We can learn from Faroes’ story

Martha Harris Myron

Created: Apr 02, 2016 08:00 AM

Island economy: a view of Klaksvik, the Faroe Islands' second-largest town

Already we have passed the first day of spring, April Fools’ Day and are headed into an early summer.

Last week’s article was a story about an island, the Acqua Isle, a small island with a small population trying to stay afloat in the sea of global competition. Some thought it sounded like Bermuda — just change the name. Another thought it was Iceland, and probably, there were a few readers who labelled the whole thing as fictitious attempt at a lesson-revealing parable.

Truth be told.

The Acqua Isle is actually the Faroe Islands located in the Norwegian Sea between Iceland and Norway. Inhabited for more than 1,000 years, semi-autonomous, self-governing for most internal affairs with the population of around 45,000 descended from Vikings, the islands are connected to Denmark, which is responsible for the administration of justice, defence, and foreign affairs. Faroe’s international commerce (95 per cent) is focused on the fishing industry, with little else to supplement, agriculture arable land less than 2 per cent.

The islands’ gross domestic product was $2.3 billion for 2010; exports for same time frame at $824 million, and imports at $776 million.

These numbers are the result of a comeback after the economic collapse of the islands’ industry in the early 1990s (see last week’s article).

I first stumbled on the Faroe Islands’ situation about eight years ago, before the global recession, then followed by the long-suffering Bermuda recession. Little has been written about the Faroe Islands’ collapse, with some of the best research papers exclusively in Danish (no translation available). However, I was able to research enough information, including research on fishing catch volumes, trading partners and economic sanctions and the like about the Faroe economic stumble. Comparing these facts gently to Bermuda, and the parallels were absolutely eerie.

The Faroe Islands’ economy had operated full throttle ahead for more than 70 years as did the Bermuda economy in about the same time frame.

It was billed as the first sovereign debt crisis in the EU. “The Faroe Islands, in the early 1990s, accumulated too much sovereign debt, eventually getting hit by a crisis much larger in magnitude than even the worst in the ongoing European crisis,” according to J Danielsson and H Oskarsson, September 11, 2012.

It was later in time for Bermuda. The Bermuda economy then was booming, everything overheating, but getting better and better according to the economists of the day. You could see, you could feel that the overreliance on just one product — international business — was a concern. The doomsayers were roundly shushed as Bermuda had successfully survived many a storm over the years. However, all it would take to burst the Bermuda bubble would be an outlier, a “Black Swan” event à la Nassim Taleb to occur.

And it did.

The market crash of 2008 precipitated cutbacks, redundancies, corporation relocation and closings, real estate and share price declines, decreasing government tax revenue, greater demands on government purse for public service benefits, and related matters. The Bermuda Government increased and increased debt borrowings, banking on a fairly quick reversal to great economic fortune, but recovery has been slow.

The rest is history.

The parable of the Acqua Isle story delineates the vulnerability and the unexpected consequences of small island economies dependent on just one or two revenue producers. The Faroe Islands’ main product was and is still fishing, although according to various commentators, fish farms and some service industries seek to diversify the one-source revenue product.

There is a severe lesson here.

Bermuda is vulnerable, too. We have discovered this in our unrelenting recession as positions dried up, businesses implemented very tight cost-cutting measures while others closed up shop, thousands left the island, real estate prices declined as sales slowed to a crawl, islanders retrenched to personal non-spending modes, and many residents no longer have the jobs they once had or the opportunity to obtain another job.

A small island economy is subject to global market forces as never before.

Continuous pressure from countries’ tax authorities and global public interest groups such as the Organisation for Economic Cooperation and Development, larger aggressively competitive nations seeking to siphon off prized international business, highly attractive reasonably priced new tourist resorts like Cuba beckoning new customers, smaller nations with highly educated workforces and attractive tax/financial incentives urging corporate entity redomiciliation, individual traveller border crossing restrictions increasing as nations seek to protect their borders, increasing reputational risk as common reporting standards (CRS) are implemented whereby sharing of resident/entities tax structure and responsibilities are implemented between countries, anti-money laundering prevention and detection is a pre-eminent goal for global security forces.

We must protect ourselves from becoming irrelevant. What can we do to diversify away from the reliance upon one industry?

Some ideas espoused from time-to-time include: aquaculture, wind farms, coding, blue water gold mining, gas exploration, etc.

All of these above revenue generators require thousands of hours, millions to billions of dollars in equipment infrastructure, and years and years prior to any real profits forthcoming along with significant government or foreign investor funding. While aquaculture has a model in place on Faroe Islands, it too can be subject to the vagaries of fish population, disease, fish quotas, consumer tastes, competitive global pricing, and the like.

Let’s face it — as much as the word “service” is despised, Bermuda is a service island. We still have a fabulous reputation for financial innovation. We can earn back our service reputation.

The Monaco model: we are still famous seamen, for the most part, in a highly desirable location for mega-yachts, the ultra sailing experience, and a temporary haven for the rich and restless.

But we have to want to do this — meaning we have to want to serve in a highly efficient way the financially intelligent — so that we can take our money earned to the bank. And yes, we will need to understand coding.

The key to increasing our service skills lies with aggressively inspired education, the key to financial success.

Basic banking and finance should start in school, with more advanced topics covered at upper levels, adult learning classes in finance and computer skills offered on a routine basis to everyone — for free.

No skills, or old-fashioned irrelevant skills in the new millennium may mean endlessly working at low-paid employment. Does anyone want that?

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We can learn from Faroes’ story