An Economic Report From The Bermuda Triangle

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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

Bob
Stewart [send him mail] is
a long term resident of Bermuda, and was the Chief Executive of
the Royal Dutch/Shell Group of Companies in Bermuda between 1985
and 1998. He retired on December 31, 2001 as President of Old Mutual
Asset Managers (Bermuda) Limited. A director of several companies
in Bermuda, he holds degrees in economics and law from the University
of London. In 1997, he authored a book entitled Bermuda –
An Economy Which Works.

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