The world is dominated by a few very large and powerful economies ? the United States, China, the European Union, Japan. And yet a handful of small islands, Bermuda among them, are now, thanks to a financial services industry unconstrained by geography, among the most prosperous places on earth.

Usually I find myself being asked what we need to do to keep it that way. But I want to try to answer a rather different question: is continued economic development desirable in very small states that are already rich, and if it is, for what purpose? We are rich, though we are not all completely happy. Nonetheless, we who live in Bermuda are envied by all who visit us. But would being even richer make us even happier? I?m supposed to be a specialist in international development. But I have been puzzling over these questions ever since I first arrived on the island four years ago.

That puzzle deepened when I read recently of a company selling peanuts which has put a warning on the jar: ?Caution ? may contain nuts?. May contain nuts seems to me ? with apologies to John O?Farrell who may have got there first ? a pretty good metaphor for modern life. You want nuts; so you buy nuts; but you have to be warned lest possessing them does not make you happy. And note the ?may?: there?s an intriguing possibility that nuts are not, after all, included. Is it, I wonder, the same with economic growth? You want more; so you go for growth; but you didn?t read the caution ? possessing it does not necessarily make you happy. And as with all special offers, even when nuts are involved, conditions apply.

The easy assumption ? that of course the economy should grow because that way we all get richer, and that will make us all happier ? isn?t necessarily the right one on a crowded island that already imports a quarter of its labour force . Economic development has consequences that go well beyond higher incomes. The lively debate about sustainable development in Bermuda illustrates both the level of public interest in the issue, and the need to establish a practical basis for the very real decisions that lie ahead. But nor is the equally seductive assumption ? that we are so rich we don?t need to grow any more ? as convincing as it may at first appear to those who have been fortunate enough to thrive in this environment.

A more sophisticated answer might be to deny the relevance of the question, on the grounds that a well-run economy like ours has a momentum of its own and gets on quite nicely taking very little notice of Governors. But we cannot escape so easily from confronting the issue: are we happy with where that momentum is taking us?

It is said that Governments campaign in poetry but must govern in prose. Governing in prose ? good simple government, without frills, appropriate to the size of the economy - does seem to me the right objective in small island states. But we should allow ourselves a little poetry too: a willingness to spread the wings of imagination, to take a fresh look at the familiar, to discover what we really value. So let me start with a few propositions that may be helpful: lenses through which the issues surrounding growth may become more focused.

First, we need to be a lot more imaginative about how we measure prosperity. The wealth of the economy is usually expressed as gross national product per head. That includes many things we probably do not value at all, such as the cost of commuting, and excludes much of what we value most, such as leisure. The main boost to the US economy in the 20th century came with increased arms production in the Second World War, and it is surely perverse to regard that as a benefit. In Bermuda, much of the so-called ?night economy?, generating large amounts of cash, is fuelled by the sale of drugs. Planning decisions, here as elsewhere, balance the public good of open space, which is not captured in the measure of wealth per head, against the private good of new building, which is. If we set the wrong measures, we may head in the wrong direction.

The World Bank argued in 2000 that the quality of economic growth was determined by four key factors ? the distribution of opportunities, the sustainability of the environment, the management of global risks, and the quality of governance . That analysis seems to me as applicable to Bermuda as it is to China and India. Growth should supply as many people as possible with the opportunity to benefit from it; it should not be at the expense of the physical environment in which future generations have to live; it should be within a context of global security; and it should be accompanied by the delivery of high quality services where these need to be provided by the state.

Second, we should be more conscious that individuals perceive relative positions, not absolute ones. Individuals throughout the world aspire to the purchasing power of others, rather than to a particular standard of living. The change in Wal-Mart?s mission statement between 1990, when its ambition was size ? ?become a $125bn company by the year 2000? ? and 2006 ? ?to give ordinary folk the chance to buy the same thing as rich people? illustrates this perfectly. And remember Henry Ford?s mission statement for the Ford Motor Company in the early 1900s? ?Ford will democratize the automobile?: you couldn?t get clearer recognition that everyone wants what others have. Absolute riches matter less than we think.

Most of us know what our income is, but when it comes to whether we are satisfied with it what really matters is how it compares with what we got last year, or with what we expected, or with our co-workers and with those with whom we went to school. It matters far more to us that we should feel able to change those relativities than that we should reach a given level of wealth.

Third, the generally high level of prosperity here has come relatively easily. Throughout the memory of most Bermudians, living standards have increased almost every year. The expectation that we will all continue to get better off is deeply embedded. People borrow large amounts, relative to their incomes, in the expectation that their future earnings will pay off their mortgages, and that their houses will always rise in value. Fuelled by income from wealthy tourists, and more recently by the profits of the international businesses, consumption has been high for several generations.

That has not been the common human experience. In almost all of the rest of the world, a lifetime of hard work without a significant improvement in living standard has been and remains the norm. Bermuda?s wealth per head is now an astonishing ten times that of the world as a whole - and 100 times that of Africa . But the great economies of the modern era ? the United States in the 20th century, China in the 21st ? were built on competitiveness, not consumption. For long periods in the 20th century, average incomes in the US stagnated or declined. Real incomes were lower in 1933 than in 1903, and in the twenty years between 1973 and 1993 real income hardly rose . For most of the 20th century the American story for the average worker was about hard work, not wealth. The same will be true, even more so, in China in the 21st. Because Bermuda is physically isolated, it is rather easy to become complacent about our favoured position; but the globalization of financial services means that the signals of rising and falling competitiveness, and of willingness to innovate, are transmitted instantly around the world.

And fourth, the constraint on continued economic expansion in Bermuda is labour, not land or capital. Those who have visited Manhattan, Singapore or Hong Kong will have seen the answer to limitations on land area: build vertically. There is almost no limit to the physical expansion of a city-state that puts economic growth before open space. As to capital, efficient international markets will continue to bring as much of it to Bermuda as our financial services demand, as long as it can be employed most profitably here. When I arrived in Bermuda in 2002, we had 84 insurance companies on the island. That increased to 147 last year ? while the number in London actually fell . But labour, on the other hand, will clearly be a limiting factor on any further increase. That is because of the small size of the Bermuda labour market; because of the often relatively poorly prepared local entrants to it; and because of the limits to the social acceptability of guest workers.

So what does this special offer on economic growth look like? So far, growth is offering Bermuda a pretty poor cv. It seduces us with the prospect of greater riches; but it seems to have a habit of conflicting with the physical environment. It?s got an indifferent record in allowing everybody to participate in its success. It has tended to diminish our competitiveness; and it is constrained by the supply of labour. It doesn?t seem likely to provide the advertised benefits of greater opportunity, long term sustainability, security and service quality. Should we give up on growth? Would that make us happier?

Economists differ on whether happiness requires an expanding economy. The late J K Galbraith argued forcefully that it did not: for him it was the nature of the society that counted, not what the economy produced . Richard Layard?s research on the relation of happiness to individual prosperity tends to support that . It is certainly tempting to reject growth?s cv, on the grounds that Bermuda is the first example in human history of an economy that can do without it, being rich enough already and not wanting to risk the quality of life. Bermuda?s own Sustainable Development Plan acknowledges the tension between an economy that raises living standards, and the need to live within Bermuda?s physical limits .

This recognition of values that extend beyond measurable riches is not confined to Bermuda. The tiny Kingdom of Bhutan has spent over thirty years trying to escape the straitjacket of traditional economics by pursuing an explicit path of Gross National Happiness rather than Gross National Product. GNH comprises sustainable development, the preservation of cultural values, conservation of the environment and good governance . No one could possibly quarrel with all that ? it has much in common with the World Bank?s model ? but some of us would question the effectiveness of a development path that still leaves 95% of the population without secondary schooling.

Among economists there is, however, a growing interest in the linkages between economic growth and the quality of governance, social tolerance and civility ? none of which is captured by conventional measures of GNP. Benjamin Friedman, for instance, has shown convincingly that when incomes stagnate, there is less left over, both for individuals and for governments, for constructing the social capital that makes societies work well . The stagnation of American middle class living standards during periods of the twentieth century were accompanied by rising intolerance and incivility and an erosion of generosity and openness. Globally, rising living standards have been associated with movement towards openness and accountability; and, in general, with better governance . And throughout history, it has been the prosperous societies that have generated patronage of the arts and sciences, and which have left their mark in the temples of Ankor Wat, the palazzios of Venice and the creativity of Silicon Valley.

The no growth society is very probably also a rather immobile one. Some may feel excluded from the benefits of Bermuda?s present success, but it is likely that even more would feel excluded from the wealth of a Bermuda that stood still. Changes in relative positions would become much harder, and resentment would grow.

Happiness is a readily understandable objective. The United States Declaration of Independence demands ?life, liberty and the pursuit of happiness?. The mission of the Walt Disney company is even simpler: to make people happy. Politicians in democratically accountable systems invariably try to make their constituents happy. So the argument might run that successful politics requires happiness, happiness depends on the quality of the society in which an individual lives, and that quality requires economic growth. The richer the society in the first place, the more important is the quality of growth because the benefit of a marginal increase in individual wealth is small.

I find that persuasive. Economic growth in prosperous societies can make more people happier, but only if it is managed so as to achieve some specific objectives. These need not interfere with, indeed they can reinforce, the disciplines of the market place that are the foundation of successful economies. Three such objectives seem to me particularly relevant to Bermuda.

First, we have to recover our competitiveness. Growth at the expense of competitiveness wouldn?t make anyone happy for long; in fact it would end in tears when the consumers of our products ? financial services and hospitality ? went elsewhere. The cost of doing business in Bermuda has been rising steadily. Other jurisdictions, with lower costs, are working hard to build international reputations. The debate on territorial tax has recently been reopened in the US : the incentives for US firms to be headquartered in offshore jurisdictions must not be assumed to last forever. Our growth must be secured without rising costs.

That means that we must use our existing resources more efficiently. Our land area is small and it is right that we should preserve some of it against development. But a surprising amount of it is unused, or underused. Our labour is not as productive as in many competing jurisdictions; we need to invest much more effectively in education and training. With some two thirds of male students leaving the public education system without so much as a Bermuda School Certificate , we are building up problems for the future. In terms of both the proportion leaving school with recognized qualifications, and of the level of attainment represented by those qualifications, Bermuda?s public system is falling well behind the UK and the US . And American research shows how effectively human capital, and the lack of it, is transferred from parent to child: effective schooling for one generation makes effective education of the next more likely .

Second, we have to ensure that a higher proportion of the population have a sense of participating in the general prosperity. Exclusion creates resentment. The challenge of matching growth with equity must be an increasing preoccupation for all of us in a world that is both rapidly developing and increasingly uncertain. It is increasingly widely recognized that continued global stability requires that the economically disadvantaged benefit from the forces of globalization , from the forms of governance that are emerging , and from the patterns of international trade .

That argument too applies here. We have full employment in Bermuda, and because we have few really poor people we do not have an unusually wide distribution of wealth ? similar to that of France, with wealth a little more evenly distributed than in the UK and US . For the majority of Bermudians, the combination of skill and hard work has brought great material reward. But there are also many who, despite often having more than one job, struggle to find a foothold on the ladder leading to financial security for the family. Their exclusion from our prosperity would threaten the rule of law and social stability.

And third, we should ensure we have more of the goods that we actually value in the economy, and fewer of those we don?t. That may mean greater investment in health care, the arts, the sciences and sports ? all of which contribute to the quality of life without detracting from it ? and less in condos and cars. It may also mean health care that does not consume scarce open space, science which draws on local skills more than imported ones, and sports that are readily accessible to those on relatively low incomes. But it is vital to get this right. Well-directed investment in all these areas will keep Bermuda unique, and will ensure that it continues to be a magnet to internationally mobile capital and high wealth individuals.

Conclusions

You might expect me, as Governor of this particular small island, to draw some conclusions about how such places should be governed so as to bring all this about. I can certainly offer some general observations; but it is definitely not for me to suggest specific policies ? under our constitution and in our democracy, that is a matter for our elected Ministers.

My main observation is this: whatever else they may aspire to, Governments should make sure they pick the low hanging fruit. Geoff Mulgan has pointed out that Governments are often at their best when they concentrate on the mundane practical things like welfare and justice . They are generally at their worst when they try to do things beyond their capacity to deliver. Every Government is tempted to cruise in a process-heavy comfort zone, rather than implement tough decisions, when it comes to the more complex policy areas. And the talk shows remind us that the everyday concerns of most Bermudians revolve not round the poetry of the imagination and the unfamiliar but round the everyday prose of law and order and public services.

Lurking in the background, though, is our friend Growth with that puzzling cv. It carries some baggage. But it promises us the opportunity to write poetry: to construct a peaceful, tolerant and balanced society, in which everyone participates fully. Without it, the ambitions of participation, sustainability, security and quality services will be elusive. Let us recruit Growth, by all means ? but with our eyes wide open. Growth will make us richer, and that could make us happier, but only if we manage it carefully. More of the same is unlikely to meet our longer-term needs and aspirations. Conditions apply.