaudy. Gold-plated everything, diamond studded dog collars, etc. Things that scream, look at me, I'm rich! The problem is that most of these items are almost worthless as soon as they are created because they could never be resold at for the same value at which they were purchased.

The question is whether building the world's tallest building is just the cherry on top of a serious investment in Dubai's future or a multi-stories Graceland without the musical heritage.