Friday, 22 August 2008

Optimism in Dubai and Johannesburg

I am in Johannesburg, South Africa, by way of Dubai. It is hard not be optimistic about the future of humanity having visited these vibrant, modern cities. They have their problems, but each in its own way stands testimony to the ability of humans as a species to adapt, collaborate and generate prosperity under good leadership despite – and perhaps because of – challenging circumstances.

First, Dubai. I never cease to be amazed by this city. Having very little oil, Sheikh Mohammed and his predecessors chose to use Dubai’s historic advantage as a trading port as the basis of growth and development. Having achieved world class status as a port, tourism hub, commodities trading hub, trans-shipment hub, technology/communications hub, and finance hub, the latest ambitions are to drive development as a centre of excellence for higher education and medical treatment – and then a space programme.

I would never, never bet against Sheikh Mohammed. I’m not sure he isn’t more successful at investing than Warren Buffett, were a dollar for dollar comparison of returns possible. Unlike Warren Buffett, the Sheikh does not invest in equity of companies with proven management, but creates whole companies and industries from scratch by driving high achievement throughout the Emirati community which he educates and appoints to managerial positions, and through attracting the best business talent globally. Dubai’s scale, sophistication and prosperity are proof he understands both leverage and results-driven management.

Is Dubai a bubble economy? Of course it is, but even when the bubble bursts the accomplishments and dynamic commercial skills concentrated in Dubai will persist and form a solid foundation for enabling future growth. My guess is that as the US and UK financial-based economies implode from debt-deflation, and their military influence in the Gulf recedes, Dubai will strengthen its network of trade and finance deeper into former Eastern Europe, Asia and Africa. Dubai will facilitate the investment capital flows that allow all of these diverse geographies to develop according to their internal political, economic and resource constraints.

A word about cronyism and the difference between the USA and Dubai. In the US the well connected can fail upward, with friends covering for them and promoting them and financing them to new ventures. George W. Bush’s whole miserable business career and cronyist administration of failed Nixonites is proof of that. In Dubai, you don’t fail because it would shame your family. I have seen young Emerati with no background in the businesses they were appointed to mature rapidly into good managers because the massive pressure of family and social connections demands that they not screw up when given an opportunity to perform.

The reward for good work is more good work, and Sheikh Mohammed only promotes those who have proven adept at managing the opportunities formerly provided to them. Being a small country that loves to gossip, he stays very well informed. Those who choose to be corrupt, lazy, selfish and self-aggrandising are given enough commercial rope to hang themselves, and then obligingly hung (metaphorically) as an example to others. Those who are diligent, professional, ambitious and productive are promoted, also as an example to others. Families gain status by producing good executives, reinforcing a family interest in educating and motivating their young. Those who fail can go into business for themselves, as there is no shortage of opportunity, and that saves the emirate underwriting their risks while it gains from new enterprise. I suspect the recent investigations of corruption at real estate and finance companies are based on good evidence, but the subtext of the very public inquiry is a warning to every manager in Dubai to remember that they owe their success and their loyalty to the leadership, family and community that put them in their current positions.

I once heard of Franklin Delano Roosevelt that in his administration, he owned the successes and the appointees owned the failures. That seems to me to be a reasonable way to motivate innovation and infrastructure development. It doesn’t fit with the bonus-centric incentive programmes so beloved of modern boardrooms and management consultancies, but as a means of engineering social prosperity through government programmes, it might have merits. FDR would not have renewed massive no-bid contracts with Halliburton’s KBR and others once they failed to deliver essential goods and services to wartime troops in a combat zone. FDR would not have appointed the delusional and incompetent Defense Undersecretary Paul Wolfowitz as president of the World Bank. Times have changed.

Perhaps Halliburton in Dubai will corrupt Dubai, or perhaps Dubai will reform Halliburton. Since Halliburton is moving its global headquarters to Dubai to evade US taxes, investigations and subpoenas, we will have the chance to find out.

Now to Johannesburg, where I stay in as comfortable a hotel as anywhere I’ve been. I drink the tap water – that says a lot in Africa. The food is excellent, with springbok shank and kudu steak new favourites.

I have been here every two years since 2004. Each time I am impressed with the rapid progress. There are problems, sure, but there are problems everywhere. The electricity grid failures in the early part of this year were a wake up call that the government needs to focus on the basics of infrastructure if it is to continue to provide growth and jobs to the vast population. Unemployment remains stubbornly high, at almost 40 percent. The refugees who have fled to South Africa from neighbouring Zimbabwe, add to the pressures (and explain why stabilising Zimbabwe is more important to the Mbeki government than confronting the egregious Mugabe).

When I first visited in 2004 there were still vast shantytowns around the capital. When I next visited in 2006 these had been largely replaced with neat little tract houses, each with plumbing and electricity. Now the housing boom is slowing, credit is tightening, but millions have homes they did not have before. That is a major achievement. Unlike America where huge houses are the norm, here the norm is much more modest and sustainable.

On learning I was in banking, my driver from the airport handed me an e-mail he had received quoting John Mauldin’s recent praise of South Africa:

Johannesburg is a world-class city, on a par with New York or London or any major city in terms of facilities, shops, infrastructure... and traffic. There were new shopping malls all over, and the stores were busy. The restaurants were excellent. The hotels I stayed in and spoke at were excellent and modern. The Sandton area is particularly pleasant.

Durban is a tropical jewel on the Indian Ocean. Again, there was construction everywhere - a green, verdant city of 1,000,000 people, with modern roads and great weather.

I have been to Sydney, Vancouver, and San Francisco. I love all of them. But for my money, Cape Town is the most beautiful city I have been to in the world. Amazing mountains, blue water harbours, white sand beaches, with wineries nestled in among the mountains and valleys. The Waterfront area, where I stayed, is fun and vibrant. Again, an amazing amount of construction everywhere, especially in the waterfront area, as investors from Dubai are pouring huge sums of money into creating a massive residential/business/ retail/restaurant development. There are several similar, quite large developments going up in different parts of Cape Town.

. . .

The simple fact is that as the world grows more prosperous we are going to need more grain and other foods. Where is the land we are going to need to feed the world? There is an abundance in Africa, along with the needed water and labour. And as African countries upgrade their infrastructure, it will improve the ability of farmers to get their grains to market at profitable levels.

There is much to like about emerging markets. That is where a great deal of the real potential growth in the coming decades will be. And South Africa will be one of the better stories. If you are not doing business there already, you should ask yourself, why not?

Mauldin offers specific praise for development of South Africa’s housing, retail, banking, commodities and farming sectors. I have never read a piece by him so optimistic about anywhere else, particularly in the developing world.

I thanked my driver for the Mauldin article, but suggested that the problems in the banking sector would cause problems for South Africa too. My driver then proceeded to detail his own preparations for a downturn in the economy: selling his old passenger van to pay off the newer one; paying off all his credit cards and keeping the balance at zero each month; delaying his purchase of a new house for at least a year while he sees what happens in property. This lone tour driver was more prepared for a shift in the economy than most of the bankers in the City of London. And if he reads John Mauldin, he is better informed too.

The group of bankers which showed up the next day for my workshop was another pleasant surprise. In 2004 the group was widely mixed as to backgrounds, race and abilities. In 2006 it was whiter and more professional, but also less friendly. In 2008 the group is blacker, more professional still, more experienced, more knowledgeable and universally friendly too. They are delightful to teach as they know enough to take in information readily and apply it to their careers and specialties. They collaborate readily, with clear trust and confidence in each other. Everyone is respectful and considerate.

I asked some neutrally each break about the challenges in South Africa, and they were uniformly optimistic. This is a big contrast to 2006, when the group complained about racial quotas, reforms and problems much more. One expressed concern about the potential damage of a corrupt government when Zuma takes over from Mbeki, and the others all nodded, but then he confirmed that the direction of change for the present remained for the better, and that it would take time to reform the ANC.

I have always believed that democracy can only really exist in those states with a large middle class. I do not subscribe to the view that democracy should be universal, as poor or rich are too self-interested to allow uncorrupted democratic government unless constrained by a middle class from abuses. As South Africa continues to grow at 4-5 percent each year (probably an under-estimate of real growth), the middle class continues to grow and prosper. So although a Zuma administration may hold risks, I hope there will be constraints on their policies as the already substantial and growing middle class enforces longer term discipline on the government.

I could not live in Dubai, but for the first time, I find myself looking around me and thinking I could live in South Africa. That says more about the optimism I feel here than any statistics.


Knute Rife said...

Crises, like politics, are local. Unfortunately, we (read "I") are not all as smart and talented as you, LB. We're stuck in a decaying sack of haggis. Guess I should just head back to the farm.

Detlef Guertler said...

You couldn't live in Dubai. You're not alone with that. A lot of people in Marbella, where I live, have thought about moving to Dubai - following the bubble. Almost no-one did it. Going on holiday there, okay, living there, no way. Climate, culture, religion, education, you name it, nothing fits. And I can't imagine how even the best businessman can change the habits of so many people that all these apartments, these villas, these office in Dubai will be populated.
My best guess is Dubai with its palm and world islands will stay for centuries as some kind of modern pyramids. Tourists in the 24th century will visit these sights like tourists of today visit the ruins of Petra in Jordania: What a strange culture must have been there, to build such marvelous buildings in the middle of nowhere...

Anonymous said...

LB, your blog is informative and challenges my thinking - bravo.

However, I think you should avoid being too awestruck by the beauty and potential of an investment idea. The power supply problem alone may sink growth prospects for years in South Africa.

Reading your description of the country, I couldn't help but recall my two past trips to India (most recent one in January 2008), where my meetings and experiences there impressed and (I thought) informed me. I'm an American so I bought an Indian closed-end fund traded on the NYSE in early January, fueled by my long-term optimism for the place. Based on the past 7 months' performance, I have concluded I fell victim to several cognitive biases:

Mere exposure effect — the tendency for people to express undue liking for things merely because they are familiar with them.
Recency effect — the tendency to weigh recent events more than earlier events
Focusing effect — prediction bias occurring when people place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.
(source of definitions: Wikipedia)

London Banker said...

@ Knute
I believe you are as smart and talented. I've read your blog, you know.

@ Detlef
I lost one of my team to Dubai in 2005. He loves the continuous challenge to innovate and excel, and the anything-is-possible ethos. He also likes the luxurious, structured, crime-free expat lifestyle relative to the gritty, disorganised, crime-ridden modern Britain.

@ Anonymous
I would not suggest investment in either South Africa or Dubai, nor am I tempted. I expect global debt deflation to bring down all markets - good and bad - and bring dangerous political instability in its wake.

Most of the chatter among the bankers in breaks and lunch was about traffic and infrastructure projects. There is a sense that problems here are being addressed. One current project is a drive-on, drive-off "car train" between major city centres to keep cars off the freeways. That is an interesting idea, and new to me.

We might find places like South Africa, India, China, etc. lead in innovative approaches to infrastructure problems.

I also met an engineer building a power plant here to come online 2015. So yes, it will be some time before the power shortage is fixed, although it has been managed well since the spring. Interestingly, he expects a similar crisis in the UK within a few years.

Peter J. Bolton said...

LB: You are now eating from the table of change and diversity; the essence of life's dynamic nature. I have oft said that ideologies, such as democracy, socialism, communism, fascism etc., etc., cannot be imposed on the human condition as they bring stasis to a dynamic event and as such end violently in death and destruction.
Now you know and you are obviously attracted as to what living life in accord with the Laws of Physics, ie change and diversity can bring to hope and aspiration.

Jesse said...

Very interesting set of observations and I thank you for them. I was very happy to hear of the progress being made in Jo-burg. I have not been there since the 1990's when it was a dangerous place. Of course at that time London for me at least was by far my favorite desitnation for business and vacation, so it sounds as though they might have done a reversal based on your comments.

In your comments you said this:
I would not suggest investment in either South Africa or Dubai, nor am I tempted. I expect global debt deflation to bring down all markets - good and bad - and bring dangerous political instability in its wake.

I would be interested in hearing more about this in future blogs as I am sure other might as well.

One of the more specific but related topics is what will replace BW II, and the oil-dollar regime. More than incidental, since he who prints the gold makes the rules to some extent.

Have a safe journey.

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Danny said...

Outside of the deification of FDR, great post. It's easy to look back on the past, and say that there was no corruption in his regime, but that was hardly the case. The list of total incompetents in his administration only begins with Ickes, an amorphous, 'progressive Republican', a man who couldn't solve a problem without creating some new inefficient bureaucracy to make it worse.

I'm afraid that the idealizing of FDR in light of recent events might lead to a repeat occurrence. Instead of a disastrous multi year downturn in the US, we'll see a long drawn out decade+ of economic malaise as government continues to throw scarce capital down the sinkhole that deflation provides it. The bailouts are coming, the banks first, now F and GM are coming to the begging window. This is a repeat of the 30's, bad businesses that deserve to be sunk are propped up by government, good money thrown after bad, all because FDR and the New Dealers 'meant well', doesn't mean that their contributions didn't contribute to the shockingly drawn out depression of the 30's.

LB, you have it right now on the problem. The problem was the leverage, the credit expansion, not the deflation. That is the painful healing process. Let's let it happen, and hope we don't have another FDR to 'save' us.

I'm Not POTUS said...

Excellent reveal of reality outside the box that traps a lot of peoples myopic lives.

I'm in the camp of others who believe that the immediate future holds no good prospects for anyone.

But I do believe there are many places around the globe that will rise up quickly from the coming "gut punch" of false credit that will strike every nation down.

Dubai may be an eden but it is surrounded by turmoil. The family must focus on isolating itself from the increasing turmoil.

I hope to find more insights like yours about other places that have potential. Prudent folks that follow your work should do the same.

don said...

With all due respect, you do need to educate yourself about Dubai:

Mack said...

LB, your blog is informative and challenges my thinking .My best guess is Dubai with its palm and world islands will stay for centuries as some kind of modern pyramids.Dubai is a good country. and i like it.