opinion

Beware the skyscrapers

by Rohit Chawdhry First though, a brief history

of the cycle of skyscrapers.

A
little-known
truism about financial
markets and economic
cycles is that they relate to
underlying social trends. The
primary thesis is that trends
in social mood cause, and
therefore precede, changes in
the business climate. Take the
construction of record-break-
ing skyscrapers. The impulse
to build coincides with peaks
in social moods as well as
economic cycles.
The first such cycle occurred
in New York between 1904
and 1909 when the Singer
Building, completed in 1908,
and the Metropolitan Life
Insurance Company Tower,
finished the following year, set
records in quick succession.
The Panic of 1907 took place
when a crop failure coincided
with cyclical problems in
money and credit which devel-
oped into a financial panic
when a bank refused to clear

Illustration: Tim Gravestock

Indeed, what is known as
the skyscraper cycle is a fairly
reliable proxy for fluctua-
tions in business activity. The
construction of skyscrapers
qualifying as the “World’s tall-
est building” tends to presage
downturns in the economy.
What usually happens is that
a project is announced and
building work begins during
the final phase of a boom
when the economy is still
growing and unemployment
is low. This is then followed
by a sharp downturn in both
financial markets and the
economy.
Why is this important to the
Gulf? Think of the skyscrap-
ers that are now being built
or which have recently been
announced. Burj Al Dubai,
which aims to be the tallest
structure in the world, is likely
to be completed in 2009. It
may not hold the title for long.
The proposed mile-high
tower in Saudi Arabia and the
Madinat Al Hareer Tower in
Kuwait – part of the so-called
fifth international wave of
skyscrapers – are destined to
dislodge Burj Al Dubai from
its perch. In doing so, they
could signal a turning point
in the business cycle for the
Middle East and North Africa.
funds for the Knickerbocker,
an unregulated trust. The
result was a run on banks and
one of the sharpest downturns
in America’s economic history.
The second cycle took
place at the onset of the
Great Depression. Three
record-setting skyscrapers
were announced during the
late 1920s in the US, when
a boom in the stock market
was matched by bubbles in
the markets for residential
and commercial property. In
1929, a building at 40 Wall
Street was completed with 71
storeys. This was followed in
1930 by the Chrysler Building
with 77 storeys and, in 1931,
by the Empire State Building
with no fewer than 102
storeys.
The third cycle of skyscraper
building occurred in the early
1970s. Once again, the econo-
my was slowing after a strong
and sustained boom during
the 1960s. The subsequent
downturn marked the begin-
ning of more than a decade of
inflation and recession as well
as disruption to institutions
and markets.
As the last vestiges of the
gold standard were abandoned
and the Bretton Woods system
was disintegrating, construc-
tion workers in New York and
Chicago were busy building
the next set of the world’s tall-
est buildings. Breaking records
set in the run-up to the Great
Depression, One World Trade
Centre was completed in 1972
and Two World Trade Centre
was finished the following
year, both of them 110 storeys
high. The buildings were
destroyed, of course, by the
terrorist attacks of 2001.
In Chicago, the Sears Tower
was completed in 1974. This
was also 110 storeys but
reached a height of 1,450 feet
compared with the 1,368 feet
of the World Trade Towers.
Once again, economists failed
to anticipate the downturn in
the economy that followed.
The fourth such cycle
ushered in East Asia’s
economic crisis. The econo-
mies of Hong Kong, Malaysia,
Singapore, Vietnam, and
South Korea grew quickly
during the 1980s and 1990s.
The Petronas Towers were
completed in Kuala Lumpur
in 1997, setting a new record
for the world’s tallest building
at 1,483 feet. They beat the
previous record by 33 feet
even though the two towers
had only 88 storeys.
So will the present clutch
of skyscrapers being built in
the Middle East and North
Africa prove to be the region’s
nemesis? It certainly makes
the case for a short-term peak
in the business cycle.
What could be the cata-
lyst? Possibly higher interest
rates or maybe an event to
watch out for. It is perhaps
significant that the US Federal
Reserve sees “diminished
risks to growth” compared to
heightened inflationary pres-
sures. Sometimes it pays to be
prudent. <
Rohit Chawdhry is Portfolio
Manager at Bank of Bahrain
and Kuwait. This article is
written in a personal capacity

the gulf | July 19-25, 2008 31