Answers to escaping this economic quagmire
David Burt and his government have been given a good deal of credit for their handling of the coronavirus crisis, and rightly so.
But Mr Burt faces a greater challenge now with the economy, and it’s one that his government was struggling with before the onset of Covid-19. Facing an even worse situation than Bermuda did in February, the Government must tackle the hardest economic challenge the island has faced in the postwar era.
There are no easy choices to be made. Worse, the wrong decision could make a bad situation a catastrophic one. Mr Burt and his Minister of Finance, Curtis Dickinson, should bear in mind two insights about the Bermuda economy.
The first was put best by former finance minister Bob Richards: Bermuda must import almost all of its goods and can survive only by selling services to earn the foreign currency it needs to buy those goods.
That means Bermuda can grow only if it either increases the amount of foreign currency it earns — by selling services — or replaces imports with locally made goods. However, outside of a few niche products, Bermuda’s costs are too high and its economies of scale too limited to produce finished goods that can compete with imports on price.
The second insight came from the late columnist Larry Burchall: he recognised that as the tourism industry declined, the non-Bermudians who came to staff the island’s burgeoning financial services sector were Bermuda’s “new tourists”, earning and spending the foreign currency the island needed.
The difference was that instead of coming for one week, they came for 52. As a consequence, Bermuda did not need 500,000 visitors a year; it needed 10,000 workers, which meant a population of about 70,000.
If a hotel guest spends an average of $1,500 per visit, and each visit lasts about a week, it takes 40 visitors to spend $60,000.
Which is what, conservatively, a non-Bermudian international business worker will spend annually on rent, food and entertainment. So Bermuda needs just one IB worker for every 40 air visitors. The ratio is six times that for cruise visitors — one worker equals 240 passengers.
In the wake of the coronavirus crisis, it appeared initially that Mr Burchall’s insight had been forgotten.
New immigration minister Jason Hayward’s first act was to turn down more than 100 work-permit renewals, with little consideration for what sectors of the economy they worked in. Even an accountant, where qualified Bermudians are at a premium, was turned down. Mr Hayward has also announced that he expects the recession to last until 2022.
This is not reassuring. If part of leadership is to be positive — and this is especially true of economics where confidence is a precondition for growth — then Mr Hayward risks turning a bad recession into a great depression.
That is not to say that politicians should pretend that things are better than they are. But talking down the economy is no way to encourage consumers to spend or entrepreneurs to invest.
Since then, the Government has changed tack, at least a little. The decision to follow the example of Barbados and to invite remote workers to Bermuda for 12 months is very welcome and has brought some badly needed publicity.
And Mr Dickinson has been more measured than Mr Hayward. He has had some success, along with the rest of the Government, in persuading public servants to reduce their overall wage packages, although not necessarily their take-home pay.
His economic revival committee has begun to meet and has been credited with the decisions to offer the aforementioned remote workers’ programme, to extend unemployment benefits and payroll tax for restaurants and hotels, and the amendments to the rules governing redundancies. All of those steps are obvious but welcome. The committee is also considering more “quick hits”, which in a “normal recession” would be welcome and sensible.
But in these abnormal times, Bermuda needs bolder thinking and a well-thought-out vision that will not only get Bermuda out of its present mess but lay the foundations for a vibrant economy that will benefit all Bermudians. Similarly, as admirable as Mr Dickinson’s desire to contain the budget deficit would be in normal times, a different approach is needed now.
In the past 15 years or so, Bermuda has consistently got it wrong at the macroeconomic level, borrowing when it should have saved and applying austerity when it should have stimulated.
Now after three years of economic inertia under the Progressive Labour Party, Mr Dickinson responded to the Covid-19 crisis with alacrity, changing course with unemployment benefits and other spending as the economy stalled.
As Bermuda emerges from the initial crisis, Mr Dickinson and his committee have decisions to make, decisions with the potential to either unleash a new wave of economic growth after a lost decade, or to condemn the island to more of the same. Bermuda cannot afford to get it wrong again. There is a good argument to be made that Bermuda should be joining with many other countries in spending its way out of this recession. Mr Dickinson has been reluctant to do this.
He is ready to borrow to cover the costs of Covid-19 and the concomitant reduction in revenues, but not enough to kick-start the economy.
As a result he risks creating the worst of all worlds: taking on sufficient debt that will be difficult to pay back in the best of times, but not enough to stimulate the economic growth needed.
Taking on even more debt will be anathema to many in Bermuda whose fetish is a balanced budget. But taking on debt at the right time can be positive, and this is that time.
Why? First, the cost of borrowing is historically low now so low rates can be locked in.
Second, borrowing and flooding an economy with money risks inflation. But inflation is at historic lows and for now shows little sign of rising. Indeed, deflation, in which people’s assets such as their homes lose value, is a greater risk and can be as or more damaging than inflation. Third, borrowing now can help keep businesses open and people working, leading to higher tax revenues later.
The alternative, to leave people out of work for months or even years, and to allow businesses to go to the wall — as is already happening — will make the recovery that much more difficult, while the pressure to raise all taxes, from payroll tax to Customs duties to permits, will increase. Further hampering growth.
How the Government spends the money is just as important as how much it borrows. The Government was right to provide an unemployment benefit during the shutdown, which enabled those who were unable to work to keep food on the table and a roof over their heads.
Those who are still out of work continue to need relief, but borrowing should be focused on infrastructure projects that will position the island for growth — and offer some chance of payback.
Indeed, the investments should generate income, thus making repayment easier. In fact, it may not be necessary for the Government to borrow all of the money required. It could be lent by an independent entity.
That should offset the other risk of heavy borrowing: the concern that drops in Bermuda’s sovereign rating will affect the island’s reinsurance companies, which are the main engine of the economy.
The concern centres around the idea that no Bermuda company can have a debt rating higher than Bermuda’s, and that drops in the companies’ ratings will prevent them from underwriting certain classes of insurance and may ultimately force them to leave. This is a genuine concern. But using debt for capital investment and not for current expenditures should help, as should the reality that every government in the world is increasing its debt burden.
Bermuda can start with a variation on a green new deal. Bermuda spends millions of dollars in foreign exchange purchasing fossil fuels to generate electricity. The argument against moving to solar power has been the island’s lack of space. But Bermuda has ample space on the roofs of homes and workplaces to generate much of the electricity the island needs.
Some homeowners and businesses have already done this and are realising savings. Because of the relatively high initial investment needed, these savings are mainly enjoyed by those who can afford the original investment; an example of the rich getting richer, albeit in a good cause.
Intervention by the Government or by an independent entity would enable those unable to afford the original installation to get it. The Government or the funder would first get their original investment back through energy sales before the plant reverts to the owner or bill payer.
The high initial costs of such a programme are daunting, but the payback is worth it. It is a literal virtuous circle, creating jobs, foreign-exchange savings and individual liquidity while helping Bermuda to do its part to reduce carbon emissions and mitigate against climate change.
This could be financed through a “green bond”, underwritten by an independent local entity that manages the assets. Thus there would be little or no cost to the Government and no effect on its credit rating.
A second area to exploit is technology. Mr Burt’s financial technology efforts have stuttered, in part because Bermuda has little competitive advantage in this area. High costs for everything from broadband to bread are not an incentive, while unlike Silicon Valley or Cambridge, England, the island does not have a big pool of neighbouring, highly skilled computer programmers to draw on.
While subsidies need to be handled with care, some form of public financing to enable people to use fast and cheap broadband would give Bermuda a better opportunity to compete in technology, as it must. At the same time, incentivising companies to come to Bermuda in return for training and education makes sense. This has been done already in a limited way, but can be expanded.
Bermuda should also look at inviting top universities to hold physical classes here, provided we can remain relatively free of Covid-19. This would be particularly valuable in areas where Bermuda already has expertise such as finance, marine biology and hospitality, although it could also apply to fine art and other areas, and it may make more sense for graduate students from North America.
Empty hotels and office buildings could be repurposed for housing and teaching with little difficulty.
The Government has already raised the idea of improving the island’s food production and there are protectionist measures in place to assist the minuscule farm sector.
With advances in automation, biointensive farming, hydroponics and other forms of concentrated agriculture, Bermuda can produce more locally grown and raised produce at costs that are broadly competitive with imports. The pandemic has shown the fragility of supply chains; Bermuda needs to ensure it is not vulnerable to future breakdowns while preserving foreign exchange.
Mr Burt has recently promoted the idea of cannabis production. This needs to be thought through carefully. As with gaming, the need to finance public-health efforts at the same time is vital.
Large-scale cannabis production also requires high electricity usage; it would need to be done in tandem with increases in alternative energy, or production costs may prove to be prohibitive.
There will be more ideas than this; the Government should use borrowing to improve infrastructure and to seed business ideas that achieve one of two goals: they should either generate foreign exchange or they should reduce the need for it.
Because governments are traditionally poor at picking winners and losers, and to ensure that the investment process is credible, any funding of private enterprise should be carried out by a respected and independent “shark tank” or “dragon’s den” made up of people with track records in investing.
Now is the time for the Government to act boldly, and in doing so to give all Bermudians the opportunities they need to thrive.
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