What Dubai Can Learn from Vegas
Friday, December 4, 2009
Sin City and the Sheikhs’ playground on the creek have many similarities, but the differences are worth considering and may indicate how each may weather the global economic peril.
I was in Las Vegas for Thanksgiving week when I heard the news that Dubai World, the investment company owned by the emirate of Dubai, had asked its creditors for a freeze on its debt repayments. I found myself pondering casinos, banks, and casino banks. Sin City and the Sheikhs’ playground on the creek have many similarities, but the differences are worth considering and may indicate how each may weather and shape the continuing global economic peril. Las Vegas, despite its vulnerability to the recession, is well placed to adapt and recover from the crisis, due its open economy and market processes. Dubai, in whatever state it emerges from the debt crisis, will likely continue having problems while its political power is centralized in the ruling elite and shielded from media and market scrutiny.
Walking on the Vegas Strip, I was struck by the smell of sewage wafting between two of the fabulously opulent hotels, and I wondered whether this might be taken figuratively as a kind of miasma for a city going the way of Ozymandias. For 20-plus years, Vegas had seen incredible expansion. Had its winning run come to an end as abruptly as that of a cocksure Craps player who has rolled the dice once too often? Anecdotally, this seemed far from the case. The casinos and hotels I visited were packed and hummed with gamblers’ energy. Yet Las Vegas’ revenues have been inevitably hurt by the national decline in disposable wealth. Its conference business has been decimated by corporate reluctance to be seen partying in an age of taxpayer bailouts. It has been one the worst centers of the real estate foolishness with the highest foreclosure rate in the country. Experts fear that Las Vegas may be a bellwether for the feared corporate real estate crash that could trigger a “double dip” recession.
When the Burj opens its doors next year as the world’s tallest skyscraper, visitors will look down not on the promised wonderland but at a landscape of what could have been.
It’s not hard to spot the large aborted projects in Sin City. Fontainebleau, a $3 billion hotel and casino, sits unfinished, its shining “coming soon!” sign misleading and depressing. Boyd Gaming’s $4.8 billion Echelon is suspended. Several gleaming condo towers are currently housing only squatters. Almost 40 major projects lack firm completion dates. “Too Big to Fail” is a tag unlikely to be bestowed on a casino project by the Washington politicians who have bailed out Detroit and Wall Street, but that is exactly how parent MGM Mirage views its latest mega project, CityCenter, set to open before the new year. How CityCenter fares, with its 6,000 rooms, casino, and shopping centers will be key to Las Vegas’ immediate fortunes. Intriguingly, the construction, involving more than 8,000 workers, was jointly financed by Dubai World.
The construction boom that Dubai embraced and was engulfed by in the last decade has been phenomenal to behold. The first time I drove down the Sheikh Zayed Highway from Abu Dhabi to Dubai in 2000, the tallest building on the road was the Dubai Hard Rock Café. Resembling a miniature version of one of Stalin’s Seven Sisters, the addition of a giant pair of crossed Fender Stratocaster guitars out in front gave it an eclectic look. Within a few years it had been dwarfed by dozens of scaffolding-clad skyscrapers and the cranes that serviced them. This was even before you reached Dubai’s center, where the majority of construction surrounded the creek and the Gulf coast with its Palm Islands, seemingly conjured from the blue sea. All over the landscape tens of thousands of migrant workers toiled on building sites operating 24 hours a day, often without helmets, harnesses, or any of the health and safety precautions that moderate the progress of construction in the West. Now the boom has bust. When the Burj opens its doors next year as the world’s tallest skyscraper, visitors will look down not on the promised wonderland but at a landscape of what could have been.
How did this happen? Dubai’s infrastructure never seemed able to keep pace with its ambition. Traffic gridlock was endemic on its inadequate roads. Yet financing for its myriad follies flowed freely mainly from British banks such as Barclays, Standard Chartered, HSBC, and the Royal Bank of Scotland, who sought to capitalize upon the United Kingdom’s historical ties to its former Trucial States. Now many of those banks, the same banks which have already been partially nationalized due to the 2008 financial crisis, will suffer enormous liabilities. Amid the opacity and desire to save face (typical of the Arab world) what happens next is uncertain. Two things, however, seem clear: Britain’s already precarious fiscal position will bear another buffeting, and Abu Dhabi, Dubai’s relative and rival, its larger, quieter, and oil-rich neighbor, will expand its regional power and importance as it calls the shots on bailing out its ailing dependent.
In the global and interdependent marketplace, the stock market shock triggered by Dubai World has affected the U.S. economy, and of course, Las Vegas is feeling the heat. While City Center is still due to open for Christmas, gaming investors are spooked. Last Friday, shares in Wynn Gaming, Las Vegas Sands, Boyd Gaming, and MGM all declined between 3.5 and 4.5 percent.
It is telling that the state-owned Dubai World was able to invest in a casino project in Las Vegas, but Islam’s prohibition on gambling means it is illegal to place a bet on Dubai sand.
In Las Vegas, however, the biggest gamblers of all seem bullish. Steve Wynn, the man whose luxury edifices such as the Bellagio and the eponymous Wynn with its sister the Encore have helped turn Las Vegas into a high-end resort, has been quoted as saying that he expects the United States to have positive GDP growth by April 2011. Sheldon Adelson, the chairman of Las Vegas Sands Corp., who was briefly the world’s third-wealthiest man before losing in the financial crisis, at his own estimate, $36.5 billion, has said he believes that Americans will not fundamentally shift their tastes from extravagance to prudence and that Vegas’s long-term future as a destination of choice is assured. Wandering toward the Four Corners section of Las Vegas Boulevard last week, I noticed a billboard-sized electronic screen that should have been broadcasting a teaser for the latest Cirque Du Soleil show but was instead displaying a Windows error message. In a city which has prospered by continually rebooting itself, the feeling seems to be that its current problems, like those of the sign, are merely temporary.
Dubai may well end up as effectively a suburb of Abu Dhabi if the expected power shift due to its indebtedness comes about. The two emirates have often in the past displayed the competitiveness of Vegas hotel developers, with all the accompanying one-upmanship and fixation with size, novelty, and records. Much of it is beyond satire. Abu Dhabi’s response to Dubai’s display of the world’s largest flag was to construct the world’s largest flagpole, complete with a three-man elevator inside it. Abu Dhabi pioneered sand dune skiing, whereas Dubai simply built an enormous indoor center for snow skiing. When Dubai built the Burj Al Arab, its iconic sail-shaped hotel, Abu Dhabi responded by commissioning the Emirates Palace, a vast and fabulous white elephant on the edge of its city.
The resurgent oil price, together with the untold vast resources of the Al Nahyan royal family should mean that Abu Dhabi has plenty of liquid assets to spare in its rescue and annexation mission of Dubai. And yet, in spite of this, regardless of the shape of whatever emerges, I cannot help but think that Abu Dhabi will have similar problems as Dubai in the long term. Even at its fittest Dubai was sickly. The massive abuses of poor migrant construction workers from the developing world, committed by Dubai in pursuit of its fantastical growth, are beyond the scope of this article and in any case are well documented. Those abuses are shared by Abu Dhabi. Similarly shared are the disdain for property rights shown by the governing tribe, and the disenfranchisement of the population.
Dubai and, to some extent, Abu Dhabi have sought a third way between the openness of the liberal West and the absolute draconian restrictiveness of Saudi Arabia that dominates the peninsula they sit on. The result is uneasy. Tourists are sought to fill the hotels, shopping, and leisure complexes, but publically displaying Western vices, for example public drunkenness or indecency, can land them instantly in jail without anything approaching habeas corpus to protect them.
Dubai has its problems with native extremists. In the aftermath of 9/11, two of whose principal perpetrators were Emiratis, one nutcase fired gunshots at the aforementioned Hard Rock Café, presumably seeing it as emblematic of the Great Satan. It is telling that the state-owned Dubai World was able to invest in a casino project in Las Vegas, but Islam’s prohibition on gambling means it is illegal to place a bet on Dubai sand.
The debt crisis all over the Western newspapers is currently subject to a media blackout in Dubai itself.
The efforts to avoid the impression of violating usury prohibitions in Sharia banking laws helped keep the Emirates’ financial affairs inscrutable to the analysts who might have been able to provide wise counsel and stave off the current predicament. Dubai did not have the all-encompassing five-year plans that have characterized Saudi Arabia’s infrastructure development, but neither did it have anything approaching the decision-making processes of the market. Much of the national strategy emanated from just one man, the ruling Sheikh Mohammed bin Rashid al-Maktoum, who published a book, My Vision, extolling his ideas as a model for the region and beyond. Dubai never pretended to expand political participation beyond a small group around the ruler. The debt crisis all over the Western newspapers is currently subject to a media blackout in Dubai itself.
The legendary slogan may say that “what happens in Vegas stays in Vegas,” but in reality it is a town that displays its ups and downs unashamedly. They are quantified and marked on the bourses, and when casinos take losses they are primarily borne by the shareholders and not by the people as a whole. Some sensitive types find the Vegas casinos, with their myriad souls glued to the slot machines and the tables, a little dispiriting. Like W.H. Auden, they see “only the hands living; to the wheel attracted.” Nevertheless, even the most skeptical must admit that the transactions are undertaken by consenting adults under the protection of U.S. and state law. The city has largely shaken off its gangster past.
Hoarding political power and privilege is a form of mob violence and while this status quo prevails, Dubai’s travails are likely to continue while Vegas may reincarnate itself to meet the challenge of the hour. Many Vegas casino magnates, led by Sheldon Adelson, are currently developing Macau as the Vegas of the East, bringing Sin City to the People’s Republic of China. Dubai’s predicament is similar to China’s in that its ruling elite seek economic development while denying political freedoms to the vast majority of its people. Achieving political freedoms for these peoples remains one of the great challenges of our century and doing so will help ameliorate the current financial shocks through which we are living.
David Archer is a freelance writer and business risk analyst.