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Bermuda in 2016 An Economic Analysis and Political Critique of Where We Are, How We Got Here and The Way Out Robert John Stubbs

Like those of countries the world over, Bermuda’s most pressing problems are multifaceted, requiring multiple solutions. Despite this, if we can correctly identify the problems we have and ease the fears of overblown or perhaps nonexistent ones, we’re half way to solving our problems. Indeed, if we correctly identify our problems, I believe most of their solutions will appear self-evident. Fortunately, this is not rocket science. Very few of our problems require complex economic analytical solutions. Having said that, I should start by warning the following analysis will unnerve many in our community. In this analysis, I have tried to stick to the objective facts as closely as possible. Given the urgency of our position, I have left no economic fact consciously unexamined nor sacred cow ignored. These facts are the data at hand produced by the Government of Bermuda. As with any government’s data, some of ours is suspect and I have conducted multiple checks on the veracity of the data - in the process discarding some. The data I present can only be described as the objective facts as best we can determine. Examining the sea of data produced by our government can seem at first overwhelming. I have attempted to select the most salient facts of our economy, facts that can only form a starting point for any coherent economic analysis and discussion. While some of the data presents a picture not as bad as feared by some, other data will challenge the most commonly held opinions across the country. Many Bermudians will experience the discomfort of what scientists term “cognitive dissonance” when examining this data through their biased lens of political party affiliation. The inferences I draw from these facts, my determination of likely cause and effect, the implications of my analysis and the conclusions I make are open for discussion. They are my opinion - informed, experienced and professionally Robert J. Stubbs, a Bermudian, is an economist, CFA, holds an International Bond Dealer Diploma (ICMA) and is nearing completion of the ACAS actuarial qualifying requirements. He was formerly Head of Research for Bank of Bermuda and his future career aspirations lie in enterprise risk management.

qualified opinion, but opinion nonetheless. Unfortunately in discussing our problems in Bermuda, there is typically very little discussion of the facts. Indeed, very little attention is paid to establishing the facts. Bermudians, like people of other countries, tend to jump straight to opinions and conclusions, the premises of which, if closely examined, often bear little resemblance to reality. Make no mistake, we do face a crisis. Without question, Bermuda is at a crossroads in history. A number of critical decisions need to be made in our immediate future that will have repercussions for the well-being of Bermuda for generations to come. How we act, or fail to act, is of vital importance. In deciding how Bermuda should act, we must be brave enough to face the facts and limit our discussion and disagreements to our opinions and conclusions.

Where We Are….…....The Perfect Storm Everyone in Bermuda knows of the economy’s weakness, but it is important for us to come to grips with the true scale of our decline. Even the most financially and economically switched on people in Bermuda regularly cite our 10% decline in GDP since 2008 and Bermuda’s concurrent decline in population. The local daily has quoted these factors numerous times in the past year as Bermuda has struggled to address the economy’s deep-seated problems. Neither factor is fully understood nor appreciated. The 10% decline in Bermuda’s GDP since 2008 is in nominal terms. That is the total value of Bermuda’s Gross Domestic Product at current or market prices. Measuring economic performance in such terms, especially over significant periods of time, can be highly misleading. Economists refer to such deceptions as “money illusion,” a deception caused by the influence of changing prices, or inflation, over time. That’s why economists use “real” data in the vast majority of their research. If the economy grows in real terms from one year to the next, you know more was produced this year than last. Our rate of inflation has been very modest since 2008, but because eight years has elapsed, our economy in real terms has suffered much more than the nominal data suggests. In real terms, our economy fell 18.2% from 2008 through 2014. The two most important questions are, is this representative of the underlying health of our economy and how significant is our decline relative to those of other countries now and at other times in history? I have limited comparisons to the most important economic indicators we have a full history of over the period in question and, given Bermuda’s relative sophistication, comparisons are only made with other “developed” countries. While other measures I present later will suggest our predicament is not nearly as bad as commonly feared, by these general indicators our economy has suffered badly:


Real Gross Domestic Product Percentage Decline in Real GDP Six Years After the Onset of Depression Bermuda 2008-14a


US Great Depression 1929-35b


Greece 2008-14c


Spain 2008-14d


Ireland 2008-14e


Japan’s “Lost Decade” 1991-97f



Bermuda’s Department of Statistics


US Bureau of Economic Analysis

c - f


Retail Sales Percentage Decline in Retail Sales Six Years After the Onset of Depression Bermuda 2008-14a


US Great Depression 1929-35


Greece 2008-14d


Spain 2008-14e


Ireland 2008-14f


Japan’s “Lost Decade” 1991-97g




Bermuda’s Department of Statistics: Annual Average of Monthly Retail Sales Volume


US Bureau of Economic Analysis, Real Personal Consumption Expenditures


US Census Bureau, Nominal Retail Sales adjusted by Personal Consumption Price Deflator (Necessary to compare Apples with Apples)

d - g

OECD Retail Trade Volume for Greece, Spain, Ireland & Japan respectively


Employment Percentage Decline in National Employment Six Years After the Onset of Depression Bermuda 2008-14a


US Great Depression 1929-35


Greece 2008-14d


Spain 2008-14e


Ireland 2008-14f


Japan’s “Lost Decade” 1991-97g




Bermuda’s Annual Employment Survey, Department of Statistics - 40,213 in 2008, 33,475 in 2014


US Census Bureau, Total Civilian Employment


US Bureau of Economic Analysis, Full-time and Part-time Employees

d - g

OECD Total Employment for Greece, Spain, Ireland & Japan respectively

House Prices Percentage Decline in National House Prices Seven Years After the Onset of Depression Bermuda 2008-15a


US Great Depression 1929-36b


Greece 2008-15c


Spain 2008-15d


Ireland 2008-15e


Japan’s “Lost Decade” 1991-98f



Author’s Guestimate


Robert Shiller Nominal House Price Index

c - f

Economist Global House Price Data


National Stock Market Declines from Peak Levels Percentage Decline in National Stock Market Indices Eight Years After their Peak Levels Bermuda 2007-15a


US Great Depression 1929-37b


Greece 2007-15c


Spain 2007-15d


Ireland 2007-15e


Japan’s “Lost Decade” 1990-97f



BSX Index


Dow Jones Industrials








Nikkei 225

The above data compares changes in economic indicators as snapshots of the economy’s health at two different points in time. It is also interesting to view the evolution of the indicators between the start and end points. I am including this comparison with the time series charts for both employment and real GDP. Each series has been indexed to 100 at the start of the period for comparability. The fact that the relative performance of each country is very much the same for both factors and that both factors declined by similar amounts for each country supports the credibility of the estimates of each data series.


Real GDP

110 105

Japan 1991-97

100 95 Spain 2008-14

90 85

US 1929-35 Bermuda


2008-14 Greece 2008-14

75 70

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Total Employment


Japan 1991-97

105 100 US 1929-37

95 90

Spain 2008-14


Bermuda 2008-14


Greece 2008-14

75 70

Year 1

Year 2

Year 3

Year 4


Year 5

Year 6

Year 7

Year 8

“I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our people impel. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.” - Opening paragraph of Franklin D. Roosevelt’s first inaugural address at the depths of the US Great Depression on March 4, 1933.


How We Got Here….….A Slow Train Wreck The reaction of most Bermudians when it’s suggested our economy has approached the severe declines seen in Greece today or the US in the 1930’s is to say, “Where’s the unemployment?.…..We don’t have any soup lines.” Indeed, it was announced last summer that our official unemployment rate fell to 7% in 2014 from 9% the previous year. Bermuda’s unemployment data is produced from the Department of Statistics' annual Labour Force Survey, which was only started in 2009. (Presumably most Bermudians previously assumed we had so little unemployment it was not worth measuring.) Close examination of the Labour Force Survey’s data suggests it is suspect. Regardless of how many unemployed people there are in Bermuda, the employment data from the survey bears little resemblance to Bermuda's GDP. Even considering the margin for error built into the design of the survey, the data is at such variance to our GDP data it suggests the Department of Statistics' survey contains serious methodological flaws. Since 2009, employment as measured in the Labour Force Survey declined by only 3.3% while real GDP fell by 13.0%, implying the productivity of Bermuda’s workers fell by 10.0%. If that were the case, we would be in even deeper trouble, but Bermuda’s alternative measure of employment suggests that it is not, providing further evidence that the Labour Force Survey data is flawed. Perhaps the Department of Statistics needs to re-examine the definition of what constitutes employment. So what's our real unemployment rate? The Department of Statistics’ alternative measure of employment is derived from a survey of Bermuda businesses. This longstanding data series includes a breakdown of total jobs based on age, sex, race, Bermudian status, occupational categories etc. The figures for total employment are highly correlated with our real GDP data, lending credibility to both estimates. Close examination of that data indicates Bermuda’s economic problems started long before 2008. The truth of our economic performance is we have been haemorrhaging Bermudian jobs under both the OBA and the PLP, in both good times and bad. Bermuda has been suffering from an on-going, consistent loss of Bermudian jobs. Our economy has clearly not been working for Bermudians, in good times or bad:


Total Jobs Bermudian Non-Bermudian

Change in Jobs Since 2000 Bermudian Non-Bermudian














Of course, most Bermudians cannot afford to hang around if they fail to find work on the island quickly. With financial assistance on the island being as it is, most unemployed Bermudians don't stay on the island long enough to be counted as unemployed in the government's survey. Most people on the island have heard of expatriates leaving in droves, but it is the on-going emigration of Bermudians forced to leave the island for economic reasons in good times and bad that is of far greater concern. Separate data produced by the Department of Statistics shows that Bermudians emigrating between 2000-2010 outnumbered expatriates by more than 2-to-1.1 If not for this involuntary emigration, our unemployment rate would be north of 20%. In fact, given the weakness in the economy relative to Greece today and the US in the Great Depression and their associated levels of unemployment, 20% Bermudian unemployment sounds about right. The flip side of this is the appalling job losses in Bermuda. Total employment in Bermuda (Bermudian and non-Bermudian) is back down to 1993 levels. Bermudian employment is back down to 1978/80 levels.

1 In 2013, Bermuda’s Department of Statistics released Emigration: Bermuda’s Qualified Human

Capital Departs, which outlines the demographic characteristics of people emigrating from Bermuda between 2000 and 2010. The report estimates that 70% of a total 1,121 people emigrating from Bermuda over the ten-year period were Bermudian. As Bermuda’s Employment Survey estimates a loss of 2,634 jobs amongst Bermudians alone over the period, the report most likely significantly underestimates Bermuda’s total emigration from 2000-2010, but the report’s distributional breakdown of Bermuda’s emigration conforms with the demographics of Bermuda’s job losses over the period. The data released by the Department of Statistics indicates that emigration amongst expatriates increased significantly towards the end of the decade, but Bermudian emigration outstripped expatriates leaving the island in each and every year. Amongst Bermudians interviewed as to the motivation for their emigration, almost one half (47%) responded it was due to “employment” with the frequency of the next most popularly cited reason as “family” dropping to 25%. Most alarmingly, amongst Bermudians our emigrants were disproportionately well educated and young to an extreme extent. Fully 53% of Bermudians leaving the island held degrees in comparison with 19% of the Bermudians they left behind and only 37% of their fellow departing expatriates. Moreover, in a separate government statement accompanying the report’s release, it was revealed that 83% of the emigrating Bermudian degree holders were under the age of 35. No doubt, the forced emigration of much of Bermuda’s younger, better educated generation will have negative repercussions for Bermuda’s economy stretching far into the future.


Jobs Held By Bermudians 1978-2014 29,000 28,000 27,000 26,000 25,000 24,000 23,000

1978 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Perhaps by now, the reader may be wondering why we have not heard any of this before. Strange as it may seem, only in 2014 did Bermuda start producing the most basic economic data economists regularly work with and expect to see. In 2014, the Department of Statistics started producing a conventional National Accounts breakdown in real terms of our GDP. (I’m referring to the usual C + I + G + X - I accounts. See below table.) The Department of Statistics produced these critical estimates in the 1980’s and 90’s, but for some reason best known to the government of the day, Bermuda stopped producing this data in 2002. Ever since then, the reaction of any international economist when faced with Bermuda’s economic data would have been, “What do you expect me to do with this?” The importance of working with such data cannot be overestimated. This is how macro and international monetary economists make sense of the world. Their world is broken down into these components because, like insurance expected loss data, these components behave fundamentally differently from each other, and analysing the factors that influence their behaviour necessary to make forecasts and anticipate future changes is critically important. The existing body of economic theory and research literature implicitly assumes such a breakdown. When one wants to “look under the hood” of Bermuda Inc., such breakdowns are necessary.


A Rough Estimate of Bermuda ‘Under The Hood’ 2008-2014 The Department of Statistics only released National Accounts data that extends from 2007 to 2014 last fall, but it has been reported in nominal terms, and now we know the danger of working with nominal data. In an effort to make sense of Bermuda’s economy, I have adjusted our nominal data in a best efforts attempt to estimate the real components of our economic decline from 2008 onwards. (Proxies were made by adjusting each component’s nominal data by the annual implicit price deflator reported in our aggregate GDP series.) There is much to learn from such a breakdown. Before reviewing the real performance of each component of our economy since its decline, it’s important to know the relative size of each sector. According to our nominal data, the relative size of each of our economic sectors in 2008 was:

Bermuda’s Economy in 2008 Consumer Expenditure……………………………….……..49.7% Investment………………………………………………….... 17.2% Government Spending……………………………………… 15.5% Net Exports…………………………………………………... 17.6% 100.0% Exports of Goods & Services as a Share of GDP…………. 50.5% Imports of Goods & Services as a Share of GDP…………. 32.9%

Bermuda’s Economy in Nominal Terms (Current Prices) Consumer Expenditure Investment Government Spending Exports of Goods & Services Imports of Goods & Services Net Exports Gross Domestic Product

2008 $ 3,026,008,000 $ 1,050,764,000 $ 942,417,000 $ 3,075,434,000 $ 2,005,282,000 $ 1,070,152,000 $ 6,089,341,000

2014 $ 3,000,035,000 $ 606,031,000 $ 979,422,000 $ 2,899,868,000 $ 1,884,281,000 $ 1,015,587,000 $ 5,601,075,000

After adjusting our nominal data for inflation, Bermuda’s real economic decline since 2008 breaks down as follows:


Estimated Changes in Real GDP Components 2008-2014 Consumer Expenditure Investment Government Spending Exports of Goods & Services Imports of Goods & Services Net Exports Gross Domestic Product

Percentage Change -10.9% -48.2% -6.6% -15.2% -15.5% -14.7% -17.3%

In 2008 Prices -$ 329,347,326 -$ 506,017,034 -$ 62,037,674 -$ 468,811,079 -$ 311,546,270 -$ 157,264,809 -$ 1,054,666,843

Keen observers will note the 17.3% decline in real GDP does not agree with the previous estimate of 18.2%. Hence the confusion caused any international economist in attempting to analyse our data. The economic data produced by the Bermuda Government in the past ten years could be improved upon considerably. It has been neither timely, comprehensive, complete, nor in most instances really relevant. The nonsensical results of some of our National Accounts data even suggest some of the calculations are being tabulated incorrectly. The 17.3% decline in real GDP is my estimate using our nominal data reported on a National Accounts basis adjusted by the aggregate GDP implicit price deflator reported on an industrial sector basis. The 18.2% decline in real GDP is the Bermuda Government’s estimate reported on an industrial sector basis (2008 real GDP: BD$ 5,609,525,000 ; 2014: BD$ 4,590,547,000.) For those who prefer looking at charts, Bermuda’s economic decline since 2008 looks like this: Percentage Change

Estimated Real Change 2008-2014 in GDP Components


Government Spending



Consumer Expenditure

Net Exports Real GDP







The impact of each sector on our GDP growth depends on both the change and relative size of each sector. Taking both into consideration, the contribution of each sector to our GDP growth is as follows:

Estimated Contributions to GDP Growth 2008-2014 0

Government Spending

-2 -4 -6 -8 -10

Net Exports

Consumer Expenditure Investment

-12 -14 -16 -18

Real GDP


Given Bermuda has been caught in the grips of an economic depression, to an economist most of this data is hardly surprising. As most of Bermuda’s unemployed have been forced to emigrate, the steep decline in consumer expenditures since the crisis began is no surprise. Investment spending is the most volatile component of any economy and, in fact, typically leads the others in terms of its cyclical timing. In the National Accounts data, every government’s capital spending is categorised as investment. With our government embracing austerity, it’s no surprise our investment spending has taken such a hit. Likewise, our government spending. What’s really surprising in our data is the weakness in net exports. Economies are like people. They each have their own idiosyncrasies and one of the first things to recognize in getting to know our economy is, unsurprisingly, the importance of foreign trade. In 2013, our exports accounted for 47.7% of our GDP and in some years it’s not uncommon for over half Bermuda’s income to be derived from exports. As our container ships leave Bermuda’s shores empty, some Bermudians will be perplexed to hear exports dominate our economy to such an extent. (Trinidad’s exports are only so large because they export vast quantities of oil and natural gas.)


Exports of Goods & Services as a Share of 2013 GDP











Canada Barbados Bahamas Germany Bermuda Trinidad

Much of the world’s developed economies are dominated by service industries. In fact, one measure of an economy’s sophistication is the degree to which its manufacturing industries have been eclipsed by high value-added services. In Bermuda, manufacturing has almost disappeared altogether as our economy today is comprised almost entirely of services. Health care, education, public administration, legal, accounting and other professional services are all classified as “service industries”, but much of their activities are produced for domestic consumption. Exports dominate our economy because our leading industries, international business and tourism, are both export service providers. Every time a tourist checks into a hotel, a reinsurance company renews a contract for an overseas insurer or a bank executes a securities trade for a foreign trust, that’s an export. One of the most serendipitous facts in Bermuda’s historical good fortune is that the world’s largest consumer and business market lies just over our horizon. The US market is by far and away our largest customer base for both our tourism and international business services. As tourism and international business rose to dominate our economy, our fortunes became directly tied to the US. For forty years Bermuda’s economy followed that of the United States like clockwork. Since 1970, every time America experienced an economic upswing, Bermuda followed:


Real GDP 1970 - 2014





6% 4% 2% 0%

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

-2% -4% -6%

Somehow that changed. In 2009, our economy decoupled from the United States. In econometric terms, the co-integration of our economies was broken. Considering how important trade is to our economy and that the US is by far and away our largest trading partner, our decoupling from America is big news. It’s telling us that something is desperately wrong. Something is broken. Percentage Change

4% 2% 0%







-2% -4%



BDA Real Exports

-8% -10%


Much of Bermuda’s current economic hopes are pinned on our hosting America’s Cup in 2017. America’s Cup may be the world’s biggest boat race, but our recent performance suggests it will take more than America’s Cup to turn our economic fortunes around. Unless we learn from our mistakes and actively implement fundamental economic reforms, our decoupling from the United States foreshadows the future impact of America’s Cup on our economy. If we don’t start preparing for America’s Cup with a whole new mind-set, the influence of America’s Cup on our economy will be both limited and fleeting. Unless we make the necessary changes, America’s Cup will be a once in a lifetime economic opportunity that Bermuda lets largely blow by. No doubt, the preparation and staging of America’s Cup will be positive for Bermuda’s GDP growth in 2015-17, albeit partially financed with government debt. Indeed, anecdotally Bermudians are benefitting from race preparations and the Department of Statistics’ data suggests Bermuda’s GDP grew 2.7% in the first three quarters of 2015 over the year-ago period. Following our “six-year recession”, much has been made of our recent headlined growth. Alas, it would appear the gods are conspiring against us. Such is our fate these days, it turns out even our good news is bad. In the first nine months of last year, the entire 2.7% increase in our GDP was due to an improvement in net exports as Bermuda’s consumer expenditure, investment and government spending was flat over the year ago period. Moreover, the improvement in net exports was driven principally by a significant fall in Bermuda’s imports. Normally, weak imports are a sign of economic weakness, not strength. Most concerning is the continued decline in our investment spending which fell a further 1.9% in the first three quarters of 2015 from the year ago period.2 And this weakness while America’s Cup preparations were well underway. If Bermuda was set up for America’s Cup, its effect on our economy would be far greater post the event than in its run up. Unfortunately, our economic performance since 2008 is telling us the opposite is true. Despite the economic revival of our largest trading partner, Bermuda’s tourism continues to head south. Americans are spending more money on just about everything but a Bermuda vacation. Post 2017, unless we make substantial changes, America’s Cup could well be a net negative for our economy. Bermudians have a nagging sense something has fundamentally changed in our economy and that America’s Cup is not the wished for panacea to our problems. There’s a sense that all the celebrations of America’s Cup coming have papered over our underlying problems. We feel that something doesn’t quite add up and our problems require a more detailed understanding of what’s wrong. 2 The composition of Bermuda’s growth in 2015 has significant implications for the assessment of

our economy’s current condition. Taken together, consumer expenditure, investment and government spending are referred to as “domestic demand” while economists call changes in net exports “external demand”. Although Bermuda’s aggregate spending in 2015 will record its first year of growth since 2008, it would be premature to say our domestic demand has recovered. Given the performance of Bermuda’s domestic demand in 2015, a more accurate characterisation of our economy’s current condition would be to say, “we’re bouncing along the bottom.”


Air Arrivals to Bermuda 105 100

US Arrivals


Total Arrivals

90 85 80 75 70 65









Ultimately, Bermudians need to come to terms with two facts: A) Bermuda’s tourism is broken, and B) We broke it.


Bermuda Annual Air Arrivals

450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015


Many Bermudians will say our tourism was run aground by our unions and unproductive, uncompetitive Bermudian labour force. I would not describe Bermudian workers that way. In fact, I would argue our unique background makes Bermudians particularly well suited to tourism when compared with people of other countries. Bermudians are naturally welcoming, friendly and are capable of delivering polite service. Many of our visitors have found Bermudians to be positively charming. I would suggest our repeat visitors return to the island year after year because of our people and national culture as much as the island’s beauty. The world has any number of beautiful islands, but you won’t find people like Bermudians anywhere else. No doubt, Bermuda’s tourism suffered in the 1980’s and 90’s from an overpriced product, but I would argue this was caused from, more than anything else, economic mismanagement. In particular, Bermuda’s money growth in the 1980’s amounted to mismanagement by Bermuda’s political, business and regulatory leaders. Economists of all schools and political stripes agree that significant changes in credit will eventually feed through to prices. The empirical evidence of this cause and effect relationship from countries around the world is overwhelming.3 “Too much money chasing too few goods” really does cause

Average Money Supply Growth & Inflation Rates for 71 Countries 1980-1995 1000

Brazil Nicaragua D.R. of Congo Bolivia

Inflation Rate (%)



USA Bermuda




Bahrain 1

Germany Japan

Saudi Arabia



10 100 Money Supply Growth (%)

1000 Source: David Romer


See Benati (2005), Berger and Österholm (2008) and Freidman and Schwartz (1963).


inflation. Some will counter that in our system of banking the Bermuda Government has little to no influence on credit, but that’s just a dereliction of duty. When you issue bank charters and determine people’s taxes, one’s powers of persuasion are significantly enhanced.

Cumulative Increase in Money Supply By Decade Bermuda M3 Growth US M2 Growth

1975-80 89% 64%

1980-90 258% 114%

1990-00 91% 47%

2000-10 60% 82%

1990-00 33.7% 22.6%

2000-10 42.1% 23.7%

Cumulative Increase in Prices By Decade As Measured by GDP Price Deflators Bermuda US

1960-70 37.5% 30.1%

1970-80 127.9% 94.8%

1980-90 130.2% 50.3%

2010-14 7.9% 7.1%

Today, I think Bermuda suffers from a constellation of problems that prevents us from capitalising on our inherent significant economic advantages. Rather than being too expensive, today I would argue Bermuda’s problems are due to the TripAdvisor's More Expensive Caribbean Destinations* $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0

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configuration of business activity on the island, the unnecessary congestion of our roads, the wasted opportunities in revitalizing our capital city, the lack of initiative in redeveloping our waterfronts in key areas across the island, the Bermuda Government’s inability to capitalise on economic opportunities due to its ideologically motivated, as opposed to evidence-based, fiscal constraints…..In short, because of our lack of foresight and prudent planning, we have made our own lives and those of everyone who visits unnecessarily stressful. Moreover, our failure to understand our deep-seated, underlying problems has resulted in a “just-more-of-the-same“ approach to the island’s development that continues to this day and has actually compounded our problems. What’s most unfortunate is that much of this was eminently predictable and easily avoided. Indeed, a public policy research report issued in 1977 warned of this very eventuality and heeded Bermuda to take steps in advance to advert its outcome. Simon Reisman, a Canadian international economist who subsequently acted as Canada’s chief negotiator in their Free Trade Agreement with the United States, researched and produced Economic Options for Bermuda: A Report. Amongst other economic recommendations, Reisman stressed the importance of Bermuda decentralising incremental economic activity away from Hamilton. Reisman warned that further commercial development of Hamilton would ultimately lead to intense traffic congestion in the centre of the island and


could seriously curtail Bermuda’s growth potential. Given Bermuda’s small size, efficient utilisation of land was vital to the island’s prosperity and would only become increasingly important over time. In addition to the concentration of commercial activity and congestion of our roads in the centre of the island, for all our talk of tourism, truth be told, tourism has suffered from our outright neglect. There was a brief flurry of activity on the island in the early 1990’s in an attempt to arrest tourism’s decline. Many of Bermuda’s business people took part in compiling a report in 1992-94 referred to as Commission on Competitiveness that was aimed principally at reviving Bermuda’s tourism. But despite the honest effort, our air arrival numbers kept dropping. Bermudians seemed to accept tourism’s terminal decline somewhere in the mid1990’s and unfortunately we have effectively turned our backs on the industry ever since. Most damningly, this stance was taken officially by Bermuda’s then Minister of Finance in 2000 when he formally singled out financial services for Bermuda’s future development, even adopting specific growth targets for both its employment and share of total GDP to be met over the next five years. With both growth targets being met by 2005,4 the government of the day congratulated itself even as total jobs held by Bermudians was well on its way in its precipitous decline. We do have additional problems in our international business sector. Bermuda’s reinsurers are in the process of dealing with unprecedented competition from institutional investors. Risk is being transferred from the reinsurers to investors in the capital markets who are better placed to assume it. The diffusion of societal risks in increasingly broader hands is likely to be an on-going secular trend throughout the 21 century. Unfortunately for Bermuda and our reinsurers, the process has taken a big leap forward in just the markets Bermuda’s reinsurers specialised. In spite of this, our reinsurance market has attracted some of the shrewdest people in the business and the market will survive. It may not ever be as profitable as it was in its early stages, but in considering the island’s longer term, wider interests, that may not be such a bad thing. st

In analysing Bermuda’s problems, some may be tempted to say we’ve been hijacked by finance. More particularly, we have made too many concessions in accommodating the demands of reinsurance. While there may be an element of truth to this in our most recent history, it’s too easy to blame foreigners for our problems. Reinsurance is better suited to Bermuda than many other areas of finance. Reinsurance is not labour intensive, offers a high value-added product and, in contrast to other areas of finance, the operations of reinsurance businesses are not so sophisticated that Bermudians can’t expect to participate in the industry in large numbers. 4 See National Economic Report of Bermuda 2007.


Finding the right balance in developing an island economy dominated by finance and tourism is not easy. Other island economies, notably the United Kingdom and Manhattan, are struggling with many of the same issues. Our small size, isolation and already heavily populated conditions mean we have to be especially mindful of striking the right balance. It’s no mistake, however, that many of the world’s centres of finance are also successful tourism destinations. A number of natural synergies exist between the two and in many ways they enhance each other’s development. There is an increasing realisation globally that when faced with the anonymous levelling forces of global capital, it’s our differences that count.5 Each location in the world is endowed with its natural and cultural differences that lend each place its individual appeal and inherent competitive advantages. The current loss of biodiversity in the world is well known with our current age marking the globe’s sixth mass extinction. Less well known is the even faster loss in human culture. Of the world’s 7,000 languages spoken just forty years ago, less than half will survive our lifetimes. Recognising and nurturing our differences and competitive advantages is critically important in the economic development of each country. Our forefathers developed principles and practices that were uniquely suited to Bermuda. In managing our economy, we have to be respectful of our history and yet, as our ancestors did before us, be willing to adapt and actively shape our future. Many of our residents, both locals and expats, think life in Bermuda can feel, at times, a little crazy. For all our material wealth and excess, Bermuda has to be one of the most under-researched countries in the world. Research and analysis of this kind is routinely produced in other countries by think tanks, investment banks and academia. In Bermuda, for many years now research like this has been published solely by the Bermuda Government and then only on a perfunctory basis, with little thought or meaningful analysis in its production. The last time any real cogent economic, social and political research was produced in Bermuda was in the wake of Bermuda’s civil unrest of the 1970’s. With Bermuda forced to reimburse the British Government for the cost of sending troops out to restore order, our government had no choice but to participate in a close examination of the island’s underlying grievances. Unfortunately, some of the most important economic recommendations provided by foreign consultants at the time were effectively squelched by our then policymakers as they short-sightedly viewed the proposals as not in their interests.

5 See Rodrik (2007 and 2011).


For some time now, Bermuda has had the largest number of accountants and CFA’s per capita in the world, but in the 1980’s Bermuda had many more economists than actuaries. At that time, the Bermuda Monetary Authority regularly employed an economist on secondment from the Bank of England. With the subsequent transformation of our international business sector, today Bermuda has the world’s highest concentration of actuaries and virtually no economists. That’s unfortunate. Our biggest problems are fundamentally economic and, just when Bermuda was in most need of an economist, there were none to be found. Moreover, since 2001 economically speaking Bermuda effectively has been flying blind, lacking the most basic National Accounts data to make informed analyses and decisions. While our economy was growing and we seemed to be doing relatively well internationally, most people adopted the attitude “If it ain’t broke, don’t fix it.” More recently, although our economy was obviously ailing, without National Accounts data, arguments that we needed to change direction too easily fell on deaf ears. But that’s now changed. We now have enough data to see roughly where we are and perhaps what changes we need to think about making. Bermuda’s need of reform is underscored not only by our economic decline in the new millennium, but by even longer measures of our poor relative economic performance. Having well outpaced the performance of our largest trading partner, the United States, throughout most of the 20 century, Bermuda entered a period of significant relative economic decline starting in 1980. Admittedly, relative international economic comparisons are plagued notoriously by issues of data comparability and reliability. th

Our small size and lack of relevant macroeconomic data does not help, but the following measure I believe is the most reliable estimate of our relative performance vis-à-vis the United States. Over the last thirty-five years, our relative GDP per capita has underperformed the United States by 26%. To put that in current dollar terms people can relate to, every man, woman and child in Bermuda would be better off by an additional BD$ 21,943 in income each year if we had kept pace with the economic advance of the United States since 1980. Bermuda’s annual income would be more than BD$ 1.4 bln. higher.


Bermuda/US Relative Real GDP Per Capita 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2












I would suggest the lack of an effective public policy response to our economic predicament by successive Bermuda Governments is due largely to a general lack of understanding. Bermudians have been largely ignorant of exactly where we are economically, let alone how we got here or how we are going to get out. For the record, the indisputable, unadulterated facts of Bermuda’s economic performance are: 1) We have experienced a period of significant economic decline vis-à-vis the United States since 1980, 2) We entered a period of outright secular decline as measured by Bermudian jobs in 2000, and 3) With the Global Financial Crisis of 2008, Bermuda entered a seven-year economic depression and, as we have yet to recover from the crisis, we are now the world’s very last country to do so.6

6 Outside the world’s war-torn countries.


These are the undeniable facts. Yet, we hear no mention of them by Bermuda’s media, by the Bermuda Government, by Bermuda’s Loyal Opposition or, indeed, by the public at large. There are any number of reasons to account for such stony-faced silence regarding Bermuda’s most important economic realities. With the regular lack of reference locally to the objective data produced by our Department of Statistics, I would suggest the most prevalent reason is a general lack of economic understanding amongst Bermuda’s residents. Given the duration of our decline, the UBP, PLP, OBA and, indeed, the entire island, expatriate as well as Bermudian, is accountable for the island’s downfall. Perhaps the lack of truthful acceptance of our economic realities is due partly to a reluctance to accept responsibility. Perhaps it is due in part to an inability to provide effective solutions. Indeed, perhaps it is due to an awareness amongst some that meaningful solutions to our problems will require hard choices and may even include additional sacrifices by Bermuda’s economic establishment. Internationally, amongst policymaking circles, pressure to silence criticism of harsh realities is typically made by threats of sanctioning academic or activist individuals as “alarmist.” Perhaps such pressures have existed in Bermuda amongst individuals who are better versed with the financial and economic realities of the country. Regardless, the lengthy duration and full extent of Bermuda’s economic decline exposed by our objective data will render any further acts of denial as “absurdist.” It is time all of Bermuda’s residents, both expatriate and Bermudian, looked our economic realities squarely in the face and began the process of meaningful analyses of their underlying causes and the formulation of an effective policy response. Not only have we suffered unnecessary unemployment and the forced emigration of Bermudians due to our crisis, but the social ramifications of our economic decline are fairly obvious to all who have remained on the island. I would suggest it is no coincidence that Bermuda’s relatively peaceful existence was shattered by the emergence of on-going gun violence amongst the gangs of our misdirected youth only after Bermuda had already entered its period of economic secular decline. Despite our efforts to present an image all is right with Bermuda to the outside world, our local daily serves us a virtual constant reminder of the social woes plaguing the island. Indeed, without the adoption of meaningful economic reforms, Bermuda’s economic future looks even bleaker than our past. Our failure to confront Bermuda’s economic decline head-on is unsustainable. Without significant changes in government policy, the Bermuda Government is steering the island


Bermuda Dollars Billions 2.5

Bermuda Government Net Debt Outstanding














on a collision course with a full-blown financial crisis of our own making that makes our most recent economic history look benign.7,8 We may be hosting the world’s biggest boat race in 2017, but it will take more than America’s Cup to 7

Our current government is on course to accumulate as much debt in five years as our former government accumulated in the previous five (2008-12). In the first three years alone of the current government’s term, our budget deficits totalled BD$ 819,404,000. Our debt servicing burden, or interest and sinking fund payments as a share of government revenues, has exploded from 2% in 2006 to 18% in 2015. A detailed fiscal analysis is provided later in this paper. 8 The

just released first annual report of Bermuda’s newly formed Fiscal Responsibility Panel represents the latest in a long line of consulting reports commissioned by the Bermuda Government the primary aim of which, in my opinion, is to justify and entrench Bermuda’s status quo. The panel’s report is not without its merits as Bermuda, like most countries in the developed world, faces a rapidly aging population and significant health care and pension liabilities in the medium to longer term. While the report’s authors have considerable expertise in the fiscal challenges of preparing for such liabilities, the report is wholly inadequate in accounting for Bermuda’s severe economic weakness and examining the economic technicalities of implementing a fiscal consolidation while concurrently nurturing a nascent economic recovery (more on these details to follow.) In the case of previous Bermuda Government consulting reports, the consultants’ hands were tied before they even arrived in Bermuda with overly restrictive terms of reference that predetermined the reports’ conclusions as virtual foregone certainties. It’s as if we invited them into our house and said, “By all means, have a good look around - just stay out of the basement.” In the case of this particular consulting report, the authors’ objectivity is further compromised by the fact they are on an annual retainer. See Heller, Peretz and Portes (2015); Gutman and Toder (1999); Diguer (1994) and Denniss (2015).


close a budget deficit of BD$ 250 mln. annually (4.5% of GDP) and meet unfunded national pension liabilities of more than BD$ 3 billion. Our current government’s policies have only exacerbated our problems. Since they took office over three years ago, we’ve lost over 5% of our jobs and our economic depression has only deepened. Preparations for America’s Cup are well underway and the most you can say about our economy is we’re bouncing along the bottom. What’s worse, our debt situation has deteriorated badly. In fact, despite cut backs in government spending, our debt continues to escalate at the same rate under our present government as it did under the last. Most alarmingly, our debt servicing payments are rapidly closing in on 20% of government revenues.

Bermuda Dollars Billions

Bermuda Government Net Debt (Net of Sinking Fund)

Net Debt to GDP 45% 40%


35% 2.0

30% 25%


20% 1.0

15% 10%

0.5 0.0

5% 0% 2009






Bermuda's Debt Service Burden

Net Debt to Government Revenues

(Interest and Sinking Fund Payments as a Share of Government Revenues)


20% 18%


16% 14%


12% 150%

10% 8%


6% 4%


2% 0%









The government’s response to these developments is to say we’re doing the right things, we’re just not doing them in the right measure. In other words, they want to double down. Their solution is another round of the same old spending cuts and tax increases that got us here in the first place.9 Such a response to our seven-year depression has been tried now in its same basic form by two successive Bermuda Governments. Our previous government emphasised tax increases over spending cuts and, to date, our current government has favoured spending cuts over tax increases. Judging by their outlined plans, in wrestling with our spiralling debt the current government is preparing further spending cuts and additional significant increases in existing taxes. Neither of our previous governments has successfully reduced our budget deficit or stimulated an economic recovery. Both governments have only made Bermuda’s economic predicament worse. No doubt, Bermuda needs to close its budget deficit, but we need to do it in a way that does least harm to our economy. With the Bermuda Government providing the world with a textbook case of how to prolong an economic depression, it’s time we took a critical look at how our government is raising its revenue and what exactly it’s spending our money on. Some say the first rule of politics is, “when you find yourself in a hole, stop digging.” Given the Bermuda Government’s current plans, I would suggest our seven-year depression is about to get worse. Bermuda’s long spiral downward will continue. Our economic secular decline and looming financial crisis have fairly unique international ramifications as we are not an independent country. “Bermuda sovereign debt” is an oxymoron. There is no such thing. It doesn’t exist. Faced with the obvious and now substantial financial liability posed by Bermuda,10 the British Government ought to play a more active role in encouraging 9 See Heller, Peretz and Portes (2015). 10 Britain

has 14 overseas territories, 11 of which are inhabited, Bermuda’s population being the largest. None of the territories are independent states and each falls under the sovereignty of the UK, although they are not part of it. The territories have varying forms of self-governance but all share the British Monarchy as Head of State. Relations between each territory and the British Government can change unilaterally. Indeed, they have for the second and third most populated overseas territories in recent years in both cases for financial reasons. In 2009, the Turks and Caicos Islands lost legislative control over their internal governance as Britain unilaterally dissolved their parliament in the wake of a widespread corruption scandal. See Helmore (2009), Jones (2009) and Lunn (2012). Perhaps less widely known, with their government debt spiralling out of control, the Cayman Islands lost control of their government finances in 2009 as Britain initiated oversight of Cayman’s annual budgetary deliberations. The Cayman Islands was pressured to sign the Framework for Fiscal Responsibility, an agreement between the UK and Cayman Islands Governments in 2011. While Cayman’s fiscal health has improved substantially since 2009, to this day Cayman must seek Britain’s annual approval of their government spending and revenue plans. See Hyslop (2012a & 2012b), Klein (2013), Mathiason (2009b) and Peel (2011). At the time of Britain’s intervention in Caymanian affairs, Cayman Islands government debt was less than US$ 800 mln., one third of Bermuda’s projected debt at the end of fiscal year 2015/16.


appropriate local reforms.11 Britain has faced stiff resistance from Bermuda’s recalcitrant establishment in the past in encouraging the island to adopt basic economic and democratic reforms.12 Recent public pronouncements by the Bermuda Government suggest nothing has weakened the resolve of Bermuda’s establishment in fiercely defending the island’s economic status quo.13 Timing markets and anticipating investor behaviour is always difficult, but the very fact Britain provides an implicit backstop to Bermuda’s debt suggests international investors will be willing to lend Bermuda far more funds than they otherwise would. Implicit backstops represent just one of numerous market failures (such as the moral hazard associated with “too big to fail”) that distort market outcomes and can lead to market meltdowns with disastrous financial consequences. As has been revealed with the recent declassification of US government documents, in December 1977 the British Government was caught by surprise with the sudden outbreak of riots in Bermuda.12 Civil unrest can be even harder to predict than financial crises, but with the data Bermuda has published to date, the British Government will be unable to credibly claim they were caught unaware of an emerging financial crisis in Bermuda. I would suggest it is not only in the interests of all our residents (including Bermuda’s economic establishment), but in fact the British Government as well, that we collectively embark on a more activist recognition of our present circumstances and the identification of meaningful solutions to Bermuda’s problems. Not surprisingly, public opinion polls in Bermuda reflect a significant erosion of support for both our political parties. No doubt the British taxpayer would like to see Britain play a more active role in addressing Bermuda’s fiscal crisis. Now we recognise the depth and duration of Bermuda’s decline and the speed at which our fiscal position continues to deteriorate, I believe Bermudians will increasingly support reaching out for Britain’s assistance. Not only has Bermuda suffered the policy errors of our previous two governments, but neither of our political parties exhibits a depth of understanding in analysing our problems. Every country made policy mistakes in reacting to the 2008 Financial Crisis – including Britain.14 The important 11

Britain is well aware its Overseas Territories are members of neither the IMF nor the World Bank and financial instability in the territories, particularly Bermuda and the Cayman Islands, could pose a serious liability for Britain. Given our constitutional status, the IMF and World Bank will not lend us a penny. See The Overseas Territories - Security, Success and Sustainability (2012), The Economist (2013) and Mathiason (2009a). 12 See

Pitt Commission (1978) and Wikileaks (2015a).

13 See

Bermuda’s 2015/16 Budget Statement.

14 Some

would say especially Britain. See Krugman (2015).


point is that we learn from these mistakes - our own as well as those of others.15 No economy has recovered from the crisis as robustly as its policymakers would like. But Bermuda’s performance is truly dismal. Not only are we the only country in the world not to recover from the 2008 Financial Crisis, but by many measures our economic performance in the new millennium is the world’s worst outside the war-torn countries of the Middle East. Moreover, Britain now has a successful track record in helping restore fiscal stability in its Overseas Territories since the 2008 Financial Crisis. While their politicians were resistant at first, the Cayman Islands has benefitted enormously from Britain’s encouragement of local financial and governance reforms.16 In restoring fiscal stability, the Cayman Islands has raised tax revenues without the loss of their competitiveness as an offshore financial jurisdiction or an exodus of existing business. Since first targeting offshore finance for their economic development in the 1960’s, the Cayman Islands has failed to develop, mature and evolve anywhere near the degree Bermuda has. No doubt, Cayman could benefit from further substantial reforms, but arguably the Cayman Islands today is a more stable, sustainable and sound jurisdiction from which to do business than they ever were. I would suggest Britain’s active involvement in solving Bermuda’s fiscal crisis is in the enlightened self-interest of all our residents. Britain could provide us with considerable expertise in the crucial areas of macroeconomic analysis and modelling we so sorely lack. Crafting reform solutions to our problems will require compromise, cooperation and concessions from all quarters of the island. Given the fiercely partisan posturing, bitter acrimony and, at present, virtually non-existent communication amongst Bermuda’s various constituencies, Britain could play a vital role as a relatively impartial party in nudging and cajoling our varying interest groups in the right directions. Finally, from the perspective of our current government, they stand a far greater chance of political survival if they reach out now for Britain’s assistance rather than waiting until Britain’s involvement is imposed from above. The active involvement of Britain in defusing our crisis would not only reduce the final financial cost of the crisis, but substantial costs in terms of unnecessary human suffering would be averted as well. Greece suffered an on-going fiscal crisis over the 2008-14 period. We managed to perform almost as badly as Greece over the same time frame and that’s before our own financial crisis 15 Given the unprecedented economic challenges facing governments in the aftermath of the 2008

Financial Crisis, the efficacy of fiscal policy and technicalities of implementing fiscal consolidations in depressed economies have been areas of burgeoning research interest amongst the world’s leading economists. In fact, the crisis has provided sufficient evidence to facilitate a significant evolution in the consensus of economic policymaking opinion and settle a number of theoretical arguments some of which have plagued the world’s economic community for fifty years. See Akerlof et al. (2014), Blanchard and Leigh (2013), Delong and Summers (2012), Perotti (2012) and Romer (2011). 16 See Fuller (2015).


really got going. Imagine how much worse things could get. What’s more, perceived financial stability is a prerequisite to building a successful financial centre. Bermuda is testing the world’s boundaries of an offshore financial jurisdiction’s ability to amass significant liabilities. Given the considerable reputational risks a home-grown financial crisis poses Bermuda, in the aftermath of such a crisis the island may never recover its former status as one of the world’s leading offshore financial centres. As should be clear by now, the implosion of Bermuda’s tourism industry is not the country’s only problem. “Bermuda Inc.” is broken. Bermuda’s “business model” has been bankrupt for quite some time now.17 Nor are we the only ones to suffer this fate. Every country to our south that modelled their systems of government finance, labour market policies and business regulation after Bermuda’s has met with similar results.18 With Bermuda as a whole rapidly approaching bankruptcy, it’s time all our stakeholders came together in identifying and adopting the fundamental reforms necessary to turn Bermuda around and position us to capitalise on our still significant inherent economic advantages.

“It is not within the Government’s power, neither is it the Government’s wish to regulate the economy according to some inflexible and all-embracing plan. Nevertheless, it is appropriate for the Government to bring its influence to bear on the general pace and direction of the Island’s economic development. In this regard the Government has a number of instruments at its disposal - its control over taxation and public spending, the phasing of tourist accommodation and construction, the incorporation of companies, immigration policy, interest rates and exchange controls. The purpose of this review has been to map out a framework within which these policies can be applied.” - Concluding paragraph to the Government of Bermuda’s 1983 Economic Review.

17 See Stubbs (2017b). 18 See

Peretti (2016) and Stubbs (2017c).


The Way Out……...Laying the Foundations of a Balanced, Sustainable, Better Bermuda for Both Bermudians and Expatriates Alike I believe the identification of effective policy prescriptions for dealing with our crisis has been hamstrung to date largely by self-imposed or ideological mental constraints19 and incrementalist thinking. Faced with our crisis, the correct policy prescriptions are significant increases in public investment to restore our national investment to levels approaching pre-crisis activity and the implementation of necessary reforms to enable our net exports to respond to the economic revival of our largest trading partner. Of course, there are also the not so small matters of how we pay for it and what exactly we invest in.20

Taking Tourism Seriously Tourism today is one of the world’s largest industries. It was not always this way, and in the 20 century two locations led the world in demonstrating the enormous potential of tourism - Hawaii and Bermuda. Our forefathers clearly had the wisdom, foresight and execution skills to build one of the very first world-class tourism products. Bermuda can do it again. It will require us to make a commitment, use our imagination, be innovative, use the talent, energy and skills of our younger generation and make accommodations in our daily lives necessary to support tourism, but we can do it again. th

Some doubt our ability to ever resuscitate tourism saying there’s not enough to do in Bermuda. In actual fact, we have loads to do. We tend to dwell on the negative developments in our society, but in terms of attractions and activities for visitors, we have much to celebrate. Today, in addition to being one of the world’s most beautiful islands with warm, hospitable people, we have a number of world-class attractions. Bermuda’s Aquarium Museum & Zoo has undergone a metamorphosis since most Bermudians were youths and is now a popular sight with locals as much as our visitors. Today we have a number of world-class museums and attractions that never existed in Bermuda’s heyday of tourism in the 1970’s. Our Masterworks museum was just awarded recognition as one of the world’s finest small island 19 See Stubbs (2017a). 20

See Stubbs (2017d).


museums. The Bermuda Underwater Exploration Institute is impressive and our National Gallery and Bermuda Maritime Museum are first rate. In fact, the entire rejuvenation of Dockyard has occurred since the 1970’s and proven to be a huge hit with tourists. Of course, there is also the town of St. George’s that has received formal recognition as a virtual living museum with its award as a World Heritage Site. Bermuda has one of the world’s highest concentrations of shipwrecks and, thanks to our environmental stewardship, still has healthy coral and marine life for scuba divers to enjoy. Our deep-sea fishing has always been some of the world’s best with Bermuda holding an outsized number of fishing records. Water sports have evolved considerably in the last thirty years, and our protected inland waters and stunningly beautiful water make the island an ideal location to enjoy these innumerable activities. Of course, we have some of the world’s most beautiful beaches, but our network of national parks and nature reserves is one of the island’s greatest treasures. Our railway trail has received significant investment recently in its upgrading and enhancement and has always been popular with locals as much as visitors. Bermuda’s nightlife is quiet but it will return with the revival of tourism. Bermudians are not short in their ability to produce world-class art, music and culture. We have a number of musicians who have made it on the world stage. More coffee houses, restaurants, entertainment venues and boutique shops will soon follow and reinforce a revival in tourism. Thankfully, not every young Bermudian has both the ability and willingness to become an accountant, actuary or portfolio manager. We have huge advantages in competing with the Caribbean for tourists. Our advantages are so great in fact, arguably we are sui generis - in a class by ourselves. We are far closer to the most lucrative Northeastern portion of the US market than any other island. Our climate is more conducive to year-round tourism. Bermuda’s beauty derives largely from its extensive network of inland waters, a feature of the island that is entirely unique. Even in comparison with the Caribbean, we have stunningly beautiful water, world-class fishing, a sophisticated national culture with deep multicultural roots and an interesting history inextricably linked with the histories of some of the world’s greatest powers. Given the state of our tourism industry, however, we clearly have made a number of mistakes. I would suggest one of our gravest mistakes was allowing the cruise ship operators to cannibalise our tourists. As the size of the ships has grown, they have had an increasingly detrimental impact on Bermuda’s air arrivals. Not surprisingly, the cruise ship operators are under pressure to maximize profits and they are now raking their passengers and Bermudian businesses at land and sea to extract every last penny. Today, cruise ships stay at sea unnecessarily to keep their passengers at the gaming tables. When docked in Bermuda, they demand up to 60% of passenger associated revenues from local businesses and dictate the prices local companies charge.


Although perfectly legal in Bermuda, rather than traditional cruise ship operations, these practices are beginning to resemble piracy. Of course, Bermuda has fully acquiesced in these developments. We behave as if we have no option, and yet we do. In tourism’s initial stages of decline, as Bermudians searched for solutions, one of the ideas often suggested was starting our own national airline. I never believed a national airline was the solution to our problems, but Bermuda could, and I believe probably should, start our own cruise ship company. A Bermudian owned cruise ship company could provide the island with enormous benefits and begin developing hitherto untapped economic potential. A company that designs its cruise ships and cruises with the interests of its customers and the island at heart could be such a novelty in the cruise ship business departing from America’s eastern seaboard that it carves out a whole new market for itself and Bermuda. In return for the exclusive right to service the island with passengers, a Bermudian cruise ship company could ensure that our economy gains from cruise passengers in a number of ways. Demands for kickbacks from local businesses could be ended. Meal plans could be arranged so passengers have to dine on the island for at least some of their meals. More luxurious boats with higher income passengers would mean local shops saw more business. With a Bermudian owned cruise ship company, the appropriate sized boats could be servicing Hamilton, Dockyard and St. George’s from Boston and New York at least nine months of the year. There is no reason a boat couldn’t visit Bermuda from Europe, perhaps including stays in the Acores and New York along the way. Rather than the monstrous “mega” ships departing from America’s east coast, our boats would more closely resemble the smaller, higher end ships cruising the Pacific. Such new business could prove very beneficial to Bermuda. To encourage these boats to stay longer, rather than receiving docking fees, the Bermuda Government could pay the cruise company for each additional night a boat stays on the island in compensation for the externalities their presence generates. Bermuda’s cruise ships could then be viewed as similar to another hotel with much the same clientele as our air arrival visitors. Unfortunately, Bermudians for decades have accepted the practices and policies of private corporations at face value. Year after year, we accepted rate increase proposals from BELCO without question until only just recently. Without a doubt, British Airways has caused Bermuda irreparable harm in effectively limiting the island’s tourism market to one continent - North America. British Airways has been gouging its customers for years in flying to Bermuda. BA so overcharged its customers, many Bermudian families have paid more in airfares annually to British Airways than in student tuition fees at British universities. This is one of the only areas the UK Government has a genuine conflict of interest in its role as our ‘mother’ country. Bermuda finally needs to get tough with British Airways and UK Government. Of course, if Bermuda got rid of British Airways all together, the British Government would no longer have a conflict of interest. At the bare minimum, however, I would suggest we tell the British Government we will be welcoming a new low-cost air carrier from London as well as a similarly priced service originating from somewhere in


Germany. Quite how Bermuda allowed similar services to fall by the wayside in years gone by is just one example of how disorganized and half-hearted our attempts at resuscitating tourism have been. We all know we are traveling too fast on our roads. Bermuda’s roads are no longer safe for visitors or locals. Bermudians haven’t made the connection yet, but the faster we go, the further the country is falling behind. Motorcycles regularly hurtle down our roads at 50 mph. To restore a level of civility and remind ourselves of the importance of tourism, perhaps we should alter and rigorously enforce our speed limit. I suggest we should think of the east and west ends of the island as ‘Tourism Protected Zones.’ As a physical reminder, our speed limit in these zones could be 25 miles per hour, while on the rest of the island a speed limit of 35 mph could be enforced. If Bermuda is to fully capitalise on the extraordinary opportunities offered by America’s Cup, we need foreign investors to provide the hundreds of millions dollars it will require to rebuild our tourism infrastructure. So far, we have been disappointed by the reaction of global hoteliers in overlooking Bermuda for investment. Our landscape is currently pockmarked with idle hotel properties looking like tombstones to a bygone era. Bermuda needs to signal to the world we are once again serious about tourism. We need to demonstrate we have learnt from our mistakes and are committed to rebuilding our tourism industry. When asking foreign investors to provide the significant capital necessary to rebuild our tourism infrastructure, we should be prepared to put our money where our mouth is. We should be prepared to build our own hotel in preparation for an anticipated upswing in tourism in the wake of America’s Cup. Bermudians have always been good at building and managing hotels. Arguably, Bermudians are better at managing hotels than foreigners. Most of the surviving hotels in Bermuda are locally owned and managed. If we are serious about resuscitating tourism, the best way of signalling to the world our intent is by making a direct investment in the industry ourselves. In advance of America’s Cup, we need additional hotel capacity in place and there is no better way of guaranteeing its production than building at least some of it ourselves. If we were willing to embrace change and be more innovative in our development, I would suggest that with a few simple changes Bermuda could be far more attractive to today’s younger generation of tourists. One of the biggest drawbacks for tourists in contemporary Bermuda is our traffic congestion has effectively removed the option of getting around Bermuda safely on mopeds. We could more than compensate for this by building substantial networks of paths for bikers, joggers and rollerbladers in the east and west ends of the island. If designed well, Bermuda’s tourists could see a substantial portion of the island without ever crossing a public road. Building paths from Dockyard to Warwick Long Bay would be relatively easy and a similar network of paths could eventually be built through much of the east end of the island. In using bicycles and ferries to get around and avoiding our roads, Bermuda’s tourists could then


return to a pace of life that existed on the island in the days of our train, prior to the introduction of cars. Other development opportunities for today’s youth are numerous and have been embraced by some of our competitors. The world’s second largest skateboard park exists in the Cayman Islands. We could build skateboard parks in the east and west ends of the island. Mountain biking is already popular in Bermuda, but we could build purpose built mountain bike parks perhaps at Hog Bay and somewhere suitable in the east end of the island. Bermuda has always encouraged the use of our railway trail for walking, but there are numerous government lands and large estates held by private trusts that could be used to develop a network of hiking trails. Surfing is growing in popularity globally. We should research the possibility of building a structure and/or system of artificial reef to enhance the size of our waves as California has done. If it would work, a purpose built surfing hotel could be built at the old Sonesta or some other suitable site on the island. Bermuda is stunningly beautiful at sea level, but it’s even more beautiful from the air. We currently offer flying lessons, but there is no reason Bermuda couldn’t develop tourism for skydivers. Marketing the island is always important, but I would suggest the best talent in the world for marketing Bermuda exists right here at home. Arguably the most stunning footage ever taken of Bermuda was filmed and edited by young expatriates and Bermudians with cameras and drones and is readily available to view on YouTube. The younger generation is familiar with the new means of reaching a wider global audience with new technology. I would suggest we give a substantial portion of tourism’s marketing budget to our youth. With greater resources, I bet they could produce much more appealing and unique images of Bermuda than any global advertising company and they may even have better ideas for the advertisements’ distribution. At the very least, they should be working in conjunction with our traditional advertising agencies. One of the benefits of having made so many mistakes in our recent history is we’ve been presented with a lot of learning opportunities. Another is we will be rebuilding tourism virtually from scratch. Yet another benefit of our crisis is we are not as complacent in our respect for the economic opportunities we’ve inherited. As the fortunes of finance have waned in the post-2008 world, Bermudians have a new found appreciation for their tourism industry. If we learn from our mistakes and embrace fundamental changes in the management of our development, we can turn tourism around. America’s Cup offers us an unprecedented opportunity to redesign, relaunch, and rebuild tourism. Indeed, we cannot only rebuild it, Bermuda offers so much untapped potential, I would suggest our tourism could be bigger than it ever was.


Green Urban Hubs In our not too distant past, Hamilton had a number of hotels and fashionable neighbourhoods with cedar-lined streets. It was a pleasant place to both live and visit. Over the last thirty years, as one hotel after another across the island closed its doors and international business rose to dominate our economy, Hamilton and its immediate environs grew to host over 90% of the island’s workforce. At the same time, Bermuda has been largely “suburbanised” as Bermudians moved from the city of Hamilton and Pembroke to live elsewhere on the island. As little as sixty-five years ago, over 35% of Bermuda’s population lived in Pembroke. Today, at 17%, that proportion has more than halved. As Bermuda’s population almost doubled, Pembroke was the only parish to experience a population decline:

Bermuda’s Population by Parish, City & Town Total St. George’s Hamilton Smith’s Devonshire Pembroke Paget Warwick Southampton Sandys City of Hamilton Town of St. George

1950 37,403 3,434 2,466 1,767 4,125 13,155 3,181 3,197 1,703 4,375 2,816 1,506

2010 64,237 6,422 5,862 5,406 7,332 10,610 5,702 8,615 6,633 7,655 1,032 1,801

Change 26,834 2,988 3,396 3,639 3,207 -2,545 2,521 5,418 4,930 3,280 -1,784 295

The net result of these developments is not only that our roads in the central parishes have become congested with traffic, but Hamilton itself is seen by visitors and residents as a place to avoid. For an economy that nominally wants to host both finance and tourism, our capital city is a physical testament of the degree to which we have turned our backs on tourism. With the current paradigms of suburban living and preferred use of cars for transport, Bermuda already showed signs of slowing long before our current crisis emerged. Having grown rapidly in the fifty years to 1970, Bermuda’s population growth slowed markedly for forty years before entering its current period of outright decline.


Bermuda Population Growth by Decade 45%





2010-14 1900-10 1910-20 1920-30 1930-40 1940-50 1950-60 1960-70 1970-80 1980-90 1990-00 2000-10



Percentage Change 0

World's Fastest Declining Populations 2008-14

-2 -4 -6 -8


Romania Bulgaria

Croatia Puerto Rico Sint Maarten Lithuania



-12 -14 Andorra Bermuda

-16 -18

Source: World Bank Bermuda data estimated as follows: 1.5 X Total 2008-14 Job Losses / Bermuda 2010 Census Population (1.5 X 6,738) / 65,038 = 15.5%


Nor do international comparisons of population densities suggest we can grow our economy without making significant changes. The only countries in the world with significantly more dense populations than our own are effectively city-states:

Global Population Densities by Dependent Territories & Sovereign States Density (pop./mi ) Macau 54,882 Monaco 47,850 Singapore 19,731 Hong Kong 17,019 Gibraltar 11,007 Vatican City 4,709 Bahrain 4,224 Malta 3,421 Bermuda 3,139 Bangladesh 2,860 Maldives 2,758 Jersey 2,186 Guernsey 2,072 Palestine 1,958 Taiwan 1,676 Barbados 1,652 Source: Official National Estimate or Latest National Census 2

Bermuda can change many things, but we can’t change the shape and size of the island. These immutable facts have significant consequences for our development - consequences that create natural limitations for our economy unless Bermudians organise life on the island within fundamentally different parameters. World's Densest Road Networks (Km of Road per Km2 Land Area) 8


7 6

Belgium Singapore

5 4 3

Bahrain Bermuda Netherlands Japan Luxembourg

2 1 0


World's Most Crowded Road Networks (Total Vehicles per Km of Road) 280 260

Hong Kong


240 Singapore 220

Kuwait Bermuda

200 180

Taiwan UAE


160 140 120 100

Source: Economist Intelligence Unit Bermuda 2012 - Public Roads: 225 Km, Area: 53.2 Km , Total Vehicles: 47,459 2

If we are to arrest Bermuda’s secular decline, let alone grow our economy, Bermudians need to recognize that certain longstanding paradigms on the island no longer serve us: A) Our development as largely a “suburban” environment, B) The concentration of commercial activity in Hamilton, and C) Our reliance on our roads for transportation. We should reduce people’s need for transportation in their daily lives by creating Bermudian “Green Urban Hubs” - centres of commercial, residential and cultural activity.21 For people who have to commute to work, we need them commuting to locations other than just Hamilton. To the degree people need transportation in their daily lives, we should get more people off our roads and make greater use of the islands’ waterways. Green Urban Hubs on St. David’s waterfront, Morgan’s Point and Hamilton would accomplish all three of these goals.22 Our growth potential would vastly 21 See Ehrenhalt (2012), Jacobs (1961), Schwartz (2015), Speck (2012) and Stubbs (2017e). 22 See

Bermuda’s Department of Planning (1991) Bermuda 2000: Facing the Future.


increase as many people would be able to walk to work. Commuting to work via a network of ferries would also be much easier than our current system that bottlenecks on Hamilton. Most significantly, our nerves and physical infrastructure would show far less signs of fraying. Bermuda would be less congested with traffic as the dispersion of economic activity from the centre of the island would result in a far more efficient utilisation of our roads. The use of regular high-speed ferries between these Green Urban Hubs, particularly between Morgan’s Point and Hamilton, would naturally follow the dispersion of economic activity away from Hamilton. To encourage the use of our ferries, I would suggest their service should be provided free of charge. To lessen the congestion of traffic in our central parishes and further remove trucks and vans from our roads, at some point it may behove us to provide a fleet of roll-on roll-off ferries servicing the island between Spanish Point and Morgan’s Point - again free of charge. We have distinctive looking houses, and there is no reason our architects couldn’t design uniquely Bermudian looking Green Urban Hubs. Bermudians have been innovative in creating sustainable practices throughout our history. We could lead the world in the creation of urban hubs as much of the world will face similar constraints in their development. We have been forced to adapt sooner than other countries due to our already densely populated conditions, the island’s unique physical configuration and our economy’s recent decline, but much of the world will eventually follow.23 We’re not talking about a campaign to demolish existing houses and condos on the island. We just can’t think of these as substantial options for our future development. Where more condos were seen as a solution to a housing shortage in the early 1980’s and a housing affordability problem by the end of the decade, today the building of more condos with their residents commuting to Hamilton will only compound our problems. If we want to think of growing Bermuda’s economy substantially in the future, of achieving any “scalability,” Bermuda will have to embrace the idea of Green Urban Hubs - sustainable, urban living in multiple locations on the island.24

February 16, 2016

23 See Farr (2008) and Glaeser (2011). 24 See Stubbs (2017d).


End of Part I

The Way Out completed in Part II to be published at a later date.

This paper is being published for discussion purposes. As this is the paper’s first draft, it likely contains minor errors. Corrections of identified errors will be published in subsequent drafts. While the opinions expressed herein are my own, I would like to thank the following individuals for helpful comments and suggestions during the paper’s research - Ali Arouzi, Douglas De Couto, Allan Marshall, Joel Peltier, Walter Roban, Craig Simmons, Brooke Southall, David Stubbs and Hadi Taheri. Although there was considerable agreement amongst these individuals with my economic analysis, a few expressed reservations regarding its political implications. Challenging discussions with these individuals in particular caused me to marshal the evidence for and the coherent logic of the analysis. I would also like to thank Bermuda’s Department of Statistics. No government agency produces error free data and without the proximate accuracy of the data presented in this paper I could not have produced this analysis. For over 15 years, more than 25% of the author’s working life was spent in the research, analysis and forecasting of developed economies around the world with a combined size of more than 50% of world GDP. In 1965, his father, Dr. John Stubbs, was the United Bermuda Party’s first chairman. Dr. Stubbs subsequently played a leading role in the island’s development, until his death in 1994, as Minister of Planning, Housing and the Environment; Minister of Works, Housing and Agriculture and Minister of Industry and Technology.



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The Royal Society of Canada, Atlantic Regional Fall Symposium, 2015, Knowledge Institutions, Free Expression and Democracy in Canada in the 21 Century, Memorial University, Newfoundland. An informed discussion on Canada’s institutional capacity to produce the knowledge required to sustain a healthy democracy and to provide the foundation for sound policies and practices into the 21 century. st


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, 2013, Four Ways to Make a City More Walkable: Jeff Speck at TEDxMidAtlantic. walkable Stiglitz, J., 2000, “Capital Market Liberalization, Economic Growth, and Instability,” World Development, Vol. 28, No. 6, pp. 1075-1086. , 2002, Globalization and Its Discontents, New York: W. W. Norton & Company. , 2013, The Costs of Inequality: Joseph Stiglitz at TEDxColumbiaSIPA. , 2013, The Price of Inequality: How Today’s Divided Society Endangers Our Future, New York: W. W. Norton & Company. , 2015, The Great Divide, London: Penguin Books. Strásky, J. and E. Wurzel, 2015, “Luxembourg – Diversifying a Small Open Economy,” OECD Economics Department Working Papers, No. 1240. Stubbs, R., 2017a, Neoliberalism: Prudent Policy Prescription or a Persistent Poisoning of the Patient? Bermuda as Test Tube to the World. , 2017b, Bermuda in 2017: Economic Test Tube to a Neoliberal World. A presentation exposing the extreme neoliberal bias in Bermuda’s economic policymaking and the deep inherent flaws in the island’s fateful economic model. , 2017c, Bermuda in 2017: Convergence of the Offshore World – An Emerging Common Economic Model? A presentation reviewing the transformative reforms adopted post-2008 by Bermuda’s biggest competitors in the offshore world. , 2017d, Bermuda in 2017: A Consideration of Reform Solutions. A discussion of Bermuda’s cyclical adjustments and structural reforms necessary to overcome our economic crisis and meet the longer term economic constraints and opportunities facing the island. , 2017e, Bermuda in 2017: An Urban Economic Perspective. A presentation examining Bermuda’s contemporary inefficiencies, imbalances, constraints and opportunities from an urban economic perspective.


, 2017f, Bermuda in 2017: A Public Finance Perspective. Forthcoming. A presentation of Bermuda’s fiscal crisis and the issues, considerations and competitive constraints regarding the island’s urgently needed tax reform. , 2017g, Bermuda in 2017: A Macroeconomic Perspective. Forthcoming. A presentation of the island’s cyclical imbalances and the short-term, demand management, stabilisation policy adjustments needed to stimulate a meaningful economic recovery. , 2017h, Bermuda in 2017: The Urgency of Financial Regulatory Reform. Forthcoming. A presentation of weaknesses and omissions in Bermuda’s financial regulation and the reforms needed to correct deficiencies in the island’s poorly implemented process of capital market liberalisation. , 2017i, Bermuda in 2017: The Existence, Effects & Potential Alleviation of Chronic Poverty in Bermuda. A presentation examining Bermuda’s long experience with chronic, but as yet unacknowledged, poverty. , 2017j, Bermuda in 2017: The Crisis in Contemporary Capitalism – Deconstructing Neoliberalism’s Ultimate Paradox. Forthcoming. A presentation of research results providing necessary and sufficient inferences linking neoliberal economic policymaking to the widening inequality in market income distributions globally. Sullivan, N., “Neoliberalism is Killing Us: Economic Stress as a Driver of Global Depression and Suicide,” Truthout, 2 April, 2017. Tett, G., 2009, Fool’s Gold - How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe, London: Little, Brown. UK Government, Foreign & Commonwealth Office, 2012, The Overseas Territories - Security, Success and Sustainability. A White Paper. , Office for National Statistics, 2016, The Effects of Taxes and Benefits on Household Income: Financial Year ending 2015. , Pitt Commission, 1978, Report of the Royal Commission into the 1977 Disturbances. Végh, C., 2013, Open Economy Macroeconomics in Developing Countries, Boston: MIT Press. Walker, J., 2012, Human Transit: How Clearer Thinking About Public Transit Can Enrich Our Communities and Our Lives, Washington: Island Press. Welsh, J., 2016, The 2016 CBC Massey Lectures: Lecture 5 - The Return of Inequality, CBC Radio-Canada.


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Bermuda in 2016  

An Economic Analysis and Political Critique of Bermuda's Crisis

Bermuda in 2016  

An Economic Analysis and Political Critique of Bermuda's Crisis