There is an article in The Economist about the effort at Dubai in becoming an international financial centre. On one hand, this is a success story of the speed and effectiveness of a dictatorship-doing-the-right-things. But as their next piece on the same subject says:
Yet it takes more than a dream and government largesse to succeed as a financial hub. Dubai and its imitators need to remember that the market is built not just on subsidies that attract foreigners, but markets that attract locals.
Dubai has done a lot right. Despite a tarnished past as a centre for money laundering, it has burnished its image so as to attract big investment banks and other financiers in the past year. Just a few weeks ago Carlyle, a large private-equity firm, announced that it would open shop there. Building on its transport links and a pleasant quality of life, Dubai has created a sparkling new financial centre that offers international-quality regulations enforced by imported regulators, a Western legal code, oodles of subsidies and refreshingly little red tape.
Yet in spite of this and the sea of petrodollars sloshing around the Middle East, Dubai is only halfway towards its ambition (see article). Its new stock exchange is struggling, with thin trading and few listings. The banks that blew in with the tide of global capital are impatiently muttering about embarking for the next port. Something is still missing.
To win a place in the top club of financial centres, Dubai must attract not just providers of capital but users, too. The bankers need companies that want to sell their shares and bonds in the region; fund managers want local companies to invest in; and private-equity partners need a pipeline of enticing ventures and the prospect of listing their companies after a few years. Dubai has sought to profit from the unprecedented mobility of markets, but without local demand for capital, that same mobility will start to count against it.
The trouble is that few local companies are ready for Dubai's capital markets. The Arab world includes plenty of sophisticated large investors but few modern companies. Long ago, the region's failure to develop joint-stock companies was one reason why it fell behind the West. Even today, financial transparency is weak and accounting is erratic. Most enterprises are family owned and, since they operate in protected markets, have no great need to raise capital, especially if it means exposing themselves to greater scrutiny.
This is not unique to the Gulf: the developing world is full of companies that are shielded from competitive marketsll that oil wealth, which means there is plenty of traditional bank credit for all sorts of Middle Eastern businesses. To make matters worse, local stockmarkets are still shaky after a crash earlier this year.
My reading, based on conversations with many people who have looked closely at DIFC, is that DIFC is creeping up into the ranks of a credible venue for placing certain mid-range financial functions. For the low-end BPO, India wins. For the high-end knowledge work, it's still London. There is a certain middle where Dubai is attractive. But as yet, it isn't a `financial ecosystem', where people meet and talk and do transactions on each other, where secondary market liquidity pulls in economic agents. A `big push' by a State, that tries to create an exchange or three by fiat, does not generate this liquidity. E.g. as of yet DGCX is doing perhaps 2,500 contracts per day... the case has yet to be made for trading at an exchange in Dubai when capital controls do not force business away from the great exchanges of the world. Perhaps you cannot will an international financial centre in a desert.
I like to apply a `bookshop test' in judging an international financial centre. I judge the quality of a financial centre by wandering the bookshops, which gives me a hint of the kinds of books the local financial elite is buying. Here London and New York clearly stand alone: their elite buys books on implementing finite difference schemes for Heath/Jarrow/Morton. Singapore is very, very impressive, with plenty of effort on learning stochastic calculus. Bombay is mediocre - with a big focus on get-rich-quick trader books. I haven't seen a bookshop inhabited by finance folk in Dubai - what is it like?