The mess we’re in
Like the swell on the South Shore before a hurricane, the bad economic news keeps rolling in on Bermuda’s own economic storm, making a mockery of Premier Paula Cox’s unfortunate use of the term “post-recession”.
In just the last week the Island’s two leading law firms have announced layoffs for what is probably the first time in their respective histories, troubled resort Newstead-Belmont Hills has been placed in the hands of its receivers and Government workers have agreed to forego premium pay for overtime work.
Of the three announcements, the overtime decision is the least disheartening, because it at least shows that the regular Bermuda worker now recognises just how bad the economic situation is.
It is worth considering why this recession has hit Bermuda so hard and why it is so intractable. This is not a means of assigning blame, although there is plenty to go around. It is necessary, because unless Bermuda sees why the Island’s “economic miracle” went wrong, we will not recover and, even if we do, we risk making the same mistakes again.
It is worth starting with the external factors. The “Great Recession” unquestionably harmed Bermuda. Foreign investment money for office, tourism and residential developments dried up. The market for fractional properties the core of new hotels’ business models disappeared. Tourists, especially from the US, decided to forego vacations, so air visitor arrivals plunged to levels not seen in decades.
The mutual and hedge fund industry was hammered by the stock crash of 2009 and has still not fully recovered. Many reinsurance companies reduced expenses as rates softened across the board. Often this was done through layoffs or by locating business functions in less expensive jurisdictions.
Pressure on “tax havens”, a group into which Bermuda was often included, increased as western governments tried to recoup tax revenues. That and other regulatory matters have resulted in a stream of international companies relocating to places like Luxembourg, Ireland and especially Switzerland while Bermuda is a less attractive domicile for new incorporations.
Much of this was predicted. People like Shadow Finance Minister ET (Bob) Richards were consistently derided as doomsayers. The response of people like former Premier Ewart Brown was a nebulous claim that somehow Bermudians would find a way through it because they always had.
In the meantime, under Dr. Brown and then-Finance Minister Ms Cox, the economy was allowed to overheat, with economic activity growing at unsustainable levels. Property prices soared. Too many people thought the ability to raise rents made them business geniuses. Credit was too easy. Overheating was denied. Those who worried were accused of denying people their share of the Island’s success. As a result, when the crash came, it came all the harder.
At the same time, tourism’s recovery proved to be shallow, while the Island became ever more dependent on international business, and especially tourism. As alternatives, the only proposal ever aired was gaming, which has always been political poison.
At the same time, Government failed to prepare for the bad times which always come. Instead of reducing debt and saving for a rainy day, Government spent. It overspent on schools, office buildings and cruise ship wharfs. It launched Future Care with the best of intentions and no thought for its cost. It gave away college tuitions, bus fares, day care and more without considering that these services must still be paid for, usually by the ever shrinking domestic arm of the economy where successful businesses were punished with higher taxes. Borrowing soared, and now there is no money for the kind of public sector investment that often sees countries through recession.
The private sector must take some of the blame. The desire for ever higher profits and a shocking failure to supervise on the part of its board of directors very nearly put Butterfield Bank out of business and wiped out hundreds of millions in personal wealth and millions in personal incomes. The result has been a lack of confidence in investment in Bermuda, which is causing a downward spiral in the economy.
Above all, Bermuda’s lack of competitiveness and its failure to upgrade skills make recovery all the harder. Too many other countries have the same or better skills and are cheaper too. They are recovering. Bermuda isn’t.