Dubai and the anxiety of old elites by mattsteinglass
November 29, 2009, 8:56 pm
Filed under: Economics

Zachary Karabell has a good take in the Wall Street Journal:

The old centers—New York, London, Frankfurt, Tokyo—fear risk in parts of the world they deem emerging and underplay the risks in the offices next to them. They view the Dubais, the Shanghais and the Rios with suspicion and with errant conviction that their models are built on foundations of sand, ready to collapse, when it was their own foundations that have proved to be weak. Judging from the misguided reaction to Dubai’s challenges, the past year hasn’t changed those attitudes. That should make us worried, very worried, but not about Dubai.

It does seem like the back-and-forth sloshes of money towards and away from emerging economies reflect a lingering discomfort and unfamiliarity on the part of old elites in long-developed nations as to whether these countries are “for real”, a cycle of infatuation and panicked disappointment. Developing nations are strongly advised to consider capital controls to keep that hot money from moving too fast in either direction.


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I don’t know but couldn’t the money sloshing in and out of developing markets have as much to do with new rich folks testing the system, or the meager retirement savings of a heroically striving proletariat collectively seeking stability in a quickly changing world? Or couldn’t reflect the regime risk of inexperienced bankers reading blogs for advice?

Comment by citifieddoug

I don’t there’s a banker in the world crazy enough to have been influenced by anything I’ve ever written, and I don’t even trust myself enough to make investment decisions based on what I know, which comes from a mix of reading blogs and getting Vietnamese stock tips from my wife’s masseuse.

That said: the way people behaved when FDI poured into Vietnam in 2006-7 was obviously crazy, even at the time. And the way they behaved when they got antsy because of inflation and rumors about currency reserves in early 2008 was equally crazy. And the craziest thing of all was that so many of these investors continued to insist ideologically that it would best for the Vietnamese government to relax its capital controls so that the currency could find its “real” level based on the wisdom of the market! Thank god the government had better sense than to listen to them: there would have been a currency collapse in late spring 2008 and everyone would have lost their shirts. As it stood the hot-money investors lost their jackets and ties anyway when the market bubble popped, but at least it didn’t take down the currency and the real economy with it.

So that’s where I get this sense that there’s an infatuation-revulsion cycle going on with Western investors and their emerging-economy flavor of the month, and that investors should get a little more restrained and serious and wait to get comfortable with a country before they pour money into it.

Comment by Matt Steinglass

I’m sure that’s right, although I’m not sure capital controls are necessarily the solution and I’m not sure the “old elite,” whoever they are, are the problem. I’m more inclined to think that too much investment capital is the problem, in which case a giant credit crunch might be a solution. The cycle of infatuation and revulsion might be a symptom of an overcapitalized world economy.

Feel free to pass along your wife’s masseuse’s stock tips.

Comment by citifieddoug

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