Toward an Understanding of Competitive Markets: Just Why Is Bermuda the Most Expensive Place on Earth?
Robert J. Stubbs
Since last summer’s election, we’ve heard a lot about how high a priority reducing the island’s exorbitant cost of living is to our new government. As with many of our new government’s policy initiatives, there was an initial flurry of activity with a commission formed, commitments to study the problem made and promises to report relevant recommendations duly delivered. Indeed, in the case of this particular initiative, legislation has already passed changing the name of Bermuda’s previous Price Commission to the Cost of Living Commission, but this amounts to the sum total of progress to date visible to the public. In comparison to their predecessors, however, it should be noted even these modest developments represent tangible progress as Bermuda’s former government refused to even acknowledge the issue despite its great importance to the general public, consumers and businesses alike. But where would one begin? How might we tell whether the island’s residents are being over charged for goods and services? Where should we look? How would we know? The economics literature contains a substantial body of knowledge known as ”Competition Policy” dealing with the relevant theoretical and empirical issues surrounding these very concerns. Such is its economic significance, competition policy is viewed as of critical national importance to the successful economic oversight and stewardship of every country. Considerable research has been produced in this area and by now a recognised set of best practices has been developed for the public monitoring, review and, where warranted, further investigation of individual private markets. Robert J. Stubbs, a Bermudian, is an economist, CFA, holds an International Bond Dealer Diploma (ICMA) and has completed the ACAS actuarial exams. He was formerly Head of Research for Bank of Bermuda and his future career aspirations lie in enterprise risk management.
Fortunately, a few calculations with data provided by our Department of Statistics supplies a comprehensive overview of our economy with considerable insight into many of the most important considerations at issue. Our annual National Accounts data produced by the Department of Statistics provides estimates of Bermuda’s GDP on a production basis broken down by industry. Buried towards the back of this report is a two-page section entitled “Production and Cost Components.” Having received little prior attention, these two short pages prove a veritable treasure trove of information providing much of the data needed to assess the relative competitiveness of the vast majority of our economy, even suggesting a prioritised programme for further investigation. But before examining our data, perhaps a brief review of the range of data gathered by competitive market analysts overseas will begin to impart an appreciation for the subtlety of the task at hand. Reliable detection of uncompetitive markets is not easy. There is no simple formula - no magic bullet providing a failsafe identification of anticompetitive corporate practices. Uncompetitive markets have varying causes and consequences requiring a range of quantitative and qualitative factors to be assessed in determining the individual nature of each market. The complexity of analysis required is somewhere between that of stock analysis in the financial markets or credit analysis at rating agencies and the financial analysis conducted by management accountants. Perhaps the first information reviewed in market oversight are the various qualitative features of markets providing a good guide to the likely preconditions for and manifestations of anti-competitive corporate practices. Such features include various measures of market concentration, size of barriers to entry, common ownership of competing entities and the rate of firms’ entry and exit in markets. Greater market concentration, higher barriers to entry, common ownership of competing entities and lower rates of entry and exit are all hallmarks of possible anti-competitive practices. Providing further possible evidence of likely uncompetitive conditions would be a study of price changes within a market. While not conclusive in and of themselves, infrequent price movements or continually rising prices can signal potential problems, while the existence of parallel pricing where competitors move prices in unison may well indicate the presence of collusion or coordinated price agreements. Then there are a range of quantitative performance-based indicators consulted in a more thorough analysis. The first of these would include productivity. Changes in productivity over time can be used as a guide with lower levels of productivity gains suggestive of competiveness problems. Estimates of the variance in levels of productivity between firms within a market are also used with a wider variance indicative of potential uncompetitive behaviour. Profitability - both its absolute levels and changes over time - are also used to flag potential problems. As with each of these measures, profitability is not a clear cut sign of competitiveness or lack thereof. One might expect the presence of high profitability - particularly unusual profitability that persists over time - to be a sign of anticompetitive practices but reliance on high levels of profitability as an indication of competitiveness problems can produce false positives and negatives. Extreme levels of high profitability could be the natural consequence of business success such as a string of innovative breakthroughs. Conversely, consistently poor levels of profitability may well exist in uncompetitive markets where ineffective competition
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fails to force nonperforming firms to exit markets. Before conclusions are made, unusual levels of profitability need to be examined more closely to see which factors are driving unusual results. Additionally, comparisons between similar markets within countries and the same markets between countries can be used in a range of measures to more confidently detect unusual behaviour. These would include relative measures of productivity, profitability, price levels and costs. Especially when such results are supported by additional corroborative evidence, unusual relative levels and changes can give competition analysts greater confidence in their conclusions. Finally, before reviewing our data results, a brief explanation of the “Production and Cost Components” data itself. In this section of the GDP report, the Department of Statistics breaks our GDP production into 24 mutually exclusive and exhaustive industries. Prior to the inclusion of taxes paid by households, GDP is classified as Gross Value Added and for each industry this is broken down into four fundamental cost components. The first cost component is “Compensation to Employees” which in this analysis is referred to as returns to labour. The second component is “Depreciation” which is the common accounting estimate for the annual consumption of fixed capital. The third component is “Operating Surplus/Mixed Income” which is termed here as returns to capital and the fourth component is “Other Taxes less Subsidies on Production” which is taxes paid by corporations. Of the cost components, this analysis only uses the returns to labour and capital, or the “Compensation to Employees” and “Operating Surplus/Mixed Income.” The analysis also uses the “Gross Output” data amongst the production components as a proxy for total revenue. Gross Output is split between Gross Value Added, or internal costs to the corporation, and “Intermediate Consumption,” or external costs of supplies used in production. Finally, the data results exhibited here focus on the nonfinancial private sector, so banking and insurance have been excluded as have health care and education, being largely provided in Bermuda by the public sector. Additionally, the real estate sector could not be included in this analysis as their costs are not classified in the same manner as the rest of the private sector in the Department of Statistics’ data. So what do our calculations show? We are unaccustomed to thinking in such simplistic terms, but our economy’s income can be distributed in one of two fundamental ways - income to labour or capital. Once provision is made for the natural wear and tear of fixed capital and the requisite taxes to government have been paid, the remainder is available for distribution either to workers and management as compensation to labour or to capital in the form of dividends, interest and retained earnings. (In this sense, the “Operating Surplus/Mixed Income” is a proxy for EBI as opposed to EBIT - earnings before interest but after taxes.) The providers of capital to a corporation include banks and bondholders as well as its shareholders. Figures 1 and 2 show Bermuda’s “Labour Share of Income” and “Capital Share of Income” for the eleven listed industries since 2009, the first year the Department of Statistics published the data. As the two most fundamental factors of production, each is the complement of the other. An increase in the proportion distributed to one necessarily results in an equal loss in the share provided the other. Having risen 4 points to 80.5% in the two years to 2011, Bermuda’s labour share of income in this portion of our economy fell 9 points to 71.5% in 2016 for a net 5 point loss over the
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Figure 1 Industries Included:
Bermuda's Labour Share of Income* 81%
Agriculture & Fisheries Manufacturing
79%
Electricity & Water
77%
Construction
75%
Sale & Maintenance of Motor Vehicles
73%
Wholesale Trade 71%
Retail Trade
69%
Hotel & Restaurants
67%
Transport
65%
Communications 2009
2010
2011
2012
2013
2014
2015
* Non-Financial Corporations excluding Real Estate
2016
Business Services Source: Department of Statistics
Figure 2 Industries Included:
Bermuda’s Capital Share of Income* 34%
Agriculture & Fisheries
32%
Manufacturing Electricity & Water
30%
Construction 28%
Sale & Maintenance of Motor Vehicles
26%
Wholesale Trade
24%
Retail Trade
22%
Hotel & Restaurants
20% 18%
Transport Communications 2009
2010
2011
2012
2013
2014
2015
* Non-Financial Corporations excluding Real Estate
2016
Business Services
Source: Department of Statistics
period covered. For comparative purposes, Figures 3 and 4 illustrate the equivalent values for the US and UK (the reporting of their real estate sectors allows their inclusion.)
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Figure 3 Industries Included:
Labour Share of Income*
Agriculture & Fisheries
81%
Manufacturing
79%
Electricity & Water
77%
Construction
75%
Sale & Maintenance of Motor Vehicles
73%
Wholesale Trade Retail Trade
71%
US
Hotel & Restaurants
UK
Transport
69% 67% 65%
Communications Real Estate 2009
2010
2011
2012
2013
2014
2015
* Non-Financial Corporations
2016
Business Services
Source: OECD
Figure 4 Industries Included:
Capital’s Share of Income*
Agriculture & Fisheries
34%
Manufacturing
32% 30%
US
Electricity & Water
UK
Construction
28%
Sale & Maintenance of Motor Vehicles
26%
Wholesale Trade
24%
Retail Trade
22%
Hotel & Restaurants Transport
20% 18%
Communications 2009
2010
2011
2012
2013
2014
* Non-Financial Corporations
2015
2016
Real Estate Business Services
Source: OECD
Before looking at more detailed analysis, a few qualifications of these values should be mentioned. First, while economists once believed these apportionments to be cast in stone, more recently it has been recognised that they can and, indeed, do vary considerably over time. Secondly, the period covered is exceedingly short and should not be interpreted as representative of long term averages. Thirdly, this most basic distribution of national income is affected by a host of factors not least of which are the prevailing business conditions and political leadership of the time, but may also include a range of sociological and cultural influences amongst others. Of course, in
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the case of Bermuda the period covered includes a particularly tumultuous time in our history including both the most extreme weakness of our economic decline and our change in government from labour to pro-business in 2012. In many ways the results displayed for Bermuda are not surprising. Returns to capital are highly cyclical with the windfall gains during good times apportioned more highly to capital than labour. This can only be expected as capital can be wiped out during times of extreme weakness - the higher the risk, the greater the reward during good times. Bermuda’s extreme weakness during our crisis peaked in 2011/12 meaning that is when the low point in corporate profits would be expected and labour’s share of income would be at its highest. Similarly, with the pro-business change in government in 2012, the political leadership of the country would have favoured policies promoting a greater share of national income going to capital. The strongest influences on these factors of production were both pulling in the same direction and, hence, Bermuda’s greater volatility and overall slightly less agreeable trend toward labour. The real question is can we discern distinct differences between industries? Were these results driven by some industries more than others? Here the data broken down by industry begins to suggest we may well be able to. Figures 5 and 6 show the levels and relative changes for a subgroup of four industries: Electricity & Water, the Sale and Maintenance of Motor Vehicles, Retail Trade and Transport. Over the entire period, payments to labour were reduced significantly which is not surprising as companies across the economy reduced staff significantly in an effort to cut costs. But over the same period, these industries stand out in Bermuda for the scale of their
Figure 5
Bermuda’s Change 2009-2016 Labour Income
Capital Income
2009
2016
2009
2016
Electricity & Water
$49.1 mln.
$39.5 mln.
$20.8 mln.
$27.6 mln.
Sale and Maintenance of Motor Vehicles
$44.2 mln.
$27.2 mln.
$10.9 mln.
$30.0 mln.
Retail Trade
$182.4 mln.
$179.0 mln.
$49.7 mln.
$68.2 mln.
Transport
$69.0 mln.
$64.9 mln.
$2.5 mln.
$29.5 mln.
Source: Department of Statistics
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Figure 6
Bermuda’s Change 2009-2016 Labour Income
Capital Income
Electricity & Water
-19.6%
+32.8%
Sale and Maintenance of Motor Vehicles
-38.5%
+174.5%
Retail Trade
-1.9%
+37.2%
Transport
-6.0%
+1,085.8%
Source: Department of Statistics
rebound in returns to capital. In fact, as Figures 7 - 10 show these four industries are driving the results at the overall non-financial corporate level.
Figure 7
Bermuda’s Labour Share of Income* 83% 81%
Industries Included:
79%
Electricity & Water
77%
Sale & Maintenance of Motor Vehicles
75%
Retail Trade
73%
Transport
71% 69% 67% 65%
2009
2010
2011
2012
2013
2014
2015
* Non-Financial Corporations excluding Real Estate
7
2016 Source: Department of Statistics
Figure 8
Bermuda’s Capital Share of Income* 34% 32%
Industries Included:
30%
Electricity & Water
28%
Sale & Maintenance of Motor Vehicles
26%
Retail Trade
24%
Transport
22% 20% 18%
2009
2010
2011
2012
2013
2014
2015
* Non-Financial Corporations excluding Real Estate
2016 Source: Department of Statistics
Figure 9
Bermuda’s Labour Share of Income* 81%
Industries Included:
79%
Agriculture & Fisheries 77%
Manufacturing
75%
Construction
73%
Wholesale Trade Hotel & Restaurants
71%
Communications 69%
Business Services
67% 65%
2009
2010
2011
2012
2013
2014
* Non-Financial Corporations excluding Real Estate
8
2015
2016 Source: Department of Statistics
Figure 10 Bermuda’s Capital Share of Income* 34%
Industries Included:
32%
Agriculture & Fisheries
30%
Manufacturing 28%
Construction
26%
Wholesale Trade Hotel & Restaurants
24%
Communications
22%
Business Services
20% 18%
2009
2010
2011
2012
2013
2014
2015
2016
* Non-Financial Corporations excluding Real Estate
Source: Department of Statistics
A review of profit margins by industry supports the disparity of results both across industries within Bermuda and relative to the same industries in the US and UK. Profit margins are calculated as returns to capital relative to Gross Output. Figures 11 - 14 show the profit margins in these two industry groupings in Bermuda as well as the US and UK. While starting from lower levels, mark ups in these identified four industries more than compensated for lower initial levels. Moreover, the data shows by period’s end profit margins in both industry groupings in Bermuda exceeded those in the US and UK by a significant margin. Figure 11
Bermuda Profit Margin* 18% 17%
Industries Included:
16%
Electricity & Water
15%
Sale & Maintenance of Motor Vehicles
14%
Retail Trade
13%
Transport
12% 11% 10% 9%
2009
2010
2011
2012
2013
2014
2015
* Non-Financial Corporations excluding Real Estate
9
2016 Source: Department of Statistics
Figure 12
Bermuda Profit Margin* 18%
Industries Included:
17%
Agriculture & Fisheries
16%
Manufacturing
15%
Construction
14%
Wholesale Trade 13%
Hotel & Restaurants
12%
Communications
11%
Business Services
10% 9%
2009
2010
2011
2012
2013
2014
2015
* Non-Financial Corporations excluding Real Estate
2016 Source: Department of Statistics
Figure 13
Profit Margin* 18% 17%
Industries Included:
US
16%
Electricity & Water
UK
15% 14%
Sale & Maintenance of Motor Vehicles
13%
Retail Trade
12%
Transport
11% 10% 9% 8%
2009
2010
2011
2012
2013
2014
* Non-Financial Corporations excluding Real Estate
10
2015 Source: OECD
Figure 14
Profit Margin* 18%
Industries Included:
17% 16% 15%
US
Agriculture & Fisheries
UK
Manufacturing Construction
14%
Wholesale Trade 13%
Hotel & Restaurants
12%
Communications
11%
Business Services
10% 9%
2009
2010
2011
2012
2013
2014
* Non-Financial Corporations excluding Real Estate
2015 Source: OECD
Moving on to measures of productivity, once again noticeable disparities between these industry groupings can be discerned. Figure 15 shows the changes in productivity from 2009-2016. Here productivity is measured as Gross Value Added in real terms per employee. (The wholesale industry is included with retail and motor vehicles while transport is combined with communications as these are the narrowest reportings of employees by industry.) Not only did two of the three industry groupings in question experience weak productivity growth, by this measure productivity in the Electricity & Water and Wholesale, Retail Trade & Motor Vehicle Figure 15
Change in Productivity* 2009-2016 Agriculture, Forestry & Fishing Manufacturing Electricity & Water Construction & Quarrying Wholesale and Retail Trade & Motor Vehicle Repair Services Hotels & Restaurants Transport & Communications Business Services
-10%
-5%
0%
5%
* Real Gross Value Added per Employee
11
10%
15%
Source: Department of Statistics
Figure 16
Change in Prices* 2009-2016 Agriculture, Forestry & Fishing Manufacturing Electricity & Water Construction & Quarrying Wholesale and Retail Trade & Motor Vehicle Repair Services Hotels & Restaurants Transport & Communications Business Services
-10%
0%
10%
20%
* As Measured by Implicit Price Deflators
30%
40%
Source: Department of Statistics
Repair Services actually declined. Finally, Figure 16 shows the changes in implicit price deflators as a reflection of relative price movements between industries. While these results give a good indication of priority for further investigation, they are by no means infallible and need further refinement. In the nomenclature of the international National Accounts data, the industry labelled “Transport” includes storage companies which has seen a number of new entrants in Bermuda in recent years. Storage companies require substantial capital investment and have relatively low labour requirements, so this growing industry in Bermuda may well have skewed results for this sector as suggested by the sector’s healthy productivity growth. Additionally, industries such as communications and wholesaling saw relatively modest changes in returns to capital but both industries in Bermuda enjoy persistently high levels of profitability perhaps warranting a closer look. Individual market results also need to be parsed from the industry level data. For instance, the retail industry includes grocery stores and general merchandise stores. Before establishing final conclusions, relevant numbers for each category should be reviewed. The revelation of anti-competitive corporate practices should not be unexpected in Bermuda. Indeed, its preponderance would meet the prevailing norm of markets globally in the modern era, while an absence would be the true exception. In fact, the benefits of and threats to competition between sellers of goods and services have long dominated the consideration of markets since well before Adam Smith and his origin of modern economic analysis in the 18 century. th
In the UK economy, price fixing agreements were widespread prior to the passage of the UK’s Restrictive Practices Act of 1956. Today in the UK, oversight of markets and anti-competitive corporate practices is the purview of the Competition and Markets Authority. Investigations of markets in the UK have been so widespread virtually no sector of the economy has avoided detailed scrutiny at some point in time. In depth investigations have been conducted on markets ranging from retail banking, investment consulting, private healthcare, legal services, audit services and retail
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pharmacies to auto insurance, pay TV, elderly care homes, grocery stores, payday lending, local bus routes and even online dating services. The harm inflicted by anti-competitive practices is substantial. Estimates of price increases due to collusion typically fall between 20% and 30%. Not only does this have negative consequences for efficiency in harming productivity and growth in the economy as a whole, but income inequality is exacerbated as well as income is unjustly redistributed upwards. This occurs not only as the undue gains from collusion are usurped by owners of capital, but the industries most commonly afflicted by cartels are typically supplying the very goods occupying greater allocations of low income household budgets (Figures 17 & 18.) Figure 17 Number of Latin American Cartels Sanctioned 1995-2015 Transport & Logistics Food & Beverage Health Oil & Gas Chemical Inputs Construction Material Public Services Consumer Services Manufacturing Inputs Financial Services Business Services Telecommunications Consumer Goods Manufacturing Construction Consumer Services Mining
48 39 29 16 14 14 12 11 10 9 8 6 4 3 2 1 1 0
10
20
30
40
50
Source: World Bank
Figure 18
Bermuda’s* Income Inequality versus the OECD P90/P10 Ratios in 2014 8.8
9 8 7 6 5 4
As always, Bermuda’s low income are hurt most by the island’s high cost of 7.2
living. In fact, public policies aimed at enhancing Bermuda’s competitiveness not only raise productivity and growth
5.9
6.4
but, importantly, lead to socially inclusive growth. 3.4
3.7
4.2
3 2
0
DNK ISL CZE FIN NOR SVK SWE SVN AUT BEL LUX NLD FRA HUN DEU IRL CHE POL CAN GBR AUS NZL ITA PRT GRC EST LVA ESP TUR ISR USA MEX BDA
1
* Bermuda data based on unequivalised household income taken from 2010 census
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Some may question whether the potential benefits of a competitive markets authority to small island economies are worth the costs and as always this is a valid concern. The potential benefits depend on the prevalence of anti-competitive practices. As the evidence reviewed here suggests, anti-competitive practices may well be widespread in Bermuda today, but we also have considerable evidence Bermuda suffers from long-term challenges of uncompetitive pricing (Figures 19 - 21.) Moreover, if penalties Figure 19
US/Bermuda Purchasing Power Parity* $1.50
“The Most Expensive Place on Earth”
$1.45 $1.40
Defying gravity…
$1.35 $1.30 $1.25 $1.20
…but for how long?
$1.15 $1.10 $1.05 $1.00
1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 * As Measured by Consumer Price Indices
Figure 20
US/Bermuda Relative Real GDP per capita 1.50
The island’s uncompetitive pricing has real consequences…
1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00
….one step forward, two steps back 1960
1965
1970
1975
1980
1985
1990
14
1995
2000
2005
2010
2015
Figure 21
130.0 125.0 120.0
Offshore Real GDP 2008-2016 Our crisis has long since dispelled the myth of
Isle of Man 127
Bermudian economic exceptionalism
115.0 110.0
Guernsey 109
105.0
Cayman 102
100.0 95.0
Jersey 94
90.0 85.0 80.0 2008
Bermuda 83 2009
2010
2011
2012
2013
2014
2015
2016
paid in fines by companies found in violation are sufficiently onerous, the benefit of competition authorities is largely due to their effect as a deterrent. With no competition authorities, or authorities with insignificant penalties however, there is little deterrence. Other small island economies have competition authorities. Jersey, the largest and most advanced in economic oversight and management of Britain’s Crown Dependencies and Overseas Territories, has had a competition authority since 2005. Rationalising costs is as much a concern in the Channel Islands as anywhere else and, in 2010, Guernsey and Jersey pooled resources in jointly administering a competition authority. Cost is not the only concern in administering a competition authority. Competency must be a consideration. Considering the complexity of analysis demonstrated in this analysis, the Bermuda Government presently possesses the requisite skills in perhaps only the Department of Statistics and the Bermuda Monetary Authority. In fact, I would suggest the BMA is naturally placed to administer a local competitive markets authority. Not only does the BMA employ staff with the needed skills and qualifications, but the BMA is already charged with oversight of Bermuda’s monetary regime. Well-functioning, competitive markets are integral to Bermuda’s monetary stability. In the long run, preservation of the Bermuda dollar’s nominal value depends critically on the conservation of its real value. So far so good but, in actual fact, the above analysis only begins to uncover our pricing problems. Truth be told, even if we were to wring every last dollar in efficiency and equity gains from our uncompetitive markets, this would only begin to address our exorbitant cost of living. A review of the island’s long term changes in costs reveals Bermuda’s biggest competitiveness problems turn out to be much deeper, much more structural in nature than hinted in the above analysis. Ultimately, recognition of our biggest underlying problems will require a gestalt shift in Bermuda’s thinking, and providing an illustration of just this may well be this analysis’ greatest insight.
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Figures 22 - 24 show Bermuda’s long term changes in household spending, extending to our earliest records of 1974. Figure 22 shows the absolute changes in amounts spent in each of the categories recorded by our Department of Statistics in their Household Expenditure Survey. It is important to note changes in absolute amounts spent are due to changes in price and changes in quantity. Household expenditures are determined by changes in the amounts consumed per item as well as changing prices. Figure 22 Change in Amount Spent in Average Household Budget 1974-2013 Food & Beverages Alcohol & Tobacco Clothing & Footwear Housing Fuel & Power Household Goods & Services Transportation Education Travel Medical & Health Entertainment & Recreation
0%
200%
400%
600%
800%
1000%
1200%
1400%
1600%
Amounts consumed depend on consumer demand which is critically influenced over time by new technologies, tastes, perceived need for household investment and improvements in quality. Each of these will have influenced Bermudians’ household expenditure over this forty-odd year period. The biggest increases in expenditure have been in the categories of Housing, Education, Medical & Health and Entertainment & Recreation. Changing technologies and tastes have caused the significant increases in amounts spent on Entertainment & Recreation. 1974 marked the year the Nintendo company, originally incorporated in the 19 century, entered the fledging video gaming industry, and of course in the 1970’s iPads, Netflix and Apple TV weren’t even dreamed of. th
Likewise, changes in the perceived needs of household investment have resulted in a substantial increase in amounts spent on education. In fact, in percentage terms education has received the greatest increase in expenditure. Bermuda’s economy has changed significantly since the 1970’s, with the greatest growth in sectors requiring higher skilled workers, and Bermudians have responded by making substantial investments in better quality and greater amounts of education. In contrast to the 1970’s, today the majority of Bermuda’s secondary school students are educated in the private sector while Bermudian families have invested significantly in higher education. In fact, it could be argued higher educated Bermudians have become one of the island’s greatest exports. Data from the Department of Statistics show that while 70% of Bermuda’s emigres over the 2000-2010 period were Bermudian, 53% of
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those Bermudians held degrees and, of those degree holders, 83% were under the age of 35. Indeed, these factors have influenced the other categories where amounts spent by Bermuda households have surged. Medical & Health and Housing expenditures have increased enormously and in both areas these have been due in part to improvements in quality. As any Bermudian who has received care in KEMH’s new acute care wing knows, advancements in healthcare are largely due to significant advances made in technology and, no doubt, the knowledge and training of healthcare professionals, all of which costs money. Similarly, the quality of Bermuda’s houses has improved significantly as the size, number of bathrooms, and quality of bathrooms and kitchens have increased or improved considerably. Figure 23
Bermuda Households’ Average Expenditure Medical & Health (6%) Travel (6%) Education (2%)
2013
1974 Entertainment & Recreation (7%)
Entertainment & Recreation (11%)
Food & Beverages (24%)
Medical & Health (11%)
Alcohol & Tobacco (3%)
Transport (8%)
Clothing & Footwear (6%)
Household Goods & Services (13%) Fuel & Power (4%)
Food & Beverages (13%)
Clothing & Footwear (3%)
Travel (5%) Education (5%) Transport (7%)
Housing (21%)
Alcohol & Tobacco (2%)
Housing (29%)
Household Goods & Services (11%)
Fuel & Power (4%)
Figure 23 shows the relative amounts spent in each category and the areas consuming the greatest portions of the average Bermudian family’s budget. Housing, Medical & Health, Education and Entertainment now form the majority of household expenses having grown from 36% to 56% of average family budgets. But perhaps the most informative change is displayed in Figure 24. Figure 24 shows the relative change spent in each category as a share of Bermuda households’ total budgets and it is here that the underlying structural problems in Bermuda’s costs stand out. It is here Bermuda’s quagmire of uncompetitive costs is illustrated in bold relief for virtually all the goods and services provided by the industries in the above analysis fall on the left hand side of this ledger. Healthcare and housing costs account for a significant majority of the long term expense increases of the average Bermudian family and, while some of this is due to advances in quality, it is here that Bermudians must confront our greatest mistakes in our lack of foresight and prudent planning.
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Figure 24 Change in Household Expenditure As Share of Total Budget 1974-2013 Food & Beverage Alcohol & Tobacco Clothing & Footwear Housing Fuel & Power Household Goods & Services Transportation Education Travel Medical & Health Entertainment & Recreation
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Source: Bermuda Household Expenditure Survey
Much of these cost increases are not only inextricably linked, but were eminently avoidable. Bermudian lifestyles have changed substantially in the last half century and, regrettably, in many ways not for the better. For much like the rest of the New World, Bermudians have adopted en masse a suburban, car dependent way of living that is proving too expensive to maintain in any number of ways. Bermuda’s physical health, affordability, social inclusion, economic livelihood, even our environment, all have been harmed by these changes.1 As Bermuda changed incrementally over the past half century and the consequences of these trends took effect, their negative ramifications were compounded in numerous ways. Fortunately, the required rebalancing of our economy will have similarly multiple compounding positive effects. Rebalancing the urban/suburban residential life in Bermuda and redistributing our economic activity across the island will not only improve our affordability and physical health, but increase our growth potential enormously. Over the latter half of the 20 century, Bermudians largely modelled our development on the ideals and aspirations of those overseas, but we have allowed ourselves to be unduly influenced by the outside world. To some degree, correcting these mistakes will require us to relearn the principles and practices of our forefathers. th
These mistakes have been costly and could have been afforded only by one of the world’s most successful economies. In some ways this is a fortunate consequence of our crisis, as Bermuda’s current hardships are forcing us to recognise the island’s status quo is no longer affordable. Bermuda’s past successes have bred a complacency and stiff resistance to change. But change we must for it is not by chance that the most expensive place on earth also happens to be one of the world’s greatest exemplars of lessons learnt in unsustainable development. Q.E.D.
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1 See Stubbs, R., 2017, Bermuda in 2017: An Urban Economic Perspective - A presentation of the 20 century’s changing distributions of where people live and work on the island and the subsequent deterioration in Bermuda’s health, affordability, social inclusion, congestion and economy. In addition to economic revitalisation, identified reforms promise a restoration of the island’s once vibrant social, cultural and entertainment scene. https://issuu.com/robertstubbs0/docs/urbaneconomics th
References Baker, J. and S. Salop, 2015, “Antitrust, Competition Policy and Inequality,” Georgetown Law Journal. Competition and Markets Authority, 2015, Productivity and Competition: A Summary of the Evidence. OECD & The World Bank, 2017, A Step Ahead: Competition Policy for Shared Prosperity and Inclusive Growth. Oxera, 2015, A Review of the Jersey Regulatory and Competition Framework. Stubbs, R., 2016, Bermuda in 2016: An Economic Analysis and Political Critique of Where We Are, How We Got Here and The Way Out. https://issuu.com/robertstubbs0/docs/bermudain2016 Stubbs, R., 2017, Bermuda in 2017: A Consideration of Reform Solutions. https://issuu.com/robertstubbs0/docs/interview UK Competition Commission, 2013, Guidelines for Market Investigations: Their Role, Procedures, Assessment and Remedies.
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