Japan - So Many Nuggets

I spent a bit of the holiday season in Japan visiting friends and riding the Shinkansen (bullet train). There is a lot to like. From clean, sprawling, dense, and affordable cites, to strangers offering to help an oftentimes extremely lost Gaijin (foreigner).

Yet, I leave the Land of the Rising Sun with more conflicted thoughts than I have for my own home. Things are so familiar and so different. There is so much peace and so much chaos. There is so much hope and so much despair.

I am also accumulating quotes about things far faster than I am writing about them so I thought I’d grab ones about Japan and smoosh them all together in the hope I can simulate the same conflict I feel as I depart.

The Economist recently published a special on housing in the west. One of the articles details how housing policies have increasingly caused wealth to be transferred from the poor, young, and members of ethnic minorities to those who are richer, older, and in the ethnic majority but calls out Japan for largely escaping this trap.

Overall housing costs in America absorb 11% of GDP, up from 8% in the 1970s. If just three big cities—New York, San Francisco and San Jose—relaxed planning rules, America’s gdp could be 4% higher. That is an enormous prize.

It does not have to be this way. Not everywhere is afflicted with every part of the housing curse. Tokyo has no property shortage; between 2013 and 2017 it put up 728,000 dwellings—more than England did—without destroying quality of life. The number of rough sleepers has dropped by 80% in the past 20 years.

In Japan, zoning limitations (height, “setbacks” from other properties, density, etc) are much less restrictive than in the United States and other Western nations. Building projects (often at a massive scale) continue with limited challenge1, and though Japanese culture is generally more communitarian which probably explains some of the permissiveness, Japan also lacks the explosive growth in property values see in centers of the West’s housing crisis such as the San Francisco Bay Area.

First, let us consider the wealthy Japanese families of the late-twentieth century. During the 1980s, Japan’s economy experienced an incredible boom. From 1985 to 1989, the Nikkei stock index tripled in value, reaching an all-time high of 38,957.11 yen.

By 1993, half of the world’s billionaires were Japanese, and they held almost 13.6% of the global wealth of billionaires. Today, that figure has shrunk to only 1.4%. On the other hand, while there were no billionaires in mainland China in 1993, today’s top-earners in China hold 8.1% of the world’s private wealth.

What caused this extreme reversal in fortune for wealthy Japanese families? Put simply, these Japanese billionaires mismanaged their fortunes. As Japanese real estate appreciated, Japan’s wealth grew. This extreme and rapid appreciation of real estate and stock market valuations, however, created an enormous asset bubble. During the 1990s, the Nikkei index saw sharp declines, and real estate in Japan quickly lost value. By 2004, Tokyo residences were worth only 10% of their 1980s peak value. Similarly, the value of Japan’s most prized land in Tokyo’s Ginza business district lost 99% of its value. Moreover, twenty years after the 1989 peak, the Nikkei index closed at 7,054.98 on March 10, 2009, a full 82% lower.

Due to the combination of falling real estate values and the depreciation of Japanese equities, many Japanese billionaires saw their fortunes disappear. Billionaires could have seen their fortunes grow through intelligent, diversified, and calculated investments that compounded over years. Instead, their wealth is lower today than it was in 1989. While billionaires in the rest of the world grew wealthier, Japanese billionaires only experienced wealth stagnation and loss.

The Nikkei closed 2019 at 23,566.72, ~40% below 1989’s all-time high. It has been 31 years since 1989.

Japanese equities often swing wildly from year to year. This is surprising given that Japan is the world’s third largest economy (and second largest stock market), the index is dominated by large multinationals who don’t seem to be facing much local disruption, and the country has a strong institutions, rule of law, and general stability.

Last 30 Years Change in the Nikkei:

Year Closing Level Percent Change in Index
1989 38,915.87 29.04
1990 23,848.71 -38.72
1991 22,983.77 -3.63
1992 16,924.95 -26.36
1993 17,417.24 2.91
1994 19,723.06 13.24
1995 19,868.15 0.74
1996 19,361.35 -2.55
1997 15,258.74 -21.19
1998 13.842,17 -9.28
1999 18,934.34 36.79
2000 13,785.69 -27.19
2001 10,542.62 -23.52
2002 8,578.95 -18.63
2003 10,676.64 24.45
2004 11,488.76 7.61
2005 16,111.43 40.24
2006 17,225.83 6.92
2007 15,307.78 -11.13
2008 8,859.56 -42.12
2009 10,546.44 19.04
2010 10,228.92 -3.01
2011 8,455.35 -17.24
2012 10,395.18 22.94
2013 16,291.31 56.72
2014 17,450.77 7.12
2015 19,033.71 9.07
2016 19,114.40 0.42
2017 22,764.94 19.10
2018 20,014.77 -12.08
2019 23,656.62 18.20

The government has tried many things to encourage the economy to grow, Prime Minister Shinzo Abe’s “Abenomics” efforts with quantitative easing, fiscal stimulus, and structural reforms to make the country more competitive abroad have been a key push that started in 2012.

As a Wikipedia Article about Japan’s world-high national debt to GDP ratio explains:

Abenomics led to rapid appreciation in the Japanese stock market in early 2013 without significantly impacting Japanese government bond yields, although 10-year forward rates rose slightly. Around 70% of Japanese government bonds are purchased by the Bank of Japan, and much of the remainder are purchased by Japanese banks and trust funds, which largely insulates the prices and yields of such bonds from the effects of the global bond market and reduces their sensitivity to credit rating changes. Betting against Japanese government bonds has become known as the "widowmaker trade" due to their price resilience despite fundamentals to the contrary.

Capital staying within a large developed economy makes plenty of sense but Japan still exports a far greater share of its goods than the United States2 and has remained consistently competitive in the automotive, electronics, electrical machinery, and medical device spaces.

Japan builds particularly good cars, and the gap between Japan and the rest of the world was even wider in the 80s. Things were so bad at GM’s Fremont plant they shut it down until they started working with Toyota on their “New United Motor Manufacturing, Inc” (NUMMI) joint venture.3

One of the expressions was, you can buy anything you want in the GM plant in Fremont,” adds Jeffrey Liker, a professor who studied the plant. “If you want sex, if you want drugs, if you want alcohol, it’s there. During breaks, during lunch time, if you want to gamble illegally—any illegal activity was available for the asking within that plant.” Absenteeism was so bad that some mornings they didn’t have enough employees to start the assembly line; they had to go across the street and drag people out of the bar.

When management tried to punish workers, workers tried to punish them right back: scratching cars, loosening parts in hard-to-reach places, filing union grievances, sometimes even building cars unsafely. It was war. In 1982, GM finally closed the plant. But the very next year, when Toyota was planning to start its first plant in the US, it decided to partner with GM to reopen it, hiring back the same old disastrous workers into the very same jobs. And so began the most fascinating experiment in management history.

Toyota flew this rowdy crew to Japan, to see an entirely different way of working: The Toyota Way. At Toyota, labor and management considered themselves on the same team; when workers got stuck, managers didn’t yell at them, but asked how they could help and solicited suggestions. It was a revelation. “You had union workers—grizzled old folks that had worked on the plant floor for 30 years, and they were hugging their Japanese counterparts, just absolutely in tears,” recalls their Toyota trainer. “And it might sound flowery to say 25 years later, but they had had such a powerful emotional experience of learning a new way of working, a way that people could actually work together collaboratively—as a team.”

Three months after they got back to the US and reopened the plant, everything had changed. Grievances and absenteeism fell away and workers started saying they actually enjoyed coming to work. The Fremont factory, once one of the worst in the US, had skyrocketed to become the best. The cars they made got near-perfect quality ratings. And the cost to make them had plummeted. It wasn’t the workers who were the problem; it was the system.

An organization is not just a pile of people, it’s also a set of structures. It’s almost like a machine made of men and women. Think of an assembly line. If you just took a bunch of people and threw them in a warehouse with a bunch of car parts and a manual, it’d probably be a disaster. Instead, a careful structure has been built: car parts roll down on a conveyor belt, each worker does one step of the process, everything is carefully designed and routinized. Order out of chaos.

With relations between labor and management portrayed so positively, I wasn’t super surprised to hear that in the 50 years of the Shinkansen bullet train’s operation, none of the network’s 10+ billion passengers have died in a train accident. All of this in a system whose average delay was 0.9 minutes which include delays caused by the earthquakes and typhoons which often strike Japan. While the dueling mandate of safety and punctuality hasn’t resulted in a tragedy on the Shinkansen, a speed related derailment of a commuter line outside of Osaka in 2005 brought scrutiny to the punctuality standards enforced upon train drivers.

Drivers face financial penalties for lateness as well as being forced into harsh and humiliating retraining programs known as nikkin kyōiku (日勤教育, "dayshift education"), which include weeding and grass-cutting duties during the day. The final report officially concluded that the retraining system was one probable cause of the crash. This program consisted of severe verbal abuse, forcing the employees to repent by writing extensive reports. Also, during these times, drivers were forced to perform minor tasks, particularly involving cleaning, instead of their normal jobs. Many experts saw the process of nikkin kyoiku as a punishment and psychological torture, and not as driver retraining.

A similar severity is brought in the criminal justice system. After the 1995 sarin-gassing of the Tokyo Subway by a doomsday cult, the response was more severe than the United States’ response to the Boston Marathon Bombing 18 years later.

When the police finally moved, they did so with overwhelming force. Two days after the subway attack, 2,500 of them raided a dozen cult properties with riot gear, gas masks and caged canaries. (With a straight face, a spokesman said they were investigating a kidnapping.) They arrested Aum acolytes for jaywalking and bicycle theft, and questioned them for weeks to find out where Mr Asahara was hiding. (Suspects can be held for 23 days without charge in Japan.) They eventually found him in a crawl-space in a building they had already raided several times.

It then took 23 years to hang him. The outcome of his trial was never in doubt: the conviction rate in Japanese courts is over 99% and there were literally warehouses full of evidence against him. Yet his first trial lasted seven years—like many in Japan, it was not held on consecutive days. His appeals dragged on until 2006. He lingered another 12 years on death row, never knowing each morning whether he would be hanged that day. This is how Japan treats the condemned. It is not how anyone should be treated, not even a monster like Mr Asahara.

At the same time, institutions like the police are almost always remarkably personable in everyday interactions.

Wherever I travel somewhere, I ask myself if I would live there, and if I would raise children there.4 Here too I struggle to make a decision. One of my favorite bloggers — Patrick McKenzie — lives in Japan and offers this anecdote:

People often ask me why I live in Japan. A part: is that it is a place where I could take my daughter to lost-and-found to ask about an acorn, knowing that someone would return an acorn, knowing that someone would clearly expect a lost acorn to be returned and therefore ask.

There are so many things I like about Japan. The streets are clean and safe, public transit is often faster than a car, employees take pride in their work and are extremely helpful. At the same time, I struggle to think about what it would mean to live in an economy that doesn’t really grow, and with a social structure much more rigid than the one I am used to.

Since I am still young and trying to grow and learn as much as possible, I worry how these things might change and limit me. But, as a place to live with a family unit — especially with young children - I think Japan offers most of the world stiff competition.

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1: Though the construction of Tokyo’s Narita Airport was extremely hard foughtprotestors built a 200 foot tower at the end of a runway)

2: 16.1% vs 11.9% — though both are far below the world average of 28.5%

3: This American Life)[https://www.thisamericanlife.org/403/nummi-2010] did a story about the plant when it was closed in 2010. It later sold to Tesla — becoming that company’s first factory.

4: I ignore a good deal of practical things (language, proximity to family, mostly what I would do for work) and be somewhat flexible with my (Western) values when I think about this. I try to make asking myself if I would live somewhere a more micro than macro question about the livability of a place and the way I feel about it. Asking yourself if you’d raise kids somewhere is much more of a macro and culture question since environment will define a big part of who a kid becomes (though I’d also assume they would be in an international school…)

Related reading:

This is honestly just more quotes about Japan with some interjected thoughts that has less flow than above :/

Everyone loves cross laminated timber!

Japan’s government has long advertised the advantages of wooden buildings, and in 2010 passed a law requiring it be used for all public buildings of three stories or fewer.

It has been interesting to contrast Japan with much more familiar Germany. Japanese War Crimes during the Second World War were exhaustive and the country has responded very differently from Germany and continues to be a sore point with its neighbors.

Denial and revisionist accounts of the Nanjing Massacre where 50,000 to 300,000 people were murdered by Japanese troops at the start of the Second World War is a “staple of Japanese Nationalism.” The Chinese took to calling their invaders “Japanese Devils” during the war and the phrase seems to still see occational use.

"A Kind of Prophecy"
Village elders say
I resemble my grandfather in his youth
I didn’t recognize it
But listening to them time and again
Won me over
My grandfather and I share
Facial expressions
Temperaments, hobbies
Almost as if we came from the same womb
They nicknamed him “bamboo pole”
And me, “clothes hanger”
He often swallowed his feelings
I'm often obsequious
He liked guessing riddles
我喜欢预言 I like premonitions
In the autumn of 1943, the Japanese devils invaded
and burned my grandfather alive
at the age of 23.
This year i turn 23.
-- 18 June 2013

Similar issues with Korea where Japan ruled from effectively 1895 when assassins snuck into the palace, killed the empress and burned her body.

In 2017, Japan recalled its ambassador from South Korea in protest of a statue to honor the “comfort women” sex slaves taken by the Japanese army across from the embassy. Tensions have even run high in the United States when San Francisco approved a statue of a comfort woman and the mayor of Osaka (Japan’s second largest city) threatened to dissolve the “sister city” relationship the two cities had shared for over 50 years. Unfortunately it does’t seem like this will be figured out anytime soon.

History gives the Japanese and the Koreans ample grounds for mutual distrust and contempt, so any conclusion confirming their close relationship is likely to be unpopular among both peoples. Like Arabs and Jews, Koreans and Japanese are joined by blood yet locked in traditional enmity. But enmity is mutually destructive, in East Asia as in the Middle East. As reluctant as Japanese and Koreans are to admit it, they are like twin brothers who shared their formative years. The political future of East Asia depends in large part on their success in rediscovering those ancient bonds between them.

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My Blog - Now Blocked in China ://

Is the censorship even effective? Everyone seems to have a vpn and most Chinese of means seem to have spent time outside the country.

- a friend the other day

I just finished a half semester class where we focused on Tiananmen Square as a focal point of protest and social movements in China over the last 100 years. One of the largest plazas in the world, Tiananmen sits adjacent to the former imperial palace and in the last hundred years has hosted the May 4th Movement of 1919, Mao’s proclamation of the PRC in 1949, a massive rally of Red Guards in 1966 that began the implementation of the Cultural Revolution, protests after the death of the PRC’s first Premier Zhou Enlai in 1976, further protests in 1989 after the death of former CCP General Secretary Hu Yaobang, and countless PLA demonstrations.

For our final paper in the class we were asked to reflect on protest in China. I choose to write about my doubts in the effectiveness of the CCP’s “Great Firewall” and its policy of censoring content it deems sensitive. With the 30th anniversary of June 4th 1989 having just passed, I thought it appropriate to post that essay here.

Dear Mr/Mrs Chinese Visa official, I would very much like to be approved for my visa and to visit your country. I hope you can appreciate that this essay is very much in the spirit of Dengism and trying to seek truth from facts. Hopefully it doesn’t matter if the cat is white or black; if it catches mice, it’s a good cat.


1.4 Billion Ambassadors - An Argument for Soft Power over Censorship in the PRC

Techopedia defines a copypasta to be “a block of text that has been copied and pasted multiple times. This often leads to a kind of generic or stilted result, or something that is slightly jumbled or disjointed” (Copypasta, Techopedia). More innocuous than chain letters sent in analog and early digital times in the hopes of avoiding bad luck or finding riches, copypasta such as the “Navy Seal” copypasta and the script of the Bee Movie spreads virally across the internet because senders think they are funny. In the West, copypasta and their cousins, memes, serve as a way for people to express themselves on the internet. Chinese so called “netizens” also enjoy using the internet as a new medium for expression, but its levels of censorship lead Freedom House to denote it “the worst abuser of internet freedom in 2018” (Freedom on the Net 2018, Freedom House). While China’s government has become increasingly aggressive in the content they limit and the degree to which they suppress any mention of the Tiananmen Incident, it is fighting a battle it cannot win as its citizens become more globalized. The Chinese government would be better served conveying a convincing story to its citizens rather than censoring content and having a limited voice when its citizens inevitably learn about the things it seeks to hide.

There are many ways to elicit censorship from the what has become known as the “Great Firewall of China.” From puns that turned a viral musical homage to President Xi Jinping and his wife Peng Liyuan (Daddy Xi loves Mama Peng) that have come to elicit references to marijuana (daddy - 大 + mama - 媽 is similar in pronunciation to 大麻 - marijuana), to images of Winnie the Pooh also deemed to be a mockery of Xi, censors and their increasingly sophisticated algorithms remain busy (Why China is Banning Puns, Quartz). If one wishes to have their entire website censored for an indefinite time, users on the popular forum site Reddit recommend the following copypasta:

动态网自由门 天安門 天安门 法輪功 李洪志 Free Tibet 六四天安門事件 The Tiananmen Square protests of 1989 天安門大屠殺 The Tiananmen Square Massacre 反右派鬥爭 The Anti-Rightist Struggle 大躍進政策 The Great Leap Forward 文化大革命 The Great Proletarian Cultural Revolution 人權 Human Rights 民運 Democratization 自由 Freedom 獨立 Independence 多黨制 Multi-party system 台灣 臺灣 Taiwan Formosa 中華民國 Republic of China 西藏 土伯特 唐古特 Tibet 達賴喇嘛 Dalai Lama 法輪功 Falun Dafa 新疆維吾爾自治區 The Xinjiang Uyghur Autonomous Region 諾貝爾和平獎 Nobel Peace Prize 劉暁波 Liu Xiaobo 民主 言論 思想 反共 反革命 抗議 運動 騷亂 暴亂 騷擾 擾亂 抗暴 平反 維權 示威游行 李洪志 法輪大法 大法弟子 強制斷種 強制堕胎 民族淨化 人體實驗 肅清 胡耀邦 趙紫陽 魏京生 王丹 還政於民 和平演變 激流中國 北京之春 大紀元時報 九評論共産黨 獨裁 專制 壓制 統一 監視 鎮壓 迫害 侵略 掠奪 破壞 拷問 屠殺 活摘器官 誘拐 買賣人口 遊進 走私 毒品 賣淫 春畫 賭博 六合彩 天安門 天安门 法輪功 李洪志 Winnie the Pooh 劉曉波动态网自由门 

(r/China, Reddit) 

Each of these topics comes with their own sensitivities — and all use the traditional script the Chinese Communist Party has worked to replace — but the copypasta highlights well just how many things are limited in public discourse within China. While many of these items such as the The Xinjiang Uyghur Autonomous Region, and Liu Xiaobo’s Nobel Peace Prize remain in recent public consciousness, others such as the Cultural Revolution are not so personal to most (People’s Republic of Amnesia, Lim).

The disconnect between issues relevant to the youth and what is relevant to China’s leadership is perhaps something the CCP has missed as the age gap between them grows ever wider. Deng Xiaoping, China’s leader for two decades and the most influential man in China until his death in 1997 joined the communist party in 1923 (Deng Xiaoping, Biography.com). Mao — whose portrait remains on all denomination of the Renminbi and hangs in Tiananmen Square — is known to have been fond of Nikita Khrushchev’s declaration that “revolutionaries never retire,” and this has manifested itself in the leadership of the CCP (79-218, Weiner; We Revolutionaries Never Retire, Armageddon Letters). Xi Jinping — whose father Xi Zhongxun participated in the “Long March” of the 1930s — assumed the position of China’s Paramount Leader at the age of 58 — younger still than several of the previous Paramount Leaders (The CCP’s Age Problem, The Atlantic).

Beyond the Great Firewall, China has grown the state’s soft power strategy to perhaps the largest in the world (Gaining Face, The Economist). Between CGTN, China Daily, People’s Daily, Xinhua, and the Global Times, have perhaps 300 million followers on Facebook — representing five of the top six global new site. With an order of magnitude more engagement than Russian trolls during the 2016 US Election, and a $10 billion capital annual expenditure on soft power like this, China has built itself a bullhorn able to reach nearly 10% of Facebook users in Africa, and nearly 20% of Mexican and other Latin American users (Gaining Face, The Economist). Largely innocuous, these channels seem to follow the state owned Russian broadcaster — RT’s — strategy wherein sensational stories are seeded amongst real news (Agents of Doubt, Washington Post). The strategy appears to be working. As The Economist notes, “most popular posts [on Chinese media pages] are Orwellian titles such as China human rights report notes violations in us and “Why is Tibet a target for Western countries to pick on China?” (Gaining Face, The Economist). From hosting the 2008 and 2022 Olympics, the sponsorship of 500 “Confucius Institutes” at schools and 2,000 Chinese New Year celebrations both across 140 countries, the Chinese government is deeply focused on its image abroad (Subtleties of Soft Power, The Economist). This too appears to be working. Surveys find younger audiences across counties to have more favorable views of China than their elders — especially in countries like the United States and Japan (ibid).

Chinese youth may too follow the trend of approving more highly of the CCP than their parents. While the government has a hard time discussing sensitivities within its border and defaults to censorship, when asked to answer for troublesome periods outside the Great Firewall, it has answers that many accept. Leveraging its enormous populations to be messengers of its narratives would be an effective way to build national cohesion, pride, and further endear it to its citizens. With the events of 1989 nearing 30 years in age and a population that is increasingly realpolitik and removed from the events of June 4, China could stand to loosen its censorship of events — even as significant as this one. The social credit system, facial recognition technology, and monitoring of WeChat will persist.

Related reading:

Active at major tourist spots around the world they call Truth Sites across the world, the Tuidang movement seems to exploit the PRC’s suppression of news by talking to visiting Chinese about incidents they don’t hear about on the mainland. Tuidang has helped over 300 million people quit the CCP.

Let’s stay in touch - I’d love to hear your thoughts on this and other posts! Email me at spence dot burleigh at gmail and sign up to get the next post in your inbox.

Delta - Be Better

“While the usual suspects ended up buying a handful of A380s due to national pressure (Lufthansa, Air France, British Airways), delusions of grandeur (Malaysia, Thai), or me-too syndrome (Asiana, Etihad, Qatar), there was really only one airline that truly loved the airplane. That was Emirates.”

- A cool airplane blog I like to read

Airlines and their routes are fun because the decision to fly a plane from one city to another can be made from more than just an immediate profit seeking perspective.

Air Canada flies from Seattle (SEA) to Vancouver (YYZ) — a distance of 126 miles — to feed its Asian and domestic Canadian flights. Delta and Alaska fly the same route to feed their domestic US flights.

American Airlines started flying from Dalles (DFW) to the airport near Reykjavik Iceland (KEF) when WOW Air (now defunct) and Icelandair already flew the route to protect their dominance in the Dallas market.

And Qatar Airways flies from Doha (DOH) to Atlanta (ATL) “in order to rub salt into the wounds of Delta” according to its colorful CEO Akbar Al Baker.

Delta has long alleged the three largest Middle Eastern carriers — Emirates of Dubai, UAE, Qatar Airways of Doha, Qatar, and Etihad of Abu Dhabi, UAE — collectively ME3 are in violation of the treaty that allows the airlines to fly to the United States because of the money they (do almost certainly receive) from their respective governments, but I’m not very concerned.

ME3 have collective orders for hundreds of American manufactured planes - directly providing American jobs. Delta has four outstanding orders for planes manufactured by American companies.

What’s more, American Airlines, directly partners with Qatar Airways as part of the One World Alliance, giving it a share of revenue on passengers traveling to destinations it doesn’t serve (India, Africa, etc). JetBlue and its minimal international route network benefit even more — connecting passengers to all of ME3.

Delta too has only picks convent times to complain — throwing a regulatory fit at Qatar Airways’ investment in tiny (15 plane fleet — only five of which can fly across the Atlantic) Air Italy while standing aside as Etihad invested billions into Delta partner Alitalia.

Delta is widely known to the be the best mainline carrier in the United States. They should focus on expanding that excellence beyond an airline that makes no money flying passengers and one that drags doctors off overbooked flights.

Related reading:

Dallas (DFW) is what is known as a fortress hub — which arguably do more to hurt the traveling public than anything else.

Travelers often prefer nonstop flights — which airlines are increasingly able to offer with aircraft like the Boeing 787 and A350. Singapore Airlines flies nearly 20 hours from New York to Singapore, Qantas flies a similar distance from Perth to London, and even Pittsburgh, Pennsylvania now has a non-stop to London. As routes like these only grow in scope, airlines of the newly connected city pairs will have a material advantage over airlines that require a connection — lessening the impact of ME3 on their passengers even further. Indeed, the Middle East is not a particularly efficient place to connect passengers traveling from the United States to Europe, South America, or (north) Asia.

(It is worth noting here that so-called “fifth freedom” flights like the one Emirates operates from New York to Milan, Cathay Pacific has from New York to Vancouver, or Singapore Airlines offers from New York to Frankfurt are not particularly common).

Also worth noting that while Delta has orders for foreign designed planes like the Airbus A220 and A320, these planes will most likely be manufactured at Airbus’ facility in Mobile, Alabama.

Let’s stay in touch - I’d love to hear your thoughts on this and other posts! Email me at spence dot burleigh at gmail and sign up to get the next post in your inbox.

Sukuk - No Interest Here

How did all this get financed? Islam doesn’t seem so big on charging interest so bonds wouldn’t be an option.

- me wondering about all the nifty architechture and skyscrapers in (relatively) oil poor Dubai

I just arrived back in Pittsburgh after spending a week at Carnegie Mellon’s campus in Doha, Qatar. My time on Doha was incredible and something I’ll very much be digesting over the coming weeks and may write about soon on this blog. I wanted to thank all of the students at CMU-Q for their hospitality (I had heard much about Arab hospitality and was still blown away by the generosity and kindness I was afforded) and for the administrators at CMU (Kevn D’Arco, Elizabeth Coder, Lenny Chan, and especially Renee Camerlengo) for all the work they did in to make this trip possible. They enabled our two groups and all the others who we interacted with to see the world as a smaller, more similar, place. I also wanted to thank my CMU-Q partner Rameez who got excited when I told him I had a blog and has definitely read more of these posts than my mother :p

I took a class on the contemporary Middle East a couple years ago and my final paper for the class focused on how many countries fund their expansion while remaining in compliance with Islam and its prohibition on charging interest. While Doha is more conservative (and far more wealthy) than the focus of my work, relatively oil poor Dubai, Dubai is often seen as a model for development in the region and Doha too relies on Islamic Finance instruments such Sukuk to power its growth. I hope you enjoy reading as much as I did researching and writing :))

Babel to Burj

In the book of Genesis, Noah’s descendants settled on the plain of Shinar — not far from the Persian Gulf — and said: “Come, let us build ourselves a city, with a tower that reaches to the heavens, so that we may make a name for ourselves”. Seeing the people’s desire to best him, God confused the people’s languages and “scattered them from there over all the earth, and they stopped building the city”. Known as Babel, the tower was abandoned, and the world’s people would never again speak the same language. In contemporary times, on the shores of the Persian Gulf, a modest fishing village rose to be a global financial hub in just 20 years. Built on migrant labor and populated primarily by expatriates, Dubai expanded its 65 kilometer coastline to over 1000 kilometers — building the world’s only 7 star hotel, an archipelago in the shape of the world and visible from space; indoor ski resorts; and the world’s tallest building that rises over half a mile above the inhospitable desert — just like Babel’s planned tower. And, just as Babel’s tower incurred God’s wrath, Dubai’s economy as represented by the Burj Dubai/Khalifa, was punished for its over-reaching ambition. Sideswiped by the global financial crisis of 2008, Dubai’s glut of real estate, once “gobbled up by voracious buyers who were eager to indulge” and “flip (property) three or four times before a single grain of sand (was) moved” was exposed for what it truly was — a colossal bubble. To attract tourists, to differentiate themselves from the historically more powerful and wealthy emirate of Abu Dhabi to the south, and to divest the economy from reliance on its limited oil reserves, Dubai mirrored the West by developing sophisticated financial instruments to catalyze this change.

Dubai built its economy at an unprecedented pace over twenty years. As Silvia Montero, an expatriate from Spain who came to Dubai in the 1980s recalled, “When I got here, there were no paved roads. People kept their goats and camels out in the backyard. It was incredible; to me it was like the Third World. And now it’s become the other extreme. Now they’ve become too sophisticated for my taste … now I’m the one who comes across as the local yokel”. When Sheikh Rashin bin Said al-Maktum — the leader of Dubai — died in the mid-1990s, his four sons dedicated themselves to building an economy free of a dependence on hydrocarbons and their volatility. Dubai capitalized on its status as a small trading center, creating tax free zones and providing incentives for companies such as Microsoft, Dell and Reuters to base their Middle Eastern operations in Dubai.

Analogous to Singapore, Dubai set its sights on economic parity with first world nations — utilizing a pro-business authoritarian structure to do so. Government led economic development through its conglomerate Dubai World. Sheikh Muhammad, Dubai’s leader (and the third son of Sheikh Rashin) embraced the emirate’s nickname Dubai Inc. by saying, “I change the way of government to make it like a big company”. Even though Dubai is under authoritarian control, “You get a sense of freedom when you are in Dubai” recounted Dr. Rochdi Younsi, lead analyst for the Eurasia Investment Group, “you do not really feel that you live under an oppressive regime [though] freedom of expression is not guaranteed”. Most Emirati — the native people — like this system. As Sheikh Muhammad boasted to 60 Minutes in 2007: “I want (Dubai) to be number one. Not in the region, but in the world … high education, health, housing. [I want] my people [to have] the highest way of living”.

When the tidal wave of the 2008 global financial crisis hit Dubai’s shore, it seemed just a ripple. Solvent and stable through the initial global shocks of the crisis, the emirate quickly became a haven for capital and began to attract thousands of people seeking work. With 95 percent of the population expatriates, these newcomers quickly integrated into the city and found jobs. For Brooke Butler, a 24-year-old recent graduate of Dallas Baptist University, who was laid off and was subsequently unable to find a job, the choice was simple. “Should I get another lame job in the States, or should I live in Dubai?”. She went online, applied for a job and arrived a month later. As Brooke recalled in a 2008 New York Magazine article, “Within a year, I’ll be a millionaire. It’s not that difficult over here … I know a girl who made $2 million U.S. in commissions last year”. Reminiscent of Joseph P. Kennedy’s fabled encounter with a shoeshiner predicting the market’s movements before the Great Depression, and his conclusion that “if a mere boy could predict the movement of the market, then it certainly was no place for a man with plenty of money to lose”, the absurdity of young recently laid-off Americans coming to Dubai and making millions warned of the impending collapse.

As the global crisis thickened, interest in Dubai grew to new heights. As James Ruiz, a banker who moved to Dubai only 6 months prior, mentioned in the same New York Magazine article, “Once or twice a week since I’ve been here, I’ve gotten calls from New York from people looking for jobs” and from August to November of 2008, “it’s just snowballed”. These sentiments are understandable. The same day the US Treasury pumped billions into failing US banks, Dubai held a grand opening for their new $1.5 billion Atlantis seaside resort complex.

Though some investors were still skeptical of Dubai’s claims to solvency, the Islamic nature of its financing eased these concerns. In Islam, where collecting Riba (interest) is prohibited by Shariah (Islamic Law), traditional financing through securities such as bonds is not permitted. To unlock the benefits investment brings to economic development, instruments consistent with Islamic law known as Sukuk were developed. Instead of loaning money based on credit history and assessment of a borrower’s ability to repay a loan, Sukuk are based on the value of revenues generated by an asset or business offered that creditors temporarily own a stake in. A shell company leases control of an asset to an SPV (special purpose vehicle) that then issues shares in the revenues generated by the underlying asset. The SPV then leases the asset to another shell company which pays for the right to use the asset. If a borrower is unable to pay, the SPV can seize and liquidate the asset to make investors whole.

While many Islamic scholars assert that in the spirit of Riba’s prohibition, Sukuk valuations should be entirely dependent on the revenues generated by an underlying asset, this is not practically true. To protect their purchasers and to make their instruments more attractive, Sukuk issuers often pledge a certain percent of the Sukuk’s shares to another shell company that will distribute these shares to investors should the underlying asset depreciate. Alternatively and more dubiously compliant with Shariah, issuers will often explicitly guarantee repayment of a Sukuk’s forecasted value. Securities such as these are analogous to bonds but are fundamentally less risk prone given the collateralized nature of an underlying asset.

While Sukuk inherently hedge the risk of an issuer’s default, the security they offer can be disrupted by adverse changes in the valuation of the underlying asset. When the global financial crisis began, and investors lost confidence in the solvency of debtors across the world, Dubai did not suffer because of their Sukuk’s collateralization. As the real estate bubble popped in Dubai in late summer of 2008, however, property values plummeted more than 60 percent, and over $750 billion in projects were put on hold. The stock market collapsed too, causing even government backed “blue chip” stocks such as Emaar Properties to fall more than 80 percent. As fall of 2008 ended, hundreds of cranes hung silent over the skyline and even Dubai’s infamous traffic began to ease. Against the backdrop of a string of cancellations of large projects, the Dubai government revealed the deep insecurity it had about the economy through its censorship of speech against the economy — holding investigative journalists without charge, and even removing The Sunday Times from newsstands when it ran an article criticizing the economy.

For Dubai’s Sukuk, the massive collapse of the real estate market removed the security that had made Dubai a haven for capital. Since property values fell well past levels where share pledges could restore investors, only Dubai World’s explicit guarantee and the Dubai Government’s widely assumed implicit guarantee of debt remained. Amidst credit downgrades from the major agencies, Dubai announced that it had accumulated over $80 billion in debt but that its sovereign wealth fund was sufficient to cover the debt. Investors, however were skeptical given global asset depreciation in the wake of 2008’s financial crisis. It would take intervention by Dubai’s oil-rich southern neighbor, Abu Dhabi to normalize the situation.

While Dubai extravagantly developed away from oil, Abu Dhabi developed conservatively, leveraging its massive hydrocarbon reserves to expand across the world through investment. Since its escape from Abu Dhabi’s control, Dubai has sought to differentiate itself through liberalism, secularization and massive projects like the Burj Dubai — the world’s tallest building.

Eager to divest from its small hydrocarbon deposits, Dubai had become reliant on property and speculators who provided demand for new projects — forever increasing in profligacy. For some like Iñaki Aris, who came to Dubai as a banker, real estate speculation had become the most lucrative job in the city. As he explained: “(The) apartment where I live now has doubled in value in just under two years, and the one in Marina has gone up 20% in a year, and I’ve just bought another one. I expect it to go up another 20% in (a year)”. Abu Dhabi, already at the top of the UAE’s power structure and with 90 percent of the UAE’s hydrocarbon reserves, was just the opposite.

With the UAE’s global reputation at stake, Abu Dhabi was compelled to help support its “flashy and free-spending” neighbor when it first faced trouble in late 2008. Extending $15 billion in assistance to help stabilize the emirate. A year later, in November of 2009, a new crisis far more severe struck when Dubai World announced that it would not be able to meet payments on a $3.5 billion Sukuk issued by Nakheel — a property developer — and that it would need to restructure an additional $26 billion of debt. With the security provided by the collateral already gone, and now, the implicit guarantee many believed Dubai’s government to have over its wholly owned subsidiary formally declared to be nonexistent, financial markets across the world fell temporarily, and markets in the Middle East plummeted. Abu Dhabi was initially more hesitant to save Dubai the second time and investors were unsure if the emirates’ weak relationship could be overcome. As markets continued to crash however, the emirate saw the need to stabilize the region and they extended a jaded hand, attempting to gain equity in Dubai’s best assets and ultimately succeeding in changing the name of Dubai’s pride — the tallest building in the world — from the Burj Dubai, to the Burj Khalifa, in honor of Sheikh Khalifa — the leader of Abu Dhabi. Ultimately, with an additional $10 billion capital injection, and affirmations that “Abu Dhabi has stood by Dubai and will stand by Dubai” from people like cabinet minister Sheikh Nahyan Bin Mubarak Al Nahyan, Dubai reached new payment terms with their investors and markets generally recovered.

Dubai sought to best its richer and more conservative neighbor through extravagant and luxurious developments. Ultimately though, they leveraged complex financial instruments to gain easy credit to build their golden city — weakening the base of their economy. With the collapse of the real estate market, the complex financial instruments failed and the focus on real estate that had made Dubai so successful, brought the economy to its knees. Only with an intervention from Abu Dhabi did Dubai remain solvent. The city built, but did so unsustainably. They wanted to be the best, but in the end, the dream dissolved into the confusion, discord, and ultimate failure of Babel.

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Pierogis - with Bryndza Sheep Cheese

“English please”

- A waiter at this really yummy pub in Bratislava, Slovakia, the other day after I asked if he preferred English or German

I know Slovakians speak Slovak. I just found it really interesting that in Bratislava – less than two miles from the border with Austria that English was the language of choice after Slovak (for both the waiter and the menu). This interest is perhaps misguided and it’s entirely reasonable for former countries of the Eastern Block to speak languages (Czech, Polish, etc) reflective of their history behind the Iron Curtain but it’s been nearly 30 years and Slovakia makes an exceedingly large number of (mainly German) cars.

The English = lingua franca argument is an pretty developed one that seems to go:

—> British Empire had a bunch of colonies that kicked things off —> the United States became a major world power after winning the Second World War exporting its culture and language pretty much everywhere —> the internet was invented and a lot of the early people on it were from American universities —> massive network effects

While it’s pretty useful that English gets me by just fine in Slovakia and a whole host of other nations and people from countries with comparatively few native speakers (and some from larger ones that seem to think English is really cool like in Germany) will probably continue to learn English or another “world language”, I wonder if increased communication over the internet and rapid advances in machine translation will change the world less than we think.

Later on this trip in Lyon, France, my friend and I found ourselves with an extremely kind and excited AirBnb host who spent 45 minutes giving us a tour of his loft and pouring over a map of the city entirely in French. Helped by cognates between French and Spanish, a lot of smiles, and the Google Translate App, we made it through but this is a UX I would definitely take steps to improve if I expected to encounter it with any frequency. At this point, the only way to improve would seem to be to apprendre le français.

Related reading:

The Slovak Pub’s menu is almost enough to make me get on a plane back to Slovakia right now. We had 207: Slovak Platter for Two with dumplings with bayndza’ sheep cheese, pierogi also with bayndza’ sheep cheese and the dumplings with cabbage and bacon (where dumpling are more similar to macaroni and cheese then what you would find at dim-sum).

Machine translation is usually pretty great for ordering food and other simple things but even then it messes up like in this case:

“a Palestinian construction worker wrote “good morning” in Arabic on Facebook. The company’s automatic translation service translated the post to “attack them” in Hebrew and “hurt them” in English, prompting the Israeli police to arrest the individual.”

Cool travel tools:

People sporadically ask me for a list so here we go:

I’m a big fan of TripIt to make pretty itineraries and to track things, Citymapper for transit maps in places Google doesn’t have (Lyon smh), Ofo/Mobike/Lime for magic dockless bikes, the AR translate in Google Translate they integrated after they bought WorldLens, and ofc T-Mobile for the magic international (albeit somewhat slow) service that’s only failed me in Cuba.

Let’s stay in touch - I’d love to hear your thoughts on this and other posts! Email me at spence dot burleigh at gmail and sign up to get the next post in your inbox.