In my previous roles as program manager for sustainability at ABN AMRO Bank I often had skeptical managers trying to argue that sustainability was a fad and contrary to sound economical behavior. I have since moved on but sustainability has trancended from a activist “use both sides of the toiletpaper” oddity to a permanent item on the board agenda.
Last Friday there was an interesting article on mises.org, the website of the Ludwig von Mises institute. For those of you unfamiliar with Ludwig von Mises; he was one of the forerunners of the Austrian school of economic thought. The main premise of the Austrian school is that human behavior is too complex to develop mathematical models of evolving markets. It is often seen as an extreme libertarian stream because Austrian economists largely reject government interventions but believe that the power of pricing organizes the market.
Although I am a long time follower of the Austrian economic school of thought, I refuse to let myself be swept away by “Austrianism”. Like socialism, it is a very tempting idea that works best if everyone follows the rules. Unlike socialism, Austrian economics stops working whenever politics come into play. Off course in practice politicians seldom stay out when money and electoral power are at stake.
Tyler A. Watts, a PhD candidate in economics at George Mason University takes a shot at what he calls “the sustainability movement”. Like any proponent of an idea he doesn’t fully understand but is against anyway, he starts out with labeling sustainability as an “-ism”. The same technique is used by religious zealots when they talk about the ideas of Darwin. It makes the attack easier because you can dismiss any rational argument with the counter-argument “it’s a belief, not a fact”. It also makes any attack more personal because you can group the “believers” into a homogenous category which makes for a larger target. Watch out! The sustainists are out to control us!
As Watts tries to make his readers believe, sustainability is all about control of the market. “(Sustainists) are damning in their fervor, poise, and rhetoric. Their ideology is pregnant with an accusation that the way things currently are is somehow unsustainable.”
The rant gets even more polarizing when Watts argues that: “The sustainability movement is an assault on economics. It claims at its core that prices don't operate through time to direct consumption and production decisions in a sustainable way. A lesson in basic economics should suffice to defend against the sustainists' attack.”
Apparently Wattsists know exactly what sustainability is all about and companies that operate in a sustainable way are a threat to the free market. Unfortunately for the not-ye- existing Wattsist movement, practice has shown that sustainable behavior in the market has nothing to do with intervention but everything with supply and demand.
One of the arguments that Watts brings to the table is that “prices arise in the market economy as a concomitant of mutually beneficial exchange. People want things that improve their lives — we call this value. (…)The price of any good reflects this combination of value and scarcity.”
Apart from the fact that diamonds are expensive not because of scarcity but because their price is tightly controlled, what is ignored or forgotten here is that “value” is not only determined by price and scarcity but by (perceived) quality as well. Apple products are more expensive, not because they are scarcer than comparable products but because they have a (perceived) higher quality.
High quality commodities can become so expensive that few can afford them. According to Watts, water is abundant and therefore sustainists (which my MS Word spellchecker suspiciously wants to change to “Satanists”) needlessly worry about depletion. If water becomes scarcer, prices will go up, consumers will use less and entrepreneurial scientists will invent substitutes. The market will control itself. What Watts is basically advising is to use resources as much as possible until they become too expensive and then find a substitute.
What will happen if we were to follow the Wattsist behavior? Empirical evidence can be found in countries like Ethiopia and Sudan. Clean water is scarce there and people are poor. The ratio of water price vs. average income is extremely high. The result is that people drink whatever is available. One out of three children dies of diarrhea.
Watts’ solution to the price dilemma is simple: “if the price of a good trends strongly upwards over time (indicating it has become scarcer and/or more valuable), they rush to find cheaper substitutes”. I wonder what substitute for clean water is being researched in the labs of George Mason University.
Watts argues that “prices reliably guide individuals, both consumers and producers, toward a rational use of resources.” Theoretically this is true. In practice however, humans tend to have an economical horizon, both in fore- and in hindsight. Managers rarely think more than 5 years ahead. An earned profit now is often better than a possible profit in the future. This is especially true if you expect to be promoted away from your responsibility anyway. Unsustainable use of resources may sound very attractive. It keeps prices down and margins and profits are higher. Who cares about the time when resources become expensive? Let my successor worry about that!
Free markets are a crucial part of a world where prosperity is divided in a fair and equal way. This doesn’t mean that one should blindly follow every idea that comes out of the Austrian camp. The most attractive and in my humble opinion most valid argument for Austrian economics, is Mises’ premise that every conscious action is intended to improve a person's satisfaction.
True sustainability isn’t about “going green” or intervention in healthy market behavior. It’s about long term true value that is not only determined by price and income but by our satisfaction with the way we live. Even from Watts’ own somewhat cynical point of view, sustainability makes sense. It has created a huge, multi billion dollar industry and isn’t that what free market is all about?
Monday, December 7, 2009
Monday, November 30, 2009
Dubai goes pop
It’s been an incredibly long time since I wrote anything, which I blame squarely on my workload instead of my laziness off course. However the events of last week in Dubai have renewed my interest in writing at least a little bit even if it’s just so I understand it myself clearly.
Dubai’s state owned investment company, Dubai World had to postpone repayment of part of its crushing $59 billion debt, including $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. The Dubai World announcement came less than two hours after Abu Dhabi, the capital and wealthiest emirate in the U.A.E., bought $5 billion of Dubai bonds as part of a $20 billion support fund to help reorganize state companies.
Investors, journalist and the whole financial industry held its collective breath and braced for impact. Off course Dubai’s oil rich sister state Abu Dhabi and the rest of the UAE will not allow Dubai to fail. It’s just a matter of how many pounds of flesh the ruling house has to shed to make sure that their dream of a thousand and one nights will stay alive.
However, will this work in the long term? Whenever I’m in Dubai I’m always amazed by the scale of the real estate projects. There seem to be more shopping malls than people and at one time the largest part of the world supply of construction cranes could be found in Dubai.
The problem with shopping malls though is that you need shops and that means shoppers. The thing is that there doesn’t seem to be a lot of incentives for locals or tourists to shop in the cavernous Mall of the Emirates or the gigantic Dubai Mall. The local population is so rich that they rather fly to Paris or London to do some real shopping which leave the tourists. The price of electronic goods and clothing, two things tourists shop most for, isn’t much lower than in any comparable Western shop. D&B, Gucci and friends can be bought for less in Amsterdam. Sony, Samsung et all can be had for less in the malls of Hong Kong or even Singapore.
So if it isn't the shopping, what will attract tourists? Culture? Unlike Abu Dhabi, which agreed to pay France $1.3 billion to borrow the Louvre's name and hundreds of its artworks, as well as treasures from the Picasso Museum, Pompidou Center, Chateau de Versailles and other French museums, Dubai borrowed even more money to build Dubailand amusement park. Apart from the small but interesting local museum, there’s not much else to do. Dubai is notorious when it comes to nightlife but I doubt that the authorities really want that kind of image for their Islamic state.
A lot of people think that Dubai is oil rich, just because it lies in the Middle East. This is not so. Abu Dhabi has enough oil to guarantee revenue in years to come but Dubai saw the need to diversify years ago and borrowed heavily against its real estate assets. Doesn’t it sound familiar? Someone who borrows money against his house to afford a lavish lifestyle? It’s the mortgage crisis on a country wide scale!
Let’s have a look at Dubai’s current financial position. It has always been a well kept secret but the debt crisis forced the Dubai Executive Council to give a little insight:
Sovereign debt: $10.000.000.000
State-affiliated debt: $70.000.000.000
Sovereign assets: $90.000.000.000
State-affiliated companies assets: $260.000.000.000
This means that the total debt of 80 billion is covered by 1.3 trillion in assets. How many of these assets need to be written down to more realistic values if the Dubai real estate market continues like it is? Most of Dubai’s prestigious projects were conceived on the basis of making a quick buck. When stripped from all their glamorous hype, the Palm and World islands are just sandbanks with buildings on them. Sure it’s nice to have Brangelina as your neighbors but who would want to live on a sandbank?
Now that foreigners are fleeing the country to avoid debtors prison (yes there is such a thing in Dubai), the glitterati must really consider if they want to be associated with this less than glamorous reality. No celebs means no wannabes that are willing to pay the big bucks and that means re-evaluating real estate (yet again).
Again, this should sound eerily familiar. If Dubai can’t refinance, it will have to sell and if the assets values are going down, friendly uncle Abu won’t be around forever for the bail out.
That leaves the regular options that any sovereign state has at its disposal. Argentina and Russia, two states that hovered at the same brink of financial destruction restructured and raised their taxes. Both countries have a sizable domestic workforce and enough GDP based on tangible production. The issue with Dubai is that it has neither. The local workforce is largely comprised of imported construction workers, domestic personnel and white collar expats. Tax is negligible and for the domestic population, most public amenities are free. The real estate boom ground to a halt even before the Dubai debacle hit. Dubai’s best bet for the future would be modest spending habits combined with leverage of its central position between the East, the West and Africa. Expanding Dubai’s role as importer/exporter with excellent port and airport facilities could start the revenue engine again. Financial and political transparency is crucial if the image of the desert state as an overspending family owned business is to be changed. Time to sell the Ferrari and pawn the bling bling. If not, Dubai World will be only the beginning of the bursting bubble.
Dubai’s state owned investment company, Dubai World had to postpone repayment of part of its crushing $59 billion debt, including $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. The Dubai World announcement came less than two hours after Abu Dhabi, the capital and wealthiest emirate in the U.A.E., bought $5 billion of Dubai bonds as part of a $20 billion support fund to help reorganize state companies.
Investors, journalist and the whole financial industry held its collective breath and braced for impact. Off course Dubai’s oil rich sister state Abu Dhabi and the rest of the UAE will not allow Dubai to fail. It’s just a matter of how many pounds of flesh the ruling house has to shed to make sure that their dream of a thousand and one nights will stay alive.
However, will this work in the long term? Whenever I’m in Dubai I’m always amazed by the scale of the real estate projects. There seem to be more shopping malls than people and at one time the largest part of the world supply of construction cranes could be found in Dubai.
The problem with shopping malls though is that you need shops and that means shoppers. The thing is that there doesn’t seem to be a lot of incentives for locals or tourists to shop in the cavernous Mall of the Emirates or the gigantic Dubai Mall. The local population is so rich that they rather fly to Paris or London to do some real shopping which leave the tourists. The price of electronic goods and clothing, two things tourists shop most for, isn’t much lower than in any comparable Western shop. D&B, Gucci and friends can be bought for less in Amsterdam. Sony, Samsung et all can be had for less in the malls of Hong Kong or even Singapore.
So if it isn't the shopping, what will attract tourists? Culture? Unlike Abu Dhabi, which agreed to pay France $1.3 billion to borrow the Louvre's name and hundreds of its artworks, as well as treasures from the Picasso Museum, Pompidou Center, Chateau de Versailles and other French museums, Dubai borrowed even more money to build Dubailand amusement park. Apart from the small but interesting local museum, there’s not much else to do. Dubai is notorious when it comes to nightlife but I doubt that the authorities really want that kind of image for their Islamic state.
A lot of people think that Dubai is oil rich, just because it lies in the Middle East. This is not so. Abu Dhabi has enough oil to guarantee revenue in years to come but Dubai saw the need to diversify years ago and borrowed heavily against its real estate assets. Doesn’t it sound familiar? Someone who borrows money against his house to afford a lavish lifestyle? It’s the mortgage crisis on a country wide scale!
Let’s have a look at Dubai’s current financial position. It has always been a well kept secret but the debt crisis forced the Dubai Executive Council to give a little insight:
Sovereign debt: $10.000.000.000
State-affiliated debt: $70.000.000.000
Sovereign assets: $90.000.000.000
State-affiliated companies assets: $260.000.000.000
This means that the total debt of 80 billion is covered by 1.3 trillion in assets. How many of these assets need to be written down to more realistic values if the Dubai real estate market continues like it is? Most of Dubai’s prestigious projects were conceived on the basis of making a quick buck. When stripped from all their glamorous hype, the Palm and World islands are just sandbanks with buildings on them. Sure it’s nice to have Brangelina as your neighbors but who would want to live on a sandbank?
Now that foreigners are fleeing the country to avoid debtors prison (yes there is such a thing in Dubai), the glitterati must really consider if they want to be associated with this less than glamorous reality. No celebs means no wannabes that are willing to pay the big bucks and that means re-evaluating real estate (yet again).
Again, this should sound eerily familiar. If Dubai can’t refinance, it will have to sell and if the assets values are going down, friendly uncle Abu won’t be around forever for the bail out.
That leaves the regular options that any sovereign state has at its disposal. Argentina and Russia, two states that hovered at the same brink of financial destruction restructured and raised their taxes. Both countries have a sizable domestic workforce and enough GDP based on tangible production. The issue with Dubai is that it has neither. The local workforce is largely comprised of imported construction workers, domestic personnel and white collar expats. Tax is negligible and for the domestic population, most public amenities are free. The real estate boom ground to a halt even before the Dubai debacle hit. Dubai’s best bet for the future would be modest spending habits combined with leverage of its central position between the East, the West and Africa. Expanding Dubai’s role as importer/exporter with excellent port and airport facilities could start the revenue engine again. Financial and political transparency is crucial if the image of the desert state as an overspending family owned business is to be changed. Time to sell the Ferrari and pawn the bling bling. If not, Dubai World will be only the beginning of the bursting bubble.
Subscribe to:
Posts (Atom)