The root of the problem
A great deal has been said about the causes of the current recession, with some Government supporters still avowing that the major impact has been from the rest of the world.
No one would deny that the global recession has had an effect; some, although not all, of the drop in tourism in 2009 and 2010 can be attributed to it. And to be sure, the stock market crash of 2009 had a massive and immediate impact on the low profile but important fund administration sector.
The near failure of Butterfield Bank and the collapse in its share price was due primarily to a failure by its management to understand the risks of investing in the sub-prime market in the US, but it has had a serious impact on the economy as a whole.
But other parts of the economy have emerged relatively unscathed. The reinsurance sector in particular has performed well in the circumstances, in fact better than many would have predicted two years ago. And again, some companies have fared better than others. Many people were predicting the demise of XL Capital. It has survived, albeit in a slimmed down form.
However, what the recession did do was expose the structural problems that Bermuda already had. Warren Buffett’s quote, “it’s only when the tide goes out that you learn who’s been swimming naked”, has become well worn in the last few years, but only because it has been appropriate to so many, and Bermuda turned out to have no clothes on.
The Island’s high cost of living and doing business was acceptable in the good times, but when businesses looked to cut costs, they quickly saw they could operate more economically elsewhere.
The Island’s tax position, always vulnerable, meant it was easier for countries like Ireland and Switzerland to come courting, and no amount of TIEAs (Tax Information Exchange Agreements) could change that.
It can be argued that it could have been worse without that effort, but the truth is that after ACE changed domicile to Switzerland in 2008, Bermuda should have gone on the offensive to dissuade other companies from following suit. But very little was done. As a result, many reinsurers have changed domiciles and now many of the “C” class of managers are moving too.
The problem this poses cannot be overstated, on two levels. First, when the top “minds and management” of a company leave, the business, regardless of its domicile, is simply a branch, and the importance of Bermuda as a genuine business centre diminishes. Secondly, and more directly, when the wealth and spending power, both of the individual and of the office, leaves the Island, its effect is multiplied throughout the economy. Those dollars would have been spent and spent again, on rents, on groceries, on business services, and yes, on taxes. And that is the real dilemma Bermuda finds itself in today. The loss of jobs, large and small, has taken millions of dollars out of the economy, and they will not be easily replaced. A trend has been established and a new business model created, and Bermuda has failed to make the case that it is essential.
A great deal of political debate has been taken up with the question of how much responsibility Government has in this. The answer is more than it would like to admit, on two levels.
The first is the apparent antipathy to expatriates and international companies, and the Government’s refusal to listen to international business’ warnings on work permits and the like until it was literally too late. The second concerns Government’s ballooning spending and its ravenous need for revenue, which sparked the increase in payroll tax on top earners in the 2010 budget.
More than the increase itself, the fact this was done without warning was catastrophic to sentiment and killed the idea that Government and business leaders were working together for the common good.
The arrogance of Government believing that international business would never leave Bermuda was displayed in February 2010 and Bermuda is paying the price today. The same combination of high costs and hubris killed tourism in Bermuda 20 years ago, but Bermuda could depend on a burgeoning international business then. Now there is nothing to turn to.