My visit to the UAE

The visa was refused on the ground that my passport was damaged. Welcome to the Indian bureaucracy! I still made it eventually to Mumbai after having had to get a new passport from the Swiss embassy in Bangkok and then went on to Delhi, Singapore, Shanghai, and Dubai.

My visit to the United Arab Emirates held some surprises. As in the case of Shanghai, both Abu Dhabi and Dubai have developed rapidly in the last few years and have now become far more cosmopolitan than in the past. In particular, Dubai has emerged as an important trading centre, being the gateway to a large number of Middle Eastern, Central Asian, and North African nations, as well as an enjoyable entertainment and tourist center for well-to-do people from around the region.

Whereas Shanghai is impressive because of its size and rising economic power, Abu Dhabi and Dubai impress the visitor because of the money the ruling families have spent over the last few years on building extravagant gardens and parks, as well as monumental hotels. In fact, Dubai is worth visiting just to see the Burj Al Arab Hotel, the world's only seven-star hotel, whose stunning architectural structure rises to more than 40 storeys from a man-made island in the Persian Gulf.

Admittedly, one could argue that the Middle Eastern economies are 'artificial', since they depend largely on the price of just one commodity - oil. But what is the difference between the Middle Eastern economic system, which depends on the price of oil, and the Western industrialized nations, which over the last few years have increasingly become dependent on the price of their stock markets for economic growth? And on what would you rather bet your future? Oil, whose price is now rather depressed (at least in real terms), or Western stock markets, which by any valuation standard still appear to be expensive?

The purpose of this brief description of my recent trip is not, however, to draw any conclusions about the relative investment merits of emerging economies compared to the Western industrialized nations. Rather, it is to note that, despite the fact that the emerging markets have grossly under-performed the Western developed markets since 1990, impressive economic progress has taken place in most developing economies over the last ten years.

Who, ten years ago, had heard of Bangalore and of India's now famous software and pharmaceutical companies, or spoke at dinner parties about Shanghai's stunning development and China's large trade surplus with the United States?

And who, at that time, was aware of Emirates Airlines, an airline that is now certainly better managed than Swissair or Sabena in recent years. Or of the Emirates Tower Hotel Group, which owns and manages several luxury properties in Dubai (among them the Burj Al Arab Hotel) and now also runs the Carlton Tower Hotel in central London?

While I am aware of all the shortcomings of globalization, it would seem to me that, over the last ten years or so, whole regions that in the past were absent from our Western market economy have now been fairly well integrated into a 'global economic system'. They formerly shunned our capitalistic system as a result of their adherence to socialist ideologies and to the ideas of self-reliance and hostility towards foreign investments.

Moreover, there is no doubt in my mind that over the same period, an unprecedented amount of knowledge, new ideas, technology, management techniques, and capital was transferred to these developing economies. However, such a major and rapid change for the global economy - the integration of close to three billion people into the world's economy who, until the late 1980s, were participating only on the periphery of the capitalistic market economy - also brings about a state of lasting disequilibrium.

Following an initial boom that lasted from the mid-1980s to the mid-1990s, the emerging economies experienced severe crises in the late 1990s. These crises were accompanied by significant currency devaluations or, in the case of China, by a deflationary environment, which in aggregate badly deflated the price level of the emerging world.

In turn, the emerging world is now exporting their deflated price level to the Western world and contributing to a structural 'deflationary shock' in the global economy. This is very much like the opening of the western territories in the US and the opening of Australia to the production of grain in the second half of the 19th century that led to a deflationary period that lasted from the mid-1860s to 1900.

That such a deflationary shock will bring some pain to a heavily indebted world is not difficult to see. Thus, we remain basically negative about US equities because we doubt that much of an earnings recovery lies around the corner.