How would an international bureaucrat based in London or Washington view the economic prospects for a mid-Atlantic Island of just over 20 square miles of barren rock, 700 miles from the nearest land mass, with a population density several times that of UK and USA, which is two-thirds black, voted in a referendum in 1995 to retain its colonial status, imports everything from energy to electrical plugs, has no opera house or concert hall, no central bank, no national airline, no university, is dependent on rainfall for its water, and apart from a benign climate and natural beauty has no valuable natural resources, and whose government has had a hands-off policy with regard to economic matters for centuries?
Sitting in UK or USA an imaginary international civil servant would either write the place off, or regard it as a typical speck of insignificance dependent on handouts from governments of the developed world. Indeed anyone who follows international news and the financial press, or is naive enough to believe the propaganda published by the United Nations, would be hard put to contradict this conventional wisdom particularly as it is evidenced by the poverty and marginal financial importance of so many places.
If, however, the reader lands on an island by the name of Bermuda, which is still a British Colony, he would learn that most of the people are happy and prosperous; the per capita income is about US$36,8455 per annum – compared to $33,900 in the USA, and $23,300 in Canada.
There is no income tax, no capital gains tax, no corporate taxes, modest inheritance taxes, and a Aa1 Moody’s investment rating (the same as Japan, Canada, and Singapore). Bermuda has enjoyed the benefits of a consistently balanced budget over the years (although that is changing for the worse), operates a government system reminiscent of what was in place in the American Colonies before 1776, has an almost Elizabethan welfare system, respect for private property, negligible unemployment (in fact has never experienced unemployment since before 1940), no corruption, minimal crime, comparatively little social unrest, is host to almost every large multinational company in the world, has eight golf courses, and has never received a penny in aid from the UK, US or anyone else. In addition, the quality of life is superior to most places – no traffic jams, few fast food outlets, clean streets, a pristine environment, excellent sports facilities, and a wonderful climate.
Surely this is not possible in the 2002 when the description given in the previous paragraph sounds more like the hype from a tourist brochure or a party political manifesto than a sober description based on the dismal science of economics. How can a microscopic isolated barren island produce such prodigious economic success when so many larger more powerful countries, who have a seat at the United Nations, large military forces, activist governments, and are endowed with greater natural resources are conspicuous failures and spend too much of their time rattling the begging bowl for aid or development money, whilst simultaneously cursing multinational companies for exploiting their natural resources and people, or insulting their sovereignty?
The fascinating questions for the outsider, and for many Bermudians are, how is this possible and what is the secret of Bermuda’s success? If there are no oil wells or hand-outs from Uncle Sam or the British Government what is the magic formula? Is it drugs or money laundering? And is it really the land of milk and honey the tourist brochures make it out to be? How can Bermuda with all its supposed inherent disadvantages be so successful when there are so many other conspicuous failed countries in the world – many of them only a thousand miles to the South (Cuba for example)?
The reasons for economic success in most countries are often difficult to determine and are dependent on many factors, some obvious – most not. There are certain fundamentals necessary for economic success to which Bermuda has traditionally paid a great deal of attention such as:
- general acceptance of capitalism and public confidence in the system of private enterprise;
- respect for the rule of law, and a low level of serious crime;
- respect for private property and freedom of contract;
- the right of appeal from the domestic legal system to the Judicial Committee of the Privy Council in the United Kingdom;
- lots of well-paying jobs;
- tight controls on Government spending;
- Bermuda dollar tied legally and commercially to the US dollar;
- modest levels of Government debt;
- no central bank to expand the money supply and create runaway inflation;
- stable and well-managed domestic banks.
- no income, withholding, or corporate taxes;
- access to foreign capital because of a favourable credit rating, and because of the reputation of the large international companies which have established a base in Bermuda;
- a battery of top-notch professional services – legal, accounting, and technical.
- access to foreign technology and labour;
- political stability and absence of corruption;
- sensible regulation of financial institutions and international organisations who have established a presence in Bermuda;
- excellent infrastructure of roads, ports, telephones, and electrical power;
- heavy investment in education, both public and private;
- no welfare dependency;
- apart from the post office no state owned enterprises;
- a long history of political stability;
- limited government intervention in the day-to-day economy.
I have made an informal score using the measures devised by The Heritage Foundation/Wall Street Journal 2001 Index of Economic Freedom, and Bermuda ranks ahead of the world’s freest country Hong Kong. It is therefore not surprising, given the level of economic freedom, that Bermuda ranks as one of the richest and most prosperous countries in the world, and not coincidentally one of the most politically free notwithstanding the British colonialist jackboot of almost 400 years.
That being said, there is a worrying trend under a new governing party towards some of the economic stupidity, so common elsewhere in the world. Taxes have increased from about 15% of GDP 10 years ago to around a current 25% – or $10,000 per capita; income tax is unlikely although one government MP is talking about it, but there is much talk about some form of direct taxation and the desirability of income re-distribution; government debt is increasing; civil service numbers are increasing. There is even talk about the ultimate folly – economic planning that proposal having been supported by a business leader. Those whom the gods would destroy, they first make mad.
In the 1980s, Bermuda was the beneficiary of the madness of the American legal system, and the scandals in the insurance markets at Lloyds of London. It now accommodates one of the largest insurance industries in the world, no mean achievement for a population of around 60,000. One of the largest companies, ACE, joined the S&P500 Index at the end of January, 2002. Bermuda has always welcomed international operations – the Royal Navy and later the American Navy used Bermuda for years as a major base until 1995. It was a pioneer in the tourist industry well before the Second World War. Large international companies are not ogres and are welcomed with open arms – Shell and American International have been in Bermuda since 1947. For the sports minded, Bermuda introduced tennis to the United States at the end of the 19th century. For the sartorial minded, business people go to work in Bermuda shorts (with long socks) and blazers and tie.
It would be reasonable to expect that major countries would wish to congratulate Bermuda on being the success it is, especially when there are so many examples of failed states around who keep appealing for a hand-out and creating problems for the big boys. You would, of course, be wrong.
Many of the large economic powers – USA, UK, Germany, France, for example – have a particularly annoying and difficult problem. Their governments need more money, but taxpayers are fed up to the back teeth paying the monster. One consequence of this is that taxpayers seek ways to reduce their crippling burden, and one way of doing that is transfer assets to or set up shop in places like Bermuda. In days gone by it was much more difficult; you either had to rebel against the government like America, emigrate, go to prison, or pay up. Now you just change your style of doing business and turn down invitations to tea parties in Boston. For that reason, Bermuda and other low tax jurisdictions are in the cross-hairs of the many interventionist countries who are running short of revenue.
In recent years the OECD (whose main purpose for existence is lost in the sands of time) and its co-conspirators, has sought to identify harmful tax regimes and take action against them unless they sign a sort of Stalinist confession that they will behave themselves in future. Good behaviour means, in effect, modifying or giving up a major competitive advantage for the benefit of corpulent and over-taxed states. It is not an overstatement to say that this is a perverse form of protectionism. One irony of this is that the employees of OECD are exempt from paying taxes on their salaries. It is always reassuring to know that hypocrisy within bureaucracies has gone global.
Another tax adversary is the British Government which continues to have residual constitutional responsibilities for Bermuda. In 1999, the British Government issued a White Paper entitled "Britain and the Overseas Territories – A Modern Partnership". This brought together a series of subjects, not always related, such as citizenship, abolition of capital punishment, legalisation of homosexual relations, financial regulation, care for the environment, and money laundering. This document was peppered with high flown moral statements about ethical government written in the inimitable style of the British civil service – an irritating combination of good English, British understatement, threatening language, and patronising compliments. The message was clear however – you guys are stealing our tax revenue and it had better stop. This and subsequent documents are not clear as to whether they want islands like Bermuda to become like Sierra Leone and fall apart economically, or if we should just regress and become subsistence farmers and fishermen. Watch this space, as they say.
To sum up, Bermuda is politically stable, has market-friendly institutions, low taxation, and limited government which provides all the necessary ingredients for prosperity. Bureaucrats from UK, European Union, and USA are always welcome to come down and visit (we need the tourists) – especially when it is cold and wet at home – and see the benefits of economic policies they can only read about in the history books of the 18th and 19th century. Maybe they might learn something useful.
February 4, 2002
